EBay Beats Fourth-Quarter Estimates on Holiday Sales, PayPal Unit’s Growth

By Danielle Kucera - Jan 19, 2012 11:03 PM GMT+0700

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Jan. 18 (Bloomberg) -- Mark Mahaney, an analyst at Citigroup Inc., Bloomberg's William Maloney and Andrew Keene, an independent trader at the Chicago Board Options Exchange, discuss the outlook for Ebay Inc. They speak with Trish Regan on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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The eBay sign sits outside the company's headquarters in San Jose, California. Photographer: Tony Avelar/Bloomberg

EBay Inc. (EBAY), the largest Internet marketplace, reported sales and profit that topped analysts’ estimates, buoyed by a campaign to promote its expanded retail offerings and broader use of the PayPal online-payments service.

Fourth-quarter revenue rose 35 percent to $3.38 billion, EBay said yesterday in a statement. That compares with the average analyst estimate of $3.32 billion, according to data compiled by Bloomberg. Profit excluding certain items was 60 cents a share, compared with the average prediction of 57 cents.

Chief Executive Officer John Donahoe, eager to propel a stock price that’s little changed since he took over in 2008, boosted marketing spending 25 percent last year and upgraded EBay’s technology to lure back users who defected to rivals such as Amazon (AMZN).com Inc. EBay is also getting a lift as PayPal challenges traditional payment systems by persuading a larger pool of shoppers to use it more often and for bigger purchases.

“EBay right now has very consistent results,” Colin Gillis, an analyst at BGC Partners LP in New York, said in an interview. “PayPal is still adding over a million users a month, marketplaces is doing fine, and they continue to position well for mobile.”

EBay rose 4.4 percent to $31.66 at 10:58 a.m. in New York. Shares of the San Jose, California-based company had gained 3 percent in the 12 months before today.

The company benefited from a 15 percent gain in total holiday e-commerce spending, which rose to a record $37.2 billion, according to research firm ComScore Inc. (SCOR), based in Reston, Virginia.

Fastest-Growing Division

At PayPal, EBay’s fastest-growing division last quarter, revenue rose 28 percent and registered users jumped to 106.3 million. The unit is expanding its roster of merchant partners, taking aim at Visa Inc. (V) and MasterCard Inc. (MA)’s credit card- swiping customers. swiping customers. PayPal’s mobile payment volume will rise to $7 billion this year from $4 billion last year, EBay executives said on a conference call.

PayPal is working with Home Depot Inc. (HD) to let shoppers use the payment system at checkout, and the companies this week will extend a trial of the service to 51 stores, primarily in the San Francisco area, Donahoe said on a conference call yesterday.

Retailer Ties

EBay has been bolstering ties with big retailers, seeking to offer goods from more stores through its June acquisition of GSI Commerce Inc. for $1.9 billion.

“The experience that EBay and PayPal have in the virtual world with online payments and the addition of GSI Commerce --it gives them a line of logic and a set of disciplines that are easy to carry into an in-store experience,” said Bill Smead, who holds EBay shares as part of $175 million in assets at Smead Capital Management Inc., said in an interview.

Payment volume from in-store terminals will be “immaterial” to the company’s 2013 projections, Chief Financial Officer Bob Swan said on the call. EBay expects to profit from in-store payments over the next three to five years, said Donahoe, who is serving as interim president of the PayPal unit after Scott Thompson left earlier this month to become CEO of Yahoo! Inc.

“What we’re doing with PayPal point-of-sale, it’s very analogous to what we did with the merchant-services business five years ago,” Donahoe said in an interview. “Year one was planning and building the product. Year two, which is this year for point-of-sale, is trial and learn. Year three is scale it.”

Net Income

Fourth-quarter net income was $1.98 billion, or $1.51 a share, compared with $559.2 million, or 42 cents, a year earlier, EBay said. The recent period’s results included a gain from the sale of the company’s investment in Skype Technologies SA. Microsoft Corp. acquired Skype last year for $8.5 billion.

Revenue in the first quarter will be $3.05 billion to $3.15 billion, EBay said. Excluding some costs, profit will be 50 cents to 51 cents a share. Analysts on average had projected sales of $3.16 billion and profit of 54 cents, according to data compiled by Bloomberg.

EBay is reaping the benefit of money spent to begin overhauling its brand, which consumers have historically associated with online auctions, BGC’s Gillis said. A portion of that investment has been used to spur purchases on its website through mobile applications. The retailer projects it will reach $8 billion in sales volume through mobile apps this year, compared with $5 billion in 2011.

Marketing Expenses

“They’ve put a lot of technology investment into the marketplaces platform,” Gillis said. “They’ve got to get users to re-engage. They need to do a brand makeover. It’s not your collectible site.”

Operating margin narrowed to 22.3 percent in the fourth quarter, compared with 23.7 percent in the same period last year. The decrease came primarily because of four acquisitions the company completed in 2011, EBay said. Marketing expenses rose to $2.44 billion in 2011.

EBay is touting itself as a buy-it-now retailer akin to Amazon, whose stock has more than doubled since March 2008, dwarfing EBay’s growth since Donahoe became CEO. Still, the market could benefit from two e-commerce giants, Gillis said.

“If you want something that’s last season or something that has been refurbished or used, EBay gives you that range of pricing options,” he said. “It’s the difference between the mall and the outlet mall. Is there room for both? Of course.”

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

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

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China Unicom Adds Record 3G Subscribers Undercutting IPhone by 80%: Tech

By Bloomberg News - Jan 19, 2012 11:00 PM GMT+0700
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People pass a China Unicom Hong Kong Ltd. service hall in Beijing, China. Photographer: Adam Dean/Bloomberg

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Jan. 19 (Bloomberg) -- Maha Ibrahim, a partner at Canaan Partners, talks about Facebook Inc.'s possible initial public offering, the outlook for the technology industry and her investment strategy. Ibrahim speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

China Unicom Hong Kong Ltd. (762), the nation’s No. 2 carrier, is adding a record number of high-speed wireless subscribers and gaining market share by pushing smartphones that cost 80 percent less than Apple Inc. (AAPL)’s iPhone.

China Unicom started winning customers from market leader China Mobile Ltd. (941) after it switched focus from high-end users of the iPhone to those who can’t afford the device. China Unicom started selling handsets from local manufacturers Huawei Technologies Co. and ZTE Corp. (000063) that cost less than 1,000 yuan ($158), or about half a month’s salary for an urban worker.

The strategy helped make China Unicom the best-performing stock on the benchmark Hang Seng Index last year with a 47 percent increase. It also accelerated the shift to high-speed networks in China, putting the nation on course to surpass the U.S. in smartphone users and enabling Huawei and ZTE to compete against Apple in their home market.

“People aspire to own an iPhone, but they can’t afford it,” said Teck Zhung Wong, a Beijing-based analyst at IDC China. “If a vendor offers a phone that can do most of the things a high-end device can do, there’s no reason people won’t bite.”

IPhones continue to be popular among those who have the money. China Unicom, the only carrier offering the device with a service contract, is down 11 percent this year after customers frustrated by not being able to buy the new iPhone 4S pelted Apple’s main Beijing store with eggs, prompting the handset maker to pull all phones from its store shelves.

Two Months’ Wages

Apple also said its application for a phone to work on China Telecom (728)’s network was moving through the approval process.

China introduced third-generation wireless networks in 2009, six years after the U.S. Adoption of the high-speed service was hampered by handset prices in a nation where monthly urban disposable income was 1,811 yuan per capita through the first nine months of last year, according to the national statistics bureau.

A 16-gigabyte iPhone 4S costs 4,988 yuan at Apple’s online store, or more than two months’ wages.

Last year’s introduction of cheaper models from Huawei and ZTE spurred a 44 percent jump in monthly 3G subscriber sign-ups in June compared with January. The top three carriers -- China Mobile, China Unicom and China Telecom Corp., respectively -- added a record 8.34 million subscribers in September.

Apple Focus

China Unicom initially was on target to miss its forecast for adding 25 million 3G subscribers last year, signing up between 1.21 million and 1.86 million users a month through May, according to government statistics. That’s because the carrier focused on high-end users with the Apple device, said Tucker Grinnan, a Hong Kong-based analyst at HSBC Securities Asia Ltd.

