Cash Punished as S&P 500 Spenders Beat Savers

By Whitney Kisling - Dec 19, 2011 9:34 PM GMT+0700

In a year when American companies piled up record amounts of cash, the worst stocks were the savers and the best gave the money back to investors with dividends and buybacks.

Companies that hoarded cash such as CareFusion Corp. (CFN), Western Digital Corp. and 18 other members of the Standard & Poor’s 500 Index lost an average 15 percent in 2011, according to data compiled by Bloomberg. The 40 that repurchased the most stock or offered the biggest dividends climbed 5.7 percent, led by DirecTV and Reynolds American Inc. (RAI), the data show.

Bulls say gains in companies that returned money will help unlock almost $1 trillion of cash that chief executive officers have been hoarding for three years. Thomas Lee, the chief U.S. equity strategist at JPMorgan Chase & Co., says distributions should increase 28 percent to $1.1 trillion into next year. Bears say dividends and buybacks will be insufficient to keep the rally going as mandated budget cuts curb growth.

“Investors are more yield-hungry than ever before,” said Jacob de Tusch-Lec, a London-based money manager at Artemis Investment Management LLP in London, which oversees $17 billion. “Because of the market we are in, investors have flocked to companies that are the best in the world at what they do, generate excess cash and have a proven record of returning money.”

Default Concern

The S&P 500 fell (SPX) 2.8 percent to 1,219.66 last week, the first decline since November. Concern that countries in Europe face defaults pushed the index down 11 percent since it reached an almost three-year high of 1,363.61 on April 29. While the index has lost 3 percent for 2011, it has swung from an 8.4 percent gain in April to a 13 percent loss in October. The S&P 500 advanced 0.4 percent at 9:33 a.m. in New York today.

Companies built reserves as stocks sank and forecasts for growth in U.S. gross domestic product next year slipped from 3.3 percent in February to as low as 2 percent in October. Cash at companies excluding banks, utilities, truckers and automakers rose to a record $998.9 billion last quarter, according to S&P.

Hoarding money hasn’t paid off in the market. A group of 20 companies that increased cash and short-term investments the most in 2010 lost 15 percent this year, according to data compiled by Bloomberg. The data excludes companies that increased buybacks or dividends in 2011 or spent the most on capital investments last year.

CareFusion Cash

CareFusion boosted cash to the highest level since it was spun off in 2009 and Western Digital’s climbed for the past five quarters, data compiled by Bloomberg show. CareFusion, a medical supply company, hasn’t bought back shares or paid a dividend to public shareholders, and hasn’t announced plans to do so this year, according to data compiled by Bloomberg. The stock has fallen 6.4 percent since Dec. 31.

Western Digital, a maker of disk drives and networking products, beat profit estimates (WDC) for the past two quarters and raised its quarterly revenue forecast this month. The shares, which trade at a 32 percent discount to their average price- earnings ratio in the last 10 years, declined 8.7 percent this year. MetroPCS Communications Inc., down 34 percent in 2011, raised cash to a record level in the second quarter.

At the same time, the 20 nonfinancial S&P 500 companies that spent the most to repurchase shares last year advanced 6.3 percent. Those that had the biggest dividend increases relative to their operating cash level rose 5.1 percent, according to data compiled by Bloomberg. There are 312 nonfinancial companies in the S&P 500 that pay dividends, and all but six raised or maintained them in the past year, according to data compiled by Bloomberg.

DirecTV (DTV), Reynolds

DirecTV, the largest U.S. satellite-television provider, bought back $1.45 billion of shares in the third quarter, part of a $6 billion program announced in February. Reynolds boosted its quarterly dividend payout twice in 2011. The companies rallied 5.4 percent and 25 percent, respectively.

The S&P 500 is trading at 12.3 times estimated 2011 earnings, or 30 percent below its 10-year average price-earnings ratio, data compiled by Bloomberg show. More than 1,000 U.S. companies authorized buybacks this year, according to Birinyi Associates Inc. At $520 billion announced through last week, 2011 is on track for the third-biggest year for repurchases on record, the data show.

“Companies that are just building cash, they’re looked at as not taking any risk,” Eric Green, a Philadelphia-based fund manager at Penn Capital Management, which oversees about $6 billion, said in a telephone interview Dec. 15. “If they’re not going to expand, they might as well be paying it out.”

Debt Crisis

Speculation Europe’s debt crisis will spur a recession sent investors to the relative safety of fixed income in 2011. U.S. Treasuries advanced 9.9 percent and investment-grade bonds returned 7.3 percent, according to Bank of America Merrill Lynch data. Unemployment that reached 23 percent in Spain and a budget deficit in Greece totaling 1.4 times gross domestic product heightened concern the region’s economy will contract.

The Dow Jones Industrial Average (INDU) swung between gains and losses of more than 400 points over four days in August after Congress and President Barack Obama battled over borrowing limits that prompted S&P to downgrade the government’s AAA credit rating for the first time. The Chicago Board Options Exchange Volatility Index stayed above 30 between August and September as consumer confidence fell to a two-year low and U.S. unemployment was at or above 9 percent for seven months.

Manufacturing, Unemployment

While bonds climbed, equity investors snapped up companies returning money to shareholders amid signs the worst is over for the U.S. economy. Manufacturing in the Philadelphia region expanded in December at the fastest rate in eight months after plunging to a 29-month low in August, the Federal Reserve said Dec. 15. First-time claims for unemployment insurance slipped to the lowest level since 2008, the height of the worst recession since the 1930s, the Labor Department said Dec. 15.

Another contraction may send investors back to companies that have piled up cash, according to Federated Investors Inc.’s Lawrence Creatura. While U.S. jobless claims fell to a three- year low last week, concern European leaders are failing to stem the two-year debt crisis sent the euro to the biggest weekly decline since September.

“The question investors have to ask themselves is, what will be the state of the global economy next year?” Creatura, a Rochester, New York-based fund manager at Federated Investors, which oversees $350 billion, said in a Dec. 15 telephone interview. “That will define which companies you should own.”

Earnings Beat Projections

Buybacks and dividends aren’t keeping up with profits compared with 2007 distributions and should increase by about $250 billion into next year, according to Lee at JPMorgan. S&P 500 earnings have beat analyst projections for an 11th straight quarter and are projected to end 2011 at $98.89 a share, about 18 percent higher than in 2007, the last year before the financial crisis. according to analyst forecasts compiled by Bloomberg.

“Corporate cash return is not anywhere close to prior highs,” he said. “The implication is that corporates are likely to vastly ramp up cash return.”

The world’s largest economy shrank 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the most of any recession since the 1930s. General Electric Co., once the biggest company by market value, shocked investors on Feb. 27, 2009, by cutting its payout for the first time since 1938 after its shares plunged 78 percent in less than 17 months.

GE Dividend

GE, now the ninth-largest U.S. company, raised its quarterly (GE) dividend 13 percent on Dec. 9, the fourth increase in less than two years. The stock gained 3.3 percent since Chief Executive Officer Jeffrey Immelt told shareholders Dec. 13 that the company should generate $30 billion in cash to spend on acquisitions, payouts and buybacks over the next three years.

“Companies are looking at their uses of what are pretty hefty cash reserves, and they’re voting with their checkbooks that they think their shares are undervalued,” said Tom Murphy, a money manager at Columbia Management in Minneapolis, who oversees $23 billion of investment-grade credit. “They’re saying that’s the best opportunity they have.”

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net

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

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European Stocks Climb as Carmakers, Nestle, Danske Bank Advance

By Peter Levring - Dec 19, 2011 9:03 PM GMT+0700

European stocks climbed, rebounding from the Stoxx Europe 600 Index’s slide last week, as carmakers advanced, offsetting Fitch Ratings’ statement that it may downgrade France, Spain and Italy.

Volkswagen AG (VOW), Europe’s biggest automaker, gained 3 percent after a report that its luxury unit, Audi AG, expects to sell 1.3 million cars in 2011. Air Berlin Plc (AB1) soared after saying that Etihad Airways will increase its stake in the company to 29.2 percent. Nestle SA (NESN) added 1.3 percent. Danske Bank A/S rose 1.7 percent after the lender said chairman, Eivind Kolding, will become its next chief executive officer.

The Stoxx 600 advanced 0.8 percent to 235.52 at 2:01 p.m. in London, rebounding from an earlier decline of as much as 0.7 percent. The benchmark measure slipped 2.8 percent last week, dropping for a second week, as concern lingered that the euro area’s debt crisis is deepening and as the Federal Reserve refrained from taking new action to bolster the world’s largest economy. The gauge has still retreated 15 percent this year.

