Economic Calendar

Tuesday, January 10, 2012

Philips, Siemens Hit By European Weakness

By Maud van Gaal and Maaike Noordhuis - Jan 10, 2012 8:58 PM GMT+0700

Royal Philips Electronics NV (PHIA)’s earnings fell 45 percent, while Siemens AG (SIE) cautioned that its targets have become harder to reach, as the two European manufacturers feel the strain of the region’s economic crisis.

Fourth-quarter earnings before interest, taxes and amortization fell to about 500 million euros ($640 million), from 913 million euros a year earlier, Amsterdam-based Philips said today. Siemens’ profit forecast for 2012 has become “very ambitious,” and pressure has increased since November, according to Chief Financial Officer Joe Kaeser.

Philips tumbled the most in almost five months, as the world’s biggest maker of light bulbs fell short of analysts’ profit estimates because of sluggish demand for health-care equipment and lighting in Europe. Siemens predicted stagnant profit for this year in November, as sales growth moderates and a cooling global economy damps demand for industrial gear.

“Although recent warnings from peers suggested a risk for Philips, we thought that health care would deliver,” said Olivier Esnou, an analyst at Exane BNP. “The figures mean that Europe must have been pretty weak across the board and that Philips’ expectations for high delivery levels in December were misplaced.” Esnou is reviewing his outperform rating on Philips and had predicted earnings of 624 million euros.

Philips fell as much as 1.15 euros, or 7.4 percent, to 14.50 euros in Amsterdam, and traded at 15.26 euros as of 1:45 p.m. The stock has lost 12 percent in the last six months. Siemens, based in Munich, was little changed at 75.77 euros.

Van Houten’s Warnings

For Chief Executive Officer Frans van Houten, it’s the second profit warning since taking the helm in April last year. He has already unveiled a plan to save 800 million euros and cut 4,500 jobs to revive earnings and battle deteriorating demand for consumer electronics and lighting products.

“It may seem like van Houten is continuously issuing profit warnings,” said Jos Versteeg, an analyst at Theodoor Gilissen Bankiers. “But he’s not the one to blame.”

Siemens (SIE), which competes with Philips in lighting and medical equipment, has suffered increasing headwinds in the fourth quarter, Kaeser told the Wall Street Journal, in comments that were confirmed by the company. The profit forecast for 2012 will require “tough work,” he said.

Philips is scheduled to report full earnings on Jan. 30, while Siemens holds its annual general meeting and fiscal full- year earnings conference in Munich on Jan. 24.


Signs of improvement are showing at Philips’s consumer- lifestyle operation, making goods from shavers to music players, the company said today.

“While we are disappointed with the results, we are confident that by continuing to execute on our change plans, and delivering on our cost reduction plans, we will improve the operations of the company,” van Houten said.

Group sales showed a “mid single-digit” increase from a year-earlier, the company said. Ebita corresponded to a margin of 7 percent to 8 percent on a reported basis. Figures exclude the television business, from which the company has retreated.

Results of the lighting unit were held back by “continued operational issues” in consumer luminaires and as economic weakness impacted price levels in the consumer lighting business. Philips said it expects adjusted Ebita in the fourth quarter to be around 3 percent to 4 percent of sales, with a comparable sales growth of less than 10 percent.

“The lighting numbers are disappointing,” said Marcel Achterberg, an Amsterdam-based analyst at Petercam. “They seemed to have made progress in the restructuring of their supply management, yet this shows they still have a lot to do.”

Added CEO Duties

Van Houten has been in charge of the lighting unit after division chief Rudy Provoost left to become CEO of Rexel SA (RXL) last year. Philips appointed Pierre Yves Lesaicherre as head of its lumileds subsidiary yesterday.

Philips said health-care sales had “low single-digit” growth in the fourth quarter as sales in Europe fell. The unit had a “strong performance” in the U.S., according to the company. Siemens and Philips are the two biggest European makers of medical equipment, and Siemens has suffered setbacks in areas including diagnostics and advanced cancer therapy.

Van Houten has set a target of increasing Ebita to 10 percent to 12 percent of revenue by 2013, on sales growth of 4 percent to 6 percent. Philips reiterated those targets today.

“Today’s disappointment is just a drop in the bucket of the program they have announced to meet their 2013 targets,” said Petercam’s Achterberg, who has a “hold” recommendation on the stock.

To contact the reporters on this story: Andrew Noel in London at; Maud van Gaal in Amsterdam at; Maaike Noordhuis in Amsterdam at

To contact the editors responsible for this story: Benedikt Kammel at; Frank Connelly at


Software AG’s Biggest Slump in Decade Makes Stock Cheaper Target for HP

By Cornelius Rahn - Jan 10, 2012 7:38 PM GMT+0700

Software AG (SOW), Germany’s second- largest software maker, plunged after fourth-quarter profit and sales missed analysts’ estimates, making the stock cheaper for potential acquirers such as Hewlett-Packard Co (SOW).

The shares fell as much as 26 percent in Frankfurt, the steepest drop since April 2002, and traded 22 percent lower at 1:22 p.m., giving the company a market value of 2.04 billion euros ($2.6 billion). Josep Bori, an Exane analyst, said last week that the company may become a target for Hewlett-Packard or German peer SAP AG (SAP), as Hewlett-Packard’s $10.3 billion takeover of Autonomy Corp. last year may prompt interest in other European software companies.

Today’s miss is Software AG (SOW)’s second for the 2011 fiscal year. The Darmstadt-based company reported falling sales of process-optimization software in the U.S. and said it didn’t receive the “usual seasonal boost” in its enterprise transaction services as clients curbed spending amid uncertainty about economic growth. Software AG specializes in software consulting services and streamlining business processes.

With today’s decline, Software AG is trading at 6.4 times estimated 2012 earnings before interest, taxes, depreciation and amortization, according to Bloomberg data. In the past three years, deals involving western European software companies as takeover targets had a medium multiple of 9.23 times Ebitda.

Analyst Estimates

Norbert Gelse, a spokesman for HP in Germany, today declined to say whether the company is interested in buying Software AG. Christoph Liedtke, an SAP spokesman, declined to comment.

SAP, the largest maker of business-management software, announced in December it would buy SuccessFactors Inc. (SFSF), which makes software to manage employee performance, for $3.4 billion in cash.

Software AG Chief Executive Officer Karl-Heinz Streibich said Nov. 17 that the company wasn’t for sale and it would pursue a stand-alone strategy. The software maker, which is 29 percent owned by a foundation set up by co-founder Peter Schnell, has said it wants to double its sales at least every five to six years, including acquisitions.

Software AG’s fourth-quarter net income was 45 million euros to 50 million euros and revenue was 290 million euros to 295 million euros, the company said in a statement today. That compared with average estimates of 70.4 million euros for profit and 340 million euros for sales in a Bloomberg survey of analysts.

Cautious Spending

“We believe that customers have become more cautious toward spending toward the end of the quarter, given the situation in the macro-environment, and especially in the financial industry,” Streibich said on a conference call today.

Software AG (SOW) fell 6.82 euros to 23.55 euros at 1:24 p.m. SAP declined 1.25 euros, or 2.9 percent, to 41.53 euros.

Commenting on Software AG (SOW)’s results today, Exane’s Bori said in a note to clients: “Given that we believe this is macro-driven and not company-specific, long term investors may want to consider buying on this extreme weakness.”

To contact the reporter on this story: Cornelius Rahn in Frankfurt at

To contact the editor responsible for this story: Kenneth Wong at


Apple Moves Step Closer to Offering IPhone for Customers of China Telecom

By Bloomberg News - Jan 10, 2012 2:27 PM GMT+0700

Apple Inc. (AAPL) moved a step closer to accessing 33 million potential iPhone customers in China, as regulators approved specifications for a device that would run on the network of China Telecom Corp. (728)

The China Radio Management Office granted Apple’s application for a handset that operates on the CDMA2000 network standard, the regulator said in a statement posted on its website this week. The wireless standard is the third-generation network technology used by Hong Kong-listed China Telecom, China’s third-largest carrier.

Adding the standard would almost double Apple’s access to existing mobile services subscribers able to get the iPhone through a contract with a Chinese carrier. The Cupertino, California-based company would still need to get a license from China’s Telecommunications Equipment and Certification Center before it could sell the device.

“This is good for Apple as it means they’ll have a new market for the product,” said Tam Tsz-wang, who rates China Telecom shares “buy” at DBS Vickers Securities in Hong Kong.

The iPhone is now available with a service contract only through China Unicom (Hong Kong) Ltd., the nation’s second- largest carrier, which had 36.5 million 3G subscribers at the end of November. China Telecom had 33.4 million 3G mobile subscribers in the same period.

