Economic Calendar

Tuesday, April 10, 2012

S&P 500 Poised for Longest Losing Streak Since November

By Rita Nazareth - Apr 10, 2012 10:07 PM GMT+0700

U.S. stocks declined for a fifth straight day, giving the Standard & Poor’s 500 Index its longest losing streak since November, as concern about Europe’s sovereign debt crisis grew amid a surge in Spanish bond yields.

Alcoa Inc. (AA) slid 1.7 percent as it becomes the first company in the Dow Jones Industrial Average to report first-quarter results. PPL Corp. (PPL) fell 1.7 percent as the energy and utility holding company will sell shares. Best Buy Co. (BBY) reversed a gain of as much as 4.8 percent as the electronics retailer said Chief Executive Officer Brian Dunn would resign. Dell Inc. (DELL) rose 1 percent as it’s teaming up with Lockheed Martin Corp. to pursue the U.S. government’s biggest information technology contract.

The S&P 500 retreated 0.5 percent to 1,375.49 at 11:06 a.m. New York time. The benchmark measure for American equities has fallen 3.1 percent in five days. The Dow average decreased 68.57 points, or 0.5 percent, to 12,861.02 today.

“I don’t think there’s any rush to be involved in the stock market,” James Swanson, who oversees about $250 billion as chief investment strategist at Boston-based MFS Investment Management, said in a telephone interview. “Europe is a temporary concern. The market is signaling they haven’t fixed the whole problem. In the U.S., this will be a soft quarter in earnings. Investors will need more reassurance.”

Global stocks fell as the yield on Spain’s 10-year benchmark bond surged after Economy Minister Luis de Guindos declined to rule out a rescue for Spain and Bank of Spain Governor Miguel Angel Fernandez Ordonez said the nation’s lenders may need additional capital if the economy weakens more than expected.

Earnings Season

The S&P 500 has risen 9.4 percent so far this year amid better-than-estimated economic and corporate earnings reports. While S&P 500 per-share profit growth slowed to 0.8 percent during the first three months of the year from 4.9 percent in the fourth quarter and 15 percent in the three months ended in September, it will accelerate to 8.3 percent during all of 2012, according to analyst estimates compiled by Bloomberg.

Alcoa, the largest U.S. aluminum producer, lost 1.7 percent to $9.44. It is scheduled to release its first-quarter results after the market close.

U.S. corporate profit growth stalled in the U.S. last quarter as companies from McDonald’s Corp. (MCD) to 3M Co. (MMM) saw gains in the world’s largest economy eroded by a slump in Europe. The European debt crisis and a slowdown in China are hurting S&P 500 companies, which derive about 40 percent of profits from abroad.

Best Since 1998

At home, where the S&P 500 Index (SPX) had its biggest first- quarter rally since 1998, consumer confidence is improving along with the job market -- boosting demand for construction companies and retailers. The U.S. economy will accelerate 2.2 percent this year, up from 1.7 percent in 2011, according to the average of 72 estimates compiled by Bloomberg.

“While the U.S. economy is the cleanest shirt in the hamper at the moment, we’re only talking about an economy that’s motoring along at a subpar pace,” said Mark Luschini, chief investment strategist for Philadelphia-based Janney Montgomery Scott LLC, which manages about $54 billion. “The only way you’re going to see higher profitability is through faster growth.”

PPL declined 1.7 percent to $27.20.

Best Buy lost 2.6 percent to $22.07. The company said board member G. Mike Mikan would take over the CEO position on an interim basis. The change was a “mutual agreement” that new leadership was needed, the Richfield, Minnesota-based company said today in a statement. A committee of directors has been created to search for a new CEO, the company said.

Dell Rallies

Dell gained 1 percent to $16.39. The company would provide computers and support services as part of the five-year, $7.5 billion Navy agreement, said George Newstrom, general manager of Dell Services’ federal government business.

Supervalu Inc. (SVU) surged 9.2 percent to $5.81. The supermarket and pharmacy chain forecast 2013 earnings excluding some items of at least $1.27 a share, beating the average analyst forecast of $1.19.

American International Group Inc. (AIG) rose 1.5 percent to $32.48. The insurer was raised to the equivalent of buy at Wells Fargo & Co., which cited a “likelihood that the company will be independent from the U.S. government over the course of the next year.”

“A significant disconnect” between stock valuations and bond yields in the U.S. has made equities relatively cheap, according to Binky Chadha, Deutsche Bank AG’s chief global strategist.

P/E Ratio

Ten-year Treasury yields would have to rise about 120 basis points to track the estimated price-earnings ratio for the S&P 500 as they did during the first three quarters of 2011, Chadha wrote in an April 5 report. Each basis point amounts to 0.01 percentage point. The government security yielded 2.04 percent as of yesterday.

The differential primarily reflects the Federal Reserve’s plan to keep its benchmark interest rate close to zero at least through late 2014, in his view.

“The Fed’s outlook for unemployment and inflation is therefore key” in determining when the gap might close, Chadha wrote. Policy makers for the central bank are scheduled to meet on April 24-25.

Stocks are a bargain with the S&P 500 at about 13 times analysts’ projected earnings for this year, the New York-based strategist wrote. He cited a December report in which he called the index fairly valued at 15.4 times future profit.

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

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


Gartman Sees Risk of Equity Retreat, Owns Shippers

By Joseph Ciolli and Tom Keene - Apr 10, 2012 3:30 AM GMT+0700

Dennis Gartman, an economist and newsletter editor, said he abandoned his bullish view of stocks in March because of the possibility the market will retreat.

“The only things that I own at this point are a few shipping companies and a little natural gas, and I have those completely hedged with S&P futures,” Gartman, the editor of the Suffolk, Virginia-based Gartman Letter, said today in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

Audio Download: Gartman Says He Is 'Net Neutral' on Stocks

The Standard & Poor’s 500 Index (SPX) declined 0.7 percent last week, failing to build on the biggest first-quarter gain since 1998. The measure slumped 1.1 percent to 1,382.20 today after the U.S. government’s monthly tally of job creation in March missed economists’ projections. Gartman joins strategists at the biggest Wall Street firms in predicting that the rally will stall.

