Falling U.S. Wages Threaten Consumer Spending

By Sho Chandra and Steve Matthews - Oct 3, 2011 3:57 PM GMT+0700

Ninety-one percent of people in the U.S. labor force have a job. That may be the extent of the good news for these Americans, whose incomes tell a darker story.

Take-home pay, adjusted for prices, fell 0.3 percent in August, the third decrease in five months, and personal income dropped for the first time in two years, the Commerce Department reported last week. The declines followed news from the Census Bureau that median household income in 2010 fell to $49,445, the lowest in more than a decade, and the poverty rate jumped to 15.1 percent, a 17-year high.

Salary and benefit growth “has been going nowhere,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “One of the key reasons the recovery has stalled is that real incomes have fallen.”

While policy makers from Federal Reserve Chairman Ben S. Bernanke to President Barack Obama focus on cutting unemployment stuck near or above 9 percent since April 2009, the widespread stagnation in wages may offer a better explanation for the failure of economic growth to accelerate two years after the end of the recession. Workers’ ability to negotiate higher earnings won’t return until the job market strengthens, and flagging confidence has raised the risk that consumers may retrench.

Inflation-adjusted weekly earnings have fallen for six consecutive months, dropping 1.8 percent in August from a year earlier, a pace not seen since the 18-month economic slump ended in June 2009.

Getting ‘Squeezed’

“Those who are employed are worried about their income and are seeing real purchasing power get squeezed, therefore they’re set to retrench a bit,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, who has served on the Fed board’s forecasting team. “That’s the danger right now. It means the recovery remains very fragile.”

Companies including United Parcel Service Inc. (UPS) say they have flexibility to hold down employee earnings, given uncertain demand and an excess supply of labor. Retailers such as Kohl’s Corp. (KSS) report that elevated food and fuel prices have cut into paychecks, restraining shoppers.

“The biggest issue is that labor income is soft at a time when we’re getting no offset” from other sources, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Unlike in the early part of the recovery, stock-market losses are eroding wealth and home prices continue to decline, he said.

Shrinking Support

Standard & Poor’s 500 Index futures expiring in December dropped 0.4 percent to 1,121.20 at 9:54 a.m. in London, having earlier retreated 1.3 percent. The S&P 500 Index (SPX) has fallen 17 percent since this year’s high of 1363.61 on April 29. The S&P/Case-Shiller index of property values in 20 cities is down 31 percent from the pre-recession peak in July 2006.

Support from the government may shrink if Congress fails to extend payroll-tax cuts and unemployment benefits set to expire at the end of the year, and limited access to borrowing means Americans have few means to fund their purchases, said Feroli, a former Fed economist.

“It’s hard to see where consumers are going to get a lot of wherewithal to sustain strong spending,” he said. “It’s certainly a concern that, rather than sluggish consumption growth, we see flat or declining consumption.”

The stalled labor market and stagnant wages are easing one source of concern for Fed officials watching inflation.

“The painfully high unemployment rate is consistent with considerable slack or excess capacity in the economy, which tends to constrain wage growth,” Federal Reserve Bank of Atlanta President Dennis Lockhart said during a Sept. 27 speech in Jacksonville, Florida.

Wage-Price Spiral

“You are familiar with the term wage-price spiral. I don’t see any prospect of such a development in the foreseeable future, as long as unemployment remains high and longer-term inflation expectations remain well-anchored,” he said.

The worsening outlook for incomes will cause “continued pressure on home prices and on the stock market,” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. Corporate sales may be hurt as demand cools, and there may be more withdrawals from retirement plans and higher use of 401(k) loans, he said.

Sales at some luxury stores may be hurt because “at the margin, the upper end of the middle class will probably feel less inclined to spend extra money,” he said. Among chains catering to “the lower end of the earnings totem pole,” discounters including Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) may fare better as shoppers trade down.

“Perception is reality from the standpoint of consumers and investors,” Polley said. “We need people to start feeling good about themselves.”

Bad Time to Buy

The Bloomberg Consumer Comfort Index slumped in the week ended Sept. 25 to the second-lowest level on record as Americans grew more concerned with their financial situation. The share of households saying it was a bad time to buy goods and services was the highest in three years.

A record 91 percent of consumers expect that growth in their incomes will match or fall behind price gains in the coming year, according to participants in the September Thomson Reuters/University of Michigan sentiment survey, which dates back to 1978.

Until people see their wages or the labor market get better, they will be “spending on necessities, not desires,” said Chris G. Christopher, senior principal economist at IHS Global Insight in Lexington, Massachusetts.

Tamra Loomis, a graphic designer and single mother of two boys, uses the Internet at her parents’ home, grows vegetables to trim grocery bills and takes advantage of coupons to shop. She makes $17 an hour and hasn’t had a raise since September 2008, three months after she started working at a sign company in Antioch, California, about 40 miles northeast of San Francisco.

Raise Denied

The owner has twice denied her request for higher wages and in January cut the hours for her and the company’s other employee to 30 a week from 40, she said.

“My boss says because of the economy, things are tight, business is slow,” so “at this point, I’m paycheck to paycheck,” said Loomis, 32. “A lot of people aren’t hiring, and when they are, they offer even less than what I make. It’s really difficult.”

The jobless rate held at 9.1 percent in September for a third consecutive month, while payrolls grew by 50,000 after no change in August, according to the median forecast in a Bloomberg News survey of economists ahead of Labor Department figures due Oct. 7.

‘National Crisis’

The unemployment situation is a “national crisis,” Bernanke said in response to questions after a speech Sept. 28 in Cleveland. Obama is campaigning for congressional support of a $447 billion jobs program centered on rebuilding infrastructure and expanding payroll-tax breaks for workers and employers.

“It’s certainly easier to focus on the greater sources of distress,” BNP’s Coronado said, referring to officials’ concern about Americans who are out of work. “But the bigger bulk of economic momentum is going to be driven by people who are employed and how they feel about their prospects.”

Consumer spending rose at a 0.7 percent annual rate in the second quarter, less than half the 2.1 percent pace in January- March, the Commerce Department reported last week. Gross domestic product expanded less than 1 percent on average in January-June, the worst six months of the recovery.

“The economy isn’t growing fast enough to boost job growth to increase incomes,” said Omair Sharif, an economist at RBS Securities LLC in Stamford, Connecticut. “Most workers don’t have a lot of sway in demanding higher wages unless they have very specialized skills.”

‘Hold the Line’

Werner Enterprises Inc. (WERN), an Omaha, Nebraska-based truck operator, has “been able to hold the line on our salary, wages and benefits costs,” John Steele, chief financial officer, said on a Sept. 8 analyst conference call. In today’s “uncertain” economic environment, “there’s a little less pressure on driver pay than there was a couple of months ago.”

UPS, the Atlanta-based package-delivery company whose shipments make it an economic bellwether, has “a very reasonable contract in place that will show modest, below- inflation increases in wages” for drivers, Chief Financial Officer Kurt Kuehn said on a July 26 teleconference. “We’ve got a good outlook for the cost structure.”

Employees cannot hope for more bargaining power anytime soon, said Harry Holzer, a professor of public policy at Georgetown University in Washington and former chief economist at the Labor Department. Through August, the U.S. had recovered only about 1.89 million of the 8.75 million jobs lost as a result of the recession.

“There is so much slack, it will keep earnings from rising very much,” he said. “It will take most of this decade” to repair the damage “unless there is a big spurt in hiring.”

To contact the reporters on this story: Sho Chandra in Washington at schandra1@bloomberg.net; Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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S&P 500 Valuations Below Recessions Since ‘57

By Lu Wang, Inyoung Hwang and Rita Nazareth - Oct 3, 2011 8:51 PM GMT+0700
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A pedestrian passes in front of Standard & Poor's Financial Services LLC in New York, U.S. S&P 500 profits fell an average of 12 percent on a yearly basis in the nine recessions since the 1950s, according to data compiled by Bloomberg. Photographer: Scott Eells/Bloomberg

The rout that erased $2.9 trillion from U.S. equities has pushed valuations in the Standard & Poor’s 500 Index 25 percent below the average level from the last nine recessions, even as profit estimates fall.

Companies in the benchmark gauge for American equities trade at 10.2 times 2012 forecast earnings, compared with the average in economic contractions since 1957 of 13.7, according to data compiled by Bloomberg. At the same time, analysts have cut projections for profits next year by 2.6 percent to $110.78 a share, the biggest eight-week drop since 2009, the data show.

Bears say analysts have just started paring earnings estimates and that shares will prove expensive when gross domestic product shrinks. Bulls say stock prices have fallen so much that even should earnings fail to increase in 2012, equities are inexpensive.