Apple’s Retail Network

The iPhone model for China Telecom would probably be based on technology similar to the iPhone version for Verizon Wireless users in the U.S., Tam at DBS Vickers said.

China Telecom rose 2.4 percent to HK$4.31 as of 2:59 p.m. in Hong Kong trading, while the city’s benchmark Hang Seng Index gained 0.7 percent. The stock has climbed 4.1 percent in the past 12 months.

China Unicom (762) fell 2 percent to HK$16.38.

Carolyn Wu, a Beijing-based spokeswoman for Apple, and Jacky Yung, a Hong Kong-based spokesman for China Telecom, both declined to comment on the timeline for the carrier’s introduction of the iPhone.

More than 2.2 million iPhones were shipped in China in the quarter ended Sept. 30, compared with 300,000 a year earlier, according to research company Gartner Inc. Apple ranked third in China’s smartphone market in the three-month period, trailing Nokia Oyj and Samsung Electronics Co., according to Gartner.

Sales of iPhones through unauthorized channels, or the so- called gray market, in China have dropped as Apple expanded its local retail network, according to Sandy Shen, an analyst at Gartner in Shanghai.

Apple has a network of more than 200 “Apple Premium Resellers” in the country that are focused on the company’s products, Chief Executive Officer Tim Cook said in October. Combined with other types of resellers and China Unicom, there are 7,000 points of sale for the iPhone in China, he said.

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at; Mark Lee in Hong Kong at

To contact the editor responsible for this story: Michael Tighe at


HP, Dell Targeting Apple’s ‘Fashionista’ Buyers With New Ultrabook Laptops

By Aaron Ricadela - Jan 10, 2012 12:01 PM GMT+0700
Enlarge image HP, Dell Go After Apple’s ‘Fashionista’ Buyers

The $1,400 Hewlett-Packard Envy 14 Spectre laptop. Photographer: HP via Bloomberg

Hewlett-Packard Co. (HPQ) and Dell Inc. (DELL) are unveiling slim “ultrabook” laptops at the Consumer Electronics Show in Las Vegas this week, stepping up competition with Apple Inc. (AAPL)’s MacBook Air.

Hewlett-Packard introduced a $1,400 laptop yesterday called the Envy 14 Spectre, which packs a 14-inch screen into a compact chassis encased in black. Dell, meanwhile, is preparing to release its own take on the ultrabook -- an industry term created by Intel Corp. for light, thin laptops.

Personal-computer makers are counting on ultrabooks to challenge the MacBook Air, Apple’s best-selling laptop, which is less than an inch thick. Still, Hewlett-Packard isn’t trying to compete on price: The new Spectre is $100 more than a MacBook Air with a 13.3-inch screen. Hewlett-Packard is emphasizing the laptop’s premium features and design, a bid to reach the “savvy fashionista” market, said Page Murray, a vice president of marketing at the company.

“There’s always someone who wants to win the race to the bottom,” Murray said. “It usually ends with a splat.”

The Spectre features a glossy black-glass lid that sits atop a silver glass palm rest and finger-sensing pad. The computer has an extra-bright screen, enhanced Beats Audio sound and a version of Adobe Systems Inc.’s Photoshop software.

It weighs less than four pounds and can run for nine hours on one charge, Palo Alto, California-based Hewlett-Packard said. The Spectre goes on sale Feb. 8.

Vizio’s Debut

In addition to Hewlett-Packard and Dell, Vizio Inc. also is showing ultra-thin laptops at the electronics conference. Vizio is pushing into the PC market after shaking up the television industry with its rock-bottom prices.

For Intel (INTC), ultrabooks are an attempt to keep laptops relevant in an era when many people use handheld devices to surf the Web. While Intel is the world’s largest chipmaker, it has struggled to get its products into tablets and smartphones, which use processors based on designs from ARM Holdings Plc. (ARM)

Beside defining specifications for ultrabooks’ size and performance, Intel is taking additional steps to make the machines more compelling. Intel and Nuance Communications Inc. said yesterday they will develop software that lets ultrabook users control the machines with voice commands. Nuance’s Dragon software would let ultrabook users send e-mail, launch programs, and play music and video content, Nuance said in a statement.

Price Concerns

Even so, ultrabooks will have to be priced right to be successful, Jason Maynard, an analyst at Wells Fargo & Co. in San Francisco, said yesterday in a report.

“They will need to be priced significantly below the MacBook Air,” he said.

Hewlett-Packard isn’t taking that tack with the Spectre, though it previously released a lower-cost ultrabook for business users called the HP Folio. That model, which has a 13.3-inch screen and weighs 3.3 pounds, went on sale Dec. 7 at a starting price of $900.

Shares of Hewlett-Packard, the world’s largest PC maker, were little changed yesterday at $26.44 in New York trading. Round Rock, Texas-based Dell climbed 1.5 percent to $15.58.

The PC industry is also waiting for the release of Microsoft Corp.’s Windows 8 operating system, which will enhance notebooks’ touch-screen capabilities. Microsoft plans to release the first broadly available test version of Windows 8 in late February.

To contact the reporters on this story: Aaron Ricadela in San Francisco at

To contact the editor responsible for this story: Tom Giles at


Swiss Currency Test Looms for SNB’s Jordan in Race to Replace Hildebrand

By Simone Meier and Klaus Wille - Jan 10, 2012 6:58 PM GMT+0700

Jan. 10 (Bloomberg) -- Geoffrey Kendrick, head of European currency strategy at Nomura International Plc in London, discusses the outlook for the Swiss franc following the resignation of central bank head Philipp Hildebrand. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Jan. 10 (Bloomberg) -- Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA, discusses Swiss National Bank interim President Thomas Jordan and the outlook for defending the franc. Jordan was selected to replace Philipp Hildebrand, who resigned yesterday after failing to quell a furor over currency trading by his wife. Saywell speaks with Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)

Thomas Jordan’s first test as interim president of Switzerland’s central bank will be to prove he can defend the four-month old cap on the franc as well as its chief architect did.

As Jordan, 48, emerges as the frontrunner to replace Philipp Hildebrand on a permanent basis, he faces the challenge of showing investors a change in personality at the top doesn’t signal a shift in the Swiss National Bank (SNBN)’s foreign-exchange policy. Hildebrand resigned yesterday after failing to quell a furor over currency trading by his wife, leaving Jordan as guardian of the franc before a permanent successor is chosen.

“He looks like the most likely candidate,” Ankita Dudani, a foreign-currency strategist at Royal Bank of Scotland Group Plc in London, said in a telephone interview. “He’s got the confidence of the markets already.”

Whoever wins the race to lead the SNB will inherit a 105 year-old institution which has pledged to devote unlimited funds to prevent gains in the franc after paring its benchmark interest rate to zero. The task faced by Hildebrand’s successor may be burdened with internal change as the central bank revisits ethics rules to avoid a repeat of the controversy.

Resignation Forced

The 11-member SNB Bank Council, the central bank’s supervisory board, forced Hildebrand to resign, Blick newspaper reported today, citing three undisclosed sources. The council is holding an extraordinary meeting in Zurich today and a successor will be named as soon as possible, Hansueli Raggenbass, head of the council, said in an interview. It will be up to the government to decide on an appointment.

The Swiss currency surged to the highest since September against the euro after Hildebrand’s announcement. It pared gains after the SNB said it remains ready to defend the franc cap of 1.20 versus the euro with the “utmost determination,” a stance repeated later by Jordan. The franc traded at 1.2126 versus the euro at 12:55 p.m. in Zurich today, little changed on the day. It was at 94.97 centimes versus the dollar.

“The knee-jerk reaction from the market is to buy francs,” said Elizabeth Gregory, a market strategist at Swissquote Bank SA in Geneva. “Even without Hildebrand spearheading the campaign against the franc appreciation, the SNB is likely to defend the 1.20 floor vigorously.”

Jordan Thesis

Unlike Hildebrand, whose career took him from hedge fund roles in London and New York to Swiss private banks, Jordan has a largely academic background with three years spent at Harvard University in the 1990s. The native of Biel in Switzerland’s French-speaking part studied economics and business studies at the University of Bern and achieved a doctorate in 1993.

Jordan’s thesis, published in 1994, focused on the advantages and disadvantages of the European currency union, Tages-Anzeiger newspaper reported.

After completing his post-doctoral research at the Department of Economics at Harvard, he joined the Zurich-based central bank in 1997 as a head of the Economic Studies unit. A year later, he was appointed lecturer at the University of Bern. Between 2002 and 2007, he taught monetary policy at the University of Zurich and was appointed honorary professor at the University in Bern in 2003. In 2007, Jordan was appointed SNB board member before becoming vice chairman three years later.