“I had been quite bullish until about three weeks ago, and then I went to the sidelines,” he said. “I’m market net neutral, fearful” that the market may fall 5 percent to 8 percent, he said.

Strategists see the index ending 2012 at 1,362, according to the average of 11 forecasts in a Bloomberg News survey.

Gartman said companies should distribute excess funds to shareholders rather than continuing the current pace of stock buybacks. Dividends would be better than repurchasing shares, as buybacks have historically been poor investments for companies, he said.

‘Making Acquisitions Elsewhere’

“They can’t figure out what to do better with their own business, so they end up buying back shares of their own company or making acquisitions elsewhere,” Gartman said. “It’s a way, they suspect, of increasing earnings per share over time. History doesn’t bear that out. I wish they wouldn’t do it.”

Stock buybacks among S&P 500 companies dropped 23 percent to $91.5 billion in the fourth quarter of 2011, falling for the first time since the second quarter of 2009, preliminary data from S&P showed on March 28. Amgen Inc. (AMGN), Hewlett-Packard Co. (HPQ) and 1,971 other U.S. companies repurchased $397 billion of stock last year, while they issued $169 billion of new equity, data compiled by Birinyi Associates Inc. and Bloomberg show. The pace of equity buybacks was the fastest in four years.

Companies are returning record amounts to shareholders. In March, Apple Inc. (AAPL) announced its first dividend since 1995 and JPMorgan Chase & Co. increased its payout after the Federal Reserve reviewed its financial strength. Both the S&P 500 and its total-return version reached 12-year lows on March 9, 2009. They have since risen 107 percent and 120 percent through April 5, respectively.

To contact the reporters on this story: Joseph Ciolli in New York at; Tom Keene in New York at

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


U.S. Employment Growth Seen Rebounding From Slump

By Joseph Ciolli and Tom Keene - Apr 10, 2012 3:30 AM GMT+0700

The March setback in hiring will prove temporary as the U.S. economy, in its third year of expansion, now is better equipped to overcome a slowdown in Europe and rising fuel costs, economists said.

Growing sales and profits may give business leaders the confidence to take on staff at a faster clip than last month’s 120,000 gain in payrolls, according to analysts at JPMorgan Chase & Co. and Deutsche Bank Securities Inc. They say the data don’t signal a repeat of 2010 and 2011 -- when hiring was derailed after promising starts by concern about government debt, energy costs and natural disasters -- even though the total was weaker than all the estimates from 80 economists surveyed by Bloomberg News.

Job seekers wait for the opening of the Job USA fair in Robstown, Texas, U.S. Photographer: Eddie Seal/Bloomberg

April 9 (Bloomberg) -- Mohamed El-Erian, chief executive officer and co-chief investment officer of Pacific Investment Management Co., talks about the U.S. economy, stock market and investment strategy. El-Erian, speaking with Betty Liu, Dominic Chu and Sara Eisen on Bloomberg Television's "In the Loop," also discusses China's economic outlook. Todd Horwitz, chief strategist at Adam Mesh Trading Group, also speaks. (Source: Bloomberg)

April 9 (Bloomberg) -- Mark Zandi, chief economist at Moody's Analytics Inc., talks about the outlook for the U.S. labor market and economy. He speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Attachment: Top Forecasters of the U.S. Economy March 2012

That sentiment isn’t universal, with economists at Bank of America Corp. among those projecting employment will slump in the second half of the year as the government prepares to put the brakes on spending to tame the budget deficit. Joseph LaVorgna and Carl Riccadonna at Deutsche Bank counter that income gains will unleash increases in household spending and hiring that will boost job creation by an average of at least 200,000 a month for all of 2012.

“While the economy is going to do OK, we think jobs are going to be doing better than OK,” Bruce Kasman, chief economist at JPMorgan in New York, said in an April 6 conference call following the Labor Department’s employment report. “We don’t think today’s number represents the trend,” he said, affirming a forecast that payrolls will rise by 200,000 workers on average for the rest of the year.

Squeeze More From Workers

The main reason Kasman, a former researcher at the Federal Reserve Bank of New York, remains optimistic is that gains in revenue will outstrip what may be “modest” increases in wages, meaning companies have incentive to boost employment as sales improve. Additionally, a slowdown in productivity following a surge during the recession means companies may not be able to squeeze more output from current workers, he said.

“It’s much more attractive to hire people right now, to invest in human capital,” said Kasman.

SCVNGR Inc. is among small businesses looking to make such an investment. The developer of applications for smart phones plans to add 17 to 30 employees this year to the 120 already on staff, after hiring 30 at the end of January.

“Our sales have been really great,” Nick Herbold, the company’s head of recruiting, said in a telephone interview last week. The Boston-based company was founded in 2008 and is backed by investors including Google Ventures.

Increasing Confidence

“Confidence is increasing” among many clients and customers of Adecco Group North America, according to Janette Marx, a senior vice president at the Melville, New York-based division of Adecco SA (ADEN) in Glattbrugg, Switzerland, the world’s largest provider of temporary employees.

“We’re seeing a lot of people convert from temp positions to full-time positions across a lot of industries,” she said in a telephone interview. “The acceleration really stepped up in the second half of the first quarter.”

The jobless rate unexpectedly dropped to 8.2 percent in March, a three-year low, last week’s Labor Department report showed, as people left the labor force. The participation rate, the share of working-age men and women with jobs or seeking employment, fell to 63.8 percent from 63.9 percent in February.

Bernanke’s Caution

The smaller-than-forecast payroll figures reinforce Federal Reserve Chairman Ben S. Bernanke’s repeated cautions that gains might slow as companies adjust their staffs for a period of moderate growth. The central bank has pledged to keep its benchmark interest rate near zero until late 2014 to stimulate expansion.