“What you’re seeing is a growth scare,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., said in a telephone interview on Sept. 29. His firm oversaw $643 billion as of Aug. 31. “The question is, how much of that is priced in. I’d say that if we don’t have a double-dip recession, if earnings just stay flat, these valuations are reasonable. The market already expects those downgrades.”

Chinese Manufacturing

The S&P 500 fell 0.3 percent to 1,128.64 at 9:43 a.m. in New York. The U.S. benchmark gauge slipped 0.4 percent last week, extending its decline since July 22 to 16 percent, after reports showing Chinese manufacturing shrank and retail sales in Germany slumped fueled concern global growth is slowing. The index had climbed 67 percent since March 2009, with 455 of its members higher than their level at the bottom of the bear market.

Concern Europe’s debt crisis will trigger a global recession spurred investors to seek safety in the dollar and Treasuries during the third quarter. The U.S. currency’s 5.7 percent increase was topped only by U.S. bonds, which rallied 6.4 percent, according to Bank of America Merrill Lynch’s U.S. Treasury Master Index data. The S&P 500 tumbled 14 percent, the most since 2008, and the S&P GSCI Total Return Index of commodities lost 12 percent.

Analysts have slashed forecasts for 2012 earnings to the lowest level since April, data compiled by Bloomberg show. Projections have been falling for companies from JPMorgan Chase & Co. (JPM) to Caterpillar Inc. (CAT) since S&P stripped the U.S. of its AAA credit rating on Aug. 5.

Credit Crisis

The downgrades will get worse, according to Thomas O’Halloran, a Jersey City, New Jersey-based money manager at Lord Abbett & Co., which oversaw about $114 billion as of June 30. O’Halloran said profits will decrease by at least 15 percent in 2012 from this year. The average forecast of Wall Street analysts shows earnings will climb 17 percent to a record $99.17 a share this year and increase in 2012, data compiled by Bloomberg show.

Analysts underestimated the credit crisis that began in 2007 and cut forecasts throughout 2008 when the economy contracted. The reduction in profit estimates didn’t end until May 2009, two months after the benchmark sank to a 12-year low, Bloomberg data show.

“The sovereign-debt crisis is more scary than the private- bank crisis, because the sovereign can backstop the private sector but there is nobody to backstop the sovereign,” O’Halloran wrote in an e-mail on Sept. 28. “We’re in an environment where the macro is terrible. That would be the underlining reason why the market could have further downside.”

Recession Looms

International investors expect the world economy will relapse into a recession, with more than one in three forecasting a global economic contraction within the next year, according to a Bloomberg Global Poll conducted Sept. 26. More than two in five said they’re increasing holdings of cash, the largest proportion since the poll began asking that question in June 2010. A majority, 56 percent, say U.S. stocks entered a bear market.

S&P 500 profits fell an average of 12 percent on a yearly basis in the nine recessions since the 1950s, according to data compiled by Bloomberg. Should earnings drop by the same amount from the estimated $99.17 a share this year, profits will total $87.59 in 2012. Based on the S&P 500’s Sept. 30 close of 1,131.42, that would imply a multiple of 12.9.

‘Second Dip’

“We’re diving into the second dip of a double-dip recession, so how promising is it that the earnings will hold?” Rob Arnott, chairman and founder of Research Affiliates LLC in Newport Beach, California, said in a telephone interview on Sept. 28. About $83 billion is managed using investment strategies developed by his firm.

“The measures by which stocks are cheap today rely on continued recovery and a continued surge in already peak earnings,” Arnott said. “It relies on a very shaky foundation.”

Economists project growth will accelerate to 2.2 percent in 2012 from 1.6 percent this year, according to a Bloomberg survey of 66 respondents. U.S. gross domestic product expanded at a 1.3 percent pace in the second quarter, according to a Commerce Department revision released Sept. 29.

Should S&P 500 earnings hold at $99 a share next year, stocks would be trading at a 30 percent discount to the average multiple since 1954, according to Bloomberg data. The index is priced at 12.3 times earnings in the last 12 months, down from a high of 23.9 in December 2009.

Train Wreck

Companies exceeded income forecasts in the last nine quarters after cutting costs and lowering debt. Reduced estimates mean corporations will have an easier time extending the streak, said Brian Jacobsen, chief portfolio strategist for the mutual-fund division at Wells Fargo Asset Management. Unlike 2008, when the bankruptcy by Lehman Brothers Holdings Inc. came as a shock, the market is anticipating a recession and the pessimism is overdone, he said.

“The current crisis seems almost like a train wreck that everybody is witnessing,” Jacobsen, who is based in San Francisco, said in a telephone interview on Sept. 29. His firm oversees more than $400 billion. “That’s one of the reasons why I think we’ll avoid a train wreck. Policy makers know what the issues are. They just have to come to an agreement.”

Twenty-two of the 31 analysts who follow JPMorgan slashed their 2012 earnings projections in the past four weeks, and none raised them, data compiled by Bloomberg show. The New York-based bank is trading at 5.71 times next year’s earnings of $5.29 a share. That’s 45 percent lower than the average multiple since 2004, according to data compiled by Bloomberg.

Caterpillar

The average profit estimate for Caterpillar, the largest maker of construction and mining equipment, fell by 36 cents to $8.86 a share in the past four weeks, according to a Bloomberg survey of 21 analysts. Shares of the Peoria, Illinois-based company are trading at 8.20 times 2012 earnings, 38 percent below the average valuation since 2005, Bloomberg data show.

Matt Peron, head of active equity at Northern Trust Corp. in Chicago, said the economy will avoid a recession.

“Estimates will come down a fair amount, but I don’t think they’ll fall to something like an $85 level,” he said in a Sept. 29 interview. His firm manages $684 billion. “If they don’t, there’ll be a relief rally or the market will at least grind higher when it realizes it’s been pricing in too low of a number.”

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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Stocks Decline As Greek Default Risk Looms

By Stephen Kirkland and Shiyin Chen - Oct 3, 2011 8:49 PM GMT+0700
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Traders work at the New York Stock Exchangeon Sept. 30, 2011. Photographer: Scott Eells/Bloomberg

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Oct. 3 (Bloomberg) -- John Vail, chief global strategist and head of asset allocation at Nikko Asset Management in Tokyo, talks about Japan's economy, stocks and investment strategy. Vail also discusses European stocks. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Oct. 3 (Bloomberg) -- Philip Tulk, head of Asian conglomerates and gaming research at Royal Bank of Scotland Group Plc, talks about the outlook for Macau casino stocks. Tulk speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

(Corrects to third quarter in second paragraph.)

Stocks fell, following the biggest quarterly losses since 2008, and commodities dropped to a 10- month low as Europe’s finance chiefs prepared to weigh the risk of a Greek default. The cost of insuring German government debt rose to a record.

The MSCI All-Country World Index sank 1.6 percent at 9:30 a.m. in New York after plunging 18 percent in the third quarter. The Standard & Poor’s 500 Index lost 0.4 percent. The Stoxx Europe 600 Index slipped 1.9 percent as BNP Paribas SA, France’s biggest bank, tumbled 5.6 percent. The S&P GSCI index of commodities fell 1.5 percent as copper dropped 2.4 percent. Ten- year German bund yields lost seven basis points, while 30-year Treasury yields declined eight points. Credit-default swaps on German debt climbed six basis points to 118.

European officials prepared to meet in Luxembourg today to consider how to shield banks from the debt crisis and boost the region’s rescue fund after Greece missed a deficit target for 2012. Factory output in the U.S. probably grew at the slowest pace in more than two years in September, economists said before a report from the Institute for Supply Management.

“The big issue in the euro zone remains avoiding contagion from the all-but-inevitable Greek sovereign default,” Larry Hatheway, the head of macro strategy at UBS AG in London, wrote in a report today. We are “unlikely to get much relief from euro zone uncertainties in the coming months.”

The S&P 500 extended last quarter’s 14 percent loss. Yahoo! Inc. jumped as Alibaba Group Holding Ltd. Chairman Jack Ma said he’s “very interested” in buying the U.S. Web portal.

ISM Data

The U.S. ISM factory index probably fell to 50.3 from 50.6 in August, according to the median forecast of 67 economists in a Bloomberg survey. A reading of 50 is the dividing line between contraction and expansion.

Bill Gross, the manager of the world’s biggest bond fund, said the global economy risks lapsing into a recession with the pace of growth falling below the “new normal” level the firm has predicted since 2009.

“Sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack,” Gross wrote in a monthly investment outlook posted on Newport Beach, California-based Pacific Investment Management Co.’s website today. “If global policy makers could focus on structural as opposed to cyclical financial solutions, new normal growth as opposed to recession might be possible.”

European Stocks

All 19 industry groups declined in the Stoxx 600 as Commerzbank AG, Germany’s second-largest lender, and Societe Generale SA of France dropped at least 5 percent. BHP Billiton Ltd. and Rio Tinto Group, the world’s largest mining companies, retreated at least 3 percent.

Dexia SA slumped 9.5 percent as Moody’s Investors Service placed the credit ratings of the lender’s three main operating entities on review for possible downgrade. Les Echos said finance ministers from Belgium and France are meeting today to discuss financing options for Dexia.

The Federal Reserve Bank of New York may ask foreign lenders for more detailed daily reports on liquidity as the U.S. steps up monitoring of risks from Europe’s sovereign debt crisis, according to two people with knowledge of the matter.

Liquidity Concern

Regulators held informal talks with some of the largest European lenders about producing a “fourth-generation daily liquidity” or 4G report, according to the people, who asked for anonymity because communications with central ban kers are confidential. The reports may cover potential liabilities such as foreign-exchange swaps and credit-default swaps, said one person. The U.S. has already increased the number of examiners embedded in these banks, the person said.

The yield on the Greek 10-year bond rose six basis points to 22.75 percent, driving the difference in yield with benchmark bunds 12 basis points higher. The yield on Italy’s two-year security fell 12 basis points and Spain’s declined three points as the European Central Bank bought the nations’ bonds, according to four people with knowledge of the transactions. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments rose 1.9 basis points to 342.2, approaching the record high of 358.5 set Sept. 23, according to CMA.

Greece Austerity

The Greek government passed 6.6 billion euros ($8.8 billion) of austerity measures last night to cut the 2012 deficit to 6.8 percent of gross domestic product, missing the 6.5 percent goal previously set with the European Union, International Monetary Fund and ECB, known as the troika. Finance Minister Evangelos Venizelos had earlier said Greece would miss the targets and the troika accepted the new budget. Euro region finance ministers meet again Oct. 13 to decide on a sixth bailout payment.

The 10-year U.S. Treasury note yield slipped four basis points, while the two-year yield rose almost one basis point. The Fed plans to buy $2.25 billion to $2.75 billion of Treasuries maturing from February 2036 to August 2041, according to the Fed Bank of New York’s website. Today’s purchases will be the first under a program announced Sept. 21 to buy $400 billion of bonds with maturities of six to 30 years through June, while selling an equal amount of debt maturing in three years or less.

The euro depreciated 0.6 percent to $1.3307, and fell as much as 0.6 percent to the lowest level since Jan. 18. The Dollar Index, which tracks the U.S. currency against those of six trading partners, climbed 0.7 percent. The yen strengthened against all of its 16 major peers.

The pound weakened against the dollar for a second day and gilts rose as traders judged a surprise increase in U.K. manufacturing as insufficient to keep the Bank of England from providing further stimulus for the economy.

Commodities Slump

The GSCI index of 24 commodities fell as much as 1.8 percent to the lowest since Dec. 1. Oil in New York slipped 2.5 percent to $77.20 a barrel. Gold for December delivery jumped 2 percent to $1,655.40 an ounce and silver climbed 1.6 percent after jumping as much as 4.5 percent.

The MSCI Emerging Markets Index sank 2.9 percent, following its 23 percent plunge in the three months ended Sept. 30. The Hang Seng China Enterprises Index slumped 4.4 percent, the Jakarta Composite Index (JCI) slid 5.6 percent and the SET Index retreated 5.1 percent in Bangkok.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Shiyin Chen in Singapore at schen37@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net

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SEC Asks Apple CFO for Information on Nokia Patent Settlement

By Lisa Rapaport - Oct 3, 2011 7:47 PM GMT+0700
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Apple Chief Financial Officer Peter Oppenheimer. Photographer: Rick Maiman/Bloomberg

The U.S. Securities and Exchange Commission asked Apple Inc. (AAPL)’s Chief Financial Officer Peter Oppenheimer for more information about a patent litigation settlement with Nokia Oyj. (NOK1V)

The SEC asked for details on the terms of the settlement agreement, any amounts accrued, the periods in which they were recognized and the timeline of negotiations, according to a regulatory filing today.

To contact the reporter on this story: Lisa Rapaport in New York at lrapaport1@bloomberg.net

To contact the editor responsible for this story: Lisa Rapaport at lrapaport1@bloomberg.net

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Yahoo Strikes Partnership With ABC News to Share News-Gathering Operations

By Peter Elstrom - Oct 3, 2011 8:04 PM GMT+0700

Yahoo! Inc. and ABC News struck an agreement to share news-gathering operations and combine bureaus in New York, Washington and Los Angeles.

ABC News, part of Walt Disney Co. (DIS), will become the leading provider of news for Yahoo! News and editorial teams from the two companies will collaborate on stories for both websites, the companies said in a statement today.

“This relationship will give ABC News an unrivaled ability to reach across the Web, combining Yahoo!’s vast distribution and cutting-edge technology with our award-winning journalism,” said Ben Sherwood, president of ABC News.

ABC News will be used throughout Yahoo News sites and on Yahoo’s front page, the companies said. GoodMorningAmerica.com will launch on Yahoo today with three online-first videos, they said.

To contact the reporter on this story: Peter Elstrom at pelstrom@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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Google’s Schmidt Says Motorola Deal Won’t ‘Screw Up’ Android

By Tim Culpan and Erik Schatzker - Oct 3, 2011 5:01 PM GMT+0700

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Google Chairman Eric Schmidt. Photographer: Joshua Roberts/Bloomberg

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Oct. 3 (Bloomberg) -- Google Inc. Chairman Eric Schmidt discusses the company's $12.5 billion acquisition of Motorola Mobility Holdings Inc. Schmidt, speaking with Bloomberg's Erik Schatzker on Oct. 1 in Nantucket, Massachusetts, also discusses the need for the U.S. government to provide short-term stimulus to the economy.(Source: Bloomberg)

Google Inc. (GOOG) Chairman Eric Schmidt said the $12.5 billion acquisition of Motorola Mobility Holdings Inc. may spur competition among phone makers using its Android software, and the company won’t play favorites with its partners.

“The Android ecosystem is the No. 1 priority, and that we won’t do anything with Motorola, or anybody else by the way, that would screw up the dynamics of that industry,” Schmidt said in an Oct. 1 interview with Bloomberg Television’s Erik Schatzker in Nantucket, Massachusetts. “We need strong, hard competition among all the Android players. We won’t play favorites in the way people are concerned about.”

Schmidt also said the 17,000 patents Google is gaining in the Motorola deal will “bulk up” its intellectual property and ultimately end legal battles among competitors in the $207 billion mobile-phone market. His comments come after analysts raised concerns that the Mountain View, California-based company’s August announcement of its biggest acquisition had made it a competitor to its own handset partners.

Research firm Gartner Inc.’s Michael Gartenberg said the purchase was a “nightmare scenario” for handset manufacturers using the Android platform. Samsung Electronics Co. and HTC Corp. (2498) have phones running on Android.

Handset makers, which have been building devices with Google’s operating system since 2008, may have a harder time cranking out bestselling devices because Motorola Mobility may get earlier access to the newest technology, said Gartenberg, based in San Jose, California.

Google, Apple

Schmidt is looking to Android to help the owner of the world’s most-popular search engine challenge Apple Inc. (AAPL) and Microsoft Corp. (MSFT) as more users access the Internet from mobile devices. The purchase of Motorola Mobility allows Google to better understand how to integrate its software with hardware while strengthening its patent portfolio amid legal battles with the two older technology companies.

In August, Google accused Microsoft, based in Redmond, Washington, and Oracle Corp., based in Redwood City, California, of waging a “hostile, organized campaign” against its Android mobile software. Apple, Microsoft and Google have ramped up spending on patent portfolios in recent months to gain exclusive rights to a broadening array of technology, much of it used in smartphones.

‘Rough Truce’

As bidding intensifies, prices for patents are surging, fueling concerns that portfolios are overvalued. Oracle sued Google last year, accusing it of patent infringement over the use of Java technology used in Android.

“From our perspective, we will end up having enough patents that we can end up with a rough truce with everybody else, which is how it’s done,” Schmidt said of Google’s plan to “bulk up” on patents. “That’s been the pattern in all other industries, and I’d expect something similar in ours.”

It’s “hard to know” when a truce might be reached, Schmidt said. Motorola’s patent portfolio wasn’t the most important factor in deciding to purchase the Libertyville, Illinois-based company, he said.