“Everybody knows rating agencies are saber rattling and suggesting Europe should trade lower on the death of Kim Jong Il seemed somewhat overdone,” said Ole Kjaer Jensen, head of share trading sales at Aabenraa, Denmark-based Sydbank A/S. “Volumes are low and the newsflow is very weak. It seems buyers stepped into the market after the initial selloff.”

The European Central Bank will offer unlimited funding against collateral for as long as three years in a tender tomorrow in President Mario Draghi’s latest attempt to get cash flowing around the financial system. It’s up to lenders to decide what to do with the money, he told the Financial Times in an interview.

North Korea’s Kim

The official Korean Central News Agency said that Kim Jong Il died on Dec. 17 from a heart attack brought on by mental and physical strain, bringing an end to his 17-year tenure. State media urged citizens to “loyally follow” Kim Jong Un, who is at the “forefront of the revolution.”

Fitch Ratings lowered France’s credit outlook and put the grades of nations including Spain and Italy on review for a downgrade, citing the euro area’s failure to find a “comprehensive solution” to its debt crisis. Fitch placed Spain, Italy, Belgium, Slovenia, Ireland and Cyprus on a “Rating Watch Negative” review, which it expects to complete by the end of January, according to a statement.

National benchmark indexes climbed in every western- European market except Iceland. France’s CAC 40 Index added 1.2 percent, Germany’s DAX Index gained 1.1 percent and the U.K. FTSE 100 Index rose less than 0.1 percent.

Belgium’s Rating Cut

Separately, Belgium’s credit rating was cut two levels to Aa3 by Moody’s Investors Service on Dec. 16.

Euro-area finance ministers will hold a conference call at 3:30 p.m. Brussels time today to discuss 200 billion euros ($261 billion) in additional funding through the International Monetary Fund and the mechanics of the so-called fiscal compact that were agreed in the Dec. 9 European Union summit accord, according to two people familiar with the matter.

The ECB’sDraghi damped expectations that the central bank will increase its bond purchases to tame the sovereign-debt crisis, saying the ECB can’t overstep its mandate.

“People have to accept that we have to, and always will, act in accordance with our mandate and within our legal foundations,” Draghi told the FT in an interview, confirmed by the Frankfurt-based ECB. “The important thing is to restore the trust of the people -- citizens as well as investors -- in our continent. We won’t achieve that by destroying the credibility of the ECB.”

Volkswagen, Volvo Advance

Volkswagen rose 3 percent to 118.80 euros after WirtschaftsWoche reported that Audi expects to sell more than 1.3 million cars this year. The magazine cited an interview with Audi’s Chief Executive Officer Rupert Stadler, who said that the euro area’s debt crisis hasn’t had a significant impact on sales.

Volvo Group AB advanced 1.9 percent to 71.55 kronor in Stockholm as the world’s second-largest maker of commercial vehicles reported that sales rose 22 percent in November.

Air Berlin rallied 8.2 percent to 2.50 euros after saying that Etihad Airways, Abu Dhabi’s state-controlled airline, will pay 72.9 million euros to increase its stake in the German airline to 29.2 percent. Etihad will purchase 31.6 million new shares at Dec. 16’s closing price of 2.31 euros a piece, Air Berlin said in a statement. Etihad will keep the shares for at least two years and not increase its stake during that time.

Nestle climbed 1.3 percent to 51.85 Swiss francs as the world’s biggest food company contributed the most to the Stoxx 600’s advance.

Danske Bank, Maersk

Danske Bank advanced 1.7 percent to 73.05 kroner after Denmark’s largest lender said that Kolding will take over from CEO Peter Straarup on Feb. 15. Kolding, 52, is currently also CEO of Maersk Line, the container unit of A.P. Moeller-Maersk A/S. Danske named Kolding as chairman earlier this year.

Maersk, gained 1.9 percent to 35,180 kroner after saying that Soeren Skou will replace Kolding at Maersk Line.

Intesa Sanpaolo SpA, Italy’s biggest lender (ISP) by market value, jumped 4.7 percent to 1.27 euros as Berenberg Bank said the lender remained its preferred name among Italian lenders. UniCredit SpA (UCG) surged 5.7 percent to 71.95 euro cents as financial newspaper Il Sole reported that Fondazione CRT will sell its stakes in Societe Generale SA and Banco de Sabadell SA to free up funds to subscribe to UniCredit’s capital increase.

SGL Carbon SE (SGL) declined 3.7 percent to 43.64 euros after Chief Financial Officer Juergen Muth told the Frankfurter Allgemeine Sonntagszeitung that the German maker of carbon and graphite products regards a takeover by Bayerische Motoren Werke AG and the carmaker’s heiress Susanne Klatten as unlikely. BMW and Klatten together hold about 44 percent in SGL.

BP Plc (BP/), Europe’s second-biggest oil producer, dropped 2.2 percent to 436 pence. Oil and gas companies performed the worst of the 19 industry groups in the Stoxx 600.

To contact the reporter on this story: Peter Levring in Copenhagen at Plevring1@bloomberg.net or

To contact the editor responsible for this story: Andrew Rummer in London at arummer@bloomberg.net;

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Obama Passes ‘Hot Potato’ to States

By Alex Wayne - Dec 19, 2011 12:01 PM GMT+0700

The Obama administration avoided a potentially brutal lobbying battle over the medical benefits insurers must cover under the U.S. health-care overhaul when it decided last week to hand the decision off to states.

The Dec. 16 ruling, coming less than a year before the presidential elections, gives states the power to set coverage levels for the policies uninsured people will buy through regulated marketplaces, called exchanges, starting in 2014. Business groups will argue for a narrow set of benefits to save costs while consumer advocates push for more coverage.

The decision shifts the debate to statehouses and away from the White House, and lets President Barack Obama say he’s giving governors and legislatures more flexibility within their own communities to confront rising medical costs and control changes brought about by the 2010 health-care law.

“Obama has taken all the grief he can stand over health care,” said Erik Gordon, a business professor at the University of Michigan in Ann Arbor, in an e-mail “He doesn’t want it to give the Republicans any more political ammunition. He is passing the hot potato to the states.”

About 24 million people are projected to buy coverage through exchanges by 2019, according to the Congressional Budget Office. Premiums will average $5,800 for individuals and $15,200 for families in 2016.

Similar Services

Under the new guidelines, state lawmakers must either set coverage levels in line with widely subscribed small- business plans in their communities, or peg them to benefits included in their state employees’ health plan, federal employee plans or the largest commercial managed- care plan in the state.

Generally, health plans for small businesses, state employees and federal workers “cover similar services,” including doctors’ visits, hospitalization and outpatient mental health, according to a study conducted by the U.S. Health and Human Services Department ahead of the Dec. 16 announcement.

Differences arise in areas such as prescription drugs. While they’re covered as a basic benefit by all government employee plans, only 84 percent of small business plans include them. The others require additional premiums, the study found. Small business plans also don’t tend to cover dental care, acupuncture, bariatric surgery and hearing aids, unless states require it, the study showed. Federal plans cover those services.

Business’ Preference

“Businesses would rather deal with states, many of whom are far more sympathetic than Washington is to claims that high benefits will bankrupt employers,” the University of Michigan’s Gordon said. “Given the competition for jobs, I expect to see regulatory arbitrage bid down required coverages,” he said.

The lack of national standards may allow some states to skimp in areas such as maternity coverage, said Debra Ness, president of the National Partnership for Women & Families in Washington, in a statement.

The administration’s ruling is “a grave disappointment” that ignores the health-care law’s direction “to develop a detailed package that would apply uniformly to plans across the nation,” Ness said.

States that have delayed implementing the health-care law have one less excuse for not moving forward, said Ethan Rome, executive director of Health Care for America Now, a coalition of labor and civil rights groups that supports the statute.

Balancing Priorities

““This shifts the battle over essential benefits to state capitals, where the insurance lobby is strongest and where it will advocate for inadequate benefits that won’t meet the needs of people,” Rome said. “State regulators need to have a transparent process in making these important decisions and should stand up for consumers.”

Neil Trautwein, a vice president at the National Retail Federation, heads a coalition of business groups and insurers lobbying for a narrow coverage package.

He says both the federal and state governments need “to develop a rule that balances state-selected and reasonably comprehensive benefits with affordability for employers and Individuals,” no matter which state is involved.

Rules that do otherwise “will make health coverage more expensive for employers and individuals to purchase and make jobs more difficult for employers to create,” he said.

Guaranteed Coverage

Many states already set minimum benefit levels in regulating insurers. Idaho, for instance, mandates insurers to cover just 13 types of health services while Rhode Island requires coverage of 69, according to the Council on Affordable Health Insurance, an industry group.

The health law, though, created insurance exchanges as a way to guarantee coverage for those who don’t have it now and for people who find it hard to be accepted by a health plan because of pre-existing medical conditions.