The report also broke a pattern that was giving U.S. voters a growing sense of security and boosting President Barack Obama as Republican Mitt Romney attacks his economic record.

“Millions of Americans are paying a high price” for Obama’s policies, and “more and more people are growing so discouraged that they are dropping out of the labor force altogether,” the former Massachusetts governor said in a April 6 statement released by his campaign that criticized the president for creating a “stagnant” employment market.

Obama said “we welcome” the added jobs and decline in the unemployment rate, during an April 6 forum on women and the economy at the White House. “But, it’s clear to every American that there will still be ups and downs along the way and that we’ve got a lot more work to do.”

Falling Shares

Stocks fell, sending the Standard & Poor’s 500 Index lower following the biggest weekly retreat of the year, reflecting the weaker-than-expected jobs report. The S&P 500 fell 1.1 percent to 1,382.2 at the close in New York. Asian stocks declined for a fourth day, the longest losing streak for the MSCI Asia Pacific Index since November, also on the U.S. jobs numbers and after a pickup in inflation in China damped speculation the government will ease monetary policy.

Economists at Bank of America are among those concerned that government-mandated spending cuts and tax increases will cause the economy to slump later this year. Ethan Harris, co- head of global economic research for the bank estimates the U.S. faces a “Greek-sized” fiscal tightening in December amounting to about $580 billion, or 3.9 percent of gross domestic product, he wrote in a Jan. 26 note.

Businesses and households will grow increasingly uncertain about the outlook, pondering questions like how long it will take for a lame-duck session of Congress to act, he said.

Slower Growth

“As we get toward the end of the year and growth slows, you will probably see job growth slow and consumer spending soften,” Neil Dutta, a Bank of America economist in New York, said in an April 6 interview after the employment data were released. Beginning in the third quarter, employment gains probably will average closer to 100,000 a month from about 175,000 in the first six months of 2012, he said.

Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, is less pessimistic.

“The report was mildly disappointing, but I wouldn’t be that concerned,” said Hoffman, the most-accurate nonfarm- payroll forecaster for the two years through March, according to data compiled by Bloomberg. “You have to average these things out,” he added, noting that nonfarm payrolls averaged about 211,000 each month in the first quarter.

“It’s not a straight line; it ebbs and it flows,” agreed Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “The job market and the economy are steadily improving.”

Rising Earnings

Hourly earnings climbed 0.2 percent on average in March after a revised 0.3 percent gain the prior month that was larger than previously estimated, according to government figures. Aggregate incomes, which take into account hours worked and changes in payrolls, probably grew by about 5.6 percent in the first three months of the year, based on calculations by Deutsche Bank senior economist Riccadonna.

“Income growth is positive; that will support consumer spending” and will be “the linchpin of an improving, positive economic-feedback loop,” as rising sales prompt companies to hire, leading to gains in wages that will spur demand further, Riccadonna said in an April 6 interview after the jobs report.

In 2010, the emergence of sovereign-debt concerns in Europe weighed on the U.S. economic outlook. Those same fears resurfaced in 2011, in addition to rising gasoline prices, an earthquake and tsunami in Japan and a budget impasse in Washington. All contributed to a slowdown in hiring in mid-year as employers were reluctant to bring on new workers.

Private Payrolls Climb

After rising at an average 261,000 pace from February through April of 2011, private payrolls, which exclude government agencies, climbed by an average of 109,000 in the next four months, according to data from the Labor Department.

This year, the economy is rebounding, with growth at 2.2 percent according to the median estimate of 70 economists surveyed by Bloomberg from March 9 to March 13, compared with 1.7 percent last year. The improvement means Fed policy makers can sit back and wait for the monetary stimulus already in train to work, without having to do another round of asset purchases, known as quantitative easing, Kasman said.

“The Fed will be very patient here,” he said. With 12.7 million Americans still unemployed, the competition for available jobs will probably rein in wage gains, which “allows the Fed to believe there is a lot of slack that can be eaten up in this recovery,” and policy makers can “let the economy run” by keeping interest rates low.

“I’m not setting off the alarm bells yet,” Zandi said. “I had expected to be disappointed at some point this spring. I just thought it would be in April, not in March. It’s mostly weather-related. It’s not a fundamental change.”

To contact the reporters on this story: Timothy Homan in Washington at; Carlos Torres in Washington at

To contact the editor responsible for this story: Chris Wellisz at


Stocks Drop as Gold Rises After Disappointing Jobs Report

By Claudia Carpenter and Whitney Kisling - Apr 10, 2012 3:09 AM GMT+0700

U.S. stocks fell, extending losses from the Standard & Poor’s 500 Index’s worst week of 2012, while yields on 10-year Treasuries slipped and gold rose as job creation in the world’s biggest economy trailed estimates.

The S&P 500 lost 1.1 percent to 1,382.20 at 4 p.m. New York time. Treasury 10-year yields slipped as much as four basis points to a one-month low of 2.02 percent. Gold futures added 0.8 percent to $1,643.90 an ounce. The euro reversed losses, climbing 0.1 percent to $1.3113. Copper futures slumped to the lowest level since Feb. 17.