The carrier started selling 1,000-yuan smartphones in May, said Sophia Tso, a Hong Kong-based spokeswoman. By August, it was adding more than 2 million 3G subscribers a month, culminating in a record 3.49 million in December.

China Unicom added 26 million 3G users last year, according to data it released yesterday.

“Low-cost smartphones will enter a period of rapid development as a decisive factor in the popularity of 3G,” Zhou Youmeng, president of sales, said in a statement on the carrier’s website.

China Unicom subscribers can still get a free iPhone 4S by signing a three-year contract for as little as 286 yuan a month.

Taking Share

The number of subscribers to 3G mobile networks in China will almost double to 229 million this year, according to the median estimate of 11 analysts surveyed by Bloomberg News. That compares with 200 million in the U.S., according to the median estimate of five analysts surveyed.

“People are underestimating the growth,” said Jim Tang, an analyst at Shenyin Wanguo Securities Co. in Shanghai who doesn’t cover the U.S. market. “The number is going to be huge.”

As the market expands, more subscribers are going to China Unicom and China Telecom at the expense of China Mobile. China Unicom’s market share will rise to 32 percent this year from 30 percent at the end of 2010, and China Telecom will boost its share to 28 percent from 26 percent, according to the median of four analysts surveyed by Bloomberg News.

China Mobile’s share will drop to 38 percent from 44 percent in 2010, according to the survey. Rainie Lei, a Hong Kong-based spokeswoman for China Mobile, declined to comment on the company’s 3G strategy.

‘Like Hotcakes’

Investors back China Unicom because its 3G customers use an average of about twice as much data as China Mobile’s, said Paul Wuh, an analyst at Samsung Securities Co. in Hong Kong. China Mobile shares are down 3.4 percent in Hong Kong in the past 12 months.

“Unicom’s subscribers are going there with the specific purpose of buying smartphones and using data,” Wuh said. “That’s why people are more excited about Unicom versus China Mobile.”

Between the first and third quarters last year, ZTE’s sales in China almost quintupled and Huawei’s almost tripled, according to data compiled by research company Gartner Inc. Huawei sold 4.47 million handsets there through the first nine months, and ZTE sold 3.03 million.

Cupertino, California-based Apple sold 5.6 million iPhones during the same period as its market share dropped to 10.4 percent in the third quarter from 13.3 percent the quarter before, according to Stamford, Connecticut-based Gartner.

Closely held Huawei passed Apple in smartphone market share with 11 percent. ZTE more than doubled its share to 8.4 percent, cutting Apple’s lead to 2 percentage points from almost 7 in the first quarter, according to Gartner.

Huawei’s best-selling smartphone in the 1,000-yuan category is the C8650, Huawei spokesman Ross Gan said in an e-mail. The Android-based smartphone sold 1 million units within two months of its introduction in July.

ZTE’s top handset is the 1,000-yuan Blade, with 6 million sold, said Rena Qin, a spokeswoman for the Shenzhen-based company. ZTE since has introduced four more smartphones in that price range, she said.

“Low-end smartphones are selling like hotcakes, and there is nothing in the market trends that suggests this is not going to continue,” Wuh said.

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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Apple Unveils IBooks 2 to Boost IPad Usage

By Adam Satariano and Edmund Lee - Jan 19, 2012 10:43 PM GMT+0700

Apple Inc. (AAPL) introduced a product to make digital versions of textbooks available on the iPad and beef up the education content available for the tablet computer, which is gaining popularity in classrooms.

The new service, called iBooks 2, is intended to help make textbooks more interactive and searchable, Phil Schiller, Apple’s senior vice president of product marketing, said today at an event in New York. More than 1.5 million iPads are being used for educational purposes, he said.

With students, school districts and universities snapping up iPads, Apple is bolstering the educational content available for the top-selling device. The new tools are designed to kick- start the nascent electronic-textbook business so a broad range of authors can make material available to students in a digital format.

The e-textbooks will have embedded video, interactive pictures, as well as features for highlighting texts and creating flash cards, Apple executives said at the event today.

The company also introduced software tools, called iBooks Author, to create textbooks. IBooks Author will be free and publishing partners include Pearson Plc (PSON), Houghton Mifflin Harcourt and McGraw-Hill Cos. (MHP), Apple said.

Education is one piece of how the iPad became the fastest- selling consumer-electronics product in history. As of September, Apple had sold about 40 million iPads, generating $25.3 billion in sales. The iPad is Apple’s second-best selling product, behind the iPhone and ahead of Mac personal computers and iPod music players.

More Engaging

School districts in California, Nevada, New York, New Jersey and Texas are among those that have allocated funds to use the iPad in classrooms. Advocates of student use of the iPad say its interactive features, such as games and quizzes, are more engaging than textbooks for modern students.

The textbook-publishing market is valued at $10 billion by the Association of American Publishing. Cupertino, California- based Apple joins companies such as Inkling Systems Inc. and Kno Inc., which produce software to make textbooks more interactive and appealing with features such as videos, audio, 3-D pictures and quizzes. Chegg Inc., a popular textbook-rental service, announced a new e-textbook offering yesterday.

The e-textbook market is still small. On college campuses, even as the latest best-sellers have become popular for devices such as Amazon.com Inc. (AMZN)’s Kindle reader, digital textbooks were just 2.8 percent of total textbook sales in 2010, according to the National Association of College Stores.

To contact the reporters on this story: Edmund Lee in New York at elee310@bloomberg.net; Adam Satariano in San Francisco at asatariano1@bloomberg.net

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

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U.S. Stocks Rise on Earnings Optimism

By Rita Nazareth - Jan 19, 2012 10:27 PM GMT+0700

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Jan. 19 (Bloomberg) -- Bob Janjuah, global head of tactical asset allocation at Nomura International Plc, talks about the outlook for the U.S. economy and equity markets. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

U.S. stocks rose, sending the Standard & Poor’s Index higher for a third day, as Bank of America Corp. (BAC) rallied after swinging to a profit and jobless claims plunged to the lowest level since 2008.

Equities briefly erased gains after a Federal Reserve gauge of manufacturing in the Philadelphia area trailed economists’ estimates. Bank of America, the second-largest U.S. lender, added 5.3 percent as the company sold assets and built capital faster than expected. Morgan Stanley climbed 5.4 percent after the owner of the world’s largest brokerage reported a smaller- than-estimated loss. EBay Inc. (EBAY) jumped 3.9 percent as sales and profit beat analysts’ estimates.

The S&P 500 added 0.2 percent to 1,311.22 at 10:23 a.m. New York time. The benchmark gauge for American equities rallied 1.7 percent in three days. The Dow Jones Industrial Average gained 13.17 points, or 0.1 percent, to 12,592.12 today.

“We’re in a fragile economy, we’re not going to have robust growth, but it’s going to take us a lot of things to derail,” Richard Weeks, the Vienna, Virginia-based managing director and partner at HighTower’s VWG Wealth Management. His firm oversees about $20 billion. “I don’t know that I would think that the earnings of Bank of America, Morgan Stanley (MS) are all so fabulous, but everyone is so relieved that they are not as bad as they feared. It’s not like these banks are going to melt down into the sea.”

Stocks rose as as Labor Department figures showed that jobless claims plunged by 50,000 to 352,000 in the week ended Jan. 14. The median forecast of 41 economists in a Bloomberg News survey projected 384,000. The Federal Reserve Bank of Philadelphia’s general economic index increased to 7.3 in January from 6.8 last month. Economists surveyed by Bloomberg News forecast the gauge would rise to 10.3, according to the median of 56 estimates.

Most Since 1987

The S&P 500 has gained 4 percent in 2012 through yesterday, the most since it rose 10 percent over the first 11 days in 1987, according to data compiled by Bloomberg. During that period, the index advanced seven of the first eight days, something that has occurred eight times since 1900, data compiled by JPMorgan Chase & Co. show. The mean return those years was 16 percent, the data show.

