Pimco’s Gross Says Fed to Shift Operation Twist to Mortgages

By Margaret Brennan and Liz Capo McCormick - Mar 29, 2012 12:29 AM GMT+0700

Pacific Investment Management Co.’s Bill Gross said the Federal Reserve will probably shift focus to mortgage securities to keep borrowing rates low when its so- called Operation Twist program ends in June.

It will be a “twist on another twist going forward,” Gross, who runs the world’s biggest bond fund, said from Pimco’s headquarters in Newport Beach, California, during an interview on Bloomberg Television’s “InBusiness with Margaret Brennan.”

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Bill Gross, co-chief investment officer of Pacific Investment Management Co. Photographer: Scott Eells/Bloomberg

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March 28 (Bloomberg) -- Bill Gross, manager of the world's biggest mutual fund at Pacific Investment Management Co., talks about the ticker-symbol change on his month-old Pimco Total Return Exchange-Traded Fund to BOND, investment strategy in the debt market and Federal Reserve policy. Pimco Total Return ETF was listed on the NYSE Arca exchange on March 1 under the ticker TRXT. Gross speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

Fed Chairman Ben S. Bernanke said this week unemployment remains too high, the U.S. economic recovery isn’t assured and policy makers don’t rule out any further options to boost growth, including additional debt purchases. Investor expectations for more monetary stimulus declined after Fed policy makers raised their assessment of the economy March 13.

“The Fed is outcome oriented,” Gross said. “And what he said on Monday in terms of the employment picture basically suggested that, up until now we’ve done very well in terms of reducing unemployment but it will be a tougher row to hoe going forward.”

The central bank is pursuing a maturity-extension program announced in September to replace $400 billion of short-term debt in its portfolio with longer-term securities. The Fed purchased $2.3 trillion of debt in two rounds of quantitative easing that have become known as QE1 and QE2 as part of its efforts to support the world’s biggest economy.

Sterilized Twist

What the Fed will “try to do is twist in the mortgage market; basically buy current-coupon mortgages in agency space, 3 percent and 3.5 percent coupons,” Gross said. “And basically twist by repoing out the Treasuries they currently own in short-term space.”

A so-called sterilized version of debt purchases would involve the Fed buying longer-term debt while draining cash from the banking system through the repurchase agreement market, preventing a rise in bank reserves. This option may allow the central bank to take further action to bolster growth while containing investors and political leaders’ concern the actions might threaten future inflation.

Repos are transactions used for short-term funding, typically involving the sale of U.S. government securities in exchange for cash, with the debt held as collateral for the loan. In a reverse repo, the Fed lends securities for a set period, temporarily draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to its counterparties.

Buying Mortgages

Pimco’s $252 billion Total Return Fund reduced holdings of Treasuries last month for the first time since February 2011, when it cut its stake in the securities to zero.

Gross lowered the proportion of U.S. government securities in the fund to 37 percent of assets from 38 percent in January, according to a report on the company’s website. He raised mortgages to 52 percent from 50 percent.

The Total Return Fund has earned 2.9 percent for investors this year, beating about 97 percent of its competitors, according to data compiled by Bloomberg. The fund has gained 0.1 percent over one month, topping 80 percent of rivals, the data show.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.35 trillion of assets as of September.

The five-year notes that Russia plans to sell offer more value than U.S. Treasuries of the same maturity, Gross said.

Russian Debt

“At 230 basis points over the U.S. five-year, that’s an attractive situation,” Gross said. “It’s a BBB+ type of security in terms of sovereign space. Obviously it has a history of default -- 10 to 11 to 12 years back. But we think at these spreads, and with the situation currently, it’s an attractive situation compared to U.S. Treasures.”

The Russian government is issuing $2 billion of five-year bonds at 230 basis points over U.S. Treasuries, $2 billion of 10-year bonds at a spread of 240 basis points and $3 billion of 30-year bonds at 250 basis points, said a banker with knowledge of the deal who declined to be identified because the information isn’t yet public. The yield spread on a 2044 bond for similarly rated Mexico is 150 basis points and 131 basis points for Brazil’s note due in 2041.

The last time Russia issued 30-year notes was in August 2000, two years after its $40 billion domestic debt default. The sale will be the biggest among emerging markets since Qatar issued $7 billion of bonds in November 2009.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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Facebook Said to Halt Secondary-Market Trading This Week

By Douglas MacMillan and Brian Womack - Mar 29, 2012 3:22 AM GMT+0700

Facebook Inc. (FB) is halting the trading of its shares on secondary markets by the beginning of April as it prepares for an initial public offering, two people with knowledge of the matter said.

