Keystone Oil Pipeline Seen Raising Gas Prices in Midwest: Energy

By Bradley Olson - Mar 1, 2012 7:00 AM GMT+0700

TransCanada Corp. (TRP)’s Keystone XL oil pipeline, a project backers including Republican Presidential candidate Rick Santorum say will create cheaper U.S. gasoline, instead risks raising prices as much as 20 cents a gallon in the Midwest, Great Plains and Rocky Mountains.

The line would create a new way to carry Canadian imports outside the Midwest and reduce an oil surplus that’s depressing prices in the central U.S. Spot gasoline was 55 cents cheaper in Chicago than in New York on June 1, the second-highest ever. Nationwide, retail gasoline set its highest February average at $3.55 a gallon, data compiled by Bloomberg show.

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Philip Verleger, principal of PK Verleger LLC. said “the Canadian plan was to use their market power to raise prices in the United States and get more money from consumers.” Photographer: Melissa Golden/Bloomberg

The purpose of the $7.6 billion Keystone is to move 830,000 barrels of oil a day from landlocked Alberta to the Texas Gulf Coast, obtaining new customers and a higher price for heavy Canadian crude, Canadian regulators said in a 2010 report. The oil sold for $23.38 less per barrel in 2011 compared with heavy grades of Mexican crude, according to data compiled by Bloomberg.

“The Canadian plan was to use their market power to raise prices in the United States (UNG) and get more money from consumers,” Philip Verleger, founder of Colorado-based energy consulting firm PK Verleger LLC, said in an interview. Prices may gain 10 to 20 cents in central states, he said.

Producers including Exxon Mobil Corp. (XOM), Suncor Energy Inc. (SU) and Cenovus Energy Inc. (CVE) may reap as much as $4 billion more in annual revenue if prices rise as expected following the construction of the 1,661-mile (2,673-kilometer) Keystone XL conduit, the 2010 report says.

Such a change would erase the cost advantage for refiners such as Marathon Petroleum Corp. (MPC) and HollyFrontier Corp. (HFC), whose Midwest plants profited on cheaper oil supply.

Political Touchstones

The Keystone pipeline has generated a political debate before the U.S. November presidential election.

Republicans including presidential candidates Santorum, Mitt Romney and Newt Gingrich have criticized President Barack Obama’s Jan. 18 rejection of Keystone XL after Nebraskans raised concerns about the pipeline polluting their groundwater.

The three candidates and U.S. House Speaker John Boehner have said that approving Keystone, eliminating environmental regulations of hydraulic fracturing, known as fracking, and opening up new areas for drilling would lower the cost of gasoline for American consumers.

Clinton Backs Pipeline

Former President Bill Clinton backed construction of Keystone yesterday in comments at a Washington-area energy conference. As long as the pipeline avoids environmentally sensitive land, “the extra cost of running it is infinitesimal compared to the revenues” the pipeline could produce, he said.

Oil supply concerns have grown as the U.S. and Europe tightened sanctions on Iran, pushing U.S. crude prices for future delivery to $109.77 on Feb. 24, the highest in 9 months, according to data compiled by Bloomberg.

TransCanada said Feb. 27 it would reapply for a permit to build Keystone and proceed separately with a $2.3 billion segment of the pipeline that will carry crude from the storage hub at Cushing, Oklahoma, to the Texas coast.

Oil flowing through the Oklahoma-to-Texas segment of the Keystone pipeline would help remove excess supply in the Midwest and bring cheaper crude to refiners on the Gulf Coast, TransCanada Chief Executive Officer Russ Girling said in a telephone interview after the announcement.

“It will help to reduce pressure on gasoline prices,” he said.

Declines Offset Increases

As more crude flows to markets such as the Gulf Coast, prices should decline there and balance out increases seen in other places, Stephen Schork, president of the Schork Group industry consultants in Villanova, Pennsylvania, said in a telephone interview.

“Bringing these barrels to the Gulf would certainly have a dampening impact,” Schork said. “Getting more high quality, cheap oil to the market is the direction we need to go to see lower gasoline prices.”

Keystone XL might lower the average cost of gasoline across the U.S. by up to 4 cents a gallon, Ray Perryman, a consultant hired by TransCanada to assess the economic impact of the project, said in an e-mail.

The net impact of Keystone XL on gasoline prices would be minimal, said Perryman, whose research has been cited by TransCanada to back up claims on potential job growth and market impacts from the pipeline.

Consumers in Colorado and Wyoming currently pay less for gasoline than anywhere in the nation because of the supply glut in the Rocky Mountains caused by stranded Canadian imports and growing oil production from onshore fields. Denver’s average price of $3.13 a gallon today was 43 cents lower, or 12 percent, than Houston’s $3.56 average, according to AAA.

Charging More

Canadian producers will be able to charge more for their oil after Keystone XL is built, boosting revenues by $2 billion to $3.9 billion, Canada’s National Energy (TAQA) Board said in the 2010 report approving of TransCanada’s pipeline plan.

The discount on Canadian crude “should be avoided in the future” if the pipeline were built, according to the report.

Completion of the entire pipeline would raise prices at the pump in the Midwest and Rocky Mountains 10 to 20 cents a gallon, Verleger, the Colorado consultant, said in an e-mail message.

The higher crude prices also would erase the discount enjoyed by cities including Chicago, Cheyenne and Denver, Verleger said.

Gasoline Prices

Retail gasoline in Chicago today averaged $3.91 a gallon, 13 cents lower than the $4.04 New York price and more than double the 6-cent difference between the two cities a year ago, according to AAA. The average gasoline price of $2.99 a gallon in Cheyenne, Wyoming is the same as a year ago and the price in Minneapolis is $3.65, according to AAA data.

Canada exported 66 percent of its total crude production in 2010, almost all of which went to U.S. markets, according to the C.D. Howe Institute, an Ottowa-based think tank. The biggest pipeline systems moving crude southward include Enbridge Inc. (ENB)’s mainline system and TransCanada’s first Keystone line, both of which transport oil to refineries in the Midwest, including in Wisconsin and Illinois.

To contact the reporter on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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Greece Default SWAPS Don’t Have to Pay: ISDA

By Abigail Moses - Mar 1, 2012 10:01 PM GMT+0700

Default insurance on Greek debt won’t be paid out, the International Swaps & Derivatives Association said after it was asked to rule whether part of the nation’s $170 billion bailout was a credit event.

The group said the European Central Bank’s exchange of Greek bonds for new securities exempt from losses being imposed on private investors hasn’t triggered $3.25 billion of outstanding credit-default swaps. ISDA’s determinations committee, including JPMorgan Chase & Co. and Pacific Investment Management Co., said the switch didn’t constitute subordination, one of the criteria for a payout under a restructuring event.

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A staff member adjustsf flags before President of European Commission Jose Manuel Barroso meets with Greek Prime Minister Lucas Papademos at EU headquarters in Brussels on Feb. 29, 2012. Photographer: Zhou Lei/XINHUA/Landov

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March 1 (Bloomberg) -- Default insurance on Greek debt won’t be paid out, the International Swaps & Derivatives Association said after it was asked to rule whether part of the nation’s $170 billion bailout was a credit event. The group said the European Central Bank’s exchange of Greek bonds for new securities exempt from losses being imposed on private investors hasn’t triggered $3.25 billion of outstanding credit-default swaps. Michael McKee and Erik Schatzker report on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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A Evzones Greek presidential guard at the Greek parliament in Athens on Feb. 29, 2012. Photographer: Kostas Tsironos/Bloomberg

“The situation in the Hellenic Republic is still evolving” and today’s decisions “do not affect the right or ability to submit further questions,” ISDA said in a statement. The decision is not an expression of the committee’s “view as to whether a credit event could occur at a later date,” the association said.