SNB ‘Maverick’

Hildebrand’s departure from the SNB’s three-member board deprives Switzerland of a policy maker who managed to stem the franc’s rally, which threatened to push the economy into a renewed recession. The currency, which is considered a haven in times of turmoil, has remained above 1.20 after the SNB imposed its ceiling. The currency had reached a record of 1.0075 against the euro on Aug. 9.

“Hildebrand was known as a bit of a maverick, bolder and willing to take risks when it comes to policy decisions,” said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “The markets will assume that whoever replaces Hildebrand will keep the cap in place because the floor has been very successful.”

Still, it was Jordan who told Tages-Anzeiger newspaper in August that a temporary franc peg would be consistent with the SNB’s mandate, paving the way for the bank’s biggest policy shift since the 1970s, when it capped the currency at 1.20. The SNB, which on Dec. 15 maintained its ceiling and held borrowing costs at zero, will hold its next quarterly assessment in March.

Franc Ceiling

Julien Manceaux, an economist at ING Group in Brussels, said the franc cap “is here to stay, with or without” Hildebrand. Alexander Koch, an economist at UniCredit Group in Munich, called Jordan a “qualified candidate” for the top job.

“You want someone with a lot of determination, so in some sense it’s particularly unfortunate because Hildebrand was very personally involved and associated with the policy,” said Steven Bell, chief economist at hedge fund GLC Ltd. in London. “In a sense, it has cleared the air. They’ve said that we’ve lost our leader, but the fight is unchanged.”

Pressure on Hildebrand to resign increased after media reported his family may have used insider knowledge to its advantage. While the government said it still supports the SNB head and an internal investigation cleared him of wrongdoing, the purchase of $504,000 by his wife in August, three weeks before the SNB imposed the currency cap, was found “sensitive.”

Hildebrand, 48, said at a briefing in Bern yesterday that he came “to the conclusion that it’s not possible” to deliver proof that his wife requested the currency transaction without his knowledge, calling credibility “the most important asset of a central banker.”

‘Excellent Reputation’

“Hildebrand had an excellent reputation in the markets, markets will miss him,” Steven Saywell, head of foreign- exchange strategy for Europe at BNP Paribas SA in London, told Bloomberg Television in an interview today. “Clearly it was a conflict of interest. Ultimately it comes down to credibility.”

Hildebrand is not the first European central banker to leave before the end of their term in the past year. Germany’s Bundesbank President Axel Weber and European Central Bank Executive Board member Juergen Stark, both from Germany, quit over the ECB’s bond-buying program, while Italy’s Lorenzo Bini Smaghi also left the board prematurely.

While Michael Saunders, chief European economist at Citigroup Inc. in London, wrote in an e-mailed note that the new SNB head will likely continue to face calls for a higher franc cap as the economy cools, Jan Amrit Poser, chief economist at Bank Sarasin (BSAN) in Zurich, said it would be “hazardous” to raise the ceiling anytime soon.

“For Jordan, the most important thing is continuity,” said Poser, chief economist at Bank Sarasin in Zurich. “The biggest mistake they could make is to change the policy completely. The message they really want to show is business as usual.”

To contact the reporters on this story: Simone Meier in Zurich at; Klaus Wille in Zurich at

To contact the editor responsible for this story: Craig Stirling at


Birinyi Sees Bull Market Continuing in 2012

By Whitney Kisling - Jan 10, 2012 5:09 PM GMT+0700

Laszlo Birinyi, whose prediction the bull market would weather a five-month retreat came true in October when the Standard & Poor’s 500 Index rallied 11 percent, says stocks will keep climbing in 2012.

Equities will gain at least 8 percent as improving corporate profits force bears to capitulate, according to Birinyi, who manages $400 million in Westport, Connecticut. Forecasts for declines from economists Gary Shilling and Nouriel Roubini were repudiated in 2011 as the benchmark gauge for American equities erased a 13 percent drop.

Birinyi, who advised holding stocks in August as the U.S. government was stripped of its AAA credit rating and strategists cut forecasts faster than any time since the credit crisis, said shares will climb for years to come if history is any guide. Shilling, president of A. Gary Shilling & Co., predicts equity investors will lose money in 2012 as consumer spending drops.

“Many concerns are opinions, but not necessarily facts,” Birinyi, president of Birinyi Associates Inc., said in a telephone interview on Jan. 4. “Later in the year, things will get a little bit better and sentiment will change, and we end up at the last leg where we’ve got the last-guy-in-the-pool scenario.”

Annual 28% Returns

The S&P 500 has risen 89 percent since March 2009, returning 28 percent a year to investors including dividends as U.S. gross domestic product expanded at an average rate of 2.4 percent over nine quarters. After ending 2011 virtually unchanged, the index gained 1.6 percent to 1,277.81 last week, the biggest rally to start a year since 2006. Futures on the S&P 500 advanced 0.8 percent at 10:07 a.m. in London today.

While U.S. stocks avoided a bear market in 2011, they posted their biggest decline since 2008, falling 19.4 percent between April and October. Investors outside the U.S. suffered bigger losses, with the Stoxx Europe 600 plunging 26 percent and China’s Shanghai Stock Exchange Composite Index tumbling about 30 percent. About $6 trillion was erased from global equity values last year, the second annual decline since 2002.

The Chicago Board Options Exchange Volatility Index, a gauge of investor concern derived from equity derivatives, averaged 24.2 in 2011, the third-highest level in the last nine years behind 2008 and 2009, data compiled by Bloomberg show. It reached a 29-month high of 48 on Aug. 8. The Dow Jones Industrial Average swung 400 points for four straight days for the first time ever in August.

Strategists Cut

The average S&P 500 estimate from 13 Wall Street strategists tracked by Bloomberg fell more than 9 percent from May through November, the most since 2009. Their forecast for a 6.4 percent increase in 2012 at the start of this year was the most conservative since 2005, Bloomberg data show.

“Even though we were basically flat, this was a really volatile year,” Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, who helps oversee $14.5 billion, said in a Jan. 5 phone interview. “Negative sentiment is what trapped the U.S. market and then we got range bound because the fear that if Europe slips into a major recession, it takes us with them.”

Birinyi, an equity trader at Salomon Brothers Inc. in the 1980s, was one of the first investors to recommend buying when stocks bottomed in 2009. He stayed bullish through the S&P 500’s decline of 16 percent in 2010 and last year’s tumble to 1,099.23 on Oct. 3 from 1,363.61 on April 29.

‘We Were Uncomfortable’

“Quite frankly, when the market got down 19 percent, we were uncomfortable,” he said in a Jan. 4 phone interview. “But we were uncomfortable in 2010 when the market went down 15 percent, and it ended up recovering.”

U.S. equities (SPX) are in the third of four bull market stages, in which investors accept the rally that gathered momentum in the first two, according to Birinyi’s analysis. He said this phase, which started around July, should end in 2012 with a gain of at least 8 percent. The bull market’s final phase of “exuberance” has lifted the S&P 500 an average of 39 percent in the five advances since 1962, he said.

S&P 500 earnings have beaten estimates for the past 11 quarters and are forecast to climb above $100 a share in 2012, according to analyst projections compiled by Bloomberg. A ratio of debt to assets for S&P 500 companies reached its lowest point since at least 2002 in the third quarter, Bloomberg data show.

Bulls Under Pressure

Bulls such as Birinyi came under pressure in the second half of 2011 as the S&P 500 tumbled 5.7 percent in August and 7.2 percent in September. It lost 4.5 percent on Aug. 18 when the Federal Reserve said factory production in the Philadelphia region reached a 29-month low. The index lost more than 5 percent over two days twice before bottoming on Oct. 3, the first time after the Fed cited risks to the economy on Sept. 21, the second after consumer spending slowed on Sept. 30.

Stock swings increased as economists cut their forecast for 2012 GDP growth from 3.3 percent in February to 2 percent in October. Roubini, the co-founder and chairman of Roubini Global Economics LLC in New York, put chances of a contraction in developed economies at 60 percent and said investment gains would prove temporary. The S&P 500 is up 4.5 percent since he spoke Oct. 18 at an Asset Allocation Summit in London. Roubini declined to comment on his outlook.

Shilling said in September that equities were likely to drop and that earnings would fall short of estimates. He predicted in August that the U.S. would enter a recession this year. While he missed the 17 percent rally that began Oct. 3, he’s betting on a retreat as consumers save, the economy shrinks and profits fall.