Traders work on the floor of the New York Stock Exchange. Photographer: Jin Lee/Bloomberg

April 9 (Bloomberg) -- Bloomberg's Pimm Fox and Deborah Kostroun report on the performance of the U.S. equity market today. U.S. stocks fell, dragging the Standard & Poor’s 500 Index lower following its worst week of 2012, after employers added fewer jobs than forecast in March. (Source: Bloomberg)

April 9 (Bloomberg) -- Mohamed El-Erian, chief executive officer and co-chief investment officer of Pacific Investment Management Co., talks about the U.S. economy, stock market and investment strategy. El-Erian, speaking with Betty Liu, Dominic Chu and Sara Eisen on Bloomberg Television's "In the Loop," also discusses China's economic outlook. Todd Horwitz, chief strategist at Adam Mesh Trading Group, also speaks. (Source: Bloomberg)

April 9 (Bloomberg) -- Stanley Crouch, chief investment officer of Aegis Capital Corp., talks about the outlook for the equity market and investment strategy. Crouch, speaking with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "InsideTrack," also discusses JPMorgan Chase & Co. trader Bruno Iksil's bets in credit derivatives. (Source: Bloomberg)

April 9 (Bloomberg) -- Bloomberg’s Trish Regan, Adam Johnson and Alix Steel report on today’s ten most important stocks including Rosetta Stone, Apple and JPMorgan Chase. (Source: Bloomberg)

April 9 (Bloomberg) -- Mark Zandi, chief economist at Moody's Analytics Inc., talks about the outlook for the U.S. labor market and economy. He speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

April 9 (Bloomberg) -- Jeremy Friesen, a commodity strategist at Societe Generale SA in Hong Kong, talks about oil prices and demand. He also discusses gold, copper, and agricultural commodities. He speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Audio Download: Juckes Says Jobs Report Is Reminder of 'New Normal'

Alcoa Inc. employee Clarence Benjamin pushes a crucible of molten aluminum into place for transport at the company's Mt. Holly production plant in Goose Creek, South Carolina on Jan. 19, 2012. The aluminum producer is scheduled to disclose first-quarter results on April 10, 2012, the first Dow Jones Industrial Average company to report. Photographer: Stephen Morton/Bloomberg

A gold bar is weighed at Bullion Trading LLC in New York. Photographer: Victor J. Blue/ Bloomberg

U.S. employers added 85,000 fewer jobs in March than economists projected, the biggest shortfall since the report released on July 8, according to data compiled by Bloomberg. The Labor Department’s April 6 statement spurred concern about the pace of American growth after improving economic data helped fuel a 12 percent first-quarter rally in the S&P 500 (SPX), the best annual start since 1998. The index lost 0.7 percent last week.

“The economy does continue to grow, but slowly,” John Carey, who helps oversee about $220 billion at Pioneer Investments in Boston, said in a telephone interview. “That’s been the source of frustration for a lot of investors, that we haven’t had the big forward movement in the economy like we have in the past.”

All western European stock markets were shut for holidays, along with Australia, New Zealand, Hong Kong, Thailand and South Africa. U.S. markets were closed on April 6, when the monthly report from the Labor Department was released. The MSCI Asia Pacific Index (MXAP) of shares in the region fell 0.6 percent today.

Overcoming Jobs

The U.S. jobs report presents a challenge that stocks have overcome nine times during the bull market that drove the S&P 500 up more than 100 percent in three years. While the S&P 500 averaged losses of 0.8 percent in the day after the data missed projections by at least 85,000 since March 2009, the benchmark gauge cut its decline in half a week later and was up 0.9 percent after two weeks, the data show.

Alcoa Inc. (AA) slipped 0.3 percent. The aluminum producer is scheduled to disclose first-quarter results tomorrow, the first Dow Jones Industrial Average company to report. AOL Inc. (AOL) surged 43 percent, the most since it was spun off from Time Warner Inc. in 2009, after agreeing to sell and license patents to Microsoft Corp. in a deal valued at $1.06 billion.

The Shanghai Composite Index (SHCOMP) slid 0.9 percent. China’s consumer prices rose 3.6 percent in March from a year earlier, the government said. That compared with the 3.4 percent median estimate in a Bloomberg survey of economists and a 3.2 percent gain the previous month. The one-year swap rate rose five basis points to 3.195 percent.

‘High and Disappointing’

“The CPI number is very high and disappointing,” said Ju Wang, a rates strategist at Barclays Plc in Singapore. “It’s bad for sentiment as it may delay a reserve requirement cut.” Barclays has predicted a reduction this month.

Treasuries rose, driving yields lower, as investors sought the safety of U.S. debt amid concern about the economy. Investors prepared to bid at three sales of coupon-bearing debt totaling $66 billion starting tomorrow.

The Swiss franc breached the 1.20 limit versus the euro early in Asian trading today, the second time the barrier has been crossed since Switzerland’s central bank introduced the currency cap on Sept. 6.

While gold futures advanced, the S&P GSCI Index of 24 raw materials retreated 0.6 percent. Copper in New York fell to $3.705 a pound, the lowest level since Feb. 17.

To contact the reporters on this story: Claudia Carpenter in London at; Whitney Kisling in New York at

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


Santorum Child’s Illness Prompts Romney to Pull Attack Ad

By Lisa Lerer - Apr 10, 2012 2:15 AM GMT+0700

Mitt Romney’s presidential campaign pulled an attack ad set to air in Pennsylvania targeting Rick Santorum, responding to the Republican rival’s decision to suspend politicking after the hospitalization of his daughter.

“Stations will comply with this request as soon as they are technically able,” Romney spokeswoman Andrea Saul said in a statement.

Rick Santorum at the AIPAC meeting in Washington. Source: Photograph by Charles Dharapak/AP

A supporter of Republican presidential hopeful Rick Santorum wears a pin with a photo of Santorum's daughter Bella during an appearance by Santorum at the Stoney Creek Inn in Johnston, Iowa on Jan. 3, 2012. Santorum took several days off from the campaign trail after announcing on April 6 that his three-year-old daughter, Bella, was hospitalized. She suffers from a rare genetic disorder known as Trisomy 18. Photographer: Andrew Burton/Getty Images

The campaign asked stations in Pennsylvania to substitute a pro-Romney commercial praising his record as former governor of Massachusetts for the negative spot.

The $2.9 million ad buy was set to start today, with a spot focusing on Santorum’s “historically embarrassing” loss in his 2006 bid for a third U.S. Senate term in Pennsylvania. In a midterm election in which Republicans lost control of both chambers of Congress, Santorum was defeated by 18 percentage points by Democrat Robert Casey.