Combined S&P 500 profit is forecast to reach $104.76 a share in 2012, the highest level ever, according to data compiled by Bloomberg. About $640 billion has been added to the value of American shares this year and the S&P 500 reached an almost six-month high yesterday, as economic reports outweighed concern that downgrades for European nations would worsen the debt crisis.

‘Conservative’

“We do believe that the fourth quarter will be another positive surprise in terms of actual earnings by the time we reach the finish line,” E. William Stone, chief investment strategist at PNC Wealth Management in Philadelphia, wrote in a note to clients. His firm manages about $107 billion. “Analyst estimates have declined since October. Estimates could prove conservative, if analysts were a bit too bearish because market sentiment turned sharply due to the concerns about Europe.”

Financial shares have rallied 7.2 percent this year through yesterday after tumbling 18 percent in 2011. The group is poised to extend gains today after results at some of the biggest companies.

Bank of America rallied 5.3 percent to $7.16. Chief Executive Officer Brian T. Moynihan is cutting assets, expenses and staff while raising capital to meet demands from regulators for a larger cushion against unexpected losses. So far, $50 billion in holdings are gone, and Moynihan’s Project New BAC will eliminate at least 30,000 jobs as the firm seeks to save $5 billion annually. He’s also aiming to quell disputes over faulty mortgages that have cost the bank about $40 billion.

Trading Revenue

Morgan Stanley climbed 5.4 percent to $18.29. Morgan Stanley posted the only increase in trading revenue excluding accounting gains among the five largest Wall Street banks in 2011, making progress toward Chairman and Chief Executive Officer James Gorman’s goal of boosting market share.

EBay, the largest Internet marketplace, jumped 3.9 percent to $31.51. Chief Executive Officer John Donahoe boosted marketing spending 25 percent last year and upgraded EBay’s technology to lure back users who defected to rivals such as Amazon.com Inc.

Johnson Controls Inc. (JCI) dropped 8 percent to $32.75. The largest U.S. auto supplier lowered its forecast for profit for the fiscal year because of weakening demand in Europe.

BlackRock Inc. (BLK) fell 1.8 percent to $184.44. The world’s biggest asset manager said fourth-quarter profit fell 16 percent as slumping markets worldwide led to a decline in fees. BlackRock said it cut its workforce by 3.4 percent during the quarter, when market volatility hurt performance fees.

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

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

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Kodak Files for Bankruptcy as Digital Era Spells End to Film

By Dawn McCarty and Beth Jinks - Jan 19, 2012 2:14 PM GMT+0700
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The company’s credit deteriorated as revenue tumbled from traditional film, and the inventor of the Instamatic cameras was slow during the past decade to compete with Canon Inc. and Hewlett-Packard Co. in digital cameras and printers. Photographer: Heather Ainsworth/Bloomberg

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Jan. 19 (Bloomberg) -- Eastman Kodak Co., the photography pioneer that introduced its $1 Brownie Camera more than a century ago, filed for bankruptcy protection from creditors after consumers worldwide moved from film to digital technology. Olivia Sterns reports on Bloomberg Television's "On the Move" with Owen Thomas. (Source: Bloomberg)

Eastman Kodak Co. (EK), the photography pioneer that introduced its $1 Brownie Camera more than a century ago, filed for bankruptcy protection from creditors after consumers worldwide moved from film to digital technology.

The Rochester, New York-based company, which traces its roots to 1880, listed assets of $5.1 billion and debt of $6.8 billion in Chapter 11 documents filed in U.S. Bankruptcy Court in Manhattan.

“They were a company stuck in time,” said Robert Burley, an associate professor at Toronto’s Ryerson University who has photographed shuttered Kodak facilities in the U.S., Canada and France since 2005. “Their history was so important to them, this rich century-old history when they made a lot of amazing things and a lot of money along the way. Now their history has become a liability.”

The company’s credit deteriorated as revenue tumbled from traditional film, and the inventor of the Instamatic cameras was slow during the past decade to compete with Canon Inc. (7751) and Hewlett-Packard Co. (HPQ) in digital cameras and printers.

Moody’s Investors Service on Jan. 5 cut ratings on about $1 billion of Kodak debt with a negative outlook, and cited “a heightened probability of a bankruptcy over the near-term” as liquidity deteriorates.

Citigroup Loan

Citigroup Inc. (C) agreed to provide a $950 million debtor-in- possession loan to help Kodak operate during bankruptcy, the photo company said today in a statement. The loan must be approved by a bankruptcy judge.

“Kodak is taking a significant step toward enabling our enterprise to complete its transformation,” Antonio M. Perez, chief executive officer, said in the statement.

The company plans to sell “significant assets” during the bankruptcy, Chief Financial Officer Antoinette McCorvey said in a court filing. She didn’t elaborate.

Kodak, headed for its sixth annual loss in the past seven years, tried to sell more than 1,100 digital-imaging patents and pursued royalties to fund a shift to modern commercial and consumer digital printers.

Kodak’s cash and equivalents fell to $862 million at the end of its third quarter from $1.4 billion a year earlier. The company is scheduled to report fourth-quarter results Jan. 26.

Kodak’s revenue has fallen by half since 2005 to $7.2 billion last year, with further declines predicted this year and next after film and photofinishing unit sales sank by 14 percent in the second quarter. The company’s losses since 2008 exceeded $1.76 billion.

Creditors

The Bank of New York Mellon is listed as Kodak’s biggest unsecured creditor with $668 million of unsecured notes. Other unsecured creditors include Sony Studios, which is owed $16.7 million, Warner Brothers, with $14.2 million, and Alcoa Inc., with $2.8 million.

Bank of New York Mellon is also listed as the biggest secured creditor with a claim of $776 million, backed by all of Kodak’s U.S. assets except for those exempted in a 1988 agreement, according to the filing.

Perez, a former Hewlett-Packard executive who took charge at Kodak in 2005, tried to rescue the brand by slashing costs and winning shelf space for inkjet printers at Wal-Mart Stores Inc. (WMT) and Staples Inc. (SPLS) He pushed its commercial digital printers into publishing and packaging, touting their flexibility over old-school printing plates.

Too Late

Kodak was five years too late to accelerate its shift to the digital age, Perez, 65, said in an interview in August.

Kodak hasn’t sold enough printers and presses to create sufficient demand for replacement ink and supplies and service contracts to end losses in those units. In February, it projected operating profits in consumer and commercial inkjet printing by the end of 2013.

“Essentially they’re moving away from a very profitable model that generated multiple sales -- most everyone got double prints -- to one that’s awfully difficult to make a profit in,” said John Ward, a 20-year Kodak veteran who is now a lecturer in Rochester Institute of Technology’s college of business.

“Perez had a clear understanding that change had to happen and it had to happen quickly,” said Ward, 49, who met Perez shortly after he joined Kodak as president and chief operating officer in 2003. “Clearly they could have made some changes faster, but there just weren’t a lot of options to replace the film business.”

George Eastman

Kodak was founded by George Eastman, who developed a method for dry-plate photography before introducing the Kodak camera in 1888, according to the company’s website. It went on to invent film, enabling Thomas Edison to develop the motion picture camera, Brownie cameras selling for $1 and Kodachrome film.

Paul Simon immortalized the film in his 1973 song “Kodachrome.” The single, which praised Kodachrome’s “nice bright colors,” peaked at No. 2 on the Billboard Hot 100 chart. Kodak stopped producing the film in 2009.

“Everyone in the 20th century has been familiar with the Kodak name and its products,” said Burley of Ryerson’s School of Image Arts. “We’ve not only used them to memorialize our families and their histories, but also for diagnostics in hospitals, producing books and newspapers and police investigative work. And then the whole world of Hollywood is based around Kodak products.”

First Digital Camera

The company also invented the first digital camera in 1975, which it shelved because it would threaten its lucrative film business, Perez said in an interview in March.

“Like many other companies on the East Coast, Kodak has been phenomenal in research and patents and not so good commercializing things, actually terrible commercializing things,” Perez said.

The company said Jan. 10 it had adjusted its management structure and created a chief operating office to reduce costs. The new commercial and consumer segments replace a previous business structure of three divisions: graphic communications; consumer digital imaging; and film, photofinishing and entertainment.