The federally mandated exchanges are central to the law’s goal to expand coverage to as much as 95 percent of Americans. The law, though, left open many questions involving how thye would be set up and run, opening the way for the Obama administration to control that through regulatory guidelines.

The decision not to impose national standards is in line with other moves by the administration this year as it develops rules to expand coverage to a projected 32 million people.

More State Options

Regulations released by the U.S. Deparment of Health and Human Services in July gave states wide latitude to design and run the markets. The administration also offered conditional certification for states that make good-faith efforts to establish exchanges but aren’t able to meet a 2013 deadline.

HHS also issued several directives it said were aimed at giving states more options to design their own Medicaid programs. States and the federal government run Medicaid, with the U.S. approving changes in eligibility standards by granting waivers from national law. The program is among the biggest expenses for states and also a prominent vehicle to expand coverage to the uninsured under the law.

A February letter from the U.S. to states raised the prospect of dropping some adults with incomes exceeding 133 percent of the federal poverty level from the program to close budget shortages.

Still, foes of the 2010 health-care law say the moves don’t go far enough.

The law itself is the issue, not how it is regulated, said Senator Orrin Hatch of Utah, the senior Republican on the Finance Committee, suggesting that it will remain a key campaign issue in the presidential elections no matter what the Obama administration does to dim protests on specific issues.

“The framework proposed by the administration takes away the right of individuals to chose the health care plan that best fits their needs,” Hatch said after the administration announced states would set benefit rules.

To contact the reporter on this story: Alex Wayne in Washington at awayne3@bloomberg.net

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net

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U.S. Stocks Rise as EU Ministers Seek Funding

By Rita Nazareth - Dec 19, 2011 9:39 PM GMT+0700

U.S. stocks rose, sending the Standard & Poor’s 500 Index higher for a third straight day, as European finance ministers seek to draw additional aid and form new budget rules to contain the region’s debt crisis.

Caterpillar Inc. (CAT) and Pfizer Inc. (PFE) increased at least 1 percent to pace gains among the biggest companies. Las Vegas Sands Corp. rallied 2.2 percent as its unit Sands China Ltd. said a Hong Kong regulator probe ended. Vertex Pharmaceuticals (VRTX) Inc. jumped 1.5 percent after RBC Capital Markets raised its recommendation for the drugmaker’s shares.

The S&P 500 added 0.3 percent to 1,222.74 at 9:37 a.m. New York time. The benchmark gauge for U.S. equities gained 0.7 percent over the previous two days. The Dow Jones Industrial Average rose 36.18 points, or 0.3 percent, to 11,902.57 today.

“A meeting is better than no meeting, but based on past meetings in Europe, there’s no guarantee that anything substantive will come out,” Hank Smith, chief investment officer at Haverford Trust Co. in Radnor, Pennsylvania, said in a telephone interview. His firm manages about $6.5 billion. “Hopefully we won’t see a situation in which the market, by dramatically increasing the cost of funding, forces European leaders to get more serious.”

Stocks fell last week (SPX) as European leaders struggled to solve the region’s debt crisis and the Federal Reserve refrained from additional stimulus. Equities rose the last two days of the week as data on jobless claims and manufacturing offset concern Europe’s crisis is escalating. The S&P 500 has fallen 3 percent this year through Dec. 16.

Additional Funding

Euro-area finance ministers will hold a conference call to discuss 200 billion euros ($261 billion) in additional funding through the International Monetary Fund and the mechanics of a so-called fiscal compact that was negotiated at a Dec. 9 European Union summit, according to two people familiar with the planning.

“There’s discussions about putting some more money into the IMF,” said Andy Lynch, a portfolio manager at Schroder Investment Management Ltd., which oversees about $284 billion. “If that takes out some of the sovereigns that are currently paying very high yields out of the market for a couple of years, giving them time to restructure their finances, that can only be good news.”

Some of the biggest companies gained today. Caterpillar increased 1.4 percent to $88.45. Pfizer rose 1 percent to $21.24.

Las Vegas Sands (LVS) rallied 2.2 percent to $42.45. Sands China said an investigation by the Hong Kong Securities and Futures Commission for alleged breaches of regulations has ended, according to a company statement to the stock exchange. The SFC started a probe of the China unit of Las Vegas Sands in March.

Vertex Pharmaceuticals rose 1.5 percent to $34.41. The drugmaker was raised to “top pick” from “sector perform” at RBC Capital Markets. The 12-month price estimate is $48 a share.

To contact the reporter on this story: Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net

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

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Stocks Rise on Aid Meeting as Won Drops After Kim’s Death

By Rob Verdonck - Dec 19, 2011 9:31 PM GMT+0700

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Dec. 19 (Bloomberg) -- Nick Maroutsos, co-founder of Sydney-based Kapstream Capital, talks about the impact of Europe's debt crisis on Asian markets and economies. Maroutsos speaks with Zeb Eckert on Bloomberg Television's "First Up." (Source: Bloomberg)

Play Video

Dec. 19 (Bloomberg) -- Thomas Murphy, managing partner at private wealth-management firm Family Office Research & Management Ltd. in Sydney, talks about China's economy, central bank monetary policy and stock market. Murphy also discusses Europe's sovereign debt crisis and its implications for the region's banking industry. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Stocks rose as Europe sought to draw additional financial support for its debt crisis. The won weakened to a two-month low after North Korean leader Kim Jong Il died.

The Standard & Poor’s 500 Index advanced 0.2 percent and the Stoxx Europe 600 Index gained 0.6 percent at 9:30 a.m. in New York. The MSCI Asia Pacific Index slid 1.7 percent as South Korea’s Kospi index slumped 3.4 percent. The won fell against all 16 major peers. The yield on the French 10-year bond climbed six basis points and the German bund yield increased three basis points. Spanish and Italian bonds rallied.

Euro-area finance ministers are seeking to meet a self- imposed deadline for drawing additional aid to the debt crisis through the International Monetary Fund. France sold 7 billion euros ($9.1 billion) of bills after Fitch Ratings last week reduced its outlook for the nation’s credit grade to negative from stable. Kim died on Dec. 17 of exhaustion brought on by a sudden illness, the official Korean Central News Agency said.

“The ratings agencies have obviously come out and said what they think, but on the other hand there’s the discussion about putting some more money into the IMF,” said Andy Lynch, a portfolio manager at Schroder Investment Management Ltd., which oversees $284 billion.

The Stoxx 600 rose following two straight weekly losses, paring this year’s drop to less than 15 percent. Suedzucker AG, a maker of sugar, starch and bakery additives, climbed 5.7 percent after Goldman Sachs Group Inc. recommended the shares.

10-Year Treasuries

The S&P 500 climbed for a third day. The 10-year Treasury yield rose one basis point to 1.86 percent before the U.S. auctions $35 billion of two-year notes, the first of three sales this week totaling $99 billion. The dollar strengthened against 10 of its 16 most actively traded peers.

U.S. online spending for the holiday season has jumped 15 percent to $30.9 billion from a year earlier, ComScore Inc. said. Consumer purchases probably rose 0.3 percent in November after increasing 0.1 percent in October, according to the median forecast of 62 economists surveyed by Bloomberg before Commerce Department figures scheduled for Dec. 23.

The MSCI Emerging Markets Index (MXEF) dropped 1.3 percent, set for the lowest closing level in three weeks. The Shanghai Composite Index (SHCOMP) lost 0.3 percent after new home prices in China dropped in 49 of 70 cities monitored by the government in November. The BSE India Sensitive Index (SENSEX) fell 0.7 percent, while Russia’s Micex Index rose 0.4 percent.

Won Weakens

South Korea’s won depreciated 1.4 percent to 1,174.80 per dollar, after declining to the weakest since Oct. 7. A government statement called on North Koreans to “loyally follow” Kim Jong Il’s son, Kim Jong Un.

European finance ministers hold a conference call at 3:30 p.m. Brussels time to discuss 200 billion euros of additional funding through the IMF.

French 10-year bonds snapped a four-day gain as yields increased six basis points to 3.11 percent. The Dutch 10-year yield climbed four basis points, with the yield on the similarly dated Finnish security also four basis points higher. Spain’s two-year note yields fell 17 basis points to 3.29 percent. They have dropped 163 basis points in the past seven trading days, the longest run of declines since October 2010.

Belgium’s 10-year yield jumped seven basis points after the nation’s credit ranking was cut two steps at the end of last week by Moody’s Investors Service.

Three-month copper dropped 0.2 percent to $7,329.75 a metric ton in London and nickel slipped 0.8 percent to $18,410 a ton. Oil rose 0.6 percent to $94.12 a barrel in New York.