“We fired him as senator, why promote him to president?” a narrator in the Romney-sponsored ad asks.

Santorum is pushing to regain momentum from front-runner Romney in the Republican presidential nomination battle.

While Santorum has vowed to remain a candidate into May, campaign aides have said winning Pennsylvania’s April 24 primary is crucial to his political survival. Polls show a close race, and losing his home state would intensify pressure on Santorum to end his candidacy.

Delegate Count

Romney tops the race for delegates with 658, followed by Santorum with 281, former U.S. House Speaker Newt Gingrich with 135 and Representative Ron Paul of Texas with 51, according to a tally by the Associated Press. It takes 1,144 delegates to clinch the GOP nomination for president. Romney is on pace to reach the threshold in June, according to AP projections.

Santorum took several days off from the campaign trail after announcing on April 6 that his three-year-old daughter, Bella, was hospitalized. She suffers from a rare genetic disorder known as Trisomy 18, and her survival has defied the odds for those afflicted with the condition.

Romney also took a break from campaigning, spending the weekend celebrating the Easter holiday with his family.

Both men plan to hold events tomorrow, with Romney campaigning in Delaware and Santorum scheduled to participate in a religious forum with Christian broadcaster James Dobson in Lancaster, Pennsylvania.

To contact the reporter on this story: Lisa Lerer in Washington at

To contact the editor responsible for this story: Jeanne Cummings at


Facebook Agrees to Buy Instagram Photo App for $1 Billion

By Douglas MacMillan - Apr 10, 2012 7:30 AM GMT+0700

Facebook Inc. (FB), the biggest social- networking service, is buying the Instagram mobile photo-sharing application for about $1 billion in cash and stock, using its biggest acquisition yet to lure users of mobile devices.

Instagram, owned by San Francisco-based Burbn Inc., was valued at $500 million after raising about $60 million last week from investors including Sequoia Capital, said people with knowledge of the funding who asked not to be identified because the matter is private. The acquisition is expected to close this quarter, Menlo Park, California-based Facebook said today.

Instagram Founders Kevin Systrom, right, and Mike Krieger pose in this undated handout photo provided to the media on May 17, 2011. Source: Instagram via Bloomberg

April 9 (Bloomberg) -- Sam Hamadeh, chief executive officer of PrivCo, and Bloomberg News reporter Douglas MacMillan talk about Facebook Inc.'s plan to buy the Instagram mobile photo-sharing application for about $1 billion in cash and stock. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

April 9 (Bloomberg) -- Edward Zimmerman, a partner at Lowenstein Sandler PC, talks about Facebook Inc.'s agreement to purchase the Instagram mobile photo-sharing application for $1 billion in cash and stock, and the venture capital market. Zimmerman, speaking with Deirdre Bolton on Bloomberg Television's "Money Moves," also discusses his strategy as an angel investor. (Source: Bloomberg)

April 9 (Bloomberg) -- Paul Kedrosky, author of the Infectious Greed Blog and a Bloomberg contributing editor, talks about Facebook's plans to buy Instagram. He speaks on Bloomberg Television's "Bottom Line."

April 9 (Bloomberg) -- Facebook Inc., the world’s biggest social-networking service, agreed to buy the Instagram photo sharing application for about $1 billion in cash and stock. Edward Zimmerman, a partner at Lowenstein Sandler PC, talks with Deirdre Bolton on Bloomberg Television's "Money Moves." (Source: Bloomberg)

April 9 (Bloomberg) -- Instagram was valued at $500 million after raising about $60 million last week from investors including Sequoia Capital, said people with knowledge of the funding who asked not to be identified because the matter is private. Bloomberg’s Jon Erlichman reports on Bloomberg Television’s “Bloomberg West.” (Source: Bloomberg)

April 9 (Bloomberg) -- Facebook Inc., the biggest social-networking service, is buying the Instagram mobile photo-sharing application for about $1 billion in cash and stock, using its biggest acquisition yet to attract users of mobile devices. Bloomberg’s Emily Chang and Cory Johnson report on Bloomberg Television’s “Bloomberg West.” (Source: Bloomberg)

In this April 7, 2011 photo, CEO Kevin Systrom, at left, works alongside engineer Shayne Sweeney at Instagram in San Francisco. The mobile photo sharing service Instagram launched in October. Since then the service has grown to about 30 million registered users, or an average of a half-million new users each month. Photographer: Marcio Jose Sanchez/AP Photo

Facebook's new campus in Menlo Park, California. Photographer: David Paul Morris/Bloomberg

Instagram lets users take pictures with smartphones, retouch them with borders and filters, and then post the images on social networks. Founded in 2010, it has become the most popular free photo-sharing application on Apple Inc. (AAPL)’s App Store and boasts more than 30 million users. Owning it may help Facebook attract handset users and advertisers who target them, said Rebecca Lieb, an analyst at Altimeter Group LLC.

“In order to monetize mobile, Facebook needs a lot more mobile participation,” said Lieb, who is based in New York. “What they bought with Instagram was a photo app with high brand recognition and an enormous audience.”

Given Instagram’s employee base of 13, Facebook is paying $76.9 million per person for a company that has no publicly disclosed source of revenue. Facebook may seek an initial public offering valuation of as high as $100 billion, people with knowledge of the plans have said. At that valuation, Facebook would be worth $31.3 million per each of its 3,200 employees at the end of 2011.

Keep-Away From Google

Facebook paid a high premium in part to keep a popular mobile tool out of the hands of a different social-networking provider, such as Google Inc. (GOOG), said Ray Valdes, a research director at Gartner Inc.

“The value really is not what Instagram is, but what Instagram could have been in the hands of competitor,” Valdes said. “That’s the reason why the valuation was so high.”

The deal marks the first time Facebook has acquired a product and company with so many users, Chief Executive Officer Mark Zuckerberg wrote on his profile page. The company also announced the transaction on its website.