The digital business has accounted for about 75 percent, or $4.5 billion, of Kodak’s revenue last year, McCorvey said in her filing today.

The company employs about 17,000 people, 9,100 of whom are in the U.S., compared with the 63,900 that it employed in 2003, she said.

Chief Operating Office

The chief operating office will be led by Philip Faraci and Laura Quatela. Faraci, president and chief operating officer since 2007, will focus on the commercial segment and sales and regional operations, and Quatela, the company’s former general counsel who was named as a second president in December, will focus on the consumer segment and certain corporate functions, Kodak said.

Three directors resigned from Kodak’s board in December, two of them from KKR (KKR) & Co., two years after the private-equity firm helped the company refinance debt.

Adam H. Clammer and Herald Y. Chen quit Dec. 21. Both were elected in September 2009 after a refinancing deal that included KKR investing in $300 million of senior bonds and warrants for 40 million shares with an exercise price of $5.50. Kodak refinanced KKR’s bonds in March 2010 via a private placement to other investors.

By agreeing to hold the warrants for at least two years, among other conditions, the private-equity firm run by Henry Kravis and George Roberts was entitled to nominate the two board members.

Directors Leave

Laura D. Tyson was the third director to leave. Tyson, 64, a director since 1997, notified the board of her resignation Dec. 29, according to a Dec. 30 regulatory filing. Tyson is a professor at University of California, Berkeley’s Haas School of Business, has been an adviser to the Obama and Clinton administrations and sits on the boards of at least five companies, including Morgan Stanley (MS) and AT&T Inc. (T)

The bankruptcy case is In re Eastman Kodak Co., 12-10202, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Dawn McCarty in Wilmington at dmccarty@bloomberg.net; Beth Jinks in New York at bjinks1@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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BofA Swings to Quarterly Profit

By Hugh Son - Jan 19, 2012 10:02 PM GMT+0700

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Jan. 19 (Bloomberg) -- Paul Miller, managing director and banking analyst with FBR Capital Markets Corp., talks about Bank of America Corp.'s fourth-quarter profit reported today. The second-largest U.S. lender had net income of $1.99 billion, or 15 cents a diluted share, compared with a loss of $1.24 billion, or 16 cents, a year earlier when the bank booked a $2 billion writedown at its home-loan unit. Miller speaks with Erik Schatzker and Scarlet Fu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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Jan. 19 (Bloomberg) -- Thomas Brown, chief executive officer at Second Curve Capital LLC and a Bloomberg contributing editor, talks about Bank of America Corp.'s fourth-quarter profit and capital position. The second-largest U.S. lender posted a net income of $1.99 billion, or 15 cents a diluted share, compared with a loss of $1.24 billion, or 16 cents, a year earlier. Brown, speaking with Betty Liu on Bloomberg Television's "In the Loop," also discusses the outlook for U.S. regional banks. (Source: Bloomberg)

Bank of America Corp., the second- largest U.S. lender, swung to a fourth-quarter profit as the company sold assets and built capital faster than expected.

Net income of $1.99 billion, or 15 cents a diluted share, compared with a loss of $1.24 billion, or 16 cents, a year earlier, according to a statement today from the Charlotte, North Carolina-based firm. While results were boosted by one- time gains on asset sales and reserve releases, the stock advanced more than 5 percent as investors focused on the stronger balance sheet.

Chief Executive Officer Brian T. Moynihan, 52, is cutting holdings, expenses and staff while raising capital to meet demands from regulators for a larger cushion against losses. So far, $50 billion in assets are gone, and Moynihan’s Project New BAC will eliminate at least 30,000 jobs as the firm seeks to save $5 billion annually. He’s also aiming to quell disputes over faulty mortgages that have cost the bank about $40 billion.

“The biggest shock in the quarter was, nobody improves their Tier 1 common ratio by 121 points in 90 days,” said Thomas Brown, CEO of Second Curve Capital LLC and a Bloomberg contributing editor, in an interview on Bloomberg Television’s “In the Loop,” with Betty Liu. “It’s going to survive and its capital ratios are a lot stronger today than we all thought yesterday.” Brown has owned Bank of America warrants and shares.

More Capital

Tier 1 capital, a measure of ability to absorb losses, surged to 9.86 percent from 8.65 percent in the third quarter. In December, the lender indicated capital would improve to about 9.2 percent. Revenue gained 11 percent to $25.1 billion. For the year, Bank of America said it earned $1.4 billion, compared with a $2.2 billion loss in 2010, as revenue dropped 15 percent.

Bank of America’s stock rose 36 cents to $7.16 as of 9:42 a.m. in New York, leading the Dow Jones Industrial Average (INDU) and KBW Bank Index, and gained as much as 7.2 percent during the session.

Moynihan cited a “gradually improving economy” for a 13 percent rise in commercial and industrial loan balances from a year earlier. The consumer real estate unit posted a $1.46 billion loss, narrower than a year earlier. Global banking and markets reported a net loss of $433 million, compared with net income of $669 million in the year-ago quarter. Revenue in the unit declined 31 percent, primarily driven by lower sales and trading revenue and investment banking fees.

One-Time Items

The quarter’s results were skewed by one-time pretax gains including $2.9 billion from selling most of its remaining stake in China Construction Bank Corp., $1.2 billion on an exchange of preferred securities, and $1.2 billion on sales of debt securities. The provision for credit losses fell 43 percent to $2.9 billion, or about $2.2 billion less than a year earlier.

Expenses tied to bad mortgages included $1.5 billion for litigation and $263 million for buying back soured home loans from investors. A year earlier, the bank booked a $2 billion impairment at the home-loan unit.

“There’s a lot of one-time charges and gains in there,” Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said in an interview on Bloomberg Television. “On a core basis, it looks like they came in below our numbers. On one side people like the capital position, but the earnings side to us, it was kind of weak.”

Stripped of one-time items, the results add up to a quarterly loss of about 18 cents a share, according to a research note from David Trone at JMP Securities LLC in New York, who has a “market perform” recommendation on the shares. “We would expect performance to fade today as investors process the segment results, which were generally disappointing.”

Asset Sales

Bank of America is selling assets deemed risky by regulators and stockpiling earnings to comply with new international rules on capital meant to protect against a future financial crisis. The company may have to retain more than $40 billion in earnings by 2019. That figure could drop if the bank unloads more of its riskiest assets, said Jerry Dubrowski, a spokesman for the firm.

JPMorgan Chase & Co. (JPM) supplanted the bank as the biggest U.S. lender by assets last year. Bank of America’s divestments during the year included 23.5 billion shares of China Construction, a Canadian credit-card business and private-equity stakes in the biggest U.S. Pizza Hut franchisee and hospital operator HCA Holdings Inc.

Second Place

The bank doesn’t need to be the biggest, according to Moynihan, who said in September he wants his company to be more focused. Moynihan also decided to scale back the firm’s mortgage operations, shuttering a correspondent unit that accounted for half of loan volume in the first six months of 2011.

By doing so, the lender will accumulate fewer mortgage servicing contracts -- one of the assets it’s been selling because the new regulations compel banks to hold more capital if they own riskier assets.

Rivals may already be taking up the slack in mortgage lending. Wells Fargo & Co., the No. 4 U.S. bank by assets, posted a 20 percent rise in fourth-quarter income to $4.11 billion as new home loans rose 35 percent from the prior three months. U.S. Bancorp, ranked fifth by deposits, said profit advanced 39 percent to $1.35 billion.

Trading Declines

Earnings dropped at the biggest New York-based banks as trading slumped in the last three months of 2011. Earnings fell 23 percent to $3.73 billion at JPMorgan, while Citigroup Inc. (C), the No. 3 bank, said income slid 11 percent to $1.17 billion.

Moynihan’s success may hinge on how well he deflects future costs of refunds, writedowns and lawsuits stemming from faulty mortgages and foreclosures -- most of them inherited in the 2008 takeover of Countrywide Financial Corp. They total about $40 billion since 2007, and another $12 billion to $32 billion may lie ahead, according to a Citigroup estimate.