A swaps payout may still happen if Greece uses collective action clauses on private investors who refuse to take so-called haircuts on their debt holdings, according to ISDA’s rules. Officials including former ECB President Jean-Claude Trichet have opposed triggering swaps because they’re concerned traders would be encouraged to bet against failing nations and worsen Europe’s debt crisis.

‘Big Issue’

“There’s value to getting some clarity even if the ruling’s no,” said Peter Tchir, founder of New York-based hedge fund TF Market Advisors. “It’s a pretty big issue for what they’re trying to do in other countries.”

It costs $7.3 million in advance and $100,000 annually to insure $10 million of Greek debt for five years, signaling a 95 percent probability of default within that time. Greek 10-year bonds slumped to a record 19.14 cents on the euro after the ruling.

Political determination to avoid the stigma of a credit event has been waning as Greece struggles to meet the conditions of its latest 130 billion-euro ($170 billion) bailout. Standard & Poor’s downgraded the nation to “selective default” on Feb. 27 because of the government’s decision to retroactively insert CACs into bond terms.

While Greece is negotiating the biggest ever debt restructuring, the volume of credit-default swaps on the line has tumbled. The net amount of debt protected is no more than for some companies and represents less than one percent of the nation’s bonds and loans outstanding.

Credit-default swaps on Greece now cover $3.25 billion of debt, down from about $6 billion last year, according to the Depository Trust & Clearing Corp. That compares with a swaps settlement of $5.2 billion on Lehman Brothers Holdings Inc. in 2008.

Counterparty Concern

Despite concerns at that time about a daisy chain of losses if counterparties failed to meet their commitments, the Lehman settlement and those of swaps guaranteeing debt of Fannie Mae and Freddie Mac were “orderly” and caused no major disruptions for the market, according to regulators.

A settlement on Greek swaps may bolster confidence in the $258 billion sovereign insurance market and also help boost the government bond market, Tchir said. Efforts to circumvent a trigger risk undermining credit markets.

“The relevance of sovereign CDS has been called into question, but they still have value,” said Georg Grodzki, head of credit research at Legal & General Plc in London.

Insurance payouts may still happen if Greece uses the collective action clauses its parliament introduced or if it fails to make a payment in future. If an event is declared, auctions will be held to set a recovery value on the bonds, and swaps sellers will pay buyers the difference between that and the face value of the debt.

Failure to Pay

Swaps on western European governments can pay out on a credit event triggered by failure to pay, restructuring or a moratorium on payments. Restructuring events are the most subjective and have been removed as a trigger event for U.S. companies.

A restructuring event can be caused by a reduction in principal or interest, postponement or deferral of payments or a change in the ranking or currency of obligations, according to ISDA rules. Any of these changes must result from deterioration in creditworthiness, apply to multiple investors and be binding on all holders.

The determinations committee that decides whether to trigger swaps consists of representatives from 15 dealers and investors. The group rules whether a credit event should be declared after a request is made by a market participant. The question on Greece was posed anonymously.

‘Pain to Come’

“Technically the issue of the ECB subordinating other investors hasn’t yet inflicted pain -- just the threat of pain to come,” said Bill Blain, a strategist at Newedge Group in London.

A request on Irish swaps was rejected last year when ISDA’s determinations committee ruled the International Monetary Fund’s preferential creditor status in that nation’s rescue didn’t constitute subordination.

“Restructuring almost always causes confusion,” Tchir said. “The fact that it is a restructuring does leave it lot more subjective than it would be otherwise.”

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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Initial Jobless Claims Lowest Since March ’08

By Alex Kowalski - Mar 1, 2012 8:59 PM GMT+0700

The number of Americans filing first-time claims for jobless benefits fell to a level matching a four-year low, more evidence the labor market is healing.

Applications for unemployment insurance decreased 2,000 in the week ended Feb. 25 to 351,000, Labor Department figures showed today. Economists forecast 355,000 claims, according to the median estimate in a Bloomberg News survey. The number of people on unemployment benefit rolls fell, while those getting extended payments also declined.

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A job seeker looks at his mobile phone at the New York Career Fair in New York, on Feb. 22, 2012. Photographer: Scott Eells/Bloomberg

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Feb. 29 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke speaks about monetary policy and the U.S. economy. Bernanke, testifying before the House Financial Services Committee in Washington, affirmed that interest rates are likely to stay low at least through late 2014 without any indication that further monetary easing is under consideration. (Excerpts. Source: Bloomberg)

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Feb. 29 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke testifies before the House Financial Services Committee in Washington about the U.S. unemployment rate. (This is an excerpt from the hearing. Source: Bloomberg)

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Natalija Vesic, of Face 2 Face Sales Solutions, left, shakes hands with a job seeker at the New York Career Fair in New York. Photographer: Scott Eells/Bloomberg

Firing is on a downward trend as employers gain confidence in the outlook for economic growth. A smaller number of job reductions also puts those companies in place to hire additional employees as demand picks up.

“Firing is not holding back the labor market,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who forecast 350,000 claims. “Businesses recognize that they don’t need to lay off any more people. Down the road, they’re going to realize they need to hire more people.”

A separate report today from the Commerce Department showed consumer spending rose less than forecast in January after little change the previous month.

Incomes Increase

Purchases climbed 0.2 percent, while incomes increased 0.3 percent. The median estimate of economists surveyed by Bloomberg News called for a 0.4 percent increase in spending and a 0.5 percent rise in incomes.

Stock-index futures held gains and Treasury yields rose after the figures. The contract on the Standard & Poor’s 500 Index expiring this month climbed 0.3 percent to 1,368.0 at 8:56 a.m. in New York. The yield on the 10-year Treasury note climbed to 2.05 percent from 1.97 percent late yesterday.

Estimates for first-time claims ranged from 345,000 to 370,000 in the Bloomberg News survey of 49 economists. The Labor Department revised the prior week’s applications to 353,000 from the initially reported 351,000.

The four-week moving average, a less-volatile measure, fell to 354,000, also the lowest since March 2008, from 359,500.

A Labor Department official today said there was “nothing unusual” that affected today’s figures.

The number of people continuing to collect jobless benefits fell by 2,000 in the week ended Feb. 18 to 3.4 million. The continuing claims figure does not include the number of workers receiving extended benefits under federal programs.

Those who’ve used up their traditional benefits and are now collecting emergency and extended payments decreased by about 16,800 to 3.38 million in the week ended Feb. 11.

States, Territories

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 2.7 percent in the week ended Feb. 18, today’s report showed. Seven states and territories reported an increase in claims, while 44 had a decrease.

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

Job creation has strengthened, with the pace of payroll growth picking up from October through January. Headcounts grew by 243,000 workers in January, the most in nine months, and the joblessness dropped to 8.3 percent, Labor Department data show.

Payrolls will increase 170,000 a month on average in 2012, according to the results of a survey by the National Association for Business Economics released Feb. 27. Last year, they rose an average 152,000 each month.

Even so, Federal Reserve Chairman Ben S. Bernanke said “the job market remains far from normal” when spoke he to U.S. House hearing on Capitol Hill yesterday. The elevated unemployment rate and a subdued inflation outlook warrant a highly accommodative stance for monetary policy, he said.

Among companies firing workers is Blizzard Entertainment, maker of the online game “World of Warcraft,” which is cutting about 600 jobs. About 90 percent of the firings will come from departments not related to video-game development, the Irvine, California-based company, a unit of Activision Blizzard Inc., said in statement on Feb. 29.