Facebook, which intends to raise $5 billion in the biggest IPO of an Internet company, says it plans to let Instagram remain independent.

Instagram Independence

“We need to be mindful about keeping and building on Instagram’s strengths and features rather than just trying to integrate everything into Facebook,” Zuckerberg wrote. “Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.”

Instagram was introduced in October 2010 by Kevin Systrom and Mike Krieger. Building on its popularity among iPhone users, last week the company added an application for devices that use Google’s Android operating system. Systrom didn’t respond to a request for comment on last week’s funding round, reported previously by blogs AllThingsDigital and TechCrunch.

Instagram received seed funding of about $500,000 from Andreessen Horowitz and Baseline Ventures in 2010. It raised a $7 million round in 2011, when it had 1.75 million users, from Benchmark Capital and a group of angel investors including Twitter Inc.’s Jack Dorsey and Quora Inc.’s Adam D’Angelo.

The startup closed its most recent financing just days before Facebook’s purchase was announced, the people with knowledge of the matter said.

Apple Startup Help

The purchase extends the role of Apple’s App Store as a platform for building companies, said Carl Howe, an analyst at Yankee Group. It may also be the largest purchase price for an app built for the App Store, he said.

“You’re going to see valuations in app companies in general be a little surprising,” Howe said.

Many of Instagram’s backers have close ties to Facebook, including Marc Andreessen, who sits on the board of the social network, and Benchmark general partner Matt Cohler, who was one of Facebook’s earliest employees and worked as a senior vice president of product management there until 2008. He remains a special adviser to Facebook CEO Zuckerberg.

Systrom himself once received a job offer from Zuckerberg in the early days of Facebook and turned it down.

“I decided I wanted to stay in school,” Systrom told Fast Company magazine last year. “That’s one of those decisions that I look back at -- I would’ve loved to have been part of Facebook’s growth over the years.”

Nike, Tiffany

Marketers including Nike Inc., Tiffany & Co. and Burberry Group Plc have begun using Instagram to promote products using photos, Lieb said. Gap Inc.’s Banana Republic unit held a contest on the site asking users to submit pictures of their New Year’s Eve outfits for a chance to win a trip to New York City.

“Providing the best photo sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together,” Zuckerberg said.

Facebook has a history of acquiring small companies with highly-regarded talent. It has bought e-book publisher Push Pop Press Inc. and mobile messaging app Beluga Inc. since the beginning of 2011. It also hired the staff of location check-in service Gowalla Inc.

“Two years ago we didn’t have a track record in acquisitions,” Vaughan Smith, Facebook’s director of corporate development, said in an interview with Bloomberg last year. “While we expected them to work well, it was still a crapshoot how they’d turn out. We’ve built a culture that supports entrepreneurs, and it’s working incredibly well.”

When the company filed to go public in February, it told investors that its lack of experience in large acquisitions could pose risks for investors.

“Our ability to acquire and integrate larger or more significant companies, products, or technologies in a successful manner is unproven,” the filing said.

Bloomberg LP, parent of Bloomberg News, is an investor in Andreessen Horowitz.

To contact the reporter on this story: Douglas MacMillan in San Francisco at

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


JPMorgan Trader Iksil Fuels Prop-Trading Debate With Bets

By Shannon D. Harrington, Bradley Keoun and Christine Harper - Apr 10, 2012 4:08 AM GMT+0700
Simon Dawson/Bloomberg
JPMorgan Chase & Co., the second-largest U.S. bank, bought the former offices of Lehman Brothers Holdings Inc. in London's Canary Wharf district for 495 million pounds ($769 million) to use as its investment bank's European headquarters.

JPMorgan Chase & Co. (JPM) trader Bruno Iksil’s outsized bets in credit derivatives are drawing attention to a little-known division that invests the company’s reserves and fueling a debate over whether banks are taking excessive risks with federally insured and subsidized money.

Iksil’s influence in the market has spurred some counterparts to dub him Voldemort, after the Harry Potter villain. He works in London in the bank’s chief investment office, which has assembled traders from across Wall Street to its staff of 400 who help oversee $350 billion in investments. While the firm describes the unit’s main task as hedging risks and investing excess cash, four hedge-fund managers and dealers say the trades are big enough to move indexes and resemble proprietary bets, or wagers made with the bank’s own money.

April 9 (Bloomberg) -- Former U.S. Securities and Exchange Commission Chairman Harvey Pitt talks about JPMorgan Chase & Co. trader Bruno Iksil's bets in credit derivatives and whether the so-called Volcker rule would prohibit the trades. Pitt speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

April 9 (Bloomberg) -- U.S. Representative Peter Welch, a Vermont Democrat, talks about JPMorgan Chase & Co. trader Bruno Iksil's outsized bets in credit derivatives. Welch, speaking with Betty Liu on Bloomberg Television's "In the Loop," also discusses the March U.S. employment report. (Source: Bloomberg)

April 9 (Bloomberg) -- Bloomberg's Stephanie Ruhle takes a look at Bruno Iksil, a JP Morgan derivatives trader who has amassed positions so large he drives price moves in the $10 trillion market. She speaks on Bloomberg Television's "Inside Track." (Source: Bloomberg)

April 9 (Bloomberg) -- Bloomberg's Erik Schatzker, Stephanie Ruhle and Sara Eisen report on comments from Aegis Capital chief investment officer Stanley Crouch calling for the revival of the Glass-Steagall Act in the wake of JPMorgan trader Bruno Iksil's outsized bets in credit derivatives. They speak on Bloomberg Television's "Inside Track." (Source: Bloomberg)

April 9 (Bloomberg) -- Stanley Crouch, chief investment officer of Aegis Capital Corp., talks about the outlook for the equity market and investment strategy. Crouch, speaking with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "InsideTrack," also discusses JPMorgan Chase & Co. trader Bruno Iksil's bets in credit derivatives. (Source: Bloomberg)

The trades, first reported by Bloomberg News April 5, stirred debate among U.S. policy makers over the Easter-holiday weekend as they wrangle over this year’s implementation of the so-called Volcker rule, the portion of the Dodd-Frank Act that sets limits on risk-taking by banks with government backing. The law passed after the collapse of the subprime mortgage market triggered the worst financial crisis since the Great Depression. (INDU)

“I wouldn’t be surprised if the pro-Volcker folks used this as a test case,” said Douglas Landy, a partner at law firm Allen & Overy LLP who is representing Canadian banks in opposing a current draft of the rule.