Those expenses helped send the lender’s stock plunging 58 percent in 2011, the worst showing in the Dow Jones Industrial Average. Bank of America’s 22 percent gain this year through yesterday to $6.80 has led the 30-company Dow as investors bet that an improving U.S. economy will buoy earnings.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Rick Green at rgreen18@bloomberg.net

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Falkland Islands Oil Could Triple U.K. Reserves

By Brian Swint - Jan 19, 2012 8:22 PM GMT+0700

Thirty years after Margaret Thatcher fought a 74-day war with Argentina over the Falkland Islands, the prospect of an oil boom is reviving tensions.

Oil explorers are targeting 8.3 billion barrels in the waters around the islands this year, three times the U.K.’s reserves. Borders & Southern Petroleum Plc (BOR) will drill the Stebbing prospect next month, one of three Falkland wells that Morgan Stanley ranks among the world’s top 15 offshore prospects this year. Meanwhile, Rockhopper Exploration Plc (RKH) is seeking $2 billion from a larger oil company to develop the Sea Lion field, the islands’ first economically viable oil find.

“The area is underexplored and highly prospective,” said New York-based Morgan Stanley analyst Evan Calio. “These could be like the high-impact wells in Ghana and Brazil a few years ago that opened up a whole host of basins.”

A major drilling success will further raise the political temperature as Argentina maintains its claim over the U.K’s South Atlantic territory, 300 miles (483 kilometers) from the Latin American coast. President Cristina Fernandez de Kirchner said Britain is taking her country’s resources, while Thatcher’s successor David Cameron yesterday accused Argentina of a “colonialist” attitude that didn’t account for islanders’ rights.

Cameron has approved contingency plans to bolster U.K. troops on the islands, and Prince William, a search and rescue pilot and the second in line to the British throne, may spend six weeks there this year, the Times reported today in London.

Not Negotiable

“We want to have a full and productive relationship with Argentina,” said Foreign Office spokeswoman Sophie Benger in an e-mailed response to questions. “Whilst the sovereignty of the Falklands is not up for negotiation, there is still much we can do together.”

The world’s largest oil companies like Exxon Mobil Corp. and Royal Dutch Shell Plc face a dilemma: whether the potential of a virgin basin outweighs the risk of a worsening international dispute. While producers with interests in Argentina, such as BP Plc, may be put off, others will want to participate, said Tim Bushell, chief executive officer of Falkland Oil & Gas Ltd. (FOGL), who’s looking for drilling partners.

“Big oil companies are used to dealing with political risks, and bigger ones than some saber rattling by Argentina,” Bushell said in a telephone interview, declining to name the companies he’s talking to. “For every BP, there are other major companies that don’t have an interest in Argentina.”

Shares Rise

Falkland Oil & Gas rose as much as 5.8 percent in London and traded at 49.25 pence as of 1:07 p.m. Rockhopper climbed 4 percent to 329.25 pence.

The Falkland Island government, which manages the territory’s mineral rights for the 2,955 islanders, says the big producers are interested and talking to the companies already active in the region. Of the five U.K.-based explorers that have drilled or plan wells, the largest, Rockhopper, has a market value of 899 million pounds ($1.4 billion).

“The Falklands is at a stage where a big company can take a large share in what could be a big oil province,” said Stephen Luxton, the Falkland Islands’ director of mineral resources. “There is an active program of marketing by the companies here. There are discussions going on, though we can’t name names.”

Falkland Oil & Gas plans to drill the Loligo prospect later this year, a well targeting 4.7 billion barrels of oil. Named after a Patagonian squid, it’s the second-most prospective well planned worldwide this year after one in Namibia, according to Morgan Stanley. The company’s Darwin prospect will follow and ranks sixth on the U.S. bank’s list.

Darwin, Stebbing

Borders & Southern will start drilling the Darwin prospect by the end of January, which seismic surveys suggest may hold as much as 760 million barrels of oil and 3 trillion cubic feet of gas. Stebbing, the target of the company’s second well, may hold as much as 1.2 billion barrels.

Together, the four wells planned for the Falklands this year are searching for about 8.3 billion barrels of oil. The Jubilee field, which was discovered in 2007, propelled Ghana into one of the world’s top 50 oil states. Brazil’s Lula field, drilled in 2006, holds an estimated 6.5 billion barrels of oil equivalent.

“There could be significant volumes down there and it would open up a new hydrocarbon province,” Borders & Southern CEO Howard Obee said in an interview. If the first two wells are successful, “we’d like to do a big drilling program, not only to appraise what we’d find but also drill up additional prospects. To do that, we’d need quite a bit of money.”

Selling Stakes

While the company will probably be able to sell more shares to determine the size of a discovery in this campaign, it may have to sell stakes in prospects to develop them, said Tracy Mackenzie, an analyst at broker Brewin Dolphin in Edinburgh. Borders & Southern holds a 100 percent interest in its fields.

Rockhopper says its Sea Lion discovery, made in 2010 and which may have more than 400 million barrels of recoverable oil, is commercial and will be developed. Chairman Pierre Jungels said last month that the company is showing drilling data to potential partners. The company this month ended a 10-well campaign that lasted two years. It has $100 million in cash after raising 46.5 million pounds ($72 million) in a share placing in October.

That’s just a fraction of the $2 billion the company reckons it will need to get the oil to market. Developers will have to build a floating production and storage unit to load the crude onto tankers. Cairn Energy Plc, Premier Oil Plc and Noble Corp. may be interested in investing, Bank of America Corp. analyst Alejandro Demichelis wrote in a Jan. 16 note.

Colorful Penguins

Spokesmen for BP, Shell, Premier and Cairn declined to comment on whether they’re interested in investing in the Falklands. Exxon and Noble Energy didn’t respond to e-mailed requests for comment.

All the supplies will probably have to come from Europe, about 8,000 miles away. The Falklands consist of two large islands and more than 700 smaller ones, home to the colorful penguins that give Rockhopper its name.

Argentina maintains that its sovereignty over the islands was interrupted in 1833, when British forces occupied the Malvinas Islands, expelling the Argentine population, an act to which the people and government of Argentina never consented. Thatcher sent a task force to retake the islands after Argentina’s military dictatorship invaded the territory on April 2, 1982.

Risk of Failure

Earlier drilling campaigns show the risk of failure in unproven oil provinces. Shell drilled on the northern side of the islands in the 1990s and found traces of oil before abandoning the prospect in 1998 as crude prices fell to around $10 a barrel. Interest in the region revived as oil prices rose higher than $100 a barrel, though Shell had disposed of its acreage.

Desire Petroleum Plc (DES), which has licenses adjacent to Rockhopper’s, drilled six dry wells in a failed campaign that ended in April. Argos Resources Ltd. (ARG), which also holds licenses in the region, decided not to use a rig after Rockhopper because it couldn’t raise enough money.

The global financial crisis has made it harder for oil explorers to borrow from banks and kept a lid on the amount companies can raise on the market. The oil and gas index of London’s Alternative Investment Market, where all five Falkland explorers are listed, fell 35 percent last year.

That leaves larger companies as the most likely sponsors in the region, and the government said some of them are already involved in talks.

“The majors are always going to be interested when a new basin comes on the map,” Morgan Stanley’s Calio said.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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U.S. Jobless Claims Fall to Lowest in Almost Four Years

By Bob Willis and Shobhana Chandra - Jan 19, 2012 9:12 PM GMT+0700

Fewer Americans than forecast filed first-time applications for unemployment benefits last week, easing concern that post-holiday firings were on the rise.

Claims plunged by 50,000 to 352,000 in the week ended Jan. 14, the lowest level since April 2008, Labor Department figures showed today in Washington. The median forecast of 41 economists in a Bloomberg News survey projected 384,000. A Labor Department spokesman said the decrease reflected volatility seen during this time of year. The four-week average, which smoothes out fluctuations, decreased to 379,000 last week from 382,500.

Companies are slowing the pace of firings and beginning to step up the pace of hiring even as a slump in Europe spurred by a default crisis may limit U.S. growth. The improvement may be a sign that companies are looking to expand their workforces as sales climb.