To contact the reporter on this story: Alexander Kowalski in Washington at akowalski13@bloomberg.net

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

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Stocks, Commodities Rise as Spain Bonds Gain; Treasuries Fall a Third Day

By Stephen Kirkland and Lynn Thomasson - Mar 1, 2012 10:20 PM GMT+0700

Stocks (SXXP) and commodities rose, while Treasuries slid, as borrowing costs fell for Spain and France, an industry group said default insurance on Greek debt won’t be paid out and U.S. jobless claims matched a four-year low.

The Standard & Poor’s 500 Index advanced 0.4 percent and the Stoxx Europe 600 Index added 1 percent at 10:18 a.m. in New York. The yield on Spain’s two-year notes retreated for an 11th day, dropping 15 basis points to 2.17 percent. The 10-year Treasury (USGG10YR) yield rose five basis points to 2.03 percent. The euro rose less than 0.1 percent to $1.3332. The S&P GSCI index of 24 commodities climbed 0.4 percent as Brent crude advanced for a second day in London.

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Traders work at the New York Stock Exchange. Photographer: Scott Eells/Bloomberg

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March 1 (Bloomberg) -- Scott Wren, a senior equity strategist at Wells Fargo Advisors, talks about the U.S. stock market and concerns about housing and unemployment. He speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Spain and France sold 12.5 billion euros ($16.7 billion) of bonds as the European Central Bank’s long-term refinancing operation of lending to banks helped spur demand. Manufacturing improved in China and the euro region, while another report showed U.S. factory activity grew less than economists forecast.

“The Spanish auction went well,” said Trung-Tin Nguyen, a hedge-fund manager at TTN AG in Zurich. “It looks like the market is happy with the LTRO allocation, which signals easing of monetary conditions. This helps the overall sentiment ahead of the U.S. data.”

JPMorgan Chase & Co., Bank of America Corp. and American Express Co. rose more than 1.7 percent to lead gains among 23 of the 30 stocks (SXXP) in the Dow Jones Industrial Average. Financial shares rallied 1.1 percent for the biggest gain among 10 groups in the S&P 500.

ISM Misses

Stocks briefly pared gains after the Institute for Supply Management’s factory index fell to 52.4 in February from 54.1 a month earlier. Fifty is the dividing line between growth and contraction, and economists surveyed by Bloomberg News projected the gauge would climb to 54.5. Estimates of the 79 economists ranged from 52 to 56.

Separately, reports showed consumer spending rose 0.2 percent in January, less than the 0.4 percent increase predicted by economists in a Bloomberg survey, while jobless claims fell to a level matching a four-year low.

More than three shares rose for every one that fell in the Stoxx 600 (SXXP) as results from Adecco SA and WPP Plc beat estimates. Adecco SA surged 8.5 percent. WPP gained 3.7 percent after saying revenue from continuing businesses will grow 4 percent this year as the London Olympics and U.S. presidential elections buoy the industry.

The difference in yield investors demand to own Spanish 10- year bonds rather than benchmark German bunds fell 19 basis points. The yield on France’s 10-year bond slid 10 basis points, narrowing the spread with bunds to 91 basis points.

Italy Yields

Italian two-year note yields fell 44 basis points to 1.69 percent, dropping below 2 percent for the first time since October 2010.

Default insurance on Greek debt won’t be paid out, the International Swaps & Derivatives Association said after it was asked to rule whether part of the nation’s $170 billion bailout was a credit event. The decision was unanimous, ISDA said. The yield on Greece’s 10-year bond rose 153 basis points, with the price falling below 20 percent of face value for the first time.

Veolia Environnement SA jumped 13 percent after saying it’s in exclusive talks to sell Transdev, its mass-transit unit. Vivendi SA (VIV) sank 8.3 percent after the owner of the world’s largest music and video-game companies projected that profit will slump this year as its SFR unit competes with a new entrant in France’s mobile-phone market.

Copper climbed 1.4 percent in London and Brent oil rose 0.6 percent to $123.37 a barrel. Gold jumped 0.7 percent to $1,709.25 an ounce after falling the most in three years yesterday.

The MSCI Emerging Markets Index (MXEF) fell 0.4 percent, dropping from a seven-month high. The Hang Seng China Enterprises Index (HSCEI) slid 1.9 percent on speculation China won’t ease monetary policy further. The BSE India Sensitive Index (SENSEX) retreated 1 percent on concern a wider-than-estimated budget deficit may restrict the central bank’s scope to cut rates and spur growth.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net

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

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Bernanke Quells Talk of Fresh Fed Stimulus to Ease Jobless Rate

By Joshua Zumbrun and Jeff Kearns - Mar 1, 2012 10:00 PM GMT+0700

Federal Reserve Chairman Ben S. Bernanke said elevated unemployment and subdued inflation mean interest rates are likely to stay low, without offering any sign that the economy needs an additional monetary boost.

Bernanke repeated testimony today in the Senate that he delivered yesterday in the House, describing “positive developments” in the job market while saying it’s still “far from normal.” He said the inflationary impact of higher gasoline prices is likely to be temporary.

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Job seekers in New York. Photographer: Seth Wenig/AP

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Ben S. Bernanke, chairman of the U.S. Federal Reserve, speaks during a House Financial Services Committee hearing in Washington, on Feb. 29, 2012. Photographer: Andrew Harrer/Bloomberg

The semiannual testimony to Congress is a contrast to last July, when Bernanke outlined steps that the Federal Open Market Committee took at later meetings, and to the Fed’s January gathering, when some policy makers said more bond-buying might be needed.

“There’s certainly nothing in the testimony, certainly nothing explicit, to suggest that the Fed is really actively considering additional action,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. The speech countered “a strong sense among some market participants that the Fed is ultimately going to do a third round of quantitative easing.”

The Standard & Poor’s 500 Index rose 0.4 percent today to 1,371.75 at 9:37 a.m. in New York after falling 0.5 percent yesterday as Bernanke’s remarks damped speculation of new bond purchases by the Fed. The yield on the 10-year Treasury note rose to 2.04 percent from 1.97 percent yesterday.

Economy Improving

“With the economy improving, I’m not surprised that he’s not going to go with QE right now,” said Jon Burnham, the New York-based fund manager whose $123 million Burnham Fund has beaten 99 percent of rivals over the past five years. “We go through periods when the economy just improves on its own.”

Reports yesterday and today added to evidence that the world’s largest economy is gathering strength.

The number of Americans filing first-time claims for jobless benefits fell to a level matching a four-year low, more evidence the labor market is healing. Applications for unemployment insurance decreased 2,000 in the week ended Feb. 25 to 351,000, Labor Department figures showed today.

Gross domestic product grew at a 3 percent pace in the fourth quarter, up from an initial estimate of 2.8 percent, the Commerce Department reported. The Institute for Supply Management-Chicago Inc. said its business barometer climbed to a 10-month high.

The Fed’s Beige Book regional business survey, released after Bernanke’s testimony, said the economy expanded at a “modest to moderate pace” in January and early February, fueled by manufacturers, including automakers. The survey is published two weeks before the FOMC meets to set monetary policy.

2014 Outlook

Even so, Bernanke repeated the Fed’s January statement that economic conditions are likely to warrant low interest rates at least through late 2014. That extended an earlier date of mid- 2013.

“At present, with the unemployment rate elevated and the inflation outlook subdued, the committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives” for stable prices and maximum employment.

Bernanke, who has kept interest rates near zero since December 2008 and expanded the Fed’s balance sheet with two rounds of asset purchases totaling $2.3 trillion, came under fire from some lawmakers.

Hensarling Questions

“I question, after three years of the most highly accommodative monetary policy, I believe, in the history of our nation, the recent announcement that we will continue this policy for two more years,” said Representative Jeb Hensarling, a Texas Republican.