“It’s probably tough-going for the equity markets this year because the expectations are that economy is going to be strong and corporate profits are going up,” Shilling, who contributes to Bloomberg View, said in a Jan. 4 phone interview. “I don’t think that’s realistic. I think we’ll probably have a decline in earnings, which feeds off the forecast of a moderate recession.”

Michael Shaoul told clients of Marketfield Asset Management on Sept. 14 and Sept. 23 to hold stocks because the decline wouldn’t last. While investors were right to be wary of Europe’s debt crisis, calls for a U.S. recession were unwarranted, according to Shaoul, who helps oversee $1 billion in New York.

‘Violent Market’

“This was a particularly violent market,” Shaoul said in a Jan. 5 phone interview. “At some point in time those negative things are going to matter a great deal, but not at this point in the cycle. It still looks to me that the U.S. equity market should be able to surpass that 2011 high.”

The S&P 500 has risen about 7.1 percent during the third year of a bull market and the price-earnings ratio increases 6.3 percent, according to Bloomberg data dating back to 1960. The index is trading at 13.5 times reported earnings, compared with 15.8 in February and about 18 percent below the 16.4 average since 1954, data compiled by Bloomberg show.

Alcoa Inc. was the first Dow company to report earnings for the last three months of 2011 yesterday when the largest U.S. aluminum producer posted its first quarterly loss in more than two years. Fastenal Co. and eBay Inc. are among the companies scheduled to report in the next 10 days that analysts forecast will see an increase in earnings, according to estimates compiled by Bloomberg.

“What we can see is that companies are still in business, balance sheets are good, earnings are still there and the negative case continues to be somewhat sketchy,” Birinyi said. “The potential for surprise does exist.”

To contact the reporter on this story: Whitney Kisling in New York at

To contact the editor responsible for this story: Nick Baker at


India Said to Be Told Turkey May Stop Routing Iran Oil Shipment Payments

By Pratish Narayanan and Anto Antony - Jan 10, 2012 5:16 PM GMT+0700

Turkiye Halk Bankasi AS (HALKB) told Indian oil (IOCL) refiners it may no longer be able to be an intermediary for their purchases of Iranian crude, four people with knowledge of the matter said.

Executives from the crude-processing companies met with Indian oil ministry officials yesterday to discuss alternatives, including routing remittances through Russia, the people said, declining to be identified because the information is confidential. Other options include stopping purchases from Iran altogether and importing from other countries, they said. Indian officials are scheduled to visit Tehran for trade talks starting Jan. 16, two of the people said.

“This is a serious issue,” Praveen Kumar, an oil and gas analyst at Facts Global Energy in Singapore, said in a telephone interview. “India doesn’t seem to have a plan B at the moment. The refiners will be worried about what they are going to do.”

Mangalore Refinery & Petrochemicals Ltd. and Hindustan Petroleum Corp. (HPCL) are among Indian buyers struggling to find lenders willing to handle payments to Iran because of sanctions against banks in the Gulf state. Saudi Arabia will increase crude exports to some Indian refiners this year as they seek to diversify supplies, four people with knowledge of the plans said Nov. 15. Indian Prime Minister Manmohan Singh discussed alternative financial conduits with Russian officials during his visit to Moscow in December.

Strait of Hormuz

The European Union will discuss imposing harsher sanctions on Iran, including a ban on crude imports, in response to the country’s nuclear program when the bloc’s foreign ministers meet on Jan. 30. Iranian Vice President Mohammad Reza Rahimi said Dec. 27 that his nation would block fuel shipments through the Strait of Hormuz, a transit point for a fifth of the world’s oil, if penalties are imposed, according to a report by the Islamic Republic News Agency.

Crude rose as much as much as 1.5 percent to $102.87 today in New York, extending this month’s gain to almost 4 percent.

“The supply side shock potential is keeping the oil price where it is,” said David Lennox, a resource analyst at Fat Prophets in Sydney who forecasts New York crude will average $110 this year.

India, which got 11 percent of its crude imports from Iran last year, is exploring the option of making payments for Iranian crude through Russia’s Gazprombank OJSC (GZPR), though no deal has been reached, three of the people said yesterday. OAO Gazprom (GAZP), the world’s biggest natural gas producer, owns about 42 percent of Gazprombank, according to the lender’s website.

Avoiding Sanctions

Andrei Serov, a Moscow-based spokesman at Gazprombank, wasn’t available for a comment at his office because of a holiday in Russia.

“Russia has stayed away from sanctioning Iran, so this route might just work for India,” Facts’ Kumar said.

Bharat Petroleum Corp. (BPCL), or BPCL as India’s second-largest state refiner is known, planned to pay Iran for crude purchases by using the accounts of other government-run processors at Halk Bank, three people with knowledge of the situation said Dec. 21. That plan has now been rejected by the Turkish lender after BPCL made some payments, three of the people said yesterday.

Nobody answered a phone message left by Bloomberg News yesterday at Halk Bank’s office in Ankara.

BPCL, which started buying about 20,000 barrels a day of Iranian crude through a term contract in September, is considering whether to stop taking supplies, they said. Other Indian companies that buy Iranian crude include Essar Oil Ltd. (ESOIL) and Indian Oil Corp.

Contract Renewals

Term contracts for other Indian buyers of Iranian crude run from April to March, the people said. The refiners have yet to renew their deals for the next financial year, they said.

Indian refiners’ debts to Iran for purchases rose to as much as $5 billion in July, the Islamic Republic News Agency cited Central Bank Governor Mahmoud Bahmani as saying. The outstanding payments threatened to jeopardize about $9.5 billion in annual trade between the nations, with Iran telling customers they wouldn’t receive August shipments unless the bills were paid, according to the Fars news agency. The refiners started clearing the outstanding payments in August after Halk Bank agreed to make transfers.

U.S. President Barack Obama on Dec. 31 signed into law measures that deny access to the U.S. financial system to any foreign bank that conducts business with the central bank of Iran. The law includes language that allows the president to waive the sanctions if he determines they would threaten national security.

To contact the reporters on this story: Pratish Narayanan in Mumbai at; Anto Antony in New Delhi at

To contact the editors responsible for this story: Alexander Kwiatkowski at; Chitra Somayaji at


Europe Stocks Rise as Alcoa Matches Estimates

By Sarah Jones - Jan 10, 2012 7:39 PM GMT+0700
Enlarge image European Stocks Climb; BHP Advances

A photograph shows BHP Billiton Ltd.'s copper mining operations in Spence, Chile. Source: BHP Billiton Ltd. via Bloomberg

Jan. 10 (Bloomberg) -- Benjamin Pedley, head of investment strategy for North Asia at HSBC Private Bank, talks about global financial markets and his investment strategy. He also discusses the U.S. economy, Australia's economy and central bank monetary policy, and Europe's sovereign debt crisis. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

European stocks rose, rebounding from yesterday’s drop, led by a rally in mining companies after Alcoa Inc. (AA) kicked off the U.S. earnings season with results that met analysts’ estimates. Asian shares and U.S. index futures also gained.

BHP Billiton Ltd. (BHP) climbed more than 3 percent as copper rebounded from a one-week low on record monthly imports of the metal in China. Volkswagen AG (VOW) jumped more than 3 percent as German carmakers said they plan to grow faster than competitors after setting sales records last year. U.K. retailers rallied.

The Stoxx Europe 600 Index advanced 1.6 percent to 250.47 at 12:37 p.m. in London, erasing yesterday’s 0.5 percent drop. The MSCI Asia Pacific Index increased 1.2 percent as slowing Chinese import growth boosted speculation the government may act to spur economic growth. Standard & Poor’s 500 Index futures expiring in March rose 1 percent.

Most investors “look forward to 2012 with a sense of cautious optimism that things will be brighter,” wrote Robert Buckland, chief global strategist at Citigroup Inc. in a report to clients dated yesterday. “Despite the obvious macro headwinds, global corporate earnings and cash flow continue to grow at a solid rate.”

U.S. index futures climbed even as Alcoa reported its first quarterly loss since 2009. The largest U.S. aluminum producer reported a fourth-quarter net loss, excluding restructuring costs, of 3 cents a share, matching the average analyst estimate compiled by Bloomberg. Sales rose 6 percent.

Alcoa, the first company in the Dow Jones Industrial Average (INDU) to report earnings for the quarter, climbed 2.4 percent in early New York trading.

Merkel-Sarkozy Meeting

European stocks retreated yesterday, trimming three weeks of gains for the Stoxx 600, as a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy failed to ease concern that euro-leaders will fail to do enough to resolve the sovereign-debt crisis.

The euro gained for a second day today before Merkel and the International Monetary Fund’s managing director Christine Lagarde meet in Berlin.