Representatives of Facebook instructed firms that help investors buy and sell stock in closely held companies to cease trading of its equity this week, said the people, who asked to not be identified because the conversations were private. Facebook aims to hold its IPO in early May, one person said.

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Facebook’s implied value dropped 5 percent to about $93 billion in a late-February auction of a fund that holds shares of the social-networking company's stock. Photographer: Frank May/DPA/Zuma Press

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March 28 (Bloomberg) -- Samer Hamadeh, chief executive officer of PrivCo, talks about Facebook Inc.'s plan to halt trading of its shares on secondary markets by the beginning of April, according to two people with knowledge of the matter. He speaks with Emily Chang and Cory Johnson on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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The Facebook Inc. thumbs-up "Like" icon is displayed on a sign at the company's campus in Menlo Park, California. Facebook is making preparations for an IPO. Photographer: David Paul Morris/Bloomberg

Facebook, which filed in February to raise $5 billion in the largest-ever Internet public-market debut, is actively traded on secondary markets, including SharesPost Inc. and SecondMarket Inc. The halt gives the company time to account for its shareholding base and would end price fluctuations as Facebook confers with bankers and investors to determine its IPO valuation, said Lise Buyer, principal at Class V Group.

“It wouldn’t surprise me if they wanted to let the market settle down before they head out on a roadshow” to meet with would-be investors, said Buyer, who helped advise Google Inc. on its 2004 IPO. Her firm is based in Portola Valley, California.

Jonathan Thaw, a spokesman for Menlo Park, California-based Facebook, declined to comment.

SharesPost moved the date of a Facebook-share auction to March 30, the online marketplace said in an e-mail to its users yesterday. Previously, the auction had been set for April 2.

Facebook’s Request

“At Facebook’s request, SharesPost will cease facilitating transactions in Facebook stock as of Friday end of day to help ensure the company’s orderly transition into the public markets,” the company said in note to clients today.

While the trading of startup shares lets early employees and investors make money from holdings, it has come under regulatory scrutiny because the transactions can lure investors who may not understand the company and the risks involved.

Earlier this month, the U.S. Securities and Exchange Commission settled with SharesPost to resolve claims that the online marketplace acted as an unregistered broker of shares, its first action in a broad probe of trades involving nonpublic startups.

Facebook’s implied value dropped 5 percent to about $93 billion in a late-February auction of a fund that holds shares of the social-networking company’s stock. The sale set a price of $40 apiece for 125,000 units of the fund, according to San Bruno, California-based SharesPost, which managed the auction. A Feb. 14 fund auction valued Facebook at about $98 billion.

To contact the reporters on this story: Douglas Macmillan in New York at dmacmillan3@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net

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

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MF Global Treasurer Declines to Answer Questions From Panel

By Phil Mattingly and Silla Brush - Mar 29, 2012 5:17 AM GMT+0700

Edith O’Brien, the MF Global Holdings Ltd. (MF) assistant treasurer who has become a key figure in the disappearance of as much as $1.6 billion in customer funds, declined to answer questions from U.S. lawmakers.

O’Brien, who appeared today under subpoena before a House Financial Services subcommittee, invoked her constitutional right against self-incrimination during a hearing on the New York firm’s Oct. 31 bankruptcy, the eighth largest in U.S. history.

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Edith O'Brien, assistant treasurer with MF Global Inc., at the start of a House Financial Services subcommittee hearing in Washington on March 28, 2012. Photographer: Andrew Harrer/Bloomberg

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March 28 (Bloomberg) -- Seth Berenzweig, managing partner at Berenzweig Leonard, and Richard Roth, founder and partner at The Roth Law Firm PLLC, talk about hearings before a U.S. House of Representatives subcommittee on MF Global Holdings Ltd.'s bankruptcy and use of customer funds. They speak with Trish Regan and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

After saying twice that she would not answer a question on the advice of counsel, O’Brien told lawmakers she would not answer any questions during today’s hearing.

“We’re extremely disappointed that you’ve chosen to do that,” Representative Randy Neugebauer, the chairman of the Financial Services oversight and investigations panel, said before he dismissed her.

Although O’Brien was not present for the question-and- answer period, her role in the transfers was a topic lawmakers - - and the other MF Global executives present --returned to multiple times.