Bernanke, 58, acknowledged there are limits to how much the Fed can do to boost the economy.

“Monetary policy is not a panacea,” he said. “It can help offset cyclical fluctuations and financial crises like we’ve had, but the long-term health of the economy depends mostly on decisions taken by the Congress and the administration.”

Bernanke, a former Princeton University professor, said the FOMC’s announcement last month of a 2 percent inflation target was aimed at providing “additional transparency” and did “not imply a change in how the committee conducts policy.”

The Fed chairman said at times when the inflation and full employment goals are not complementary, the FOMC “follows a balanced approach in promoting them.”

Time Horizons

That approach will take into account “the magnitudes of the deviations of inflation and employment from levels judged to be consistent with the dual mandate, as well as the potentially different time horizons over which employment and inflation are projected to return to such levels,” he said.

The FOMC’s forecasts from January suggest policy makers see a higher deviation in unemployment than inflation. The panel expects inflation to be in a range of 1.4 percent to 2 percent over the next three years.

By contrast, it forecasts the unemployment rate to be in a range 6.7 percent to 7.6 percent in 2014, or as much as 1.6 percentage points above a longer-run estimate of full employment of 6 percent.

Bernanke will testify in Congress again today at 10 a.m. before the Senate Banking Committee.

“The nice thing about this is he always has a chance to refine his message on the second day,” said Eric Green, the chief economist and head of rate strategy at TD Securities in New York.

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Jeff Kearns in Washington at jkearns3@bloomberg.net

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

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Buffett Poised to Win Wager on America With Burlington

By Natalie Doss - Mar 1, 2012 12:01 PM GMT+0700

When Warren Buffett bought North America’s second-biggest railroad, he called it an “all-in wager” on the U.S. economy. It’s turning out to be a pretty good bet on the oil industry, too.

Burlington Northern Santa Fe’s track network puts it among the best situated of its peers to meet shipping demand for fracking sand, pipe and crude in the northern U.S. Bakken region, where oil production has more than tripled since 2008, according to data compiled by Bloomberg.

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Berkshire Hathaway Chairman and CEO Warren Buffett in front of a mockup of a BNSF locomotive in Omaha. Photographer: Nati Harnik/AP

Gains in mineral and chemical carloads helped Burlington Northern pay a $1 billion distribution to Buffett’s Berkshire Hathaway Inc. (BRK/B) last month. The railroad is the busiest in the U.S. in 2012 by traffic, positioning it to build on a 16 percent jump in 2011 sales that helped narrow the revenue lead of Union Pacific (UNP) Corp., which lacks tracks into the Bakken area.

“It’s kind of like if somebody discovers gold in your backyard but not your neighbor’s,” said John Anderson, advisory director at Greenbriar Equity Group, a private-equity firm based in Rye, New York, focused on the transportation industry. “It’s just good luck.”

Drilling in the Bakken region in Montana and North Dakota is increasing because of improvements in hydraulic fracturing, a technology that uses sand and other chemicals to hold open fissures in shale formations to extract oil. With no pipelines in place yet, railroads are taking oil to refineries and delivering materials such as pipe and specialized fracking sand.

North Dakota

Burlington Northern has “been lucky” to some degree, Tony Hatch, an independent rail analyst in New York, said in an interview. “They’ve got a big presence in North Dakota, which was probably not something that was probably in the forefront in their mind two or three years ago as a competitive advantage.”

That’s adding to the benefits Buffett received when he spent $26.5 billion to acquire the 77.5 percent of Fort Worth, Texas-based Burlington Northern that Berkshire didn’t already own. Buffett, 81, called the deal an “all-in wager” on the U.S. economy when he announced it in 2009.

He negotiated his biggest-ever purchase so Berkshire could benefit from demand for shipping on routes in the U.S. West. The deal has helped boost Omaha, Nebraska-based Berkshire’s profit in the past two years as a recovering economy pushed Burlington Northern’s revenue to $19.5 billion in 2011.

Burlington Northern “has benefitted from the shale play probably more than Union Pacific,” said Lee Klaskow, a Bloomberg Industries analyst in Skillman, New Jersey.

Two Railroads

The railroad serves about 30 percent of U.S. oil refineries, Klaskow said in an interview. It’s also one of only two major carriers, along with Canadian Pacific Railway Ltd. (CP), with tracks into the region. That means Burlington Northern can pick up shipments from drillers and take them to the refineries across its 32,000-mile (51,500-kilometer) system.

Having a “full service” approach contrasts with Union Pacific’s need to exchange carloads with Burlington Northern or Canadian Pacific to move petroleum to refineries on its network, Klaskow said. Freight that stays on one railroad’s system for the full trip is typically more profitable.

Oil and gas-field servicing are “exploding very healthily” for Burlington Northern, said Paul Bingham, economics practice leader at consultant CDM Smith in Arlington, Virginia. “In the west I think the BN disproportionately benefits from that.”

Fourth-quarter net income advanced 41 percent, Burlington Northern said this week in a filing. Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer.

Fracking Fallout

The increase in fracking has hurt another Buffett bet: $2 billion in bonds of Energy Future Holdings Corp. He wrote down the investment by more than $1 billion as lower gas prices pressured the power company and told shareholders in a Feb. 25 letter that the investment is at risk of losing all value.

Investors following Buffett’s lead on railroads have outperformed the broader U.S. market.

The Standard & Poor’s 500 Railroads Index (S5RAIL), a gauge of Burlington Northern’s three publicly traded peers, surged 80 percent through yesterday from Nov. 2, 2009, the day before Buffett agreed to buy the carrier. The S&P 500 rose 31 percent in the same period.

Canadian Pacific’s shares were up 57 percent since then in Toronto. Its largest shareholder, Pershing Square Capital Management LP’s William Ackman, has cited Bakken access as one of the railroad’s potential advantages as he pushes for a management change.

Trade Group’s Data

Association of American Railroads data offer glimpses of Burlington Northern’s drilling-related traffic.

Fourth-quarter originated carloads of non-metallic minerals and products grew about 15 percent, while chemicals climbed 5.4 percent. Fracking sand and petroleum are included in the latter two categories, according to the Washington-based trade group.

The railroad doesn’t report oil cargo as a category, and Krista York-Woolley, a spokeswoman, said Burlington Northern doesn’t break down volumes by shipping locations.

Burlington Northern is leading the North American industry in originated carloads of all kinds in 2012, with a four-week moving average of almost 165,000 through Feb. 18. That compares with about 140,000 for Union Pacific, according to data compiled by Bloomberg Industries.

Union Pacific’s chemical volumes also are rising because fracking technology is boosting natural-gas drilling. Chemicals are Union Pacific’s second-biggest commodity by volume, after coal. And its route system blunts the disadvantages of not serving the Bakken region directly, said Tom Lange, a spokesman for the Omaha-based railroad.

Gulf Coast Access

“The majority of Bakken crude shipments ultimately are delivered by Union Pacific to the Gulf Coast refineries,” Lange said yesterday by e-mail. “Other railroads interchange with us in Kansas City and St. Louis.”

The revenue lead for the largest U.S. railroad over Burlington Northern dwindled to only $9 million in 2011 from more than $2 billion in 2003. Sales growth at Burlington Northern has been faster since then, and it eclipsed Union Pacific sales in 2008 for the first time since at least 1987.

Burlington Northern has a “bigger position in what I think in the next cycle will be faster-growing elements -- intermodal, the Bakken, international grain,” Hatch said. “If you just woke any rail analyst in 1990 or 2000 and said, ‘Best franchise?’ They’d have said Union Pacific. I think it’s closer now.”