A group that includes Cupertino, California-based Apple and Microsoft beat out Google in June with a $4.5 billion bid for patents previously owned by Nortel Networks Corp., based in Mississauga, Canada.

Rivals are “banding together” to purchase patents they can use to charge fees that will make Android devices more expensive, David Drummond, Google’s chief legal officer, said in August.

“The majority of the reasoning had to do with the fact that we benefit by having a hardware partner at Google who knows how to build the next generation of tablets and phones,” Schmidt said.

To contact the reporters on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net; Erik Schatzker in New York at eschatzker@bloomberg.net.

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net.

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Hong Kong Stock Index Tumbles Amid U.S., China Growth Concerns

By Kana Nishizawa - Oct 3, 2011 3:48 PM GMT+0700
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Stock traders work on the trading floor at the Hong Kong Stock exchange in Hong Kong, China. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong declined 6.4 percent to 8,348.50. Photographer: Dale de la Rey/Bloomberg

Hong Kong’s Hang Seng Index (HSI) fell to its lowest close since 2009, on concern China’s economy is slowing and after U.S. consumer spending weakened amid a drop in incomes in the world’s largest economy.

Techtronic Industries Co. (669), maker of Ryobi power tools that counts North America as its largest market, sank 8.3 percent. Ping An Insurance Group Co., China’s No. 2 insurance company by market value, tumbled 13 percent. Jiangxi Copper Co., China’s No. 1 producer of the metal by market value, dropped 12 percent after commodity prices declined. Macau casino operator Galaxy Entertainment Group Ltd. (27) tumbled 19 percent on concern growth will slow.

The Hang Seng Index fell 4.4 percent to 16,822.15, its lowest close since May 2009. All but four stocks retreated in the 46-member gauge, which last week capped its worst quarterly loss in a decade. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong declined 5.7 percent to 8,408.26. The gauge tumbled 12 percent last week, after a manufacturing gauge contracted for a third month.

“When the macro environment is bad, it negatively affects the micro environment in Hong Kong,” said Francis Lun, managing director at Lyncean Holdings Ltd., an investment holding company in Hong Kong. “Investors are trying to get out of the stock market and wait for it to bottom out.”

Worst Since 2001

The Hang Seng Index last week posted its steepest quarterly drop since the three months ended September 2001, when terrorist attacks in the U.S. sent global markets tumbling. The benchmark was the second-worst performer among developed markets as Chinese banks and developers tumbled, and amid concern that global economies may enter a recession. Shares on the index traded at 9 times forecast earnings at the last close, compared with 11.4 times for the Standard & Poor’s 500 Index.

Techtronic sank 8.3 percent to HK$4.85. Li & Fung Ltd., a supplier of clothes and toys to retailers including Wal-Mart Stores Inc., retreated 5.9 percent to HK$12.44. HSBC Holdings Plc (5), the U.K.-based lender that made a fifth of its revenue in North America last year, slid 4.2 percent to HK$58.35.

Futures on the Standard & Poor’s 500 Index slipped 0.4 percent today. In New York, the index fell 2.5 percent on Sept. 30, sending the measure to its biggest quarterly drop since 2008, after reports from China and Germany fueled concerns the global economy is slowing.

U.S. Spending

Consumer spending in the U.S. slowed in August as incomes unexpectedly dropped for the first time in almost two years, forcing households to dip into savings. Purchases rose 0.2 percent after a 0.7 percent increase in July, Commerce Department figures showed on Sept. 30. Incomes decreased 0.1 percent, the first decline since October 2009. Economists had forecast incomes would rise 0.1 percent, according to a Bloomberg survey.

In China last week, the purchasing managers’ index, released by HSBC Holdings Plc and Markit Economics, showed a reading of 49.9 for September, unchanged from August.

“Economic indicators are suggesting that the economy in mainland China is slowing,” said Linus Yip, chief strategist at First Shanghai Securities in Hong Kong. Concerns of slowing liquidity in banks are dragging down financial and property stocks, he said.

Ping An tumbled 13 percent to HK$38.30, while China Minsheng Banking Corp. retreated 10 percent to HK$4.29. Agile Property Holdings Ltd. (3383), which develops properties in the Guangdong province, sank 18 percent to HK$4.21. China Overseas Land & Investment Ltd. (688), a developer controlled by the nation’s construction ministry, dropped 11 percent to HK$10.06.

Slowdown in China

The Purchasing Managers’ Index published Oct. 1 by the China Federation of Logistics and Purchasing rose for a second month, to 51.2. Readings above 50 signal expansion.

“The number that came out over the weekend isn’t all that good,” Louis Kuijs, Hong Kong-based chief Asia economist at MF Global Holdings Ltd., said today on Bloomberg television. “If you adjust for seasonal effects there has been some decline in the overall number. That is indicating in my mind that China’s economy is still growing, but we are seeing a slowdown.”

Developers also slid after Yifan Hu, Haitong International Research Ltd.’s head of research and chief economist, said about half of China’s commercial real-estate companies may be forced to stop operating in the next three to five years as the government tightens housing-market policies.

Galaxy Entertainment tumbled 19 percent to HK$9.42. Sands China Ltd., a Macau casino operator, sank 14 percent to HK$15.98, while Wynn Macau Ltd. (1128), a unit of the casino operator founded by billionaire Steve Wynn, slid 11 percent to HK$16.74.

Investors ‘Afraid’

Macau casinos are being hurt by speculation that steps by the Chinese government to tighten credit are leaving VIP gamblers with less cash to play with, Philip Tulk, head of Asian conglomerates and gaming research at Royal Bank of Scotland Group Plc., said in an interview in Hong Kong.

“People are afraid and selling their winners,” Tulk said. “In this kind of market, anything that’s up gets sold. It’s like a whack-o-mole.”

Cnooc Ltd. (883) China’s largest offshore oil producer, fell 6.5 percent to HK$12.16. PetroChina Co., the nation’s No. 1 oil company by market value, slid 2.5 percent to HK$9.43. Jiangxi Copper plunged 12 percent to HK$12.18. Minmetals Resources Ltd., a copper and alumina producer, slumped 10 percent to HK$2.67.

Oil prices fell today, extending declines after the worst quarter since 2008. Crude for November slid as much as 2.3 percent in electronic trading in the New York. A measure of primary metals traded in London fell 3.4 percent on Sept. 30, when copper futures declined for a third straight quarter.

Railway Shares Drop

Railway-related shares declined after 21st Century Business Herald reported China postponed construction of 80 percent of its railway projects, pending clarification of government policies, citing an unidentified person close to the railway ministry. CSR Corp., a mainland maker of railway equipment, tumbled 13 percent to HK$2.45. China Railway Group Ltd. (390), a builder of the nation’s railroads, fell 1.9 percent to HK$1.55.

Among other stocks that fell, Yanzhou Coal Mining Co., China’s fourth-biggest coal producer, sank 14 percent to HK$14.68 after it obtained government approvals to acquire Canadian potash exploration permits for $260 million.

“Investors certainly do not like it when Yanzhou said it’s entering a field that the company is not familiar with or has experience in,” said Lawrence Lau, a Hong Kong-based analyst at Bank of China Ltd. “Potash is not even remotely part of Yanzhou Coal’s core business.”

Futures on the Hang Seng Index slid 3 percent to 16,897. The HSI Volatility Index gained 2.9 percent to 44, indicating options traders expect a swing of 12.6 percent in the Hang Seng Index in the next 30 days.

To contact the reporter on this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net

To contact the editor responsible for this story: John McCluskey at j.mccluskey@bloomberg.net.

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Apple Loses to RIM in India Smartphone Market

By Ketaki Gokhale - Oct 3, 2011 4:26 PM GMT+0700
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Advertisements for Research In Motion Ltd.'s BlackBerry Bold 9780 smartphone hang over signage for Apple Inc.'s iPhone 4 at a mobile phone store in Mumbai. Photographer: Adeel Halim/Bloomberg

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RIM, which entered India in 2004, plans to extend its lead over Apple after expanding distribution to 80 cities from 15 starting last year, said Krishnadeep Baruah, director of marketing for Waterloo, Canada-based RIM in India. Photographer: Adeel Halim/Bloomberg

Apple Inc. (AAPL), the world’s largest smartphone maker, is having trouble selling iPhones in India, a market with 602 million active subscribers.