O’Brien was pulled from back-office obscurity onto center stage last year when former MF Global chief executive Jon S. Corzine identified her several times as an employee with knowledge of transfers that may have included customer funds.

‘Direct Instructions’

Attention on O’Brien heightened after the March 23 release of a memo drafted by congressional staff. The memo cites an e- mail from O’Brien noting that a transfer made in the days before the firm’s bankruptcy was done “Per JC’s [Jon Corzine’s] direct instructions.”

Christine Serwinski, chief financial officer of the firm’s North American broker-dealer, said O’Brien and another employee had the authority to transfer funds from a customer segregated account. She also said that Corzine’s personal involvement in the transfer would have been “unusual.”

Vinay Mahajan, the firm’s global treasurer who was not in attendance, was identified by Serwinski as a second executive who had the authority to sign off on transfers. Mahajan also was identified in the House memo as informing colleagues in an Oct. 28 e-mail that an overdrawn account in London had to be “fully funded ASAP.”

“Mr. Mahajan worked for only 10 weeks at MF Global and we’re confident that he at all times acted appropriately,” Gregory John O’Connell, Mahajan’s attorney, said today in an statement.

Two-Stage Transfer

Another MF Global executive, General Counsel Laurie Ferber, testified that she sought O’Brien’s assurance of the propriety of the two-stage transfer -- a $200 million transfer from a segregated account at the firm’s brokerage to a “house” account, followed by the move of $175 million from the house account to a London subsidiary’s account at JPMorgan Chase & Co. (JPM)

JPMorgan, by mid-afternoon of Oct. 28, contacted Corzine to request confirmation in writing that the transferred money was made up only of the firm’s funds, Diane Genova, a deputy general counsel for the bank, said in her prepared remarks.

“Mr. Corzine said he understood the request and would have someone in his organization review it,” Genova said. The bank then “e-mailed a proposed draft letter to Mr. Corzine.”

Corzine, 64, told lawmakers last year the firm’s back- office staff had “explicitly” informed him that the $175 million transfer made before the bankruptcy filing was legal.

‘Never Intended’

“I never gave any instruction to misuse customer funds, I never intended anyone at MF Global to misuse customer funds and I don’t believe that anything I said could reasonably have been interpreted as an instruction to misuse customer funds,” Corzine told lawmakers in December.

Ferber said she spoke with O’Brien about the transfers and was was provided with copies of the transaction accounts.

“My very clear understanding was that if the compliance certificate was limited to those two transactions she would sign it,” Ferber said of O’Brien.

The letter was never returned to JPMorgan, according to Genova. Serwinski, asked if she would have approved the transfer if she knew all of the information about the funds involved, said she would not have made the transaction.

Justice Department Investigates

Serwinski, Ferber and Henri Steenkamp, the firm’s chief financial officer, told lawmakers they were all in contact with the Department of Justice, which is investigating the bankruptcy. Serwinski said she had met with the the department twice, Steenkamp said he was in contact with federal authorities through his lawyers and Ferber said she is meeting with authorities next month.

Lawmakers from both parties expressed frustration with the way the three executives responded to their questions, reminding them that MF Global’s clients included farmers and ranchers around the country who have lost money. Representative Steve Pearce, a New Mexico Republican, compared them to legendary thieves “Bonnie and Clyde.”

“Looks like there’s been a great effort to maintain plausible deniability,” said Representative Nan Hayworth, a New York Republican.

Representative Michael Capuano of Massachusetts, the top Democrat on the panel, told the executives that criticism from lawmakers is the least of their problems.

“Here’s your concern: The people sitting next to you,” Capuano said. “Because somebody is going to say something to the appropriate investigators to say this is the person who had final responsibility. And when that happens, there’s going to be problems for those individuals.”

To contact the reporters on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net; Silla Brush in Washington at sbrush@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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U.S. Stocks Fall on Economic Data as Energy Shares Slump

By Rita Nazareth - Mar 29, 2012 3:44 AM GMT+0700

U.S. stocks fell, sending the Standard & Poor’s 500 Index down for a second day, as a slump in crude oil drove energy producers lower and government data showed that orders for durable goods rose less than forecast.

Exxon Mobil Corp. and Occidental Petroleum Corp. (OXY) paced losses in 42 out of 43 energy companies in the S&P 500 as oil slumped following an increase in supplies. The Morgan Stanley Cyclical Index of companies most-tied to the economy lost 1.6 percent as Federal Reserve Chairman Ben S. Bernanke said the recovery isn’t assured. Caterpillar Inc. (CAT) and Alcoa Inc. (AA) slid more than 2.2 percent. Financial shares had the only gain among 10 S&P 500 groups as Bank of America Corp. rallied 1.6 percent.