Italian Prime Minister Mario Monti will also visit Berlin this week. Sarkozy and Merkel will both travel to Rome on Jan. 20 for negotiations with the Italian government before the next European Union summit meeting in Brussels on Jan. 30.

Mining Companies

BHP Billiton, the world’s largest mining company, gained 3.2 percent to 2,009.5 pence, while Rio Tinto, the third- biggest, increased 3.3 percent to 3,418.5 pence and Xstrata Plc added 2.8 percent to 1,039.5 pence.

Copper rallied on the London Metal Exchange as China imported record amounts of the metal in December. Inbound shipments of the refined metal, copper alloy and products climbed for a seventh month, rising to 508,942 tons, according to customs data.

Carmakers advanced as Bayerische Motoren Werke AG (BMW), Daimler AG (DAI) and Audi AG, owned by Volkswagen, said they plan to beat industry growth in 2012 following record sales last year.

BMW’s deliveries this year will rise by a single-digit percentage that outpaces the car market’s expansion of 4 percent to 5 percent, Ian Robertson, the company’s sales chief, told reporters yesterday at the North American International Auto Show in Detroit. The chief executive officers of Audi and Daimler said they expect their sales to exceed 4 percent.

BMW, Daimler, Volkswagen

Volkswagen gained 3.2 percent to 125.60 euros, BMW rallied 3.7 percent to 58.96 euros and Daimler rose 4 percent to 38.19 euros.

U.K. retailers advanced with Marks & Spencer Group Plc (MKS) climbing 3 percent to 317.8 pence after the U.K.’s largest clothing retailer reported increased Christmas sales led by gains in its food unit. The company maintained its full-year profit outlook as cost reductions offset discounts on apparel.

Revenue at U.K. stores open at least a year increased 0.5 percent in the 13 weeks ended Dec. 31. U.K. food sales rose 3 percent, beating the 2 percent median estimate. Sales fell 1.8 percent in the general-merchandise division, missing the median analyst estimate in a Bloomberg survey.

Debenhams Plc (DEB) surged 9.8 percent to 62.45 pence after the U.K.’s second-largest department-store chain reported Christmas sales that beat analysts’ estimates and predicted that pressure from commodity costs will ease.

Revenue at stores open at least a year was unchanged, excluding value-added tax, in the 18 weeks ended Jan. 7. That compared with the median analyst estimate for a 0.5 percent decline. Group gross transaction value rose 0.5 percent.

Commerzbank, UniCredit

A gauge of bank shares made the biggest contribution to the Stoxx 600’s advance, gaining 3 percent. Commerzbank AG surged 7.5 percent to 1.27 euros after Germany’s second-largest lender said its funding needs for 2012 have fallen to as little as 6 billion euros.

Swatch Group AG (UHR) jumped 3 percent to 374.70 Swiss francs after revenue climbed to a record in 2011. The biggest maker of Swiss watches reported a 22 percent increase in gross sales on a constant-currency basis to 7.14 billion francs ($7.5 billion). The franc’s strength stripped 696 million francs from revenue.

Cie. Financiere Richemont SA, the owner of the Cartier brand, added 1.8 percent to 51.05 francs.

Royal Philips Electronics NV sank 4.7 percent to 14.91 euros after the world’s biggest maker of light bulbs reported a 45 percent drop in fourth-quarter earnings before interest, taxes and amortization to about 500 million euros ($638 million). Philips reiterated its 2013 financial targets.

Actelion, Software AG (SOW)

Actelion Ltd. (ATLN) lost 2.1 percent to 32.74 francs after the drugmaker said it missed its 2011 profit-growth forecast and repeated that sales this year will fall as it faces increased pricing and competitive pressure.

The company will take a charge of as much as 35 million euros for sums it’s owed by public hospitals and other institutions in southern Europe, the company said. Without the provision, Actelion would have met a target of low double-digit earnings growth in local currencies, it said.

Software AG sank 22 percent to 23.55 euros, its biggest drop since 2002, after Germany’s second-largest software maker reported fourth-quarter profit and sales that missed analysts’ estimates as its U.S. business weakened.

To contact the reporter on this story: Sarah Jones in London at

To contact the editor responsible for this story: Andrew Rummer at


U.S. Stocks Gain on China Easing Bets

By Stephen Kirkland and Lynn Thomasson - Jan 10, 2012 9:31 PM GMT+0700

Jan. 10 (Bloomberg) -- Chen Li, head of China equity strategy at UBS AG, talks about the nation's stock and real estate markets. He spoke yesterday in Shanghai with Bloomberg Television's Stephen Engle. (Source: Bloomberg)

Jan. 10 (Bloomberg) -- Paul Hickey, co-founder of Bespoke Investment Group, talks about Alcoa Inc.'s fourth-quarter loss and the outlook for U.S. corporate earnings. Alcoa's net loss was $191 million, or 18 cents a share, compared with net income of $258 million, or 24 cents, a year earlier, the New York-based company said yesterday in a statement. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Jan. 10 (Bloomberg) -- Benjamin Pedley, head of investment strategy for North Asia at HSBC Private Bank, talks about global financial markets and his investment strategy. He also discusses the U.S. economy, Australia's economy and central bank monetary policy, and Europe's sovereign debt crisis. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Stocks (MXWD) rallied and commodities rose for a third day amid speculation China may act to spur growth, while better-than-forecast revenue at Alcoa Inc. (AA) bolstered optimism at the start of the U.S. earnings season. The euro gained before leaders meet. Treasuries and German bunds fell.

The MSCI All-Country World Index (MXWD) added 1.2 percent at 9:30 a.m. in New York and the Standard & Poor’s 500 Index increased 0.67 percent. The Shanghai Composite Index (SHCOMP) jumped 2.7 percent for its biggest three-day advance in 15 months. The euro strengthened 0.2 percent to $1.2786. The yield on the 10-year German bund gained four basis points, as the rate on 10-year Treasury notes increased three basis points. The S&P GSCI (SPGSCI) gauge of 24 commodities climbed 1 percent.

China’s import growth fell to a two-year low in December, government trade data showed today, underscoring an economic slowdown that bolstered forecasts for monetary easing. International Monetary Fund Managing Director Christine Lagarde and German Chancellor Angela Merkel are scheduled to discuss Greece at a meeting today. Laszlo Birinyi, whose prediction the bull market would weather a five-month retreat came true in October, says U.S. stocks (MXWD) will keep climbing in 2012.

“Policy makers in Beijing are very much focused on downside risks,” said Andrew Pease, a Sydney-based senior investment strategist for the Asia-Pacific region at Russell Investment Group, which oversees $137.6 billion of assets. “It would be a reasonable expectation that there’s a lot of monetary easing to come in the first half of the year.”

The Stoxx Europe 600 Index advanced 1.8 percent as Bayerische Motoren Werke AG led automakers higher. Debenhams Plc, the U.K.’s second-largest department-store chain, rallied 12 percent after reporting holiday sales that beat analyst estimates. Larger rival Marks & Spencer Group Plc climbed 3.1 percent as revenue increased.

Profit Drops

Royal Philips Electronics NV (PHIA) sank 3 percent, the most since September. The world’s biggest maker of light bulbs said fourth- quarter profit dropped by about 45 percent, held back by sluggish demand for health-care equipment in Europe. Software AG, Germany’s second-largest software maker, plunged 21 percent for the biggest drop in almost a decade after earnings and sales missed analysts’ estimates.

Alcoa, the biggest U.S. aluminum producer and first company in the Dow Jones Industrial Average to report results for the fourth quarter, had a fourth-quarter loss excluding restructuring costs of 3 cents a share, matching the average projection from 18 estimates compiled by Bloomberg. Sales rose 6 percent to $5.99 billion, topping the $5.7 billion estimate in a Bloomberg survey.

Improving Sentiment

“The sentiment in the markets improved as the earnings season kicked off,” said Anita Paluch, a senior sales trader at Gekko Global Markets Ltd. in London. That’s “shifting the attention from the European troubles for a while.”

U.S. equities will advance at least 8 percent as improving corporate profits force bears to capitulate, according to Birinyi, who manages $400 million in Westport, Connecticut.

The MSCI Emerging Markets Index (MXEF) advanced 2 percent. The Shanghai Composite Index climbed 6.4 percent in three days. Benchmark gauges in Brazil, Russia, India, Poland, Turkey, South Korea and Taiwan climbed more 1 percent.

Oil in New York jumped 1.8 percent to $103.15 a barrel, the first increase in four days, and copper advanced 2.6 percent. Imports of the metal by China, the world’s biggest buyer of copper, surged to a record. Aluminum climbed as much as 2 percent to $2,150 a ton, the highest since Dec. 2.