To contact the reporter on this story: Natalie Doss in New York at ndoss@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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U.S. Stocks Advance Amid Bank Rally

By Rita Nazareth - Mar 1, 2012 11:26 PM GMT+0700

U.S. stocks advanced, following the longest monthly advance for the Standard & Poor’s 500 Index in a year, as financial shares rallied and after government data showed that jobless claims declined to a four-year low.

JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) climbed at least 1.5 percent as European banks jumped amid a slump in Spanish and French borrowing costs. Gap Inc. (GPS), the largest U.S. apparel chain, surged 7.7 percent as same-store sales beat estimates. Kroger Co. (KR) advanced 2.4 percent after the grocery- store chain forecast earnings that topped projections.

The S&P 500 advanced 0.3 percent to 1,370.22 at 11:25 a.m. New York time, after a three-month rally. The Dow Jones Industrial Average rose 22.36 points, or 0.2 percent, to 12,974.43. The Russell 2000 Index gained 0.7 percent to 816.22.

“We’re not lighting the world on fire, but we’re seeing improvement in the economy,” said Mark Masterson, managing director and partner at HighTower’s Masterson, Emma & Associates in Naples, Florida. Hightower has over $25 billion in assets. “The risk from the European situation has been reduced. I don’t know that it’s been eliminated. Best I can say at this point is that it appears to have been postponed.”

Benchmark gauges rose as the number of Americans filing first-time claims for jobless benefits fell to a level matching a four-year low, more evidence the labor market is healing. Stocks briefly pared gains as manufacturing in the U.S. unexpectedly expanded in February at a slower pace than forecast as orders cooled.

European Shares

Gains in Europe also helped lift the S&P 500 after Spain and France sold 12.5 billion euros ($16.7 billion) of bonds as the European Central Bank’s long-term refinancing operation of lending to banks helped spur demand. Default insurance on Greek debt won’t be paid out, the International Swaps & Derivatives Association said after it was asked to rule whether part of the nation’s $170 billion bailout was a credit event.

Today’s advance extended this year’s rally in the S&P 500 to 9 percent. Stocks rose amid better-than-estimated economic data and expectations that Europe would tame its debt crisis. Yet the index trades at about 14.1 times reported earnings, compared with the average since 1954 of 16.4 times, according to data compiled by Bloomberg.

UBS AG raised its forecasts for the S&P 500 and its companies earnings amid a “dramatic” improvement in the economy. Jonathan Golub’s year-end forecast for the benchmark gauge rose to 1,475 from 1,325. He estimates earnings-per-share of $103 this year and $112 in 2013. The previous forecasts were $99 and $111, respectively.

‘More Room’

“There’s more room to run,” Matt Lloyd, who oversees $8 billion as chief investment strategist at Advisors Asset Management Inc. in Monument, Colorado, said in a telephone interview. “You could see a 3 percent to 5 percent correction. Yet that doesn’t sway us because we start to see a lot more upside in the equity market, especially on metrics.”

Financial shares had the biggest gain in the S&P 500 among 10 industries, adding 1.1 percent. The KBW Bank Index (BKX) rose 1 percent as 22 of its 24 stocks gained. JPMorgan increased 1.8 percent to $39.96. Bank of America climbed 1.5 percent to $8.09.

Goldman Sachs Group Inc. (GS) jumped 4.1 percent to $119.82. The fifth-biggest U.S. bank by assets agreed to buy Ariel Holdings Ltd.’s Bermuda-based insurance and reinsurance businesses to expand property and casualty coverage.

Gap surged 7.7 percent to $25.16. Sales climbed 4 percent, beating the average projection for a 1.4 percent drop from analysts surveyed by Retail Metrics Inc.

Kroger’s Outlook

Kroger gained 2.4 percent to $24.35 after forecasting 2012 earnings of at least $2.28 a share. On average, the analysts surveyed by Bloomberg estimated $2.23.

Apple Inc. (AAPL) fell 0.3 percent to $541.02. The shares added 5.7 percent in the previous five days. Now that its market value has exceeded $500 billion, the biggest challenge for the maker of iPhones and iPad tablet computers may be staying there.

Apple is the sixth U.S. company that has ever crossed the threshold, according to data compiled by S&P. The others are Microsoft Corp. (MSFT), General Electric Co., Cisco Systems Inc., Intel Corp. and Exxon Mobil Corp., in chronological order.

All five companies were below $500 billion a year after reaching that pinnacle, according to data compiled by Bloomberg. GE was the only one to surpass that value afterward.

“Getting there is hard,” Howard Silverblatt, a New York- based senior index analyst at S&P, wrote yesterday in an e-mail. “Staying there is harder.”

Research In Motion Ltd. (RIM) lost 3.7 percent to $13.64. Jefferies & Co. cut its earnings estimate and said there’s a greater than 50 percent chance that the maker of BlackBerrys will miss its device sales forecast for the fiscal fourth quarter, which ended in February.

Sotheby’s (BID) dropped 8.8 percent to $35.89. The publicly traded auctioneer of fine arts and collectibles said fourth- quarter profit fell 26 percent as sales slid.

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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Iran Seen Suffering ‘Crippling Effect’ of Sanctions

By Indira A.R. Lakshmanan - Mar 1, 2012 6:54 AM GMT+0700

The cascade of U.S. and European sanctions imposed on Iran is crippling its ability to export oil and conduct trade, hitting the Gulf state’s economy and stoking internal dissent, sanctions specialists and U.S. officials say.

An array of restrictions on banking, shipping, insurance, ports, trade, commodities and energy transactions and ventures have severed or complicated many of Iran’s commercial ties to the outside world. U.S. officials such as Secretary of State Hillary Clinton say there is limited time for sanctions to pressure Iran into giving up disputed nuclear activities before the U.S. or Israel may take military action.

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A currency trader in Tehran on Jan. 12, 2012. Photographer: Ali Mohammadi/Bloomberg

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Iran's oil industry installations in Mahshahr, Khuzestan province. Photographer: Kaveh Kazemi/Getty Images

One of the latest examples of the sanctions’ impact is yesterday’s announcement by Noor Islamic Bank, whose chairman is a son of Dubai’s ruler, that it severed relations with Iranian banks in December in compliance with international rules.

Another example is the willingness expressed last week by Swift, the financial messaging service for most cross-border money transfers, to cut off more than 20 sanctioned Iranian banks and Iran’s central bank in a move that would be a further blow to Iran’s economy, according to two officials involved in the talks.

India, the third-biggest buyer of Iranian crude oil according to the U.S. Energy Department, may ask Iran to deliver its own crude so Indian refiners avoid violating restrictions on arranging insurance, two people with knowledge of the matter said yesterday.

‘Crippling Effect’

“The plethora of sanctions flowing from the U.S. and EU has had a crippling effect on international trade with Iran,” Nigel Kushner, a lawyer specializing in Iran trade and sanctions, said in an interview.

Kushner, chief executive of Whale Rock Legal, a London law firm whose clients include exporters engaged in legal trade with Iran, said the sanctions have become so onerous that many in the insurance and shipping industries are dropping Iran-related business entirely.

Similarly, officials from Swift, the Belgium-based Society for Worldwide Interbank Financial Telecommunication, told U.S. authorities they preferred to expel Iran’s central bank than engage in the complicated process of sequestering and verifying legal transactions, according to U.S. officials.

“It’s having a devastating impact,” Kushner said. “Recent events are unprecedented in their reach and impact since this is coupled with successful, informal pressure being placed on Iran’s trading partners to cut ties.”