To contact the reporter on this story: Rob Verdonck in London at rverdonck@bloomberg.net

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

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N. Korea Signals Kim Succession as South Braces

By Sangwon Yoon, Eunkyung Seo and Taejin Park - Dec 19, 2011 4:39 PM GMT+0700

North Korea said its people and military back Kim Jong Un, the little-known third son of Kim Jong Il, as leader as uncertainty around the political succession on a peninsula where 1.7 million troops are stationed unsettled stock markets from Seoul to Hong Kong.

Kim Jong Il died Dec. 17 from a heart attack brought on by mental and physical strain, the official Korean Central News Agency said today, bringing an end to a 17-year tenure in which North Korea built nuclear weapons while some 2 million of its people died from famine. State media urged citizens to “loyally follow” Jong Un, who is at the “forefront of the revolution.”

“Kim’s death happened at a very bad time for the North Korean regime,” said Brian Myers, a professor of international studies at Dongseo University in Busan, South Korea. “It has really not proceeded very quickly with the glorification of the heir-apparent, Kim Jong Un. An average North Korean is still in the dark about his upbringing, his biography, why he is uniquely well qualified to take over the country.”

South Korea pledged steps by the central bank if needed to stabilize financial markets, and called in police officers for emergency duty while keeping the alert level for the military unchanged. The transition in the north adds to risks for Asia’s fourth-largest economy, which is already contending with slowing export growth as Europe’s debt crisis dents global demand.

Stocks Drop

The Kospi index of shares closed down 3.4 percent in Seoul (KOSPI), and the MSCI Asia Pacific Index lost 1.8 percent as of 6 p.m. Korea time. South Korea’s won sank 1.4 percent to 1,174.80 per dollar.

During a state television broadcast monitored in Tokyo, the announcer wept as she read the news of Kim Jong Il’s death. Footage was aired of thousands of people in the main square of the capital of Pyongyang chanting in unison and waving Kimjongilia, a flower named after the deceased leader. While official reports give Kim’s age as 69, Russian records indicate he was born in Siberia in February 1941.

The late leader last year set in line his succession plan. Kim Jong Un, thought to be 28 or 29, was first mentioned in official KCNA dispatches on Sept. 28, 2010, when his appointments as general and vice chairman of the Central Military Commission of the party were announced.

Right Side

Jong Un stood at his father’s right side at a military parade the next month, wearing a black suit with a mandarin collar similar to the style worn by his grandfather, who founded the nation after World War II. The younger Kim, educated in Switzerland, also emulates Kim Il Sung’s slicked-back hairstyle, rather than the bouffant favored by his father.

Jong Il was known in official media as “dear leader,” with Il Sung known as “great leader.” KCNA today said that Jong Un is a “great successor” to lead the juche project, referring to the North’s state ideology of self reliance.

“It comes at a time when there was a slight indication North Korea was going through one of its good-boy phases,” said Carlyle Thayer, a politics professor at the Australian Defense Force Academy in Canberra, referring to signs of a North Korean pledge to suspend parts of its nuclear program. “I don’t expect an outbreak of war, but it takes the positive trends that were beginning to emerge and perhaps puts them on hold.”

North Korea for years has engaged in a strategy of brinkmanship with the U.S. and South Korea following the 1950-53 Korean war, which ended without a peace treaty. America became one of the nation’s biggest aid donors as its negotiators forged periodic agreements with the North to suspend its nuclear armaments program.

Food Aid

The U.S. agreed on providing food aid to North Korea in recent talks held between the countries in Beijing, based on steps including a suspension of the North’s uranium enrichment, South Korea’s Yonhap News reported two days ago, citing diplomatic officials in Seoul it didn’t identify.

The Obama administration resumed direct talks with Kim Jong Il’s regime in October after increased sanctions had no effect in persuading it to abandon the nuclear program. The U.S. envoy on North Korea Glyn Davies told reporters in Tokyo last week further bilateral talks hinge on the totalitarian state changing its “provocative” behavior.

The U.S. is “closely monitoring” reports that North Korean leader Kim Jong Il has died, the White House said in a statement in Washington. President Barack Obama has been notified and the administration is in “close touch” with allies South Korea and Japan, the statement said, citing the office of the press secretary. The U.S. remains “committed to stability on the Korean peninsula,” the statement said.

Military Monitoring

All police officers in South Korea were called to work for emergency duty and commanders are discussing “a detailed course of action” in response to developments in the North, the National Police Agency said in a statement on its website today. The South’s military has no immediate plans to change monitoring and combat-alert levels after finding no unusual movements among North Korean forces, said a spokesman for the joint chiefs of staff who declined to be named in keeping with military policy.

Jung Seung Jo, the chairman of South Korea’s joint chiefs of staff, and James Thurman, commander of U.S. forces in Korea, agreed to respond calmly by strengthening military preparedness, and not creating “unnecessary tension,” the official said.

Market Watch

South Korea’s central bank will “closely monitor” any developments and will take steps to stabilize markets and seek international cooperation if needed, Bank of Korea Governor Kim Choong Soo said at a meeting in Seoul today. The BOK said in a statement it will run a 24-hour market monitoring system.

Thomas Byrne, a senior vice president at Moody’s Investors Service in Singapore, said in an interview that “we recognize that the collapse of the North Korean state or an outbreak of war pose an event risk for South Korea, which will have severe implications.” He added “we consider that likelihood to be remote even under the current uncertain situation.”

Yang Moo Jin, a professor at University of North Korean Studies in Seoul, echoed Byrne’s assessment.

“The possibility of a public uprising or military coup in North Korea seems low since the North has prepared for the succession for the past year,” said Yang. “Kim Jong Un’s complete takeover of the helm will not take place for awhile due to his young age and inexperienced leadership. The North will be under the control of a governing body, I expect, for about a year.”

Deadly Attacks

Tensions on the peninsula have risen since attacks last year that killed 50 South Koreans. North Korea shelled a South Korean island last November, killing four people. It has denied an international report blaming Kim’s regime for the torpedoing of a South Korean warship in March 2010 that killed 46 sailors.

North Korea last month said it was making progress in building a light-water atomic reactors and producing low- enriched uranium. The U.S., Japan and South Korea have all urged China, North Korea’s biggest ally, to persuade it to return to six-nation nuclear disarmament talks that were abandoned in April 2009.

“Kim’s death was one of the critical Black Swan risks on the Korean peninsula,” said Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc. “The initial shock will be negative for South Korean markets. What’s important is the policy makers’ responses. The South Korean government probably has contingency plan and international cooperation with the U.S. and China is also very important.”

Defense Shares

Speco Co. led gains among defense-related companies in Seoul stock trading. A defense equipment manufacturer, it jumped by the daily limit 15 percent to 2,350 won. Victek Co., an electronic warfare equipment maker, and Huneed Technologies, a military communication equipment manufacturer, also rallied 15 percent.

The inexperience and youth of North Korea’s heir-apparent Kim Jong Un “increase the likelihood of miscalculation” with South Korea and the U.S. and raises the potential risk of “provocations,” General Thurman said in written answers to the Senate Armed Services Committee in June. “Our primary concern is the potential for additional North Korean provocations, which is a tool of choice as part of its coercive diplomacy.”

To contact the reporter on this story: Stuart Biggs in Tokyo at sbiggs3@bloomberg.net

To contact the editor responsible for this story: John Brinsley at jbrinsley@bloomberg.net

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S&P Downgrade Proves Absurd as Investors Prefer U.S.

By Zeke Faux and John Detrixhe - Dec 19, 2011 6:21 PM GMT+0700

Four months after Standard & Poor’s stripped the U.S. of its AAA credit rating and said the world’s biggest economy was no longer the safest of borrowers, dollar- denominated financial assets are doing nothing but appreciating.

Government bonds have returned 4.4 percent, the dollar has gained 8.6 percent relative to a basket of currencies, and the S&P 500 Index of stocks has rallied 1.7 percent since the U.S. was cut to AA+ from AAA on Aug. 5. The cost for the nation to borrow has fallen to record lows since S&P said the U.S. was no longer risk-free, with the average monthly yield in November on 10-year notes below 2 percent for the first time since 1950.

Demand for American assets is increasing as consumer confidence, manufacturing and employment show the U.S. is strengthening as Europe struggles to save its currency union and the developed world weakens. U.S. gross domestic product will expand 2.19 percent next year, compared with 1.55 percent for the Group of 10 nations, Bloomberg surveys of economists show.

“The U.S. is our favorite market,” Hiromasa Nakamura, a bond investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of about $42 billion, said Dec. 12 in a telephone interview. “The level of debt is high but I think they will deal with it,” he said. “Financial dislocations are continuing and investor money is flowing to the reserve currency, the U.S. dollar.”

Currency Advantage

When it lowered the U.S. rating, S&P, the world’s largest provider of credit analysis, said the failure up to then of Democrats and Republicans to agree on budget cuts made the U.S. less creditworthy, downplaying the country’s ability -- unlike individual European nations -- to print as much money as it needs to pay its debts. Congress cleared a $1 trillion spending bill on Dec. 17 that lawmakers called a bipartisan compromise.