“You’ve got a gradual improvement in the labor market,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, whose forecast of 363,000 was the lowest. Because of “choppiness with the beginning of the calendar year, you have to look at the four-week moving average” which he said was “encouraging.”

Other data today showed housing starts in December dropped more than forecast and consumer prices were little changed.

Stock-index futures held earlier gains after the reports. The contract on the Standard & Poor’s 500 Index maturing in March rose 0.4 percent to 1,307.7 at 8:36 a.m. in New York. Treasury securities fell, sending the yield on the benchmark 10- year note up to 1.93 percent from 1.90 percent late yesterday.

Cost of Living

The cost of living was little changed for a second month as stores cut prices to boost holiday sales, the Labor Department said. The median forecast called for a 0.1 percent gain, according to a Bloomberg survey of 78 economists. Excluding (CPUPXCHG) volatile food and fuel costs, the so-called core rose 0.1 percent as projected.

Housing starts dropped 4.1 percent to a 657,000 annual rate last month, reflecting a slump in multifamily dwellings, Commerce Department figures showed. Building permits, a proxy for future construction, were little changed.

Jobless claims were projected to decrease from 399,000 initially reported for the prior week, according to the Bloomberg survey. Estimates ranged from 363,000 to 405,000. The Labor Department revised the previous week’s figure up to 402,000.

Hurricane Katrina

Last week’s drop was the biggest since September 2005, when claims first surged then plunged in the aftermath of Hurricane Katrina.

“Volatility at this time of year is fairly common,” the Labor Department spokesman said as the data was released. Claims tend to jump around during holidays as the government has difficulties adjusting the data for seasonal swings in employment. It’s more important to track the moving average in such times, the spokesman said.

The number of people continuing to receive jobless benefits dropped by 215,000 in the week ended Jan. 7 to 3.43 million.

The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs.

Those who’ve used up their traditional benefits and are now collecting emergency and extended payments increased by about 105,200 to 3.56 million in the week ended Dec. 31.

Eligible for Benefits

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, fell to 2.7 percent, the lowest since September 2008, today’s report showed.

Thirty-seven states and territories reported an increase in claims, while 16 reported a decrease. These data are reported with a one-week lag.

Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates.

Payrolls climbed by 200,000 workers in December after rising by 100,000 the prior month, and the jobless rate fell to 8.5 percent, the lowest level in almost three years, Labor Department figures showed on Jan. 6.

Banks are among companies still trimming staff. PNC Financial (PNC) Services Group Inc., the sixth-largest U.S. bank by deposits, will cut 621 jobs in North Carolina and reassign some of the affected employees after buying Royal Bank of Canada’s U.S. assets.

Corporate Bankers

The lender will redeploy a “significant number” of the people, Fred Solomon, spokesman for the Pittsburgh-based bank, said in a phone interview this week. After the deal is completed, PNC expects to add jobs including corporate bankers and asset managers, he said.

Kraft Foods Inc. (KFT), the food company planning to split in two this year, said it would eliminate 1,600 jobs in North America this year, about 40 percent of them as a result of reorganizing U.S. sales, the Northfield, Illinois-based company said this week in a statement.

Some manufacturers are hiring. The Elgin, Illinois, based- U.S. unit of Germany’s Harting Deutschland GmbH, a maker of industrial connectors, will probably hire 20 people this year after doubling the workforce to 120 since the recession, Chief Executive Officer Rolf Meyer said.

More Orders

“We have a couple of large orders that we’re negotiating on in the broadcast and medical industries, and these will likely hit in the next five or six months,” said Meyer, who, supplies customers such as General Electric Co. (GE) and Siemens AG.

The economy “expanded at a modest to moderate pace” from late November through the end of December, while most industries saw “limited permanent hiring,” the Federal Reserve said in its Beige Book anecdotal business survey released last week. “The combination of limited permanent hiring in most sectors and numerous active job seekers has continued to keep a lid on general wage increases.”

Fed policy makers hold their first policy meeting of the year on Jan. 24-25.

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net; Shobhana Chandra at schandra1@bloomberg.net

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

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European Stocks Rise as Spain, France Sell Bonds; Commerzbank Shares Climb

By Corinne Gretler - Jan 19, 2012 10:10 PM GMT+0700

European stocks gained for a fourth day, extending a five-month high for the Stoxx Europe 600 Index, as Spain and France sold bonds at lower yields and fewer Americans than forecast filed claims for jobless benefits.

Commerzbank AG (CBK) led a rally in financial shares, surging 13 percent, after outlining measures to boost capital. Alstom (ALO) SA, the world’s third-largest power-equipment maker, jumped 13 percent after predicting “strong” orders in its fiscal fourth quarter. Carrefour SA (CA), the biggest retailer in Europe by sales, dropped 1.7 percent after saying profit was at the lower end of its forecasts.

The Stoxx 600 gained 0.6 percent to 254.94 at 3:09 p.m. in London, the highest since Aug. 3. The gauge has advanced 4.2 percent in 2012, the best start to a year since 1997, as reports around the world added to optimism that the economy is strengthening. Greece’s government headed into a second day of talks with private creditors today in a push to reach an accord that would slash the nation’s debt.

“The results from the Spanish and French bond sales are good,” said Manish Singh, the London-based head of investment at Crossbridge Capital, which has more than $2 billion under management. “But the debate on the Greek debt deal with private investors is damping the optimism. Unless the deal is in the bag, I don’t think the market will rally on successful auctions alone.”

Greek Talks

Greek Prime Minister Lucas Papademos is racing to tie up the accord, key to a second financing package for the cash- strapped country, before a March 20 bond payment that will cost 14.5 billion euros ($18.6 billion) Greece doesn’t have.

National benchmark indexes rose in all of Europe’s 18 western markets, except Iceland. France’s CAC 40 increased 1.7 percent and the U.K.’s FTSE 100 gained 0.6 percent, while Germany’s DAX Index (DAX) climbed 0.9 percent.

France auctioned 7.97 billion euros of two-, three- and four-year notes in its first sale of medium- and long-term debt after losing its AAA rating at Standard & Poor’s last week. Yields fell on all maturities.

Spain sold 6.6 billion euros of bonds maturing in 2016, 2019 and 2022 today, compared with a maximum target for the sale of 4.5 billion euros. The yields on the 2022 and 2019 securities declined, while the 2016 borrowing costs increased.

“Investors all heave a sigh of relief as the bond auctions are taking a successful course,” said Peter Braendle, who helps manage $60 billion at Swisscanto Asset Management AG in Zurich. “The market has developed rather pleasingly, despite France’s downgrade.”

ECB Measures

European Central Bank Executive Board member Joerg Asmussen said the ECB has a range of further non-standard policy measures.

“There is a whole range of further unconventional measures by the ECB, for example the liquidity operations with full allotment and a duration of as much as three years that was decided in December,” he said on Deutschlandfunk radio today. All non-standard measures are “temporary by nature,” he added.

In the U.S., initial jobless-benefit claims plunged by 50,000 to 352,000 in the week ended Jan. 14, the lowest level since April 2008, Labor Department figures showed. The median forecast of 41 economists in a Bloomberg News survey had projected a reading of 384,000.

Bank of America Corp., the second-largest U.S. lender, swung to a fourth-quarter profit as the company sold assets and built capital faster than expected. EBay Inc., the largest Internet marketplace, reported sales and earnings that topped analysts’ estimates.

Commerzbank Climbs

Commerzbank surged 13 percent to 1.60 euros. Germany’s second-largest lender said the measures it can take to boost capital or reduce the equivalent in risk-weighted assets by June 30 total 6.3 billion euros, outstripping the 5.3 billion euros required by the European Banking Authority.

A gauge of banks outperformed all 19 industry groups in the Stoxx 600, climbing 5.2 percent as Huw Van Steenis, an analyst at Morgan Stanley in London, said the market “still underestimates the potential impact of the European Central Bank’s support for banks to reduce systemic risk.”

BNP Paribas (BNP) SA jumped 7.5 percent to 34.46 while Deutsche Bank AG rallied 7.9 percent to 32.33 euros. Barclays Plc (BARC) gained 8.8 percent to 218.8 pence and UBS AG (UBSN), Switzerland’s biggest bank, gained 7.1 percent to 12.45 Swiss francs as Morgan Stanley named all of them as its “most preferred” bank stocks.