Dollar Weakens

The euro appreciated 0.2 percent versus the yen. The dollar weakened against higher-yielding currencies including the New Zealand and Australian dollars. The dollar depreciated 0.9 percent against the so-called Aussie, and weakened 1 percent versus New Zealand’s currency.

The yield on the 10-year U.S. Treasury note increased three basis points to 1.99 percent. The government sells $32 billion of three-year notes, the first of three bond auctions this week totaling $66 billion.

The yield on the Dutch 10-year bond rose two basis points to 2.25 percent. The Netherlands sold 3.105 billion euros of 0.75 percent debt due April 2015 at an average yield of 0.853 percent in an auction today.

Austrian (GAGB10YR) 10-year yields declined six basis points as the government issued 1.32 billion euros of securities maturing in September 2016 and April 2022, with the average yield on the 2022 debt at 3.322 percent, down from 3.528 percent in July.

To contact the reporters on this story: Stephen Kirkland in London at; Lynn Thomasson in Hong Kong at

To contact the editor responsible for this story: Michael P. Regan at


U.S. Stocks Rise Amid Bets China May Act to Spur Growth as Alcoa Rallies

By Rita Nazareth - Jan 10, 2012 9:16 PM GMT+0700

U.S. stock futures rose, indicating the Standard & Poor’s 500 Index will advance for a second day, after Alcoa Inc. (AA)’s revenue beat analysts’ estimates and investors speculated China may act to spur growth.

Alcoa, the largest U.S. aluminum producer, rallied 3.4 percent. Freeport-McMoRan Copper & Gold Inc. (FCX), the world’s largest publicly traded copper miner, jumped 3.7 percent as commodities gained. Regions Financial Corp. and Bank of America Corp. (BAC) added at least 3 percent to pace gains in financial companies. Tiffany (TIF) & Co. fell 9 percent after the luxury jewelry retailer reduced its annual earnings forecast.

S&P 500 futures expiring in March gained 1.1 percent to 1,289 at 9:14 a.m. New York time. Dow Jones Industrial Average (INDU) futures rose 115 points, or 0.9 percent, to 12,452.

“China is likely to ease monetary and fiscal policies in the first half of this year,” David Kelly, who helps oversee $394 billion as chief market strategist for JPMorgan Funds in New York, said in a telephone interview. “Their economy is growing more slowly than it did. The U.S. economy seems to have momentum. Most companies will surprise on the upside and markets will react positively to that, provided that there’s not any further negative news coming from the rest of the world.”

Global stocks rallied as China’s import growth fell to a two-year low in December, bolstering forecasts for monetary easing. German Chancellor Angela Merkel and International Monetary Fund Managing Director Christine Lagarde meet in Berlin as pressure grows to complete a Greek debt swap needed to put a rescue plan in place.

Earnings Season

The S&P 500 rose yesterday as investors awaited the start of the fourth-quarter earnings season. S&P 500 earnings have beaten estimates for the past 11 quarters and are forecast to climb above $100 a share in 2012, according to analyst projections compiled by Bloomberg.

Alcoa, the first company in the Dow to report quarterly results, rallied 3.4 percent to $9.75. Sales rose 6 percent to $5.99 billion, beating estimates by 5.1 percent. The company had a loss excluding restructuring costs of 3 cents a share, matching the average projection from 18 estimates compiled by Bloomberg.

Other raw material producers gained as the S&P GSCI index of 24 commodities rose 1.2 percent amid expectations about higher Chinese demand. Freeport rose 3.7 percent to $40.50.

Banks advanced, extending yesterday’s rally. Regions Financial (RF), based in Birmingham, Alabama, added 3.5 percent to $4.69. Bank of America climbed 3 percent to $6.46.

Tiffany Slumps

Tiffany slumped 9 percent to $60.90. The company, which generates almost half of its sales outside of the U.S., is selling fewer $65,000 diamond necklaces as volatile stock markets prompt European consumers to curb spending. Asian shoppers also are restraining purchases of luxury goods as their economies cool.

Rallying stocks have done little to entice professional money managers back to U.S. equities.

A gauge of hedge-fund bullishness measuring the proportion of bets that shares will rise climbed to 44.5 last week from 43.9 at the end of 2011, holding close to the lowest level since 2009, according to International Strategy & Investment Group. Compared with the price of the S&P 500, managers’ so-called net exposure is close to the lowest since June 2008, the ISI data show.

Speculators have been cutting equities since the index peaked in February 2011 at 54.2, concerned Europe’s credit crisis will spread and curb global economic growth. They stayed bearish after October when the S&P 500 began a 17 percent rally that has restored $2 trillion to the value of American equities.

Investors Struggle

Investors have struggled to profit amid record stock market volatility. Hedge funds, largely unregulated investment vehicles that aim to make money whether markets rise or fall, lost 4.9 percent last year as fear that the European sovereign-debt crisis would spread deterred them from buying risky assets including stocks, according to the Bloomberg aggregate hedge- fund index.

“Hedge funds have made massive mistakes,” George Feiger, chief executive officer of Contango Capital Advisors Inc., the San Francisco-based wealth management arm of Zions Bancorporation, said in a telephone interview on Jan. 6. He manages $3.3 billion at Contango and Western National Trust Co. “We are less and less willing to invest with these people because at the point when you need them the most, they’re worth the least.”

To contact the reporter on this story: Rita Nazareth in New York at

To contact the editor responsible for this story: Nick Baker at


RBS Faces Nuclear Winter as CEO Dismantles Goodwin’s Bank

By Liam Vaughan and Howard Mustoe - Jan 10, 2012 3:40 PM GMT+0700
Enlarge image Royal Bank of Scotland Group Plc CEO Stephen Hester

Royal Bank of Scotland Group Plc chief executive officer Stephen Hester. Photographer: Chris Ratcliffe/Bloomberg

RBS's investment bank, run by John Hourican, seen here, since the departure of Johnny Cameron in 2009, faces higher fixed costs after new rules on bonuses led banks to pay their employees higher base salaries as a proportion of total compensation. Source: RBS Group via Bloomberg

By Thursday lunchtime in London, the 18,900 employees in Royal Bank of Scotland Group Plc’s investment banking division will know whether they still have jobs at Britain’s biggest government-owned lender.

Chief Executive Officer Stephen Hester, 51, decided to make the announcement, originally planned for later this month, because uncertainty in the ranks about jobs was undermining productivity, said one senior executive who declined to be identified because he wasn’t authorized to speak publicly.

Hester is reversing a decade of expansion led by former CEO Fred Goodwin that included $140 billion of acquisitions. The Edinburgh-based lender plans to close its equities and corporate finance units globally, cutting as many as 5,000 jobs, said two people familiar with the situation. The cash equities, equity research, corporate broking as well as mergers and acquisitions units may also be shut, the people said. Limiting cuts to the equities unit may not be enough to boost profitability, said Raul Sinha, an analyst at JPMorgan Cazenove in London.

“Addressing only the equities business profitability is insufficient to change the global banking and markets unit’s return on equity prospects, given that the issues are capital consumption as well as costs,” said Sinha in a note to investors.

Banking Review

Hester is extending cuts he made when he reviewed the bank’s operations in 2009 after he took over from Goodwin, 53. Since that time he has cut the bank’s assets by about 1 trillion pounds ($1.54 trillion). He retreated from some markets in Asia, running off loans and selling units including the European division of commodities-trading business RBS Sempra, which JPMorgan Chase & Co. bought for $1.7 billion. At the same time he expanded the bank’s equities and advisory business on the continent.

The European debt crisis has forced securities firms to scale back or close divisions that trade equities in Europe. UniCredit SpA (UGC), Italy’s largest bank shut its European equities unit in November, joining a growing list of companies including Nomura Holdings Inc., that have eliminated jobs in the region.

When McKinsey & Co. reviewed RBS in 2009, the management consulting firm came up with possible scenarios of what the future might look like for the board to consider. The worst- case, involving a deterioration in the global economy and RBS (RBS) losing market share, was headed “Nuclear Winter,” according to a former RBS executive who helped to devise the strategy. The executive, who declined to be identified because the talks were private, said that the sovereign debt crisis and new regulation, including the planned insulation of consumer banking as outlined by the Independent Commission on Banking in September, had made the reality much worse.

Fleshed Out

The overhaul, which will be outlined in brief this week and fleshed out when the bank reports year-end earnings on Feb. 23, will call for the transformation of RBS into a U.K. and U.S.- focused consumer bank and lender to companies. The firm will retain its payment-processing arm under the plan along with a smaller investment bank focused on underwriting and trading debt, the people with knowledge of the matter said.