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March 28 (Bloomberg) -- Tom McClellan, co-founder and editor of the McClellan Market Report, talks about the U.S. stock market. He speaks with Trish Regan and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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(Corrects reporter's name.) March 28 (Bloomberg) -- Troy Gayeski, senior portfolio manager at SkyBridge Capital LLC, discusses the outlook for U.S. equities and bonds. He speaks with Scarlet Fu, Stephanie Ruhle and Adam Johnson on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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March 28 (Bloomberg) -- Russ Koesterich, global chief investment strategist for the IShares unit of BlackRock Inc., talks about global stocks and investment strategy. Koesterich speaks with Betty Liu, Julie Hyman and Josh Lipton on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)

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March 28 (Bloomberg) -- Bloomberg's Scarlet Fu reports on U.S futures, overseas markets and the headlines that will impact today's trading. She speaks on Bloomberg Television's "Inside Track." (Source: Bloomberg)

The S&P 500 slid 0.5 percent to 1,405.54 at 4 p.m. New York time. While the benchmark gauge has lost 0.8 percent in two days, it rebounded from its intraday low of 1,397.20 in the final two hours of trading. The Dow Jones Industrial Average declined 71.52 points, or 0.5 percent, to 13,126.21 today.

“Investor jitters have been heightened by another economic report coming in a bit light and by the Fed chairman suggesting the economy may be vulnerable to another period of turbulence,” said James Paulsen, who helps oversee about $333 billion as chief investment strategist at Minneapolis-based Wells Capital Management. “The selloff is also being fueled by a collapse in energy stocks. After such a significant advance in the market, investors are already worried about a correction.”

Today’s loss pared this month’s rally in the S&P 500 to 2.9 percent. The index is still poised for the best first quarter since 1998, up 12 percent. Financial and technology shares have risen the most among 10 groups, surging more than 21 percent so far in 2012.

Economic Data

Stocks fell today after a Commerce Department report showed that bookings for goods meant to last at least three years advanced 2.2 percent, less than projected after a revised 3.6 percent decline the prior month. Bernanke said unemployment remains too high, the economic recovery isn’t guaranteed and policy makers don’t rule out any further options to boost growth.

“It’s far too early to declare victory,” Bernanke said, according to a transcript of last night’s interview with ABC News anchor Diane Sawyer provided by the network. “The recent news has been good. But I think we need to be cautious and make sure this is sustainable. And we haven’t quite yet got to the point where we can be completely confident that we’re on a track to full recovery.”

Energy and raw-material producers had the biggest losses in the S&P 500 among 10 groups, falling at least 1.2 percent. Crude oil for May delivery tumbled 1.8 percent to $105.41 a barrel on the New York Mercantile Exchange. Exxon (XOM) slipped 0.9 percent to $85.86. Occidental Petroleum dropped 3.6 percent to $94.85.

Coal Shares

Coal producers slipped. U.S. electricity generators are on track to burn 22 percent less coal this year than in 2011, said Lucas Pipes, an analyst at Brean Murray Carret & Co. in New York, citing data published in Coal & Energy Price Report, an industry newsletter. Alpha Natural Resources Inc. (ANR) fell 4.2 percent to $14.87. Peabody Energy Corp. (BTU) declined 3.4 percent to $28.83.

Concern about the economy weighed on companies whose earnings are most-dependent on growth. Alcoa retreated 2.3 percent to $9.83. Caterpillar lost 3.5 percent to $104.26.

Walt Disney Co. (DIS) dropped 1.5 percent to $43.51. Rupert Murdoch’s News Corp. is taking steps to start a national U.S. sports network on cable television aimed at challenging Disney’s ESPN, according to people with knowledge of the situation.

Defective Packs

A123 Systems Inc. (AONE) plunged 13 percent to $1.22, the lowest price since it went public in 2009. The battery maker may be unable to raise capital and could lose contracts as a result of its recall of defective packs sent to customers, a Deutsche Bank AG analyst said.

Arena Pharmaceuticals Inc. (ARNA) fell 10 percent to $2.92 in its biggest drop since August. The biotechnology company was cut to neutral from overweight at Piper Jaffray Cos., which cited the share price. The stock had gained 85 percent from March 16 through yesterday.