Alstom jumped 13 percent to 28.02 euros, the biggest gain since 2008. The company said it has more than 1 billion euros of announced contracts yet to be booked in its fiscal year, which runs through March.

William Hill

William Hill Plc (WMH) rallied 7.7 percent to 225.9 pence. The betting-shop owner said full-year performance is in line with analysts’ estimates, with revenue expected to increase 6 percent and operating profit of about 274 million pounds ($423 million).

Porsche SE rose 8.3 percent to 47.13 euros after Manager Magazin reported that the German sports-car maker offered to settle claims by U.S. investors tied to its failed takeover attempt for Volkswagen AG in 2008. Porsche made the offer dependent on the investors waiving possible new claims in the future, the magazine reported.

Swiss Re Ltd., the world’s second-biggest reinsurer, added 3 percent to 51.05 francs. The company said Michel Lies, the chairman of the reinsurer’s global partnerships, will succeed Stefan Lippe as chief executive officer in February. Lippe announced in December that the planned to step down.

Continuity, Experience

The appointment “is somewhat unexpected, but keeps continuity and long standing reinsurance experience at the top position,” Stefan Schuermann, an analyst at Vontobel Holding AG, wrote in a note to clients today.

Carrefour retreated 1.9 percent to 17.13 euros after saying 2011 profit was at the lower end of its reduced forecast range after fourth-quarter sales declined.

AstraZeneca Plc (AZN), the U.K.’s second-largest drugmaker, slipped 2.7 percent to 3,026.5 pence after its experimental diabetes drug failed to win backing from U.S. regulators.

Remy Cointreau SA (RCO) fell 1.8 percent to 65.17 euros after France’s second-largest distiller forecast a slower rate of profit growth in the second half of the financial year.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

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

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S&P 500 Rallying Most Since 1987

By Inyoung Hwang and Whitney Kisling - Jan 19, 2012 10:15 PM GMT+0700

U.S. stocks are off to the best start in 25 years as investors speculate Federal Reserve Chairman Ben S. Bernanke has done enough to insulate the economy from Europe’s debt crisis.

The S&P 500 has gained 4 percent, the most since it rose 10 percent over the first 11 days in 1987, according to data compiled by Bloomberg. Stocks are overcoming earnings that trailed estimates by the widest margin in three years as improvements in hiring, manufacturing and car sales extend the biggest fourth-quarter advance since 2003.

Bernanke has left the target rate on overnight loans between banks unchanged since the end of 2008, the longest stretch since at least 1971, data compiled by Bloomberg show. The policy may push more investors toward equities after yields on 10-year Treasuries finished 2011 within a quarter-point of a record low and the economy grew at an estimated 3.1 percent rate last quarter, said John Carey of Pioneer Investments.

“It’s probably a good idea not to fight someone so much bigger than you are,” Carey, a Boston-based money manager at Pioneer, said in a telephone interview on Jan. 18. The firm oversees about $220 billion. “The Fed will probably stay on its course,” he said. “I haven’t heard any indication that the Fed is considering boosting interest rates, so stocks will look attractive from an income point of view.”

Worst to First

Four companies whose declines were among the 10 biggest in the S&P 500 last year are among the 10 largest gainers in 2012. Netflix Inc., the Los Gatos, California-based movie service, climbed 42 percent, and First Solar Inc. in Tempe, Arizona, is up 27 percent. Charlotte, North Carolina-based Bank of America Corp., which lost 58 percent in 2011, gained 22 percent this year, while Sears Holdings Corp. in Hoffman Estates, Illinois, rose 24 percent after losing 56 percent.

The S&P 500 advanced seven of the first eight days this year, something that has occurred eight times since 1900, data compiled by JPMorgan Chase & Co. show. The mean return those years was 16 percent, the data show.

About $640 billion has been added to the value of American shares this year and the S&P 500 reached an almost six-month high yesterday, as economic reports outweighed concern that downgrades for European nations would worsen the debt crisis. France was stripped of its top rating by S&P and banks suspended talks with Greece over restructuring.

Economic Growth

“Europe is important but it’s not the end of the world if they see a recession,” James Dunigan, who helps oversee $107 billion as chief investment officer in Philadelphia for PNC Wealth Management, said in a Jan. 17 phone interview. “We’re starting to see that modest economic growth expectation for this year.”

The average forecast for U.S. gross domestic product growth this year has been rising since October. From a low of 2 percent, the median estimate in a survey of 72 economists has climbed to 2.3 percent, including a 0.2-point increase on Jan. 12 that represented the biggest one-day gain since projections for 2012 began, according to data compiled by Bloomberg.

Optimism about the economy is helping investors shrug off fourth-quarter earnings that have trailed estimates. Profit (SPX) fell short of analyst forecasts by an average of 4.3 percent among the eight S&P 500 companies that posted results in the first week of earnings season, the data show. Three other quarters with a worse first week of earnings season were in 2007 and 2008 as the economy was slipping into to the worst recession since the 1930s.

Five-Month High

The S&P 500 increased 1.1 percent to 1,308.04 yesterday, the highest level since July 26. It climbed 1.4 percent over four days last week, reaching a five-month high of 1,292.48 on Jan. 11 even after Microsoft Corp., the world’s biggest software maker, said personal computer sales were probably worse than forecast in the fourth quarter. The gauge advanced 0.2 percent to 1,310.13 at 10:14 a.m. New York time today.

“This year isn’t going to be about earnings,” James Paulsen, who helps oversee about $333 billion as chief investment strategist at Minneapolis-based Wells Capital Management, said in a Jan. 17 phone interview. “There’s a lot of value in the market that could come just from people calming down about this recession, depression calamity. It’ll be about expanding that multiple.”

Combined S&P 500 profit is forecast to reach $104.76 a share in 2012, the highest level ever, according to data compiled by Bloomberg. The benchmark index is trading at 12.5 times forecast earnings. That compares with 13.4 at the beginning of 2011. The S&P 500’s average ratio in 2011 was 14.1 based on reported earnings. The five-decade mean is 16.4.

Unprecedented Stimulus

Central banks around the world have taken unprecedented measures to prevent the European debt crisis from triggering a global recession. European Central Bank President Mario Draghi last month unveiled plans to offer banks 36-month, 1 percent loans through two so-called longer-term refinancing operations, known as LTROs.

That combined with investor speculation of a third round of stimulus by the Fed and bets China’s central bank will ease monetary policy has fueled stock prices, according to Doug Noland, the money manager for Pittsburgh-based Federated Investors Inc.’s Prudent Bear Fund, which oversees $1.3 billion. It won’t last, he said.

“Markets over the years have become programmed to focus a lot on monetary stimulus,” Noland said in a Jan. 17 phone interview. “It’s a very dangerous reason to be buying equities. We saw in 2011 how QE2 didn’t have much fire power. We’ve seen European policy making repeatedly disappoint the markets.”

Target Rate Unchanged

Fed policy makers have left their target rate unchanged since the end of 2008, data compiled by Bloomberg show. The S&P 500 more than doubled from its low in March 2009 after Bernanke signaled in August 2010 the central bank would embark on a second round of asset purchases, known as quantitative easing, to boost the economy.

The index declined as much as 19 percent from its 2011 high in April through October last year as the program ended and concerns European leaders would fail to tame the region’s debt crisis escalated. It has since rebounded 19 percent.

Gross domestic product in the euro region will shrink by 0.2 percent this year, the median estimate in a survey of 21 economists surveyed by Bloomberg. The diverging outlooks are reducing lockstep price moves. The so-called 30-day correlation coefficient between the euro and S&P 500 fell 27 percent to 0.66 after reaching a record 0.91 in November.

Correlation Weakens

Speculation about whether European leaders would succeed in containing the credit crisis sent equity, currency and commodity markets up and down in unison last year. The relationship between U.S. stocks and the euro weakened after American unemployment fell to 8.5 percent from 9 percent and business activity as measured by the Chicago Purchasing Managers Index expanded at the fastest pace in seven months.