Nuclear Bomb

The U.S. and its allies say Iran is seeking the capability to make an nuclear bomb. Iran says its program is for civilian energy and medical research.

Israeli leaders, such as Defense Minister Ehud Barak, have said they may take military action within months if Iran doesn’t abandon suspected military aspects of its nuclear program.

Oil prices have increased 8.3 percent this year, in part on the prospect of a disruption in Gulf oil supplies. Crude oil for April delivery gained 52 cents, or 0.5 percent, to settle yesterday at $107.07 a barrel on the Nymex.

Since a Nov. 8 report by United Nations inspectors that raised questions about Iran’s nuclear program, the U.S. and EU have piled on increasingly stringent economic penalties -- including U.S. sanctions on non-petroleum transactions with the Iranian central bank that took effect yesterday and an EU embargo on Iranian oil that starts July 1.

Bank Tejarat

Those penalties are only the steps that have drawn the most public attention. The U.S. and EU also took coordinated action to cut off from the international financial system Iran’s Bank Tejarat, the last institution financing high-volume exports and imports between Iran and Europe, a move that affects tens of billions of euros in trade.

EU sanctions announced Jan. 23 on Iran’s largest ports operator will also curb billions of euros in otherwise legal trade. An asset freeze on Tidewater Middle East Co. affects European companies all along the trade and supply chain. The EU was Iran’s top trade partner in 2010, with about 13 billion euros ($17.3 billion) in non-petroleum trade that year, European Commission and International Monetary Fund figures show.

Iran’s Supreme Leader, Ayatollah Ali Khamenei, referred to the panoply of sanctions in a national broadcast Feb. 3 as “painful and crippling.” President Mahmoud Ahmadinejad said Nov. 1 that “our banks cannot make international transactions anymore.”

Iran’s Assurances

Iranian officials have assured the public they will prevail in the face of sanctions. Deputy Oil Minister Ahmad Qalebani said yesterday that Iran is exporting about 2 million barrels of crude a day and has an increasing number of buyers even as countries impose sanctions, according to the state-run Mehr news agency.

Iran, the second-largest oil producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, pumped about 3.545 million barrels of crude a day in January, a Bloomberg survey showed, and exported an average 2.58 million barrels a day in 2010, according to OPEC statistics.

‘Plummeting Currency’

The sustained, global sanctions effort “has brought very substantial economic and financial pressure on the Iranian regime,” U.S. Undersecretary of Treasury David Cohen said in a speech in New York yesterday. That is reflected “most dramatically in its plummeting currency,” which has lost half its value since September, he said. It was a reference to the market rate that ordinary Iranians use to acquire a hard currency rather than the official rate.

“International sanctions have disrupted Iranian trade to such an extent that, as of late last year, many Iranian banks were experiencing capital shortages,” he said.

The U.S. and its allies say the intent of the sanctions is to exert political pressure on Iran, rather than simply to cripple its economy. Clinton testified before Congress yesterday that “sanctions are working. They are producing the kind of pressure we had hoped for.”

“We believe from all of our reporting and sourcing that the sanctions are having an impact inside Iran,” she told a House appropriations panel. “We know there is a debate going on inside Iran among various power centers.”

Military Options

Military options are also part of the Obama administration’s choices for dealing with Iran, Air Force Chief of Staff Norton Schwartz told reporters yesterday in Washington.

The UN Security Council has imposed four rounds of sanctions on Iran since 2006, while the U.S. and the European Union have leveled dozens of their own sanctions on Iranian entities including banks, engineering conglomerates, shipping companies, ports operators, energy companies and individuals to punish links to illicit missile and nuclear activities and to pressure Iran’s leaders to abandon disputed aspects of the country’s nuclear program.

After years of on-again, off-again talks between Iran and the five permanent members of the United Nations Security Council -- the U.S., France, Britain, China, Russia -- plus Germany, Iran sent a letter earlier this month saying it was ready to return to negotiations over its nuclear program. U.S. and European officials have credited economic pressure as the impetus.

‘Test the Sincerity’

The international community will need to “test the sincerity” of Iran’s offer to negotiate, Clinton said yesterday.

Mark Dubowitz, executive director of the Foundation for the Defense of Democracies, a Washington research institute, said the individual sanctions amount to a “comprehensive, mutually reinforcing” strategy designed to cut off Iranian access to hard currency, fuel a hyperinflationary environment in Iran and render the Iranian currency worthless.

The net effect “will be to make it increasingly difficult for the Iranian regime to manage the economic crisis that it has imposed on its own people,” forcing it to make concessions, Dubowitz said in an interview.

To contact the reporter on this story: Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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Fed Says U.S. Economy Expanded at a ‘Modest to Moderate’ Pace Last Month

By Steve Matthews - Mar 1, 2012 3:17 AM GMT+0700

The Federal Reserve said the U.S. economy expanded at a “modest to moderate pace” in January and early February as factories increased production.

“Manufacturing continued to expand at a steady pace across the nation,” with “several districts indicating gains in capital spending, especially in auto-related industries,” the Fed said today in its Beige Book business survey, published two weeks before the Federal Open Market Committee meets to set monetary policy.

Play Video

Feb. 29 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke speaks about monetary policy and the U.S. economy. Bernanke, testifying before the House Financial Services Committee in Washington, affirmed that interest rates are likely to stay low at least through late 2014 without any indication that further monetary easing is under consideration. (Excerpts. Source: Bloomberg)

Play Video

Feb. 29 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke delivers his semi-annual report on monetary policy to the House Financial Services Committee in Washington. (This report contains opening statements. Source: Bloomberg)

Chairman Ben S. Bernanke said in congressional testimony today that maintaining monetary stimulus is warranted even as the unemployment rate falls and rising oil prices may cause inflation to rise temporarily. Policy makers, who next meet on March 13, said in January that economic slack and subdued inflation are likely to warrant exceptionally low rates through late 2014, extending a previous date of mid-2013.

“The Beige Book shows the economy continues to do better, but has a long way to go before it is robust,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. “It is slightly more upbeat” than the prior two reports. “Growth is still very slow two and a half years into a recovery.”

The central bank cited the districts of Cleveland, Chicago, Kansas City, Dallas and San Francisco as reporting moderate growth. In its January survey, the Fed applied the term only to Dallas and San Francisco.

Consumer Spending

“Reports of consumer spending were generally positive except for sales of seasonal items, and the sales outlook for the near future was mostly optimistic,” the Fed said. The housing market has “improved somewhat in most districts” with “several reports of increased home sales and some reports of increased construction.”

The report offers anecdotal evidence that will help central bankers weigh developments in an economy where unemployment is projected to remain above 8 percent through the end of the year.

The Standard & Poor’s 500 Index fell 0.3 percent to 1,368.62 at 3:01 p.m. in New York after rising as much as 0.4 percent. The yield on the 10-year Treasury note rose to 1.98 percent from 1.94 percent yesterday.

Fed officials last month were keeping open the option of a third round of bond purchases in case the economy weakens or inflation falls.

January Meeting

“A few” members of the FOMC said economic conditions could warrant buying assets “before long,” and others indicated that action would become necessary if the “economy lost momentum” or price gains seemed likely to remain lower than the Fed’s 2 percent goal, according to minutes of their Jan. 24-25 meeting.

Today’s Beige Book reflects information collected on or before Feb. 17 and summarized by the St. Louis Fed.

The U.S. economy expanded at a 3 percent annual rate in the fourth quarter, the fastest pace in more than a year, as households spent more freely, the government reported today. Growth will probably slow to 2.1 percent this quarter, according to the median of 81 economists’ forecasts in a Bloomberg News survey from Feb. 3 to Feb. 9.