The KBW Bank Index rallied 1.1 percent as 22 of its 24 stocks gained. Bank of America increased 1.6 percent to $9.75 after the lender slumped 3.3 percent yesterday..

Medco Health Solutions Inc. (MHS) added 3.2 percent to $71.20 after saying it expects its $29.1 billion takeover by Express Scripts Inc. (ESRX) to close as soon as next week. Express Scripts will probably get a Federal Trade Commission ruling on the deal as early as March 30, said two people familiar with the case who declined to be identified because the review is private. Express Scripts increased 1.3 percent to $53.89.

Takeover Offer

Amylin Pharmaceuticals Inc. (AMLN) surged 54 percent, the most in the Russell 1000 Index (RIY), to $23.77. The maker of the diabetes drug Bydureon rejected a $3.5 billion unsolicited takeover bid from Bristol-Myers Squibb Co. earlier this year, two people with knowledge of the matter said.

Pentair Inc. (PNR) rallied 15 percent to $46.32. The maker of Everpure water filters agreed to combine with the Tyco (TYC) International Ltd. division that makes valves and other flow- control instruments in a deal that values Tyco Flow at $4.53 billion. Tyco increased 4.3 percent to $55.81.

U.S. companies are better positioned for “cashing out” shareholders than at any other time in more than half a century, according to Myles Zyblock, chief institutional strategist at RBC Capital Markets.

Corporate cash increased by more than $200 billion in each of the past three years, including a $340.9 billion surge last year. Companies are poised to sustain the growth rate in their “cash mountain,” Zyblock wrote two days ago in a report.

Low Rates

Many companies are raising more money through bond sales because interest rates are low, the Toronto-based strategist wrote. The yield on a Moody’s Investors Service index of Baa rated corporate debt has averaged 5.2 percent this quarter, about 0.9 percentage point less than a year earlier.

Increased cash and relatively cheap debt financing will lead to growth in dividends as well as stock repurchases, the report said.

Health-care and technology companies have the most room to lift payouts and buy back more shares, Zyblock wrote. The groups have the highest percentage of cash to assets for non-financial companies, based on figures for the S&P 500 that he cited. Energy producers are another possibility, he added, because they have relatively little debt.

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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Unemployment May Drop to 6% by Mid-2013, N.Y. Fed Study Finds

By Carlos Torres - Mar 28, 2012 10:14 PM GMT+0700

The jobless rate in the U.S. could drop to as low as 6 percent by the first half of 2013, a bigger decrease than most economists currently project, according to research from the Federal Reserve Bank of New York.

The relationship between the number of Americans newly unemployed and those recently finding work indicates joblessness will continue to decline, according to economist Aysegul Sahin. The jobless rate held at a three-year low of 8.3 percent last month after falling by 0.8 percentage point in the year ended January, according to figures from the Labor Department.

“Simulations based on historical patterns suggest that the fall in the unemployment rate could be quicker than many forecasters predict,” Sahin wrote in a note on the bank’s Liberty Street Economics blog co-written by research associate Christina Patterson.

The analysis looked at flows into and out of unemployment since the end of World War II, likening it to water in a bathtub. The unemployment rate, or level of water in the tub, would be determined by the difference in the volume of water pouring in and draining out.

The number of those exiting unemployment, which include people finding a new job as well as those leaving the labor force, takes precedence in determining changes in joblessness at this stage of a recovery, the economists found.

The flow into and out of unemployment over the three prior recoveries indicates the jobless rate will decrease to 6 percent by at least the end of 2014, the economists said. Should the pattern be similar to that following the rebound from the 1990- 91 recession, the rate could get close to there by early next year.

Median Forecast

Unemployment will average 7.6 percent in the last three months of 2013, according to the median forecast of economists surveyed by Blue Chip Economic indicators this month. The average for the 10 lowest estimates was 7 percent.

Fed policy makers predict an unemployment rate of 7.4 percent to 8.1 percent in the fourth quarter of 2013, based on their so-called central tendency forecasts, which exclude the three highest and three lowest of 17 projections.

The study doesn’t make a projection for the unemployment rate in the fourth quarter of this year. The Obama administration’s handling of the economy is a central issue in the Nov. 6 presidential election.

The post on the Fed’s blog said researchers will discuss the importance of flows into and out of the labor force in determining the level of unemployment in a report on March 30.

To contact the reporter on this story: Carlos Torres in Washington at Ctorrres2@bloomberg.net

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

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