“A lot of people dismissed the original data in the fall as being backward looking,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview. His firm oversees $550 billion. “But when you started seeing jobless claims going down, it looked more and more like the U.S. had shrugged off a lot of the European contagion.”

Rallying stocks have done little to entice investors. Mutual funds that invest in U.S. equities posted $753 million in inflows for the week ending Jan. 11 after $7.1 billion in outflows during the first week of the year, Investment Company Institute data show. Customers pulled about $63 billion for the final three months of 2011, the data show.

Election Years

The S&P 500 has gained an average 6.1 percent during presidential election years, compared with 4.4 percent in the years that follow, according to Bloomberg data going back to 1952. The index has posted a positive return for the last seven months of those years 87 percent of the time, data from the Stock Trader’s Almanac show.

“Committed bears have to pull in their claws a little,” according to Brian Barish, who helps oversee about $7 billion as Denver-based president of Cambiar Investors LLC. “On the more bullish side, corporate earnings continue to be very good and stocks in a lot of areas are quite undemanding in terms of their valuations,” Barish said in a Jan. 17 phone interview. “We could have a good year.”

To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; 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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Dimon, Blankfein Predict Markets to Rebound

By Dawn Kopecki and Christine Harper - Jan 19, 2012 10:33 PM GMT+0700
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JPMorgan Chase & Co. chief executive officer Jamie Dimon. Photographer: Scott Eells/Bloomberg

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Jan. 19 (Bloomberg) -- Paul Miller, managing director and banking analyst with FBR Capital Markets Corp., talks about Bank of America Corp.'s fourth-quarter profit reported today. The second-largest U.S. lender had net income of $1.99 billion, or 15 cents a diluted share, compared with a loss of $1.24 billion, or 16 cents, a year earlier when the bank booked a $2 billion writedown at its home-loan unit. Miller speaks with Erik Schatzker and Scarlet Fu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon and Goldman Sachs Group Inc. (GS) CEO Lloyd C. Blankfein predict Wall Street will rebound from 2011’s trading- revenue plunge. Rivals and analysts aren’t so sure.

Fourth-quarter earnings reported by the six largest U.S. banks show the industry suffered a third straight quarterly drop in combined trading and investment-banking revenue. On conference calls this week, analysts are pressing executives with a similar refrain: Is it a temporary rut or a lasting shift to smaller volumes, profits and pay?

“This is a big debate,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and an analyst at FBR Capital Markets in Arlington, Virginia. “A lot of bears are saying it is due to regulation and deleveraging, and some are saying it is cyclical. I think it’s some of both.”

Executives and analysts are focusing on whether stiffer regulations, capital rules and a weak economy may solidify a decline in revenue after the European debt crisis curbed trading volume and corporate dealmaking in last year’s second half. Credit Suisse Group AG (CSGN), UBS AG (UBSN) and Royal Bank of Scotland Group Plc (RBS), which are all shrinking their investment banks, have announced plans to eliminate about 8,300 jobs since the start of November.

‘Snap Back’

“We’d all hoped that the headwinds to our business, including low levels of client activity, low interest rates, market volatility and political uncertainty around the world would subside,” Credit Suisse CEO Brady Dougan told analysts Nov. 1. The bank said that day it would cut about 1,500 jobs, in addition to 2,000 previously announced, and reorganize its securities unit after reporting third-quarter profit that missed analysts’ estimates. “It’s now clear, however, that these secular trends may persist for an extended period,” he said.

Dimon and Blankfein have since sought to reassure investors that markets and earnings from securities units will rebound.

“The world will snap back, and it will be a surprise, and it will be faster than people think,” Blankfein, 57, said at a Nov. 15 investor conference. Yesterday, Chief Financial Officer David Viniar echoed the remarks after the firm said trading revenue fell 25 percent from the third quarter to $3.06 billion.

“We are clearly in a cyclical downturn,” rather than a secular decline, Viniar said. “There is less activity that is cyclical. That will come back. I have no idea when, but it will come back.”

Dimon, 55, said investment banking is a volatile business in which volumes can swing by 50 percent daily.

‘Boom Again’

“It’s not a mystical thing,” he told reporters on a Jan. 13 conference call. “You just have to manage the business carefully and understand it’s going to have those kinds of swings. I don’t think the lower numbers are permanent. I think when things come back, these numbers will boom again.”

Equity issuance across the world fell to $163 billion in the last half of 2011, down 53 percent from the first six months, according to data compiled by Bloomberg. Corporate bond issuance also skidded amid the European crisis and a weaker- than-expected U.S. economy.

Government efforts to prevent banks from trading with their own money also have an impact that may last, said Charles Bobrinskoy, the Chicago-based vice chairman and director of research at Ariel Investments, which has about $5 billion under management and owns shares of New York-based Goldman Sachs, JPMorgan, Citigroup (C) Inc. and Morgan Stanley.

“It’s a little of both -- it’s a little bit of secular, a little bit of cyclical,” he said.

Less Leverage

It doesn’t help that lawmakers and regulators are seeking to limit financial maneuvers that boosted or masked leverage in the past, such as off-balance-sheet conduits, variable-interest entities and collateralized debt obligations, said Richard Bove, an analyst at Rochdale Securities LLC in Lutz, Florida.

“There’s no more CLOs, CDOs, CDOs squared, CDOs cubed,” Bove said, referring to asset-linked securities and financial instruments at the heart of 2008’s U.S. financial crisis. “The leverage isn’t there and the market isn’t there. Banks can’t grow at the same rate.”

Citigroup reduced employees’ 2011 compensation to account for a temporary decline in trading volumes and investor appetite, CEO Vikram Pandit, 55, told analysts Jan. 17. The bank also restructured reserves and sold certain assets where it sees a permanent shift in the market, he said.

“There’s no magic answer,” Pandit said. “It’s very hard to parse out exactly what part of the activity we’re seeing is the cause of the cyclical situation versus how much is secular.”

BofA, Morgan Stanley (MS)

Citigroup, the third-biggest U.S. bank by assets, said Jan. 17 that net income dropped 11 percent as lower revenue from advising companies and trading securities led its investment bank to the first quarterly loss since 2008.

Goldman Sachs said fourth-quarter net income fell 58 percent, as revenue slid 30 percent. JPMorgan, the biggest U.S. bank, said last week that net income decreased 23 percent as investment bank earnings fell. San Francisco-based Wells Fargo & Co. (WFC), which relies least on trading among the six banks, said a focus on loans helped soften a 4 percent drop in revenue. Its profit rose 20 percent.

Bank of America Corp. (BAC) reported a second consecutive quarterly loss today in its global banking and markets division, which includes trading and underwriting operations. The entire company swung to a $1.99 billion profit from a year-earlier loss as mortgage charges eased. Morgan Stanley lost $250 million during the quarter, as trading volumes and mergers and acquisitions fell.

‘Difficult Question’

“It’s either a slow cyclical recovery or secular, and I don’t think it’s clear what it is,” Morgan Stanley Chief Financial Officer Ruth Porat said today in a telephone interview. “However you look at it, it’s a slower growth environment.” Morgan Stanley has reduced headcount to account for the slower-than-expected recovery, she said.

The grim outlook for trading was a recurring topic on Goldman Sachs’ analyst call.

“Your revenue weakness recently, are you saying none of that is due to secular factors?” Mike Mayo, an analyst at independent research firm CLSA in New York, asked Viniar during the bank’s conference call. “It’s all cyclical? There’s no structural change that’s hurting your revenues?”

The market doesn’t seem any worse than the fall of 2008 or when the bubble in technology stocks burst years earlier, Viniar said in response to analysts’ questions. Still, he would never be so bold as to rule out a lasting change, he said.

“We’ve all been doing this for a long time and we’ve seen downturns before,” he said. “Every time you’re in one it feels like it’s never going to end and this world is different now.”

“So is it cyclical? Is it secular?” Viniar said. “It’s a very difficult question to answer.”

To contact the reporters on this story: Dawn Kopecki in New York at dkopecki@bloomberg.net; Christine Harper in New York at charper@bloomberg.net

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

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