“At present, with the unemployment rate elevated and the inflation outlook subdued, the committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives” of the Fed for stable prices and maximum employment, Bernanke said today in testimony to the House Financial Services Committee in Washington.

Regional Differences

The Fed report said economic gains varied widely. The St. Louis district had “modest” growth, and Minneapolis was “firm.” Philadelphia and Atlanta were “somewhat faster” and New York was “somewhat slower,” while Boston and Richmond had activity that “expanded or improved” in most sectors.

Most districts saw a “slight increase” in hiring, in part because employers in some areas, including Boston, Cleveland, Richmond and Chicago, were having difficulty finding skilled workers.

The U.S. jobless rate fell to 8.3 percent, the lowest in three years, in January, with the 243,000 increase in payrolls including gains in manufacturing, construction, temporary help agencies, accounting firms, restaurants and retailers.

Some Fed officials say recent economic gains may not last. “The recent economic news has been encouraging, but in my view we haven’t seen enough sustained improvement to be sure it will last,” Atlanta Fed President Dennis Lockhart said Feb. 14. “The labor markets are going to be sluggish for quite a while,” St. Louis Fed President James Bullard said Feb. 3.

Atlanta-based Home Depot Inc. (HD), the largest U.S. home- improvement retailer, reported fourth-quarter profit that exceeded analysts’ estimates on Feb. 21.

‘Large Projects’

“Certainly we think that as the economy continues to improve, hopefully as unemployment improves, that people will continue to want to do small and large projects in their home,” Chief Executive Officer Frank Blake said on an analyst conference call.

“Prices of final goods and services were relatively stable in most districts,” the Fed said, and wage pressures were “limited.”

The Fed’s preferred inflation gauge -- the core personal- consumption expenditures price index, which strips out food and energy -- rose at an annual rate of 1.8 percent in the year ended December. Fed officials have set an explicit inflation target of 2 percent.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;

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

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Apple Dividend May Return Part of $98B in Cash

By Adam Satariano - Mar 1, 2012 4:44 AM GMT+0700

Apple's Market Cap Tops $500 Billion

Apple Inc. (AAPL), which today topped a $500 billion market capitalization, will probably start paying a dividend this year, attempting to appease investors who have said the electronics maker is hoarding too much cash.

The company is likely to declare a quarterly dividend of about $2 a share before the year is out, according to data compiled by Bloomberg. The projections are based in part on the dividends paid by other large technology providers, including Microsoft Corp. (MSFT) and International Business Machines Corp.

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An Apple Store is seen reflected in a window in San Francisco, on Jan. 24, 2012. Photographer:Justin Sullivan/Getty Images

Play Video

Feb. 24 (Bloomberg) -- Paul Kedrosky, author of the Infectious Greed Blog and a Bloomberg contributing editor, talks about how Apple Inc. may use its $97.6 billion in cash and investments. Kedrosky also discusses Proview International Holdings Ltd.'s U.S. lawsuit against Apple over the iPad trademark and the rise in video data sent over mobile networks. He speaks with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

Play Video

Feb. 24 (Bloomberg) -- Lawrence Haverty, portfolio manager at Gamco Investors Inc., talks about the outlook for Apple. Inc. Apple Chief Executive Officer Tim Cook told investors yesterday that the company is exploring how to use its $97.6 billion in cash in investments, responding to criticism that its balance sheet holds too big a hoard. Haverty, speaking with Betty Liu, Cris Valerio and Sheila Dharmarajan on Bloomberg Television's "In the Loop,” also talks about the outlook for J.C. Penney Co. (Source: Bloomberg)

An Apple dividend would be a boon to investors and would probably yield benefits for the company, which has $97.6 billion in cash and investments, and can afford the $7.46 billion a year that a $2 dividend would cost. A dividend could provide a boost to Apple by attracting a new class of investors that only hold stock in dividend-paying companies. Apple also may buy back shares, another move that could lift its stock price.

Chief Executive Officer Tim Cook said this month that officials are in “active discussions” about what to do with the company’s cash and investments, saying that the sum is “more than we need to run a company.”

Cook isn’t likely to get much argument from investors.

“Why not do the sensible thing and begin to share part of the capital that any rational person would say is beyond what the company needs to sustain itself with shareholders,” said Keith Goddard, CEO of Capital Advisors Inc., an Apple shareholder.

Other investors that have called on Apple to pay a dividend include Wedgewood Partners Inc. and Sustainable Growth Advisers LP.

Predicting a Dividend

Analysts at Morgan Stanley, JPMorgan Chase & Co., Mizuho Securities USA Inc. and Sterne Agee & Leach Inc. also predict that Apple will institute a dividend some time soon.

Apple generated $16 billion in cash in the first quarter of fiscal 2012. Shaw Wu, an analyst at Sterne Agee & Leach, predicts Apple will generate about $75 billion in new cash this year alone.

In determining its dividend estimate, Bloomberg takes into account the dividend size of other large technology companies, Apple’s projected earnings for next year and the amount of money on its balance sheet.

Steve Dowling, a spokesman for Apple, declined to comment beyond the remarks made earlier by Cook.

Apple rose 1.3 percent to $542.44 at the close in New York. The shares have climbed 34 percent this year.

Investors’ Potential Benefit

A $2-a-quarter dividend would mean hundreds of millions of dollars in new revenue for Apple’s top institutional investors.

Fidelity Management & Research Co., Apple’s biggest investor, stands to make about $97.2 million each quarter, based on its holding of 48.6 million shares at the end of 2011. Vanguard Group Inc., the No. 2 holder, would make $74.4 million, while State Street Corp., Apple’s third-largest investor, would make $69.5 million.

Instituting a dividend might also provide a long-term boost to Apple’s stock price by bringing in investors who are restricted to buying shares in dividend-paying companies, said Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., and Sterne Agee’s Wu. With interest rates so low, investors are putting more money into dividend-paying stocks that regularly return money to shareholders, Wu said.

One-Time Option

Apple may choose to make a one-time distribution, rather than making a quarterly payment, said Doron Nissim, a professor of accounting at Columbia Business School in New York. A single payout would leave investors less vulnerable to subsequent increases in taxes on dividends, while also removing the risk to Apple’s stock price if they someday were to end the dividend, he said.

Apple last paid a dividend in 1995, before co-founder Steve Jobs returned as CEO and led the introduction of top-selling products including the iPod, iPhone and iPad. The final dividend, of 12 cents a share, was suspended amid leadership upheaval and dwindling computer-market share. According to a company filing, Apple’s cash, equivalents and short-term investments dropped by about half, to $491 million, in the year through Sept. 29, 1995.

In the years since, Apple has ascended to become the world’s most valuable company, with a market value of $505.8 billion, more than Exxon Mobil Corp. (XOM) In January, the company reported record profit of $13.1 billion on sales of $46.3 billion.

“They can pay a very significant amount,” Columbia’s Nissim said.

Overseas Accounts

Still, the amount of cash that Apple can use for dividend payments is limited because the company keeps about 60 percent of its money in overseas accounts. Apple’s taxes were almost $4 billion lower in fiscal 2011 than if it had reported all income was earned in the U.S., Nissim said. And Apple could ultimately issue a dividend bigger or smaller than $2 a share, or decide not to declare a quarterly payout.

Jobs, who died in October, had long rebuffed calls to return money to investors. Since taking over as CEO, Cook has signaled a greater willingness to heed the concerns of shareholders, including criticism that the company is stockpiling too much cash.

“The board and management team are thinking about this very deeply,” Cook said last week at the company’s shareholder meeting, reiterating earlier comments.