“It is the ability to print one’s own currency to pay government bond investors back under any circumstances that makes a government bond a government bond, i.e. a (credit) risk- free asset for hold-to-maturity investors,” Elga Bartsch, the chief European economist at Morgan Stanley in London, said in a report this month to clients.

Investors have looked past S&P’s warning even as government borrowing surpasses $15 trillion for the first time and the budget deficit exceeds $1 trillion for a third year.

Best Bonds

Long-term Treasuries are the best performing government bonds in the world this year, returning 30 percent, according to Bloomberg/EFFAS indexes. The S&P 500 has gained since August even as the MSCI All Country World Index fell 5.7 percent.

IntercontinentalExchange Inc.’s U.S. Dollar Index, which measures the greenback against the euro, yen and four other major trading partners, rose 2 percent last week and was at 80.282 at 11:17 a.m. London time today from 74.598 on Aug. 5.

Investors are showing no reluctance to lend to the U.S., bidding a record $3.02 for each dollar of the $1.96 trillion of Treasury notes and bonds sold this year, according to data compiled by Bloomberg. That’s up from $2.56 in 2007 when the U.S. issued $581 billion in notes and bonds, government data show.

Yields on 10-year Treasuries rose two basis points today to 1.87 percent, down from 2.56 percent on Aug. 5. Yields slid 21 basis points last week, or 0.21 percentage point, in the biggest drop since the five days ended Nov. 4, Bloomberg Bond Trader prices show.

Foreign Demand

Foreigners increased holdings of Treasuries by $17.2 billion in August, September and October to $4.66 trillion, the latest government data show. Non-U.S. buyers own about 48 percent of U.S. marketable debt, up from 34 percent when the nation had a budget surplus in December 2000.

“The fact that the U.S.’s credit rating was cut from AAA is not relevant,” said Jack Kelly, a fund manager at Standard Life Investments in Edinburgh, which oversees the equivalent of about $200 billion. “Treasuries are benefiting from an enormous flight to quality.”

History shows that a rally following a sovereign downgrade isn’t unusual.

After S&P cut Japan in February 2001 to AA+ from AAA, 10- year bonds yields fell below 1.15 percent four months later from 1.46 percent. Yields were at 0.97 percent today, even though S&P ultimately reduced the nation to AA-. Moody’s Investors Service waited until May 2009 to lower Japan’s foreign currency rating from Aaa, and now has it at Aa3, the same as S&P.

Stronger Yen

The yen appreciated as much as 2 percent by the end of June 2001, and is 4.7 percent stronger in 2011, based on Bloomberg Correlation-Weighted Indexes that measure the currency against a basket of nine developed-nation peers. While the Nikkei 225 Stock Average was little changed four months later, it had surged as much as 11 percent by May 7, 2001.

As the U.S. strengthens, the outlook for other parts of the world is deteriorating. Economists raised their forecasts for growth in U.S. gross domestic product next year to an average of 2.2 percent from 2 percent in October as they trimmed their estimate of Europe by 0.5 percentage point to 1 percent according to separate surveys by Bloomberg.

Demand from international investors is good news for President Barack Obama because the Treasury was able to fund the third-straight budget deficit of more than $1 trillion at a lower cost as a percentage of GDP than when the nation posted surpluses from 1998 to 2001. Interest expense accounted for 3 percent of the economy in fiscal 2011 ended Sept. 30, down from 4 percent in 1999.

Strengthening Economy

U.S. economic indicators have improved since S&P’s downgrade, with consumer confidence, as measured by the Thomson Reuters/University of Michigan preliminary index, rising to a six-month high in December.

Inflation was little changed in November and manufacturing expanded at the fastest pace in five months, according to the Institute for Supply Management’s factory index. Private employment rose 206,000 last month, the strongest increase this year, ADP Employer Services said.

The U.S. received its highest rating from international investors in more than two years, with 41 percent saying in a Bloomberg poll conducted Dec. 5-6 that the country would be among top performers in 2012.

Not everyone agrees the U.S. is more creditworthy. Sixty- seven percent of 1,031 global investors in a Bloomberg Global Poll in September said S&P’s move was justified.

Moody’s, the second-largest ratings company, put its top Aaa grade for the U.S. on “negative outlook” during the budget debate. Fitch Ratings said last month there was a greater than 50 percent chance it would strip the nation of its top ranking over the next two years.

Rising Debt

The ratio of net government debt to GDP reached 72 percent in 2011 and will rise to 80 percent by 2015, John Chambers, managing director of sovereign ratings at S&P, said in a speech in Beijing last month. The government’s reliance on foreign investors contributed to the downgrade, he said.

Germany’s debt-to-GDP ratio will fall to 65.6 percent by 2014 after peaking at 72.7 percent at the end of this year, according to a Bloomberg Brief estimate.

“The U.S. needs to raise its savings level,” Chambers said, according to a transcript of the speech on S&P’s website. “Failure to do so might raise the vulnerabilities to shifting non-resident investor sentiment.”

John Piecuch, an S&P spokesman, said the company wouldn’t make its sovereign analysts available for comment.

Reserve Currency

When S&P lowered its outlook for the U.S. in April, it cited the dollar as a reason to keep the top grade, referring to it four times in a statement. In its Aug. 5 announcement of the downgrade, the company mentioned it only once, in the 15th of 20 paragraphs.

S&P justified the move by saying “the effectiveness, stability, and predictability of American policymaking and political institutions have weakened.”

The U.S. has the world’s top reserve currency, with central banks keeping 60 percent of their foreign-exchange holdings in dollars, down from 72.7 percent in 2001, according to the International Monetary Fund in Washington. America is able to print its own currency, unlike the 17 nations in Europe using the euro, which gave that authority to the European Central Bank.

That means the U.S. has the ability to create cash to pay its debts or devalue to boost imports.

“We don’t have to worry so much about our government becoming dysfunctional as we have to worry about that damn printing press becoming dysfunctional,” billionaire Warren Buffett, Berkshire Hathaway Inc.’s chairman and chief executive officer, said on Aug. 16 in a television interview with Charlie Rose. “There are 17 countries in Europe that gave up the right to print money, and believe me they know what it means to give up the right to print money.”

‘Quadruple-A’

Buffett, the biggest shareholder of S&P rival Moody’s Corp., said after the S&P downgrade that the U.S. should be “quadruple-A.” John Bellows, then the acting assistant Treasury secretary for economic policy, said S&P made a $2 trillion “mistake” in its math and then changed the rationale for its decision to politics. S&P denied it made an error or altered its reasoning.

S&P said two weeks after the reduction that it would replace Deven Sharma, its president, with Douglas Peterson, a Citigroup Inc. executive. David Beers, head of sovereign ratings, said last month he was leaving to join the Bank of Canada next year. Mark Adelson, who oversaw S&P’s methodologies, was shifted to a research position on Dec. 9.

“The rating downgrade was a political message,” David Kotok, chief investment officer at Cumberland Advisors Inc., said on Dec. 7 in an interview with Sara Eisen on Bloomberg Television’s “InsideTrack.”

Trading Benefits

While marketable U.S. government debt has risen to $9.4 trillion from $4.34 trillion in mid-2007 as the government borrowed to bail out the nation’s banking system and lift the economy out of recession, the amount of Treasuries outstanding makes them easier to trade, according to Michael Cirami, a money manager at Boston-based Eaton Vance Corp.

“People want to hold them because they’re very liquid and because they’re among the safest assets that one can hold,” Cirami, whose firm invests $13.2 billion, said on Dec. 13 in a telephone interview. “If you downgrade the U.S. from AAA to AA+, it doesn’t change the liquidity of Treasuries.”

Though the U.S. went from budget surpluses averaging $139.7 billion from 1998 through 2001 to a deficit of $1.29 trillion last year, the country’s borrowing costs have fallen.

Average Yields

Average debt yields dropped to 1.04 percent as of Dec. 14 from 1.5 percent in July and 6.54 percent in 2000, Bloomberg data show. The average yield on all types of dollar-denominated debt fell to 2.11 percent on Dec. 8, according to the Bank of America Merrill Lynch U.S. Broad Market Index.

That compared with 2.51 percent for the firm’s Global Broad Market, Ex-U.S. Dollar index. Yields on bonds from elsewhere were lower as recently as May 12, when they averaged 2.74 percent versus 2.76 percent in the U.S.

“The U.S. is still the place to park assets,” Scott Kimball, who manages $7 billion of bonds at Taplin Canida & Habacht LLC in Miami, said Dec. 7 in New York. “It is still the strongest credit in the global financial markets.”