RBS spokesman Michael Strachan and Andrew Whitehouse, a spokesman for McKinsey & Co. in London, declined to comment.

The pending move marks a return to how the bank looked in 2004 “before the GBM runaway growth phase,” according to Bruce Packard, analyst at Seymour Piece Ltd. in London.

Acquisition Spree

RBS increased its balance sheet more than sixfold to 2.4 trillion pounds in the seven years to the financial crisis of 2008, as Goodwin sought to push the lender beyond its Scottish origins. The lender was Europe’s biggest arranger of leveraged loans from 2004 to 2008. Goodwin’s acquisition spree culminated in the 72 billion-euro ($92 billion) takeover of ABN Amro Holding NV with partners Banco Santander SA and Fortis. RBS acquired the Dutch bank’s Asian and securities units.

RBS’s investment bank accounted for 26 percent of RBS’s 7.85 billion-pound pretax profit in 2004, according to data compiled by Bloomberg. As Goodwin expanded, so too did his reliance on the unit: By 2007, the securities division generated 47 percent of the lender’s 9.19 billion-pound pretax profit. It contributed about a third of profit in the first nine months of last year.

RBS last month was ordered by the government to shrink its investment bank as part of a strategy to scale back what it termed “riskier activities.” The bank is 83 percent taxpayer- owned. Profit in the division fell 42 percent in the first nine months of 2011. The lender’s shares slumped 50 percent in London trading last year compared to a 32 percent drop for the 46- member Bloomberg Europe Banks and Financial Services Index.

‘Substantial Drag’

The shares gained 1.8 percent to 20.44 pence at 8:33 a.m. in London, for a market value of 22.5 billion pounds. That compares with the government’s break-even price of about 50.2 pence on its 65.5 billion-pound investment in the bank.

“The current difficult revenue environment does not allow RBS to generate anything like a decent return in its investment bank,” James Invine and Philip Richards at Societe Generale SA said in a note. “Global Banking and Markets is a very substantial drag as it stands today.”

RBS’s investment bank, run by John Hourican since the departure of Johnny Cameron in 2009, faces higher fixed costs after new rules on bonuses led banks to pay their employees higher base salaries as a proportion of total compensation.

The inflated wage bill came just as markets declined, making it harder for companies to sell shares and make acquisitions. Global share sales and rights offerings fell about 30 percent to $559.7 billion in 2011 from $803.7 billion in the year-earlier period, according to data compiled by Bloomberg. The value of M&A rose 4 percent to $2.28 trillion in 2011 from a year ago although it’s still almost half of the $4.04 trillion of announced transactions in 2007, the data show.

“I don’t think they’re being radical enough,” said Seymour Pierce’s Packard. “The revenue is not worth anything if you can’t control the staff costs.”

To contact the reporters on this story: Liam Vaughan in London at Howard Mustoe in London at

To contact the editor responsible for this story: Edward Evans at


Apple CEO Cook’s 2011 Comp Worth $378M

By Adam Satariano - Jan 10, 2012 12:01 PM GMT+0700
Enlarge image Apple Reports $378 Million Compensation for CEO

Apple Inc. said Chief Executive Officer Timothy D. Cook received $378 million in 2011 compensation, including $376.2 million in stock awards. Photograph: ChinaFotoPress/Getty Images

Apple Inc. (AAPL) Chief Executive Officer Tim Cook will receive compensation for 2011 worth $378 million, boosted by restricted stock awards that are payable over the coming decade.

The total includes $376.2 million in shares that will vest starting in five years, Cupertino, California-based Apple said yesterday in a proxy filing to shareholders. Cook’s base salary was $900,000 in 2011. The company, which plans to hold its annual shareholder meeting on Feb. 23, had previously disclosed that Cook received 1 million restricted shares in August.

Apple’s board, now led by Chairman Art Levinson, offered the stock options to Cook to help ensure that he doesn’t pursue other job prospects. “No formula or peer group benchmark” was used to calculate the amount, the company said in the filing. Steve Jobs, who passed the reins to Cook before his death in October, had given input about the pay package.

Cook isn’t the only executive who has received millions of dollars worth of stock option grants.

In November, software executive Scott Forstall, hardware manager Bob Mansfield, Chief Financial Officer Peter Oppenheimer, marketing chief Phil Schiller, General Counsel Bruce Sewell and operation manager Jeff Williams each received 150,000 restricted shares, which vest between 2013 and 2016, according to regulatory filings.

Eddy Cue, who handles Internet software, received 100,000 shares after having received another 100,000 when he was promoted to senior vice president last year.

One Dollar

Jobs had compensation of $1 every year when he was CEO, though the board awarded him stock grants. He owned 5.5 million shares at the time of his death. The Apple co-founder took three medical leaves before stepping down as CEO in August, with Cook filling in for him each time.

Apple shares were little changed in yesterday’s trading at $421.73. The stock climbed 26 percent in 2011, marking its third straight annual gain. Apple temporarily became the biggest company in the world by market value last year, before slipping back behind Exxon Mobil Corp. (XOM)

To contact the reporter on this story: Adam Satariano in San Francisco at

To contact the editor responsible for this story: Tom Giles at


Obama Ready to Strike to Stop Iran: Ex-Adviser

By Indira A.R. Lakshmanan - Jan 10, 2012 6:41 PM GMT+0700

No one should doubt that President Barack Obama is prepared to use military force to prevent Iran from acquiring a nuclear weapon if sanctions and diplomacy fail, the president’s former special assistant on Iran said.

Obama has “made it very clear” that he regards a nuclear- armed Iran as so great a threat to international security that “the Iranians should never think that there’s a reluctance to use the force” to stop them, Dennis Ross, who served two years on Obama’s National Security Council and a year as Secretary of State Hillary Clinton’s special adviser on Iran, said in an interview yesterday.

“There are consequences if you act militarily, and there’s big consequences if you don’t act,” said Ross, who in a two- hour interview at the Bloomberg Washington office laid out a detailed argument against those who say Obama would sooner “contain” a nuclear-armed Iran than strike militarily.

The administration considers the risks of permitting a nuclear-armed Iran to be greater than the risks of military action, said Ross, who last month rejoined the Washington Institute for Near East Policy, a research group.

His comments came the day after Obama’s top civilian and uniformed defense officials said that developing a nuclear weapon would cross a red line, precipitating a U.S. strike.

“They need to know that if they take that step, they’re going to get stopped,” Defense Secretary Leon Panetta said Jan. 8 on CBS News’ “Face the Nation.” On the same program, General Martin Dempsey, chairman of the Joint Chiefs of Staff, said he has been responsible for planning and positioning assets to be ready if ordered to take military action.

Challenging Iran’s Claim

Iran, the world’s third largest oil exporter, insists its nuclear program is for civilian energy and medical purposes only. The International Atomic Energy Agency issued a report last Nov. 8 detailing nuclear activities it said had no other use than for military purposes, bolstering the U.S. case that Iran is seeking the capability to produce nuclear weapons even if it hasn’t yet made a decision to do so.

While some Iran analysts have suggested an alternative to military strikes would be to “contain” a nuclear Iran, much as the U.S. managed to live with a nuclear-armed Soviet Union, Ross said the analogy doesn’t translate to the situation in the Mideast. Countries in the region, he said, lack equivalent Cold War-era “ground-rules,” lines of communication, and a protected second-strike nuclear capability, which deterred a surprise attack during U.S.-Soviet tensions.

A nuclear-armed Iran would set off an atomic arms race among neighbors, pose a risk of proliferation to other states or terrorist groups, and increase the chances of a nuclear strike resulting from miscalculation, he said.

Potential for Miscalculation

“You don’t have any communication between the Israelis and the Iranians. You have all sorts of local triggers for conflict. Having countries act on a hair trigger -- where they can’t afford to be second to strike, the potential for a miscalculation or a nuclear war through inadvertence is simply too high,” he said.

Ross acknowledged that a military strike would have serious consequences as well, including Iranian retaliation, either directly or through terrorist proxies around the world, a possible effort to shut down the Strait of Hormuz, and a spike in oil prices.

Understanding those risks, “nobody uses military force lightly,” he said, and “nobody commits to using military force one minute before they have to.”

Oil rose as much as 1.8 percent to $103.09 a barrel in New York today amid growing concern the dispute between Iran and western governments may lead to a disruption in Middle East crude exports.

U.S. Credibility

Ross underscored that U.S. willingness to stop Iran from getting nuclear weapons affects decision-making in other countries that fear Iran, including Israel and Gulf states. If the White House abandoned a pledge to stop Iran made by Obama and President George W. Bush before him, the U.S. would lose all credibility, he said.