Merkley, Miller

Senator Jeff Merkley criticized the transactions in a statement that called for the rule’s prompt implementation, while Representative Brad Miller said they show why related U.S. laws should apply internationally.

Joe Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on Iksil’s specific transactions, and Iksil didn’t respond to phone messages and e-mails seeking comment. Neither Iksil nor JPMorgan have been accused of wrongdoing, and the full extent of his trading and the bank’s total risk of loss, or total gain, on his investments isn’t known.

Authorities will need more information from JPMorgan, the biggest U.S. bank by assets, to discern the precise purpose of Iksil’s transactions, said Clifford Rossi, an executive-in- residence at the University of Maryland’s Robert H. Smith School of Business.

“It clearly calls attention to the Volcker issue,” said Rossi, who previously was a managing director at Citigroup Inc.

Competitive Issues

Arthur Levitt, the former chairman of the U.S. Securities and Exchange Commission, said banks may be required to reveal more specifics about their derivatives holdings in order for regulators to enforce the Volcker rule.

“That’s unfortunate,” Levitt said today in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Ken Prewitt and Tom Keene. “That raises all kinds of competitive issues.”

Levitt is a board member of Bloomberg LP, the parent of Bloomberg News, and a senior adviser to Goldman Sachs Group Inc.

Harvey Pitt, also a former SEC chairman, said he would ask JPMorgan to explain the trades and then have the agency report to the public.

“Any time any trader can be dominant in the marketplace, that has to raise appropriate regulatory concerns,” Pitt said today in a phone interview on Bloomberg Television’s “InBusiness With Margaret Brennan” program. “That means the markets can be influenced by a single actor, and that is not the way our markets ought to operate.”

Dimon’s Letter

JPMorgan Chief Executive Officer Jamie Dimon, 56, sent a 38-page letter to shareholders last week, saying he agrees with the Volcker rule’s intent to eliminate “pure” proprietary trading and ensure market-making won’t jeopardize banks. Still, as with derivatives laws, the rule must be written so that it doesn’t put U.S. banks at a global disadvantage, he said.

“We cannot and should not be in a position where the rule affects U.S. banks outside the United States but not our foreign competition,” he wrote.

Iksil drew attention from market professionals in recent months as trading accelerated in a group of credit-default-swap indexes created before and during the 2008 financial crisis. Until then, transactions had been dwindling as Wall Street banks stopped creating structured debt that the indexes were used to hedge against. Investors use credit-default swaps to shield themselves from losses on corporate debt or to speculate on a firm’s creditworthiness.

‘London Whale’

The trader became such a big client of credit-derivatives dealers that some started calling him Voldemort, the Harry Potter book-series villain so powerful he simply was referred to as “He Who Must Not Be Named,” said one fund manager, who asked not to be identified because his firm does business with JPMorgan. Iksil also has been dubbed the “London whale,” another trader said.

Iksil joined JPMorgan in 2005, according to his career- history record with the U.K. Financial Services Authority. He worked at the French investment bank Natixis (KN) from 1999 to 2003, according to data compiled by Bloomberg. Public records showing Iksil’s date of birth couldn’t be located. One person who has done business with Iksil said he’s in his late 30s.

When a group of hedge-fund traders last year bet that a cluster of companies in one of the indexes wouldn’t default before contracts expired in December, Iksil was taking the opposite view, according to four market participants at hedge funds and banks, who spoke on condition of anonymity because they aren’t authorized to discuss the transactions.

Concentrated Risks

Iksil’s bet won out, and the hedge funds faced losses of 25 percent, when American Airlines parent AMR Corp. filed for bankruptcy less than a month before the insurance-like swaps matured, the market participants said. The trades were made in so-called tranches of the index, which take concentrated risks on the member companies.

This year, Iksil has been betting on an index of 121 companies that all had investment-grade ratings when the benchmark was created in September 2007, the market participants said. Trading in that index surged 61 percent the past three months, according to data from Depository Trust & Clearing Corp.

The net amount of wagers on the index, which is tied to the creditworthiness of companies such as Wal-Mart Stores Inc. and now-junk-rated bond insurer MBIA Insurance Corp., soared to almost $145 billion at the end of March from $90 billion three months earlier, according to DTCC, which runs a central registry for credit-default swaps and reports weekly aggregate volumes.

Iksil’s trades have been so large that they’re widening gaps between the relative value of the indexes and the average price of contracts tied to companies in those indexes, according to the market participants. That has frustrated some hedge funds that had bet the gaps would close, the people said.

First Quarter

Iksil has been selling default-protection on the index using swaps that expire in December 2017, meaning he would cover the counterparty’s losses if a company in the index fails, the market participants said. The price of the index falls as more insurance is sold against it. The index declined 38 basis points in the first three months of 2012, the biggest quarterly drop since 2009. A basis point is 0.01 percentage point.

The positions, by the bank’s calculations, amount to tens of billions of dollars and were built with the knowledge of Iksil’s superiors, a person familiar with the firm’s view said.

Iksil may have built a position totaling as much as $100 billion in contracts in one index, according to the market participants, who said they based their estimates on the trades and price movements they witnessed as well as their understanding of the size and structure of the markets.