To contact the reporters on this story: Zeke Faux in New York at zfaux@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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European Ministers Seek $261B in IMF Crisis Funds

By Patrick Donahue and Stephanie Bodoni - Dec 19, 2011 10:09 PM GMT+0700

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Dec. 19 (Bloomberg) -- Thomas Costerg, a European economist at Standard Chartered Bank Plc, talks about shocks to the euro-zone economy in 2012. He speaks with Owen Thomas on Bloomberg Television's "On the Move." (Source: Bloomberg)

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Dec. 19 (Bloomberg) -- James Staley, chief executive officer of JPMorgan Chase & Co.'s investment-banking unit, talks about the European sovereign debt crisis and the firm's business strategy. Staley, speaking with Erik Schatztker and Stephanie Ruhle on Bloomberg Television's "InsideTrack," also discusses the impact of financial regulation on the industry. (Source: Bloomberg)

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Dec. 19 (Bloomberg) -- Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics in Washington, talks about Europe's sovereign debt crisis. European finance ministers today will seek to meet a self-imposed deadline for drawing additional aid to the crisis and to form new budget rules as investor confidence that a comprehensive solution is achievable wanes. Kirkegaard speaks with Zeb Eckert on Bloomberg Television's "First Up." (Source: Bloomberg)

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Dec. 19 (Bloomberg) -- Nick Maroutsos, co-founder of Sydney-based Kapstream Capital, talks about the impact of Europe's debt crisis on Asian markets and economies. Maroutsos speaks with Zeb Eckert on Bloomberg Television's "First Up." (Source: Bloomberg)

European finance ministers sought to meet a self-imposed deadline for drawing additional aid to the debt crisis and to form new budget rules as investor confidence that a comprehensive solution is achievable wanes.

Euro-area finance ministers held a conference call beginning at 3:30 p.m. Brussels time to discuss 200 billion euros ($261 billion) in additional funding through the International Monetary Fund and the mechanics of a so-called fiscal compact that was negotiated at a Dec. 9 European Union summit, according to two people familiar with the planning.

“They’ll try to get as much done as they can before Christmas, but it’s doubtful they’ll put markets in a Christmas mood,” Carsten Brzeski, an economist at ING Group in Brussels, said in an interview. “There is still so much uncertainty.”

The accord to ratchet up budget rules failed to ease concern that the monetary union risks buckling under the weight of the two-year-old crisis. Fitch Ratings lowered France’s credit outlook and put other euro-area nations on review Dec. 16, saying an overall crisis solution may be “technically and politically beyond reach.” Belgium’s rating was cut two levels to Aa3 by Moody’s Investors Service on the same day.

ECB Bond Purchases

European Central Bank President Mario Draghi damped expectations the bank will step up bond purchases to tame rising borrowing costs, telling the Financial Times in an interview published today that the bank can’t overstep its mandate.

“People have to accept that we have to, and always will, act in accordance with our mandate and within our legal foundations,” Draghi was cited as saying. “The important thing is to restore the trust of the people -- citizens as well as investors -- in our continent. We won’t achieve that by destroying the credibility of the ECB.”

Euro-area officials aim to meet their deadline for today to arrange the IMF loans. The package entails about 150 billion euros pledged by euro-area central banks and another 50 billion euros to be contributed by non-euro EU states. The euro-area ministers were due to be joined in the call by their EU counterparts to thrash out measures including the decision- making process of the bloc’s permanent bailout fund, the European Stability Mechanism, one of the people said.

“This deadline decided by the heads of states and governments is a political deadline not a legal deadline,” European Commission spokesman Olivier Bailly told reporters in Brussels today.

No ‘Urgent Need’

While leaders including Luxembourg’s Jean-Claude Juncker have expressed confidence that the deadline will be met, Germany’s Bundesbank said Dec. 16 it saw no “urgent need” to reach a decision, suggesting it could be delayed.

The euro lost 2.5 percent against the U.S. dollar last week after the Brussels summit and extended the loss today, sliding 0.2 percent to trade at $1.3023 at 4:07 p.m. Frankfurt time. The U.K.’s refusal to sign on to an EU-wide treaty change locking in new debt rules exposed divisions within the bloc and forced euro-region leaders to come up with a legal framework to patch together budget rules.

“The systematic nature of the euro zone crisis is having a profoundly adverse effect on economic and financial stability across the region,” Fitch said in a note. The growing uncertainty is overshadowing countries’ reform efforts, it said.

Fitch placed Spain, Italy, Belgium, Slovenia, Ireland and Cyprus on a “Rating Watch Negative” review. It cited the ECB’s failure to act as a financial backstop as contributing to its decision last week.

Stark’s Disappointment

Divisions within the ECB on bond buying were revealed by departing ECB Executive Board Member Juergen Stark, who told the German magazine WirtschaftsWoche in an interview that his decision to leave derived from his disappointment over “how this monetary union has evolved.” He criticized the bond purchases.

The U.K. is weighing whether to commit more funds to the IMF. Prime Minister David Cameron’s spokesman said Dec. 14 that the U.K. hadn’t agreed to increase its IMF contribution, fending off a report in the Daily Telegraph newspaper that the nation’s contribution might rise by 30 billion pounds ($46.5 billion).

Today’s conference call may focus on setting a road map for more detailed debate next month on a German-inspired budget- stability treaty. Chancellor Angela Merkel demanded treaty-level barriers against runaway debt and deficits to offer the prospect of a future “fiscal stability union” that restores investors’ shattered confidence in Europe’s economic management.

The European Commission’s power to enforce deficit limits will be strengthened, requiring a high-deficit state to amass a super majority within the euro region to head off disciplinary procedures, according to a draft of the text.

Governments will also be required to adopt balanced-budget amendments with an “automatic correction mechanism.” Those provisions will be enforced by the European Court of Justice and national courts.

The treaty, to be hammered out by late January and signed in early March, will take effect once ratified by nine of the 17 euro-area countries. EU states outside the euro will join as they ratify, with the U.K. alone so far in refusing to sign up.

To contact the reporters on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net; Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Prince Alwaleed Invests $300M in Twitter

By Shaji Mathew and Mourad Haroutunian - Dec 19, 2011 3:21 PM GMT+0700
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Saudi Prince Alwaleed bin Talal was ranked the richest Arab businessman this year by Arabian Business magazine with assets valued at $21.3 billion. Photographer: Yasser Al-Zayyat/AFP/Getty Images

Prince Alwaleed bin Talal, the Saudi investor with stakes in Apple Inc. (AAPL) and Citigroup Inc. (C), and his investment company agreed to buy a $300 million stake in Twitter Inc., the microblogging service with about 100 million users.

The agreement to acquire a “strategic stake” in Twitter followed “several months of negotiations,” Kingdom Holding said in a statement today. The Riyadh-based company, controlled by Alwaleed, a nephew of Saudi Arabia’s King Abdullah, jumped as much as 8.3 percent on the local exchange.

Twitter, which lets people send 140-character messages, is enhancing its service to lure more users and make the site more attractive to advertisers. Alwaleed’s investment in the San Francisco-based company comes as Facebook Inc., the world’s most-popular social networking site with more than 800 million users, is said to consider raising about $10 billion from an initial public offering.

“Kingdom realizes the importance of social networks like Twitter and their future growth prospects, and decided to benefit from this trend,” said Samer Darwiche, an analyst at Gulfmena Investments in Dubai.

Twitter said in August it had raised a new round of funding from DST Global, along with several past investors. The company aimed to raise about $800 million and was looking to use half the money to buy back shares from employees and earlier backers, people with knowledge of the plan said at the time. The investment valued the short-messaging service at $8 billion, the people said.

Ad Program

Twitter has been coping with executive turnover and a slow rollout of its ad program, which promises to be its main source of revenue. Co-founders Evan Williams and Biz Stone have lessened their involvement under Chief Executive Officer Dick Costolo, who took the reins in October 2010. Mike Abbott, a vice president in charge of engineering, also has stepped down.

The microblogging service’s revamp will feature tabs at the top of the screen that let users more easily access their home pages, connect with others and discover new content, Twitter said today at an event in San Francisco. Twitter will generate $139.5 million this year from ads, according to EMarketer Inc.

Twitter confirmed the investment in an e-mail, declining to give additional comments.

‘Savvy Investor’

Kingdom added 6.4 percent to 8.35 riyals at 11:14 a.m. in Riyadh. Before today, the stock had lost 4.3 percent this year.

Alwaleed is the biggest individual investor in Citigroup. His other investments include stakes in General Motors Co., News Corp. (NWSA) and Apple. The prince was ranked the richest Arab businessman this year by Arabian Business magazine with assets valued at $21.3 billion. Kingdom Holding, 95 percent owned by the prince, is building the tallest tower in the world in Jeddah at a cost of 4.6 billion riyals ($1.23 billion).