Apple, which will introduce a new iPhone version tomorrow, ships fewer handsets to the world’s second-largest mobile-phone market than it does to Norway. Nokia Oyj (NOK1V) and Research In Motion Ltd. (RIM) sell more devices in India, where smartphone shipments are forecast to grow almost 70 percent a year until 2015, helping mitigate their market-share losses in the U.S. and Europe.

Sales for the world’s biggest company by market value are hindered because Indian wireless carriers, which started third- generation networks this year, have yet to offer nationwide services fast enough to take advantage of iPhone features, said Gus Papageorgiou, an analyst at Scotia Capital Inc. in Toronto.

“Networks in India are just not conducive for Apple -- 3G networks aren’t quite where they are in Western Europe and North America,” he said. “RIM got the right product, the right timing, the right app.”

Apple shipped 62,043 iPhones to India in the quarter ending June 30, or fewer than to Norway, Belgium or Israel, according to estimates by Framingham, Massachusetts-based researcher IDC.

BlackBerry Messenger

Apple dropped 0.6 percent to the equivalent of $381.08 in German trading as of 11:22 a.m. in Frankfurt.

Apple accounted for 2.6 percent of India’s smartphone shipments in the quarter ended June 30, trailing RIM’s 15 percent, Samsung Electronics Co.’s 21 percent and Nokia’s 46 percent, IDC estimates.

“The iPhone only really works when you have Wi-Fi,” said Kshma Shah, a 25-year-old interior designer in Mumbai. “3G has barely started in India, and on 2G you just can’t have the same experience.”

The world’s largest maker of tablet computers also shipped about 21,150 iPads to India in the same period, or 0.2 percent of its global total, according to IDC.

RIM’s BlackBerry Messenger instant-messaging service is popular because it was one of the first, and it functions well on networks a generation behind the speeds offered in the U.S. and Europe, Papageorgiou said.

“Only a few of my friends have iPhones,” said Mahafareenn Sarkari, a 25-year-old dance instructor in Mumbai. “BlackBerry is where everybody is, so it made sense for me to be on it, too.”

RIM’s ‘Wave’

RIM, which entered India in 2004, plans to extend its lead over Apple after expanding distribution to 80 cities from 15 starting last year, said Krishnadeep Baruah, director of marketing for Waterloo, Canada-based RIM in India.

“We want to ride this wave,” Baruah said. “This is really the time to expand into the emerging towns and cities.”

That contrasts with RIM’s struggles worldwide, with its stock falling 65 percent this year on the Nasdaq Stock Market. At least five RIM executives have left since March, and the company sold half as many PlayBook tablets in the second quarter as analysts had forecast on average.

Nokia has more than 200,000 outlets in India and offers 13 smartphone models, Vilsha Kapoor of New Delhi-based Six Degrees PR, hired by Nokia to handle public relations, said in an e- mail.

The Espoo, Finland-based company is seeking to reverse its global performance. Shares are down 45 percent this year, and it is eliminating at least 7,500 jobs as Apple takes global market share and Asian competitors push the price of smartphones below $100.

68% Growth

Smartphone shipments in India are poised to jump almost eightfold, or an average of 68 percent a year, to 81.5 million units by 2015, according to IDC.

Apple products aren’t as accessible in India because consumers can’t buy iPhones, iPads and iTunes songs from company stores or its website. Apple sells through licensed resellers, including a Reliance Industries Ltd. subsidiary and Tata Group’s Croma.

“Apple continues to invest in India as a growing market for the company,” Alan Hely, a London-based spokesman for Apple, said in an e-mailed response.

Steve Dowling, a Cupertino, California-based spokesman for Apple, declined to comment.

In China, Apple operates six stores, including its highest- grossing ones worldwide. Revenue in China, Taiwan and Hong Kong increased six times to $3.8 billion in the quarter ended June, Apple Chief Executive Officer Tim Cook said in July.

‘Pathetic’ Advertising

Apple may be relying more on word-of-mouth among India’s wealthy, said Harish Bijoor, who runs his own brand consulting firm in Bangalore.

“They don’t see a big enough market for their products to make it worthwhile,” Bijoor said. “They’ve barely done any advertising. It’s pathetic, really.”

Cost is also an issue in a country where the World Bank estimates that about 900 million people live on less than $2 a day.

The cheapest iPhone 4 costs $705 at Reliance’s iStore, while the cheapest iPad 2 sells for about $603. In Apple’s U.S. online store, the iPhone 4 starts at $199 with an AT&T Inc. contract and the iPad starts at $499.

BlackBerrys under $200 made up 40 percent of their shipments in India in the quarter ended June 30, said T.Z. Wong, an analyst for IDC.

“I don’t think Apple is a brand for the masses,” said Ajit Joshi, managing director of Croma, which also sells other brands besides Apple. “It’s a brand for the classes.”

The masses may be getting wealthier as India’s new five- year plan aims for 9 percent growth in gross domestic product. India last year joined the top dozen countries with the most millionaires, according to a report by Capgemini and Merrill Lynch Global Wealth Management in June.

Salaries in India also are set to rise the most in the Asia-Pacific region this year, according to an Aon Hewitt LLC survey released in March 8.

“It’s a brand-in-waiting,” said Viren Razdan, managing director of consulting firm Interbrand’s Mumbai office. “Apple is waiting for infrastructure and consumer maturity.”

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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Greece Pledges $8.8 Billion in Austerity

By Marcus Bensasson and Maria Petrakis - Oct 3, 2011 3:07 PM GMT+0700
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A Greek public sector employee speaks on September 20, 2011 outside the General Accounting office in Athens during a protest against austerity measures, reduced salaries and new taxes. Photographer: Louisa Gouliamaki/AFP/Getty Images

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Greece’s measures, which require parliamentary approval, aim to secure disbursement of an 8 billion-euro loan payout this month and a second rescue of 109 billion euros agreed to by EU leaders on July 21. Photographer: Kostas Tsironis/Bloomberg

The Greek government said it passed a new budget backed by its international creditors, including larger deficits than previously forecast, as the country moves closer to securing an 8 billion-euro ($10.7 billion) aid payout needed to avoid default.

Prime Minister George Papandreou’s Cabinet also passed 6.6 billion euros of austerity measures last night to cut the 2012 deficit to 6.8 percent of gross domestic product, missing the 6.5 percent goal previously set with the EU, International Monetary Fund and European Central Bank, known as the troika. Finance Minister Evangelos Venizelos had previously said Greece would miss the targets and the troika accepted the new budget.

The new deficit numbers “should not derail Greece’s current negotiations with the troika,” Geoffrey Yu, a currency strategist at UBS AG in London, wrote in a note to clients. “Greece pledged to undertake additional spending cuts in order to secure the next aid tranche. We remain of the view that Greece will ultimately receive its current bailout tranche.

Greek bonds fell before European finance ministers gather today to consider enhancement’s to the region’s rescue fund. Papandreou adopted the austerity measures under pressure from the troika as the country’s three-year recession sapped the revenue needed to close the fiscal gap. Euro region finance chiefs will meet again on Oct. 13 to decide whether the austerity push is enough to win the sixth bailout payment.

‘Dedication’ to Goals

“Important decisions which need to be taken on a European level depend first and foremost on us,” Papandreou told his ministers last night, according to an e-mailed statement from his office in Athens. “We need to show our dedication to reaching the goals.”

The yield on Greece’s 10-year bond rose 17 basis points to 22.86 percent and the two-year yield gained 71 basis points to 62.88 percent. The euro fell 0.4 percent to $1.3333 as of 8 a.m. in London.

Greece’s measures, which still require parliamentary approval, aim to secure disbursement of the 8 billion-euro loan payout this month and a second rescue of 109 billion euros agreed to by EU leaders on July 21. Under the proposals, the deficit this year would be 8.5 percent of GDP, compared with the 7.6 percent target previously agreed with the troika.

Deficit Goals

Next year’s gap is seen at 14.7 billion euros, according to an e-mailed statement from the finance ministry last night, that is less than the 14.9 billion-euro target under the previous pledge. The budget foresees a primary surplus of 3.2 billion euros next year, or 1.5 percent of GDP, according to the statement. The Finance Ministry said in a statement last night that the budget plan was “agreed with the troika.”

Greece’s economy is forecast to shrink 5.5 percent this year, more than the 3.8 percent forecast by the EU and IMF in June, according to the statement.

Papandreou’s Cabinet approved the austerity measures on the eve of a gathering of European finance ministers in Luxembourg today. The region’s policy makers have been urged by counterparts around the world to step up their response to the sovereign debt crisis, with U.S. Treasury Secretary Timothy F. Geithner saying last week that “it’s time to move.”