Microsoft’s Approach

The closest analogy to Apple’s situation is Microsoft, which started to pay a regular dividend in 2003, said Columbia’s Nissim, whose research includes the effectiveness of dividends. Microsoft, the world’s largest software maker, also paid a one- time special dividend in 2004, using $32 billion of its $56.4 billion in available cash at the time.

Apple and Google Inc., owner of the world’s most popular search engine, are the only technology companies with a market value higher than $100 billion that don’t pay a dividend. In September, Microsoft boosted its quarterly dividend by 25 percent to 20 cents a share. Intel (INTC), the world’s largest chipmaker, raised its dividend in May to 21 cents, from 18 cents. IBM pays a dividend of 75 cents a share. Cisco Systems Inc.’s quarterly payout is 8 cents a share.

“The board and Tim Cook are feeling the pressure,” Mark Bronzo, who helps manage about $24 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “It’s very likely that we’ll see Apple pay a dividend, that we’ll see Apple return some cash to shareholders.”

To contact the reporters on this story: 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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Apple Dividend May Return Part of $98B in Cash

By Adam Satariano - Mar 1, 2012 4:44 AM GMT+0700

Apple's Market Cap Tops $500 Billion

Apple Inc. (AAPL), which today topped a $500 billion market capitalization, will probably start paying a dividend this year, attempting to appease investors who have said the electronics maker is hoarding too much cash.

The company is likely to declare a quarterly dividend of about $2 a share before the year is out, according to data compiled by Bloomberg. The projections are based in part on the dividends paid by other large technology providers, including Microsoft Corp. (MSFT) and International Business Machines Corp.

Enlarge image

An Apple Store is seen reflected in a window in San Francisco, on Jan. 24, 2012. Photographer:Justin Sullivan/Getty Images

Play Video

Feb. 24 (Bloomberg) -- Paul Kedrosky, author of the Infectious Greed Blog and a Bloomberg contributing editor, talks about how Apple Inc. may use its $97.6 billion in cash and investments. Kedrosky also discusses Proview International Holdings Ltd.'s U.S. lawsuit against Apple over the iPad trademark and the rise in video data sent over mobile networks. He speaks with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

Play Video

Feb. 24 (Bloomberg) -- Lawrence Haverty, portfolio manager at Gamco Investors Inc., talks about the outlook for Apple. Inc. Apple Chief Executive Officer Tim Cook told investors yesterday that the company is exploring how to use its $97.6 billion in cash in investments, responding to criticism that its balance sheet holds too big a hoard. Haverty, speaking with Betty Liu, Cris Valerio and Sheila Dharmarajan on Bloomberg Television's "In the Loop,” also talks about the outlook for J.C. Penney Co. (Source: Bloomberg)

An Apple dividend would be a boon to investors and would probably yield benefits for the company, which has $97.6 billion in cash and investments, and can afford the $7.46 billion a year that a $2 dividend would cost. A dividend could provide a boost to Apple by attracting a new class of investors that only hold stock in dividend-paying companies. Apple also may buy back shares, another move that could lift its stock price.

Chief Executive Officer Tim Cook said this month that officials are in “active discussions” about what to do with the company’s cash and investments, saying that the sum is “more than we need to run a company.”

Cook isn’t likely to get much argument from investors.

“Why not do the sensible thing and begin to share part of the capital that any rational person would say is beyond what the company needs to sustain itself with shareholders,” said Keith Goddard, CEO of Capital Advisors Inc., an Apple shareholder.

Other investors that have called on Apple to pay a dividend include Wedgewood Partners Inc. and Sustainable Growth Advisers LP.

Predicting a Dividend

Analysts at Morgan Stanley, JPMorgan Chase & Co., Mizuho Securities USA Inc. and Sterne Agee & Leach Inc. also predict that Apple will institute a dividend some time soon.

Apple generated $16 billion in cash in the first quarter of fiscal 2012. Shaw Wu, an analyst at Sterne Agee & Leach, predicts Apple will generate about $75 billion in new cash this year alone.

In determining its dividend estimate, Bloomberg takes into account the dividend size of other large technology companies, Apple’s projected earnings for next year and the amount of money on its balance sheet.

Steve Dowling, a spokesman for Apple, declined to comment beyond the remarks made earlier by Cook.

Apple rose 1.3 percent to $542.44 at the close in New York. The shares have climbed 34 percent this year.

Investors’ Potential Benefit

A $2-a-quarter dividend would mean hundreds of millions of dollars in new revenue for Apple’s top institutional investors.

Fidelity Management & Research Co., Apple’s biggest investor, stands to make about $97.2 million each quarter, based on its holding of 48.6 million shares at the end of 2011. Vanguard Group Inc., the No. 2 holder, would make $74.4 million, while State Street Corp., Apple’s third-largest investor, would make $69.5 million.

Instituting a dividend might also provide a long-term boost to Apple’s stock price by bringing in investors who are restricted to buying shares in dividend-paying companies, said Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., and Sterne Agee’s Wu. With interest rates so low, investors are putting more money into dividend-paying stocks that regularly return money to shareholders, Wu said.

One-Time Option

Apple may choose to make a one-time distribution, rather than making a quarterly payment, said Doron Nissim, a professor of accounting at Columbia Business School in New York. A single payout would leave investors less vulnerable to subsequent increases in taxes on dividends, while also removing the risk to Apple’s stock price if they someday were to end the dividend, he said.

Apple last paid a dividend in 1995, before co-founder Steve Jobs returned as CEO and led the introduction of top-selling products including the iPod, iPhone and iPad. The final dividend, of 12 cents a share, was suspended amid leadership upheaval and dwindling computer-market share. According to a company filing, Apple’s cash, equivalents and short-term investments dropped by about half, to $491 million, in the year through Sept. 29, 1995.

In the years since, Apple has ascended to become the world’s most valuable company, with a market value of $505.8 billion, more than Exxon Mobil Corp. (XOM) In January, the company reported record profit of $13.1 billion on sales of $46.3 billion.

“They can pay a very significant amount,” Columbia’s Nissim said.

Overseas Accounts

Still, the amount of cash that Apple can use for dividend payments is limited because the company keeps about 60 percent of its money in overseas accounts. Apple’s taxes were almost $4 billion lower in fiscal 2011 than if it had reported all income was earned in the U.S., Nissim said. And Apple could ultimately issue a dividend bigger or smaller than $2 a share, or decide not to declare a quarterly payout.

Jobs, who died in October, had long rebuffed calls to return money to investors. Since taking over as CEO, Cook has signaled a greater willingness to heed the concerns of shareholders, including criticism that the company is stockpiling too much cash.

“The board and management team are thinking about this very deeply,” Cook said last week at the company’s shareholder meeting, reiterating earlier comments.

Microsoft’s Approach

The closest analogy to Apple’s situation is Microsoft, which started to pay a regular dividend in 2003, said Columbia’s Nissim, whose research includes the effectiveness of dividends. Microsoft, the world’s largest software maker, also paid a one- time special dividend in 2004, using $32 billion of its $56.4 billion in available cash at the time.

Apple and Google Inc., owner of the world’s most popular search engine, are the only technology companies with a market value higher than $100 billion that don’t pay a dividend. In September, Microsoft boosted its quarterly dividend by 25 percent to 20 cents a share. Intel (INTC), the world’s largest chipmaker, raised its dividend in May to 21 cents, from 18 cents. IBM pays a dividend of 75 cents a share. Cisco Systems Inc.’s quarterly payout is 8 cents a share.

“The board and Tim Cook are feeling the pressure,” Mark Bronzo, who helps manage about $24 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “It’s very likely that we’ll see Apple pay a dividend, that we’ll see Apple return some cash to shareholders.”

To contact the reporters on this story: 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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