Alwaleed “is a savvy investor and the hot thing in the I.T. world is social networking,” said Nabil Farhat, a partner at Abu Dhabi-based Al Fajer Securities in Abu Dhabi, United Arab Emirates.

Facebook may file for an IPO before the end of the year, a person with knowledge of the matter said last month. The share sale may value the company at more than $100 billion, twice as high as it was in January, when the company announced a $1.5 billion investment from Goldman Sachs Group Inc. and other backers.

Demand for technology IPOs reignited in November after a summer lull, setting the stage for Groupon Inc., Zynga Inc., the largest maker of games for Facebook, and Angie’s List Inc. to go public.

To contact the reporters on this story: Shaji Mathew in Dubai at shajimathew@bloomberg.net; Mourad Haroutunian in Riyadh at mharoutunian@bloomberg.net.

To contact the editors responsible for this story: Riad Hamade at rhamade@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net

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Facebook Lawsuit Against Ads ‘Liked’ by Friends Can Proceed, Judge Rules

By Joe Schneider - Dec 19, 2011 8:09 AM GMT+0700

Facebook Inc., the world’s most used social-networking service, can be sued by people who claim showing advertisements that their friends apparently like violates a California law regarding commercial endorsements.

U.S. District Judge Lucy Koh in San Jose rejected Facebook’s bid to dismiss the lawsuit on Dec. 16, ruling the plaintiffs may pursue claims that the company’s sponsored ads violate state law and are fraudulent. Koh granted Facebook’s request to dismiss a claim that it unjustly enriched itself with the sponsored ads.

Facebook earns revenue primarily through the sale of targeted advertising that appears on members’ Facebook pages, including so-called sponsored stories, which the Palo Alto, California-based company started Jan. 25. A sponsored story is a paid ad consisting of another friend’s name and profile picture and claiming the person likes the advertiser. The plaintiffs claim it’s an unauthorized use of their names and likenesses and that they deserve compensation.

The “plaintiffs have articulated a coherent theory of how they were economically injured by the misappropriation of their names, photographs and likeness,” Koh wrote.

Facebook’s press office didn’t immediately respond to an e- mailed request for comment, sent after normal business hours in California.

Facebook’s revenue will climb to as much as $6.9 billion in 2012 from $4.27 billion this year, according to estimates by EMarketer Inc., a New York-based research company. Almost 90 percent of 2011 sales will come from advertising revenue, EMarketer estimates.

‘Newsworthiness’ Exemption

California’s Right of Publicity Statute prohibits the non- consensual use of another person’s name, voice, signature, photograph or likeness for advertising.

Facebook claimed it was immune under the law’s “newsworthiness” exemption, which doesn’t require consent. The plaintiffs are public figures to their friends and expressions of consumer opinion are generally newsworthy, Facebook said.

The plaintiffs, in their statement of claim, cited Facebook Chief Executive Officer Mark Zuckerberg saying that “nothing influences people more than a recommendation of a friend” and a “trusted referral is the Holy Grail of advertising.”

On average, each member of Facebook has 130 friends, and Facebook Chief Operating Officer Sheryl Sandberg said “making your customers your marketers” is the “goal we’ve been searching for,” according to the statement of claim.

The case is: Fraley v. Facebook Inc. 11-cv-01726. U.S. District Court, Northern District of California (San Jose)

To contact the reporter on this story: Joe Schneider in Sydney at jschneider5@bloomberg.net

To contact the editor responsible for this story: Douglas Wong at dwong19@bloomberg.net

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Microsoft Shrinking Margins Loom on Cloud Push

By Dina Bass - Dec 19, 2011 12:01 PM GMT+0700

Microsoft Corp. (MSFT)’s push into cloud computing will help the company compete with Google Inc. (GOOG), Apple Inc. (AAPL) and Salesforce.com Inc. (CRM) It also will hurt profit margins.

The company’s cloud software lets corporate customers pay a subscription to do things like manage spreadsheets and corporate websites with software stored and run on Microsoft’s servers. The new services also help users view TV shows and edit photos on the Web.

While that may be great news for customers, the cost of storing software in Microsoft’s own data centers, combined with other expenses, means the company may miss profit estimates for fiscal 2012, said Heather Bellini, an analyst at Goldman Sachs Group Inc. It also means the good old days of outsized margins for the software giant may be a thing of the past, said Jason Maynard, an analyst at Wells Fargo (WFC) Securities.

“Nothing will ever be as high as the old model,” said Maynard, who’s based in San Francisco.

Profit margins, which shrank to a 22-year low in 2011, are set to fall further. Gross margins, or the percentage of sales left after production costs, will narrow 1.6 points to 76 percent in fiscal 2012, the average estimate of analysts compiled by Bloomberg. That’s after a 2.4-point drop in 2011.

The challenge to Microsoft’s margins stems from decisions Chief Executive Officer Steve Ballmer has made in recent years to invest in new businesses, such as adding content for Xbox and acquiring Skype Technologies SA for $8.5 billion.

Rising Costs

The pressure will persist beyond this year as more customers switch to cloud computing, which involves hosting software on Microsoft’s servers and delivered it over the Internet. That shifts the cost of storing and operating those programs to Microsoft.

Microsoft traditionally sold packaged software that, once developed, costs little to manufacture and distribute. In moving more business to the cloud, the world’s largest software maker must take on the costs of running data centers. These expenses include powering, cooling, housing and maintaining servers that run the programs for clients.

Mark Moerdler, an analyst at Sanford C. Bernstein & Co., estimates that cloud-related costs will range from 15 percent to 25 percent of revenue. That’s about 10 percent more than selling standard packaged software, he said.

Goldman Sachs’s Bellini said analysts may not be taking into account a large enough increase in cost of goods sold for the fiscal year ending in June, which could cause Microsoft to miss profit predictions. Even Bellini, who lowered her projection for gross margins and trimmed 9 cents from her overall profit estimate, said she may not have cut enough.

Microsoft declined to comment for this story.

Growth Challenges

Margin pressure is making some investors leery of Microsoft stock, and may weigh on the shares in coming months, said Walter Price, who manages the $3 billion Allianz RCM Technology Fund at RCM Capital Management in San Francisco.

The shares, which gained 1.7 percent to $26 on Dec. 16, have declined 6.8 percent this year before today.

Microsoft was already facing a challenging year for profit growth. The European debt crisis and a sluggish economic recovery have prompted government and financial customers to pare spending, while the PC industry is reeling from flooding in Thailand that has slashed production of hard drives.

Companies will boost spending on software and computers at a slower rate next year than 2011, according to Gartner Inc., which said it may cut its forecast even further at the end of the quarter. Hewlett-Packard Co. (HPQ), the largest computer maker, last month said it’s started to see businesses curb spending.

Xbox Content Fees

Microsoft’s product cycles also point to a year of slower growth in its flagship Windows and Office software businesses, according to Rick Sherlund, an analyst at Nomura Holdings Inc. The two divisions will expand more slowly this year as customers wait for an update to the Windows operating system, which Sherlund expects in October. Microsoft is likely to follow that with a touch-enabled version of Office productivity software, he said.

At the same time, costs are rising across businesses. Microsoft’s Xbox game consoles, which are selling well, are more expensive to manufacture than software, and the company is paying more licensing fees for content to run on the Xbox Live service.

The addition of Skype, increased demand for consulting services in the server business, and costs of Microsoft’s search partnership with Yahoo! Inc. are also adding to the jump in expenses.

Need for Scale

Including the impact of Skype, operating expenses for the year will be as much as $29.2 billion, up from a previous forecast of $28.6 billion, Microsoft said in October.

Reining in cloud computing costs will be key, and that will depend on how efficient Microsoft can become at running its massive data centers. The company will need to attract large numbers of cloud customers to get the services running at scale. And it will have to remain vigilant on data-center energy and cooling costs, said Sanford C. Bernstein’s Moerdler.

“They should be able to be pretty efficient and they should be able to generate net more revenue so the margin will go down, but earnings per share will go up,” he said. That’s in line with Microsoft’s own forecasts since starting its move to the cloud.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net.

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

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China’s November Home Prices Post Worst Performance This Year Amid Curbs

By Bloomberg News - Dec 19, 2011 3:34 PM GMT+0700

China’s home prices posted their worst performance this year with more than half of the 70 biggest cities monitored in November recording declines after the government reiterated plans to maintain property curbs.

New home prices dropped from the previous month in 49 of the cities monitored by the government, compared with 33 posting decreases in October, the national statistics bureau said in a statement on its website yesterday. Only five cities had gains in home prices, according to the statement.

“Home prices will fall further as the government’s tightening continues,” said Jinsong Du, a Hong Kong-based property analyst for Credit Suisse Group AG. “We’ll see more small developers file for bankruptcy or sell off their assets next year.”