Buying Protection

The trade on the index, known as the Markit CDX North America Investment Grade Series 9 (IBOXUG09), probably isn’t a one-way bet, the people said. Iksil may be offsetting the trade by buying protection on the same index with contracts that expire about eight months from now, the people said. That strategy would pay JPMorgan the difference between the long-dated contracts and the short-dated ones, about 47 basis points as of April 6, and the trade would gain when the gap narrows. The hedge would end in December unless another trade is made to replace it.

“Someone in that position at JPMorgan would typically not be doing pure speculation but would be involved in strategic risk management for the firm,” Darrell Duffie, a professor at Stanford University’s graduate school of business, said in a telephone interview.

JPMorgan profited from a similar strategy as the credit crisis erupted in 2008 by buying protection on short-dated contracts linked to high-yield indexes while selling protection on longer-dated contracts, a bet that a spike in corporate defaults would happen sooner than markets were pricing in, according to a February letter to regulators from Barry Zubrow, the bank’s head of corporate and regulatory affairs.

Losses Reduced

“This strategy resulted in the firm recognizing some gains as near-term default risks increased,” Zubrow wrote. “The gains recognized on these derivatives strategies offset in part the losses that occurred on credit assets held by the firm.”

Zubrow said the trade, which was booked in the bank’s market risk capital trading account, was a hedge that may have been banned under the Volcker rule.

The chief investment office’s revenue swelled following the financial crisis as federal regulators pushed banks to keep more of their funds in liquid investments, and as deposits flooded in because of JPMorgan’s reputation as one of the industry’s strongest banks. Total securities holdings in the corporate segment, which includes the chief investment office and treasury, more than quadrupled to $340.2 billion in 2009 from $76.5 billion in 2007.

Bigger Pool

The extra liquidity meant a bigger pool of money for the chief investment office to manage -- and more revenue. The bank’s annual report for 2009 showed $6.63 billion of revenue for the corporate segment, up from $4.42 billion in 2007. It cited “the chief investment office’s significant purchases of mortgage-backed securities guaranteed by U.S. government agencies, corporate debt securities, U.S. Treasury and government agency securities and other asset-backed securities.”

Revenue in the corporate segment climbed again in 2010, to $7.42 billion, reflecting a “repositioning of the portfolio in response to changes in the interest-rate environment and to rebalance exposure,” JPMorgan said in a regulatory filing. The bank rewarded Chief Investment Officer Ina Drew with a $15 million pay package for 2010, saying in a shareholder letter that she “was instrumental in setting the course and directing the firm’s repositioning of the balance sheet.”

Revenue Tumbled

Last year, revenue tumbled 44 percent to $4.14 billion in the corporate segment, “driven by repositioning of the investment securities portfolio and lower funding benefits from financing the portfolio,” according to an annual filing. Drew, 55, got a 6.8 percent pay cut to $14 million, the bank said in a regulatory filing last week. Her pay for the past two years was higher than that of Chief Financial Officer Doug Braunstein. Drew referred a request for comment to Evangelisti.

The chief investment office is affiliated with the bank’s treasury, helping to control market risks and investing excess funds, according to the lender’s annual report.

“The chief investment office is responsible for managing and hedging the firm’s foreign-exchange, interest-rate and other structural risks,” Evangelisti said. It’s “focused on managing the long-term structural assets and liabilities of the firm and is not focused on short-term profits.”

Some people hired by the group have come with risk-taking pedigrees. Irene Tse, 42, a former portfolio manager at Stanley Druckenmiller’s now-closed hedge fund, Duquesne Capital Management, joined last year as the group’s head in North America, reporting to Drew. Achilles Macris, 51, a former co- head of capital markets at German bank Dresdner Kleinwort Wasserstein, runs the group in Europe and Asia.

Experience, Connections

A search through profiles on the LinkedIn professional- networking website shows current and former executives in the chief investment office citing their proprietary-trading experience and connections.

One executive who worked as a portfolio manager in JPMorgan’s chief investment office said he ran what he called a proprietary macro and relative-value trading book that produced a 12 percent return on capital. An executive director wrote that before he worked in fixed-income trading in the office, he was a vice president in proprietary trading at JPMorgan.

A technology specialist who worked in the chief investment office in New York in 2009 and 2010 wrote that he led New York development and business analysis for a proprietary-trading risk-management system.

The Volcker rule is supposed to take effect in July, though regulators are still determining how it will make exceptions for instances where firms are hedging to curtail risk in their lending and trading businesses.

‘Illuminate the Risk’

Iksil’s “big bets illuminate the risk inherent in hedge fund-style trading,” said Senator Merkley of Oregon, who added the Volcker rule to Dodd-Frank along with Senator Carl Levin, a fellow Democrat from Michigan. If the trades collapse, Merkley said, “you want the resulting meltdown to happen outside of the banks we depend on for loans to families and businesses.”

After the Republican-controlled U.S. House of Representatives returns from a spring recess, members are set to vote on a bill that would limit Dodd-Frank clearing, trading and collateral regulations from applying to trades between foreign- based affiliates of U.S. banks and their overseas clients.

The JPMorgan trades are an example of why such exceptions are misguided, said Representative Miller, a North Carolina Democrat who sits on the Financial Services Committee.

Miller’s Vote

“Even if these trades are done in London and even if they are done by a foreign affiliate, there’s no doubt that JPMorgan would be liable and that any solvency issue would be visited upon the U.S. and the U.S. economy and the U.S. taxpayer,” said Miller, who voted against the bill at a preliminary stage in the committee.

Even without regulatory scrutiny, reports that Iksil’s trades were so large that they moved market prices are likely to concern JPMorgan, Stanford University’s Duffie said.

“If the trades were indeed part of a risk management strategy, then the intent wouldn’t be to move markets,” Duffie said. “The most obvious remedy is to reduce the extent to which they put on such large trading positions in the future.”

To contact the reporters on this story: Shannon D. Harrington in New York at; Bradley Keoun in New York at; Christine Harper in New York at

To contact the editor responsible for this story: David Scheer at