U.S. Stocks Halt Five-Day Decline After Alcoa’s Results

By Rita Nazareth - Apr 12, 2012 3:40 AM GMT+0700

U.S. stocks advanced, halting a five-day decline for the Standard & Poor’s 500 Index, after Alcoa (AA) Inc. reported an unexpected first-quarter profit.

Alcoa, the first company in the Dow Jones Industrial Average to announce quarterly results, climbed 6.2 percent. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) added at least 2.4 percent to pace gains in financial shares. A measure of 11 homebuilders in S&P indexes jumped 4.8 percent as Wells Fargo & Co. said a survey of sales managers showed 63 percent of the respondents reported better-than-expected orders.

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April 11 (Bloomberg) -- Jim Bianco, president of Bianco Research LLC, and Michael Gayed, chief investment strategist at Pension Partners LLC, talk about the outlook for the U.S. stock market. They speak with Stephanie Ruhle and Adam Johnson on Bloomberg Television's "Street Smart." Gary Shilling of A. Gary Shilling & Co. also speaks. (Gary Shilling is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

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April 11 (Bloomberg) -- Todd Schoenberger, managing principal at BlackBay Group, and Bloomberg's Josh Lipton talk about the impact of the Federal Reserve's Beige Book business survey on the U.S. stock market today and the outlook for equities, corporate earnings and the economy. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

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April 11 (Bloomberg) -- Bloomberg’s Stephanie Ruhle, Adam Johnson and Alix Steel report on today’s ten most important stocks including Nike, Apple and Alcoa. (Source: Bloomberg)

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April 11 (Bloomberg) -- Robert Hagstrom, a portfolio manager at Legg Mason Capital Management, talks about the performance of the equity market and investor sentiment. Hagstrom speaks with Betty Liu, Josh Lipton and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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April 11 (Bloomberg) -- Tom Elliott, a global strategist at JPMorgan Asset Management, discusses the outlook for the U.S. economy and asset allocation. He speaks with Maryam Nemazee and Manus Cranny on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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April 11 (Bloomberg) -- Gina Martin Adams, an equity strategist at Wells Fargo Securities LLC, talks about the outlook for the Standard & Poor's 500 Index and drivers for market volatility. She speaks with Erik Schatzker, Sara Eisen and Stephanie Ruhle on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

The S&P 500 increased 0.7 percent to 1,368.71 at 4 p.m. New York time, after dropping 4.3 percent over the past five days. The Dow advanced 89.46 points, or 0.7 percent, to 12,805.39 today. The Russell 2000 Index (RTY) of small companies climbed 1.6 percent to 796.59. About 6.4 billion shares changed hands on U.S. exchanges today, 6.5 percent less than the three-month average and 23 percent below yesterday’s volume.

“Alcoa helped dampen the dark mood in the market,” said Frederic Dickson, who helps oversee $28 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “It’s always nice to see the first company out of the box with an earnings surprise. It’s time to see how this progresses and reassess when to put some money back in.”

Almost $800 billion was erased from U.S. equity values in the five days leading up to the first-quarter earnings season. The S&P 500 yesterday capped the longest drop since November on concern about Europe’s debt crisis and the U.S. jobs market. The decline drove the gauge to about 14 times reported earnings yesterday, below the average since 1954 (SPX) of 16.4.

Earnings Season

Today’s gain extended this year’s rally in the S&P 500 to 8.8 percent as investors bought stocks amid better-than- estimated economic and corporate data. 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, it will accelerate to 8.3 percent during all of 2012, according to analyst estimates compiled by Bloomberg.

Analysts’ estimates for S&P 500 earnings growth in the first quarter have declined from 4.1 percent in January, Bloomberg data showed. For Lawrence Creatura at Federated Investors Inc., earnings expectations are still low and profit surprises may drive the market higher.

“This isn’t a phantom bounce,” Creatura, who helps oversee $369.7 billion as a Rochester, New York-based fund manager at Federated, said in a telephone interview. “It seems reasonable to expect positive surprises as we move through the earnings season. Management teams have done a good job of keeping expectations contained.”

Alcoa Rallies

Alcoa climbed 6.2 percent to $9.90. The earnings were “driven by higher-than-expected profitability from every operating segment,” Brian Yu, an analyst at Citigroup Inc. (C) in San Francisco, said in a note. “Good cost control likely played a major role.” The stock dropped 48 percent in the 12 months through yesterday, the biggest decline in the Dow.

A rally in Alcoa shares following its earnings reports has been an indicator of gains for the S&P 500, according to Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati. Since 2005, the gauge has risen an average 4 percent in the three-month period that followed a positive reaction to Alcoa’s earnings, he said.

Financial shares had the biggest gain in the S&P 500 among 10 industries today, rallying 1.6 percent. Bank of America rose 3.8 percent to $8.86. JPMorgan jumped 2.4 percent to $44.01. Investors will get a first look at banks results when JPMorgan and Wells Fargo kick off earnings, about an hour apart, on April 13. Citigroup Inc. is set to announce results April 16, followed by Goldman Sachs Group Inc., Bank of America and Morgan Stanley.