Leveraging Fund

Bank of France Governor Christian Noyer today said he’s “open” to the idea of using borrowed money to enhance the capabilities of the European Financial Stability Facility, the region’s temporary rescue mechanism that is due to finance the second Greek bailout.

“It would be unrealistic to expect an increase in the EFSF itself,” Noyer said in a speech in Tokyo. “But I am personally open to any scheme that would allow existing commitments to be leveraged to provide greater intervention capacity.”

The meeting was originally due to coincide with the payout of the sixth installment of Greece’s original rescue. The payment been put off until later in October as the troika gave Papandreou more time to close the deficit gap. Papandreou announced last night that a special meeting of euro-region finance ministers would take place on Oct. 13 to hear the results of the troika’s review.

Firing Workers

The austerity measures were detailed after the cabinet meeting last night, which also approved the 2012 budget and the plan to dismiss state workers. The government by December will identify 30,000 public workers who will be put on reduced pay and either retire early or eventually be fired. The plan aims to save 300 million from the government wage bill in 2012.

Inspectors from the troika returned to Athens on Sept. 29 to resume a quarterly review of the country’s performance in meeting the conditions of the original bailout. They suspended the inspection weeks earlier after finding that the government was failing to implement measures agreed to in exchange for continued aid.

After the troika halted the review on Sept. 1, Finance Minister Evangelos Venizelos introduced a series of measures to plug the budget gap for 2011, including a new property tax approved by parliament on Sept. 27 and further cuts to pensions and wages for state workers.

To contact the reporters on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net; Maria Petrakis at mpetrakis@bloomberg.net;

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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Stocks, Commodities Fall as U.S. Futures Pare Loss

By Stephen Kirkland and Shiyin Chen - Oct 3, 2011 5:32 PM GMT+0700

Stocks fell and commodities dropped to a 10-month low as Europe’s finance chiefs prepared to weigh the risk of a Greek default. U.S. futures pared losses, while the cost of insuring German government debt rose to a record.

The MSCI All-Country World Index sank 1.2 percent at 6:30 a.m. in New York, after slumping last quarter by the most since 2008. The Stoxx Europe 600 Index slipped 1.7 percent as BNP Paribas SA, France’s biggest bank, lost 5.6 percent. Standard & Poor’s 500 Index futures retreated 0.2 percent after sliding 1.3 percent. The S&P GSCI index of commodities fell 1.1 percent, copper dropped 3.5 percent. The 10-year German bund yield traded five basis points lower, while the 30-year U.S. Treasury yield declined three basis points. Credit-default swaps on German debt climbed five basis points to an all-time high of 117.

European officials prepared to meet in Luxembourg today to consider how to shield banks from the debt crisis and boost the region’s rescue fund after Greece missed a deficit target for 2012. Factory output in the U.S. probably grew at the slowest pace in more than two years in September, economists said before a report from the Institute for Supply Management.

“We might face more risks, particularly in a market that hasn’t had enough of a correction,” said Diane Lin, a fund manager with Sydney-based Pengana Capital Ltd., which manages about $1.1 billion in global assets. “The U.S. is not falling into recession, and we haven’t seen enough evidence yet, but it’s definitely slowing down.”

All 19 industry groups declined in the Stoxx 600 as Commerzbank AG, Germany’s second-largest lender, and Societe Generale SA of France dropped more than 4 percent. BHP Billiton Ltd. and Rio Tinto Group, the world’s largest mining companies, retreated at least 2 percent.

Dexia, Morgan Stanley

Dexia SA slumped 8.8 percent as Moody’s Investors Service placed the credit ratings of the lender’s three main operating entities on review for possible downgrade. Les Echos said finance ministers from Belgium and France are meeting today to discuss financing options for Dexia.

The slide in S&P 500 futures indicated the benchmark U.S. stocks gauge will extend last quarter’s 14 percent loss. Morgan Stanley slipped 1 percent in pre-market New York trading after the owner of the world’s largest retail brokerage plunged 10 percent on Sept. 30. Yahoo! Inc. jumped 6.5 percent as Alibaba Group Holding Ltd. Chairman Jack Ma said he’s “very interested” in buying the U.S. Web portal.

The U.S. ISM factory index probably fell to 50.3 from 50.6 in August, according to the median forecast of 67 economists in a Bloomberg survey. A reading of 50 is the dividing line between contraction and expansion.

Greece, Italy

The yield on the Greek 10-year bond rose nine basis points, driving the difference in yield with benchmark bunds 13 basis points higher. The yield on Italy’s two-year security fell nine basis points and Spain’s declined five basis points as the European Central Bank bought the nations’ bonds, according to four people with knowledge of the transactions. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments rose six basis points to 346.5, approaching the record high of 358.5 set Sept. 23, according to CMA.

The Greek government passed 6.6 billion euros ($8.8 billion) of austerity measures last night to cut the 2012 deficit to 6.8 percent of gross domestic product, missing the 6.5 percent goal previously set with the European Union, International Monetary Fund and European Central Bank. Monetary Fund and ECB, known as the troika. Finance Minister Evangelos Venizelos had earlier said Greece would miss the targets and the troika accepted the new budget. Euro region finance ministers meet again Oct. 13 to decide on a sixth bailout payment.

Fed Buying

The 10-year U.S. Treasury note yield slipped two basis points, while the two-year yield rose almost one basis point. The Federal Reserve plans to buy $2.25 billion to $2.75 billion of Treasuries maturing from February 2036 to August 2041, according to the Fed Bank of New York’s website. Today’s purchases will be the first under a program announced Sept. 21 to buy $400 billion of bonds with maturities of six to 30 years through June, while selling an equal amount of debt maturing in three years or less.

The euro depreciated 0.2 percent to $1.3367, and fell as much as 0.6 percent to the lowest level since Jan. 18. The Dollar Index, which tracks the U.S. currency against those of six trading partners, climbed 0.3 percent. The yen strengthened against all 16 major peers monitored by Bloomberg.

The GSCI index of 24 commodities fell as much as 1.5 percent to the lowest since Dec. 1. Oil in New York slipped 1.2 percent to $78.27 a barrel. Gold jumped 2.1 percent to $1,657.50 an ounce, a third consecutive advance, and silver climbed 3.3 percent.

The MSCI Emerging Markets Index sank 2.6 percent, following its 23 percent plunge in the three months ended Sept. 30. The Hang Seng China Enterprises Index slumped 5.7 percent, the Jakarta Composite Index (JCI) slid 5.9 percent and the SET Index retreated 4.8 percent in Bangkok. OTP Bank Nyrt. led Hungarian stocks lower for a second day on concern local and regional governments may default.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Shiyin Chen in Singapore at schen37@bloomberg.net.

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net

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Alibaba May Buy Its Biggest Investor Yahoo

By Douglas Macmillan and Bei Hu - Oct 3, 2011 10:33 AM GMT+0700
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Yahoo! Inc. signage is displayed in the lobby of the company in Santa Clara, California, U.S. Photographer: Tony Avelar/Bloomberg

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Jack Ma, chairman of Alibaba Group Holding Ltd. Photographer: David Paul Morris/Bloomberg

Six years after Yahoo! Inc. paid more than $1 billion to become the biggest investor in Alibaba Group Holding Ltd., it’s now a potential takeover target for the Chinese Internet company.

“We are very interested in Yahoo,” Alibaba Chairman Jack Ma said at a Stanford University event near Palo Alto, California, on Sept. 30. Talks have snagged over “political issues,” rather than financial ones, he said.

Yahoo, which fired Chief Executive Officer Carol Bartz last month, owns 40 percent of Alibaba and a deal would give Ma more control over the Hangzhou-based e-commerce company he founded 12 years ago. Since Yahoo bought the stake, it’s been eclipsed by Google Inc. (GOOG) as a U.S. search engine, while China’s Internet users have risen fivefold to almost 500 million.

“Jack has a strong desire and motivation to take over Yahoo to regain control of Alibaba’s destiny,” said Duncan Clark, chairman of telecommunications consulting firm BDA China. “Yahoo at the moment is rudderless in the wake of the ousting of Carol Bartz, and years of declining market share.”

Ma’s existing relationship with Yahoo may give him an advantage in putting a deal together, Clark, who hosted the Stanford Graduate School of Business event where Ma spoke, said in an e-mail. The alternative would be to watch Yahoo “slide into irrelevance,” he said.

Reviewing strategic options

Yahoo is reviewing strategy and seeking a new CEO after ousting Bartz, who failed to reverse a growth slowdown or repel competition from Google and Facebook Inc. The process for reviewing strategic options is likely to take “months, not weeks,” according to the memo, which was signed by co-founders Jerry Yang and David Filo and Chairman Roy Bostock.