“I wouldn’t discount the possibility that the Israelis would act if they came to the conclusion that basically the world was prepared to live with Iran with nuclear weapons,” he said. “They certainly have the capability by themselves to set back the Iranian nuclear program.”

Ross stressed he believes there is still time for diplomacy to work, as the financial pain of sanctions may yet persuade Iran to abandon its suspected nuclear weapons program.

“Force is not inevitable,” he said. “Diplomacy is still the desired means. Pressure is an element of the means.”

Oil Embargo

Coordinated efforts to tighten penalties, including the European Union’s preliminary agreement on an oil embargo, new U.S. sanctions on the Central Bank of Iran, and pressure on Japan and South Korea to reduce their imports of Iranian oil, may finally persuade Iran’s leaders to give up the program rather than suffer a shutdown of their economy, Ross said.

The latest measures are the first “really affecting the core of their revenue, which is their sale of oil,” Ross said. Historically, “when they’re really pressured, they look for ways out.”

The leaders of Islamic Republic of Iran only accepted a cease-fire with Iraq, halted the assassination of Iranian dissidents in Europe, and abandoned the enrichment of uranium in 2003 when “it wasn’t worth the cost” anymore, Ross noted.

The latest round of punishing sanctions target oil sales, which fund a majority of Iran’s government revenues, according to the International Monetary Fund.

Iran is “feeling pain in a much more dramatic way” than ever, Ross said.

Iranian ‘Bluster’

He dismissed threats by certain Iranian officials to retaliate against oil sanctions by closing the Strait of Hormuz, through which one-fifth of the world’s oil transits, as “bluster” aimed to send a message at home and abroad, as Iranian leaders vie for power in a struggle that Ross said is as intense as any since the aftermath of the 1979 Islamic revolution.

The IAEA yesterday confirmed that Iran has begun enriching uranium to as much as 20 percent U-235 at the underground Fordow underground site near the holy city of Qom, as Iranian leaders had pledged to do last year. The site is monitored by IAEA inspectors to detect any attempt to enrich uranium to the 90 percent level necessary for a nuclear bomb.

“There really is no justification for it,” Ross said of the latest enrichment activities. “I don’t think there’s a whole lot of doubt that they are embarked on a program that can produce, at a certain point, weapons.”

To contact the reporter on this story: Indira Lakshmanan in Washington at

To contact the editor responsible for this story: Mark Silva at


Wall Street Mulls Partial Pay Freeze

By Jeffrey McCracken and Christine Harper - Jan 10, 2012 8:00 AM GMT+0700

Wall Street’s biggest firms, facing a slump in investment-banking revenue, are considering freezing compensation levels for some junior bankers, according to people familiar with the deliberations.

Credit Suisse Group AG (CSGN) is likely to suspend its practice, an industry norm, of boosting pay automatically each year for analysts, associates and vice presidents within the investment- banking division, a person with direct knowledge of the decision said. While those employees will get their regular annual salary increases, bonuses probably will be lowered to keep total pay flat from a year earlier, said the person, who requested anonymity because the plan isn’t public.

Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) are being watched by competitors for signs the companies are planning similar moves, said people at four other firms. Cutting pay can be perilous if your rivals don’t because it’s easier for junior bankers to defect, draining a future generation of talent. Wall Street firms may make the change en masse only if one or more of their biggest rivals act first, the people said.

“There’s always the risk that people may go across the street for a better deal,” said Joseph Sorrentino, a managing director in New York at Steven Hall & Partners, an executive- compensation consultancy. Among junior bankers “you have some potential future stars and you want to make sure you keep them engaged and keep them happy and performing.”

JPMorgan, which doesn’t plan to alter its practices, may change course if other firms do so, a person briefed on its decisions said.

Starting Salaries

Base pay for junior bankers typically increases automatically by about 15 percent to 20 percent, akin to a unionized salary scale, as they work a year and move up a so- called class. Younger bankers, who typically comprise about 75 percent of the investment-banking workforce of the biggest Wall Street firms, often start with a $200,000 annual salary and can expect $240,000 or $250,000 in the second year, said two senior bankers.

JPMorgan’s investment bank, which includes equity and fixed-income trading, had 26,615 employees as of Sept. 30. Goldman Sachs, with 34,200 employees, doesn’t break out how many work in each division.

A banker typically spends three to four years as an associate and then three years as a vice president before he can be named director. Top-producing vice presidents in their third year, sometimes called a VP-3, could get $600,000 to $700,000 in total compensation, said a senior Wall Street banker.

Top Tier

At Deutsche Bank (DBK) AG, senior executives are evaluating whether to cut or freeze pay for the top tier of vice presidents as a way to pare all junior-banker pay, said a person familiar with the matter.

Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment, as did Lucas van Praag at Goldman Sachs, Victoria Harmon at Zurich-based Credit Suisse and John Gallagher at Deutsche Bank, based in Frankfurt. JPMorgan and Goldman Sachs are both based in New York.

The review of junior-banker pay focuses on investment- banking divisions and not lower-level employees in equity or fixed-income trading departments, the people said.

Associate compensation continued to rise in the wake of the financial crisis, the executives said. Starting pay for each position also increased, so a first-year associate job that paid $200,000 a year rose to $210,000 for the next person to fill the slot. With compensation pools down this year at almost all Wall Street banks, climbing associate pay has caused a squeeze on pay for senior managers, said a banker involved in such decisions.

More Transparent

Pay among junior bankers tends to be more transparent and aligned with peers at competing firms than it is for senior bankers, the people said, partly because the newest employees still talk with former classmates. Word of lower entry-level pay at one bank can hinder recruiting at top business schools, which is why the biggest banks rarely consider such pay freezes.

A plunge in trading revenue last year, stagnating economic growth and Europe’s sovereign-debt crisis have forced Wall Street’s most senior bankers to rethink their pay practices as they seek to cut costs. Part of the calculus is determining whether the downturn in bank profits represents a permanent shift or a temporary phenomenon tied to the 2008 financial crisis and recession.

Compensation at the biggest banks may fall 20 percent to 60 percent this year, depending on the firm and the job, senior bankers said. Mergers-and-acquisitions bankers may face pay cuts at the lower end of that range and those in fixed income or trading could see higher reductions, senior bankers said.

Dimmed Prospects

Most of the biggest U.S. banks will inform employees about bonuses and compensation at the end of this month. Bank of America Corp. (BAC), for example, will tell employees their compensation starting Jan. 26, said a person familiar with the matter. The new pay rates typically take effect in February.

Goldman Sachs and Morgan Stanley, the major U.S. banks most reliant on trading, had their earnings estimates cut this month as a weak fourth quarter dimmed prospects for a capital-markets rebound in the first half of 2012.

JPMorgan Cazenove analysts led by Kian Abouhossein cut earnings outlooks for investment banks for 2011, 2012 and 2013, citing worsening conditions in fixed income and equities. In a Jan. 6 note to clients, the analysts lowered their Goldman Sachs 2012 earnings estimate by 19 percent and Morgan Stanley (MS)’s figure by 17 percent.

Investment-banking and trading revenue probably has dropped in each of the past two years. In 2011, global stock offerings plunged 29 percent from 2010 and U.S. bond issuance fell 6.7 percent as companies delayed plans to raise capital, according to data compiled by Bloomberg.

Final Decisions

Fixed-income trading revenue at U.S. banks may fall 12 percent from the third quarter, minus accounting adjustments, while equities drop 10 percent and investment-bank revenue remains unchanged, David Trone, an analyst at JMP Securities, wrote in a Dec. 16 report.

Some large European banks won’t make final decisions on bonuses and compensation until early next month, allowing them to tweak plans based on what their rivals determine in January, executives at those firms said.

Pay increases have traditionally been automatic because “there are traditionally very long hours in terms of the amount of work and this is another way to try to boost their morale and signify that they’re a strong part of the firm and that they’re appreciated,” said Steven Hall’s Sorrentino.

Deutsche Bank won’t announce internally in North America its bonus and compensation decisions until at least the first week of February, said a person familiar with the matter, who predicted bonuses to be down there 30 percent to 50 percent. Barclays (BARC) Capital, a unit of London-based Barclays Plc, is likely to hold off until the second or third week of February, a person familiar with the matter said.

Kerrie-Ann Cohen, a Barclays Capital spokeswoman, declined to comment.

To contact the reporters on this story: Jeffrey McCracken in New York at; Christine Harper in New York at

To contact the editors responsible for this story: Jennifer Sondag at; David Scheer at