The government said last week it won’t back away from real- estate industry curbs that are damping home sales and pulling down prices. China intensified measures this year by raising down payment and mortgage requirements and also imposed home purchase restrictions in 40 cities.

New home prices in China’s four major cities of Shanghai, Beijing, Shenzhen and Guangzhou each retreated 0.3 percent from October, the biggest monthly falls for these metropolitan areas this year, according to data from the statistics bureau.

The eastern port city of Ningbo and Shenyang in the north close to the North Korean border posted the biggest month-on- month declines of 0.6 percent, while Guiyang in the southwest rose 0.2 percent, the most among the 70 cities.

‘Critical Stage’

The gauge tracking property stocks on the Shanghai Composite Index (SHCOMP) rose 0.3 percent at the close, the only industry group that posted a gain on the benchmark measure.

The figures came after private data also showed further signs of cooling. China’s home prices fell for a third month in November, SouFun Holdings Ltd. (SFUN), the country’s biggest real estate website, said earlier this month based on its survey of 100 cities.

“It’s more and more clear that home prices are falling around the country,” said Shen Jian-guang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. “It’s still the critical stage of China’s property curbs, so the government doesn’t want to send any signals of easing of those policies too early as it may reverse the trend.”

Chinese developers will face challenges over the next 12 to 18 months including slowing sales, tight bank credit and downward pressure on prices and profit margins, Moody’s Investors Services said in a Dec. 15 report.

Vanke, Poly

November contract sales of China Vanke Co., the country’s biggest developer, dropped 36 percent from last year, while those by Poly Real Estate Group Co., the second largest, fell 28 percent. Developers typically sell homes before they are built. Vanke shares were unchanged in Shenzhen, after falling as much as 2.6 percent, while Poly climbed 0.9 percent, reversing a 1.5 percent decline.

Existing home prices in Beijing slid 0.7 percent from October, while those in Shanghai retreated 0.5 percent, according to the statistics bureau.

China faces slower growth in home sales and construction next year, Fitch Ratings said in a report on Dec. 13, adding that smaller builders will be “more vulnerable” as the government maintains its property curbs.

Easing Measures?

The government may ease its measures in the second half of next year if home prices in major cities include Beijing and Shanghai fall 20 percent from their 2011 peaks, according to Mizuho’s Shen. Shanghai’s new home prices gained 2.4 percent from a year earlier in November, and those in the capital city added 1.3 percent, according to the statistics bureau.

Residential property investments accounted for 6.1 percent of the country’s gross domestic product last year, according to Citigroup Inc.

Falling home prices helped drive sales last month. Housing transactions rose 12 percent in November to 416.4 billion yuan ($65.7 billion), rebounding from a decline the previous month, the statistics bureau said earlier this month.

China’s home prices may fall between 5 percent and 10 percent next year, Kenny Wu, a Hong Kong-based analyst at JI- Asia Research Ltd., said before the release of yesterday’s data.

--Bonnie Cao. Editors: Linus Chua, Jim McDonald

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at bcao4@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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Hong Kong Luxury Home Rents Reach ‘Tipping Point’ as Banks Halt Expansion

By Kelvin Wong - Dec 19, 2011 3:28 PM GMT+0700

Hong Kong luxury home rents, which fell last quarter for the first time since mid-2009, may slump 10 percent next year as banks and hedge funds scale back amid the threat of a global recession, according to brokers including Jones Lang LaSalle Inc. (JLL) and Colliers International.

“We’re definitely at that tipping point,” said Anne-Marie Sage, Hong Kong-based head of residential leasing at Jones Lang, the world’s second-largest commercial brokerage. “We’ve began to see vacancies at the very top end of the market. The banking and the financial sector have basically stopped all movement.”

HSBC Holdings Plc (5) and Macquarie Group Ltd. are among banks shedding jobs in the city as investment and corporate finance activity slows. Rents of luxury homes -- those with at least 100 square meters (1,076 square feet) -- decreased 1.6 percent in the third quarter, after gaining almost 19 percent in 2010 and 5 percent in the first half, according to Jones Lang.

HSBC, Hong Kong’s biggest bank by deposits, will cut 3,000 jobs over the next three years in the city, as part of its plan to reduce costs globally, the bank said in September. Macquarie closed part of its global equity derivatives operations in the city, people with knowledge of the matter said last month.

“I don’t have any statistic yet, but I would suggest the number of rental transactions has decreased over the past couple months,” said Sage, who expects luxury home rents to fall 5 percent to 10 percent next year.

Job Cuts Ahead

About 75 percent of human resources managers in the Hong Kong financial services industry are concerned that global economic uncertainty will affect the Asia-Pacific region, according to a survey by recruitment agency Morgan McKinley. Twelve percent of those surveyed said they expect to be “handling redundancies over the next 12 months,” it said.

The MSCI Asia-Pacific Index (MXAPJ) has fallen 18 percent this year and is heading for its first annual loss since 2008 as the European debt crisis and weaker global economies damp investor confidence.

The Hang Seng Property Index, which tracks Hong Kong’s seven-biggest developers, fell 1.5 percent at the close of trading in the city, extending its loss this year to 26 percent. The benchmark Hang Seng Index declined 22 percent in 2011.

Average monthly rents of existing homes in the city fell 1 percent in October from the previous month to HK$20.50 per square foot, Centaline Property Agency Ltd. said in a Dec. 7 report. That was the first decline since March 2009, Hong Kong’s biggest closely held realtor said.

“We’re seeing more supply of flats for rent in the market,” said Wong Leung-sing, an associate director of research at Centaline. “Prices and sales are falling so many people who wanted to offload their units previously have switched to leasing them out.”

Rush for Deals

A 2,800 square-foot apartment at the Repulse Bay complex in the Island South district was leased for HK$130,000 ($17,000) a month in October, according to statistics compiled by Centaline. A similar-sized unit at the Fortuna Court building in the same district went for HK$108,000 a month, the realtor said. A 2,600 square-foot apartment in Brewin Court in Mid-levels was rented out for HK$103,000 in October, it said.

Landlords looking to rent out properties with monthly rents of more than HK$100,000 have since last quarter raised the commission they pay to leasing agents to as much as one-and-a- half-months rent from the normal half-month rent, according to Ricky Poon, Hong Kong-based executive director of residential sales at Colliers.

“This shows they are sensing that the market is really turning,” said Poon, who forecast luxury rents to fall as much as 8 percent next year. “They realize if they don’t seal the deals now, conditions will probably worsen in the future.”

Finance Hub

Recruitment advertising in Hong Kong fell 2 percent in the third quarter from the previous three months, while “candidate confidence levels are muted with many unwilling to leave current positions to enter an uncertain market,” Robert Walters Plc, a U.K.-based recruiting agency, said in a Dec. 7 statement.

Hong Kong topped the World Economic Forum’s 2011 index of financial market development, overtaking the U.S. and U.K. for the first time. Finance, real estate and professional sectors account for 27 percent in the city’s gross domestic product in 2010, according to government’s data.

The number of registered financial professionals in the city rose to a record 40,039 in the third quarter, according to the Securities and Futures Commission.

‘In Sync’

Home prices in Hong Kong have fell to a near six-month low after climbing about 70 percent since the beginning of 2009, according to an index compiled by Centaline. It’s more expensive to buy a home in the city than in London, Moscow or New York, Savills Plc said in a report in January that compared London with the other cities.

“Home rents and property prices move in sync,” said Lee Wee Liat, Hong Kong-based analyst at Samsung Securities Ltd. “We’re seeing some retrenchment in the financial sector. That’s going to affect people who’re negotiating their rentals.”

Rents in areas traditionally favored by expatriates, such as the Mid-levels, about a 10-minute drive from the Central business district, and the exclusive Island South, will probably fall less than those in “newer areas” such as West Kowloon, said Poon of Seattle-based Colliers.

“In the new luxury areas, most landlords are small owners and they tend to cut prices more aggressively just to ensure a deal’s done,” Poon said. “Whereas in the traditional areas, the landlords are mostly the developers who’re not as desperate for cash flow.”

Retail Executives

Still, more than 70 percent of Hong Kong companies expect to raise wages next year, compared with 63 percent in 2011, with 38 percent forecasting increases in salaries of as much as 5 percent, the Hong Kong General Chamber of Commerce said Dec. 13.

The luxury rental market may be supported by the expansion of international retail chains in the Asia-Pacific region, with many stationing senior executives in Hong Kong, where their regional headquarters are, said Steven Hui, manager of real estate and tenancy management at Hong Kong-based Crown Relocations.

“The financial sector is definitely slowing down but the market is still OK,” said Hui. “Some of these companies are offering pretty competitive housing allowances of HK$100,000 to HK$150,000 a month for senior executives. So I don’t see things turning to be as bad as some people think.”

To contact the reporter on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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