As of mid-September, private-equity investor Silver Lake was considering a bid for Yahoo, people involved in the deliberations said at the time. As part of a deal, Silver Lake would sell off Yahoo’s Asian assets and then attempt to turn around the main operations or find a buyer for that business, the people said. Representatives from Silver Lake have approached other companies to gauge interest in purchasing Yahoo’s main business, one person said.

Alibaba, also part-owned by Japan’s Softbank Corp. (9984) and Singapore’s Temasek Holdings Pte, is expanding in search-engine services after dominating China’s e-commerce market. In 2009, Its Hong Kong-listed Alibaba.com Ltd. (1688) unit acquired two U.S. companies to step up international expansion.

“We are very interested in Yahoo because our Alibaba Group is so important to Yahoo, and Yahoo is also very important to us,” Ma said, when asked if he would buy the company. “There are so many people who are interested in that, and we are also talking to them.”

Dana Lengkeek, a spokeswoman for Sunnyvale, California- based Yahoo, declined to comment.

Yahoo rose as much as 76 cents, or 5.8 percent, in late trading on Sept. 30. Before the remarks, the shares had fallen 25 cents to $13.17 on the Nasdaq Stock Market. The stock is down 21 percent this year, giving the company a market value of $16.6 billion.

A share sale last month to investors including DST Global, Silver Lake and Temasek valued closely held Alibaba at $32 billion, two people with knowledge of the deal said then.

In 2005, Alibaba Group sold a stake of about 40 percent to Yahoo for $1 billion and ownership of Yahoo’s Chinese unit. Closely-held Alibaba Group now operates e-commerce businesses including Alibaba.com and Taobao.com, in addition to Yahoo’s local website.

Yahoo’s stake in Alibaba is worth $11.45 a share, according to estimates by Thornburg Investment Management in August.

Yahoo in ‘Limbo’

“Anyone who buys Yahoo would have to deal with the 40 percent stake in Alibaba Group, and that adds to uncertainty to Jack’s own role in the group” Li Muzhi, an analyst at Mizuho Securities in Hong Kong. “With Yahoo in the ‘limbo’ state, he feels safe.”

Yahoo’s shareholders would be hard pressed to find a more credible buyer than Alibaba, according to Clark.

Financial investors have a tendency to hire “miracle worker” CEOs to fix the companies they buy, only to fire them a few months or years down the way if they fail to live up to expectations, as seen at Yahoo and Hewett-Packard Co., Clark said.

“Despite the obvious cultural hurdles, to some extent, it would be hard for Alibaba to do a worse job than previous management at running Yahoo which had been reduced from a pioneering company to a follower,” Clark said.

China Talent Pool

Alibaba has access to China’s engineering resources and talent pool, he said. Buying Yahoo would give Alibaba access to consumers in the U.S., where it already made two acquisitions in the business-to-business services field, Clark said.

Ma said he’s interested in all of Yahoo and that discussions are proving thornier than he initially expected.

While it’s hard to see how the congressional Committee on Foreign Investment in the U.S. could credibly block Alibaba’s purchase of an “iconic” company, “anything is possible” as the U.S. enters an election year, Clark said.

When Yang was CEO in 2008, before Bartz was hired, Yahoo spurned a $47.5 billion offer by Microsoft Corp. (MSFT) The two companies later struck an agreement to outsource Yahoo’s search technology to Microsoft, diminishing the chance of a takeover.

Alipay Dispute

Alibaba reached an agreement in July with Yahoo, following a four-month dispute initiated after Alibaba transferred Alipay -- China’s most popular online-payment service -- to a Chinese company controlled by Ma. Under the accord, Alibaba will get at least $2 billion in the case of an initial public offering or “other liquidity event” at Alipay.

Ma’s role in the Alipay dispute may make it more difficult for his company to acquire Yahoo, said Laura Martin, an analyst at Needham & Co. in Los Angeles.

“Jack Ma has damaged his credibility in American capital markets by his transfer of Alipay,” said Martin, who has a “buy” rating on shares of Yahoo and doesn’t own the stock. “With him, I’d get the cash at closing. You never know what you’re going to end up with.”

To contact the reporters on this story: Douglas Macmillan in New York at dmacmillan3@bloomberg.net; Bei Hu in Hong Kong at bhu5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Hang Seng Heads for Lowest Close Since 2009

By Kana Nishizawa - Oct 3, 2011 9:16 AM GMT+0700

Hong Kong’s Hang Seng Index fell, headed for its lowest close since 2009, after U.S. consumer spending slowed amid a drop in incomes, and after oil and metal prices declined.

Techtronic Industries Co. (669), maker of Ryobi power tools and Hoover vacuum cleaners that counts North America as its largest market, sank 5.1 percent. Cnooc Ltd. (883) China’s largest offshore oil producer, declined 5.2 percent and Jiangxi Copper Co., China’s No. 1 producer of the metal by market value, tumbled 7.3 percent. CSR Corp., a mainland maker of railway equipment, tumbled 8.9 percent after a report said China postponed most of its rail projects.

The Hang Seng Index fell 3.8 percent to 16,928.52 as of 9:49 a.m. local time, headed for its lowest close since May 2009. All but one stock retreated in the 46-member gauge, which last week capped its worst quarterly loss since 2001. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong declined 4.8 percent to 8,490.50.

Futures on the Hang Seng Index (HSI) slid 2.9 percent to 16,916. The HSI Volatility Index jumped 7.5 percent to 45.98, indicating options traders expect a swing of 13.2 percent in the Hang Seng Index in the next 30 days.

To contact the reporter on this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net

To contact the editor responsible for this story: John McCluskey at j.mccluskey@bloomberg.net.

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Anti-Wall Street Protests Reach ‘Prime Time’

By Charles Mead and Susanne Walker - Oct 3, 2011 11:00 AM GMT+0700

Anti-Wall Street protests escalated with more than 700 arrests over the weekend, thrusting the once- dwindling demonstrations into the national spotlight.

The rallies, which began 16 days ago with a goal of occupying Wall Street for months, spread to cities including Los Angeles and Boston, where 25 people were arrested Sept. 30 after police said they refused to leave the lobby of a Bank of America Corp. (BAC) building. The next day, New York City police halted a march over the Brooklyn Bridge and took hundreds of activists into custody for blocking traffic. Some people arrested claimed officers had tricked them into leaving the pedestrian walkway.

“The huge event on the Brooklyn Bridge is likely to bring thousands more into the movement,” said T.V. Reed, a professor of American studies at Washington State University who wrote “The Art of Protest: Culture and Activism From the Civil Rights Movement to the Streets of Seattle.”

On placards and in chants, protesters are citing Americans’ frustrations with a financial industry that received unprecedented taxpayer bailouts while damaging an economy in which unemployment remains above 9 percent. They aim to put Wall Street on the defensive, just as firms seek to shape regulations and influence next year’s general election.

More Cities Targeted

Protests also have been held in San Francisco, and last week, about 200 people met in a Methodist church in Philadelphia to organize a similar event in that city, the Philadelphia Inquirer reported yesterday. (For a slide show of Amy Arbus’s portraits of Wall Street protesters, click here.)

Demonstrators initially struggled to build momentum, drawing a fraction of the 20,000 participants that organizers such as Adbusters, a group promoting the demonstrations, aimed to lure to lower Manhattan for the Sept. 17 kickoff. Instead, about 1,000 people showed up, and by the time traders and bankers returned to work two days later, the crowd had dwindled to about 200. The number of protesters camping in Zuccotti Park a few blocks from the New York Stock Exchange fell into the dozens that week.

On Sept. 24, a larger group of weekend protesters watched as a New York Police Department deputy inspector used pepper spray on some participants. The incident stoked public interest.

Amateur videos of the episode were posted to Google Inc.’s YouTube. Celebrities including Oscar-winning actress Susan Sarandon and documentary filmmaker Michael Moore stopped by to voice support. The police department, facing protester accusations that it had acted improperly, said its Civilian Complaint Review Board would examine the incident.

‘Cucumber Mist’

“Maybe the pepper spray was a mistake,” Jon Stewart, host of the news-satire program “The Daily Show,” joked on his Sept. 29 broadcast. “It was a hot day. Maybe that officer was reaching for his canister of cooling, cucumber-mist spray and grabbed the pepper spray by accident.”

Provoking police is part of protesters’ strategy to get noticed, said Michael Heaney, a political science professor at the University of Michigan in Ann Arbor who has researched social movements.

“The police actions give them sympathetic attention,” Heaney said yesterday in a telephone interview. “The protesters want to be pepper-sprayed, they want to be arrested,” because if authorities take actions that may be perceived as unjust, “then that helps their cause.”

The arrests on the Brooklyn Bridge may have a bigger impact on public opinion.

Entering ‘Prime Time’

“This gets you into the prime time,” said David Meyer, a professor of sociology at the University of California at Irvine and author of “The Politics of Protest: Social Movements in America.” The question activists face is “‘How do you do something that generates news, which doesn’t implicate you for being at fault?’ And I guess New York City police were really helpful in this regard.”

Police gave “multiple warnings” and told protesters to remain on the bridge’s pedestrian walkway, Paul Browne, an NYPD spokesman, said in an e-mailed statement. Some people complied, while others blocked traffic. Authorities issued more than 700 summonses and tickets, he said.

New York Mayor Michael Bloomberg supported the police department’s actions on the bridge.

“The police did exactly what they are supposed to,” he told reporters yesterday before marching in the Pulaski Day Parade in midtown Manhattan. New York “is the place where you can come to express your views. Protesting is fine, but you don’t have the right to go and without a permit violate the law.”

The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

Overshadowed by Economy

The protests are part of broader theme of class warfare, which might help President Barack Obama in next year’s election, said G. Terry Madonna, a pollster and political scientist at Franklin & Marshall College in Lancaster, Pennsylvania. Still, Wall Street isn’t likely to supplant voters’ primary focus on jobs and the economy.

“No doubt there is genuine concern about ‘Wall Street Greed,’ ” Madonna said in an e-mail. “Unless the economy turns around -- translation: the job picture improves, confidence in spending is restored, and folks think their personal finances will improve -- it won’t be a significant factor in the re- election campaign.”

Another challenge facing demonstrators is their lack of a focused agenda, said Meyer. As events began in Manhattan, organizers aimed to get Obama to establish a commission to end “the influence money has over our representatives in Washington,” according to the website of Vancouver-based Adbusters.

‘All Different Causes’

On the ground, protesters have been less unified, with demands that ranged from increasing taxes on Wall Street and the wealthy to ending global warming.

“There’s certainly a potential for starting a movement, but right now it’s just a series of events and a holder for all different causes,” Meyer said. “You have people talking about ending global capitalism, and that doesn’t poll well.”

Yesterday afternoon, people who had been arrested the night before congregated again in lower Manhattan, celebrating and vowing to stay put. Musicians strummed guitars, beat drums and played a saxophone while people danced. A bare-chested singer painted the words “Lotion Man-Utube” on his torso and bellowed the words “Occupy Wall Street.” National television networks trolled the area, broadcasting live updates.

“This is the start of something big,” said Shannon Deegan, a 28-year-old employee of a Seattle technology company who said she flew to New York Sept. 30 and witnessed the bridge arrests. She aims to replicate the protests when she returns home.

Though the incident on the Brooklyn Bridge was initially discouraging, “the arrests gave us more visibility,” she said. “People are watching, and they will see our cause.”

To contact the reporters on this story: Charles Mead in New York at cmead11@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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Asia Stocks Slump as U.S. Consumer Spending Adds to Global Economy Concern

By Shani Raja and Yoshiaki Nohara - Oct 3, 2011 11:31 AM GMT+0700

Asian stocks fell, extending the regional benchmark index’s biggest quarterly decline in three years, after U.S. consumer spending slowed as incomes unexpectedly dropped, souring the earnings outlook for exporters.

Sony Corp. plunged 5.8 percent in Tokyo, touching its lowest price in more than two decades. Toyota Motor Corp. (7203), the world’s largest carmaker, fell 3.6 percent. James Hardie Industries SE (JHX), a building-materials supplier that gets almost 70 percent of its sales from the U.S., sank 3.7 percent in Sydney. BHP Billiton Ltd. (BHP), the world’s No. 1 mining company, dropped 2.8 percent after oil and metal prices slid. HSBC Holdings Plc (5), Europe’s biggest lender, led banking stocks lower.

“The U.S. is not falling into recession, but it’s definitely slowing down,” said Diane Lin, a fund manager with Sydney-based fund Pengana Capital Ltd., which manages about $1.1 billion in global assets. “We might face more risks, particularly in a market that hasn’t had enough of a correction.”

The MSCI Asia Pacific Index fell 3.5 percent to 109.22 as of 1:20 p.m. in Tokyo, ahead of a meeting of European finance ministers to weigh the threat of a Greek default. About 14 stocks fell for each that rose in the measure and all 10 industry groups declined. The gauge has dropped more than 20 percent this year amid concern the global economy is poised for another recession as Europe’s debt crisis worsens and U.S. economic growth slows.

Tankan Survey

Japan’s Nikkei 225 Stock Average fell 2.6 percent as the quarterly Tankan index showed that sentiment among Japan’s largest manufacturers remains worse than before the March earthquake. Australia’s S&P/ASX 200 slumped 2.7 percent as a gauge of Australian manufacturing fell for a third month in September. Hong Kong’s Hang Seng Index plunged 5 percent.

Futures on the Standard & Poor’s 500 Index lost 0.7 percent today. In New York, the index fell 2.5 percent on Sept. 30, sending the measure to its biggest quarterly drop since 2008, after reports from China and Germany fueled concerns the global economy is slowing.

Consumer spending in the U.S. slowed in August as incomes unexpectedly dropped for the first time in almost two years, forcing households to dip into savings. Purchases rose 0.2 percent after a 0.7 percent increase in July, Commerce Department figures showed on Sept. 30. Incomes decreased 0.1 percent, the first decline since October 2009. Economists had forecast incomes would rise 0.1 percent, according to a Bloomberg survey.

Jobs, Manufacturing

Gains in U.S. payrolls in September were probably too small to reduce joblessness and manufacturing almost stalled as concern mounted that the global recovery was losing momentum, economists said before reports this week.

Sony plunged 5.8 percent to 1,419 yen in Tokyo. Toyota dropped 3.6 percent to 2,592 yen and Canon Inc., the biggest global camera-maker, slid 3.1 percent to 3,440 yen. James Hardie declined 3.7 percent to A$5.54 in Sydney. In Hong Kong, Li & Fung Ltd., a supplier of toys and clothes to Wal-Mart Stores Inc., sank 5.3 percent to HK$12.52.

Banks in Asia also slumped. HSBC sank 4 percent to HK$58.45 in Hong Kong. Mitsubishi UFJ Financial Group Inc., Japan’s No. 1 listed lender by market value, declined 4.5 percent to 338 yen, while in Sydney, Commonwealth Bank of Australia (CBA), the nation’s biggest bank, slid 3.5 percent to A$43.96.

Debt Crisis

European officials gathering in Luxembourg today will grapple with how to shield banks from the debt crisis and consider a further boost to the region’s rescue fund. The Greek government said yesterday it approved 6.6 billion euros ($8.8 billion) of austerity measures as part of efforts to secure a pending aid payment and a second rescue package.

“To keep paying Greece money doesn’t actually solve a long-term problem,” said Pengana’s Lin.

Asian commodity stocks also sank. BHP Billiton retreated 2.8 percent to A$34.03 in Sydney. Rival Rio Tinto Group sank 3.7 percent to A$59.50. Aluminum Corp. of China Ltd., the nation’s largest producer of the light metal, slumped 4.6 percent to HK$3.32 in Hong Kong.

Oil fell today, extending declines after the worst quarter since 2008. Crude for November slid as much as 1.6 percent in electronic trading in the New York. A measure of primary metals traded in London fell 3.4 percent on Sept. 30, when copper futures declined for a third straight quarter, the longest slump since 2001.

Yearly Decline

“While a deceleration of the global economy has largely been priced into the markets, we’re not seeing anything to change this,” said Kenichi Hirano, general manager and strategist at Tachibana Securities Co. in Tokyo. “For this reason, we’ll likely see stocks move lower.”

The MSCI Asia Pacific Index declined 18 percent this year through Sept. 30, compared with a 10 percent drop by the S&P 500 and an 18 percent loss by the Stoxx Europe 600 Index. Stocks in the Asian benchmark are valued at 11.5 times estimated earnings on average, compared with 11.4 times for the S&P 500 and 9.5 times for the Stoxx 600.

The Asia Pacific index tumbled 16 percent in the third quarter, the biggest drop since 2008, as concern mounted that Europe’s sovereign-debt crisis combined with a slowdown in the U.S. economy may drag the world back into recession.

To contact the reporters on this story: Shani Raja in Sydney at sraja4@bloomberg.net. Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editor responsible for this story: John McCluskey at j.mccluskey@bloomberg.net.

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