Bank Earnings

The results may disappoint investors who piled into banking stocks on a bet the industry was inexpensive and set to benefit from a strengthening economy. The six largest U.S. lenders may post an 11 percent drop in first-quarter profit, according to a Bloomberg survey of analysts. The KBW Bank Index (BKX) of 24 companies climbed 26 percent in the first three months of the year, led by Bank of America’s 72 percent gain.

“You can’t expect bank stocks to go straight to the moon,” said Peter Kovalski, a money manager at Alpine Woods Capital Investors LLC in Purchase, New York, which manages about $5 billion. “You have to expect fundamentals to catch up, and there are some headwinds facing the industry.”

On top of earnings data, investors also watched the Federal Reserve’s Beige Book business survey today, published two weeks before the Federal Open Market Committee meets to set monetary policy. The Fed said the economy maintained its expansion in all 12 of its regions as manufacturing, hiring and retail sales showed signs of strength in the face of higher fuel prices.

Economic Bellwether

The Morgan Stanley Cyclical Index (CYC) of companies most-tied to the economy added 1.2 percent. FedEx Corp. (FDX), an economic bellwether as it carries everything from mobile devices to pharmaceuticals, rose 1.5 percent to $87.91. Homebuilder PulteGroup Inc. (PHM) advanced 9.1 percent to $8.39.

Apple Inc. (AAPL) reversed a gain of as much as 1.3 percent, falling 0.4 percent to $626.20. The U.S. Department of Justice sued Apple, Macmillan and Pearson Plc’s Penguin in New York today, claiming the publishers colluded to fix e-Book prices. Three other publishers, CBS Corp. (CBS)’s Simon & Schuster, Lagardère SCA’s Hachette Book Group and News Corp. (NWSA)’s HarperCollins, also named in the government’s antitrust lawsuit, settled their cases, according to court filings.

Owens-Illinois Inc. (OI) rose 6.9 percent to $23.52. The glass- bottle maker said first-quarter earnings will rise more than 35 percent from a year earlier on higher prices and lower costs.

‘Too Steep’

Genworth Financial Inc. (GNW) gained 3.2 percent to $7.54. The life insurer and mortgage guarantor was rated buy in new coverage by BTIG LLC, which said the stock is trading at “too steep a discount” to the company’s inherent value.

Titan Machinery Inc. (TITN) surged 17 percent to $32.05, the highest since June 2008. The owner of full-service agricultural and equipment stores forecast annual earnings of at least $2.55 a share, beating the average analyst estimate of $2.06.

U.S. shares of Nokia Oyj (NOK) tumbled 16 percent to $4.24. The Espoo, Finland-based mobile phone maker reported an operating loss for its mobile-phone division and forecast earnings won’t recover this quarter as emerging market handsets sales slumped and margins on smartphones shrank.

VMWare Inc. (VMW) slumped 2.5 percent to $107.61. The software maker announced a management shuffle including the departure of Chief Financial Officer Mark Peek. Earnings have more than doubled to $723.94 million since 2008, the first full year after Peek joined. The company is initiating a search to replace him.

Computer Sciences

Computer Sciences Corp. (CSC) fell 2.8 percent to $27.39. The technology contractor for governments and companies said earnings excluding certain costs in the quarter ended March 30 were 19 cents to 21 cents a share. Analysts predicted 97 cents, the average of estimates compiled by Bloomberg.

U.S. stocks will probably see a short-term relief rally before extending their retreat next week, according to the head of technical analysis at Credit Suisse Group AG. The S&P 500 may climb to as much as 1,382, London-based David Sneddon wrote today. The measure will then be poised to drop more than 3 percent next week to the 1,339 low from March 6, he said.

“With a classic bearish momentum and on-balance volume divergence reinforcing the more bearish scenario, we expect further weakness to extend,” Sneddon wrote in a note dated yesterday. So-called on-balance volume shows a security’s momentum by looking at the relationship between price and the number of transactions taking place.

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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Stocks Rise on Alcoa Results as Spanish Bonds, Euro Gain

By Michael P. Regan and Rita Nazareth - Apr 12, 2012 3:22 AM GMT+0700

U.S. equities halted the longest slump of the year and European stocks rebounded from a two-month low as Alcoa (AA) Inc. opened the earnings season with an unexpected profit. Spanish bonds rose as a European Central Bank official signaled the ECB may revive its bond-purchase program.

The Standard & Poor’s 500 Index added 0.7 percent to close at 1,368.71, snapping a five-day slump. The Dow Jones Industrial Average climbed 89.46 points as Alcoa rallied 6.2 percent. The Stoxx Europe 600 Index (SXXP) rose 0.7 percent. The euro ended a five- day drop against the yen, while yields on Spanish and Italian 10-year debt dropped at least 10 basis points. Oil helped lead commodities higher as U.S. stockpiles of gasoline and distillate fuels declined, while natural gas tumbled below $2 per million British thermal units for first time since January 2002.

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Prime Minister Mariano Rajoy said Spain’s future is at stake in its battle to tame surging bond yields. Photographer: Jock Fistick/Bloomberg

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April 11 (Bloomberg) -- Jim Bianco, president of Bianco Research LLC, and Michael Gayed, chief investment strategist at Pension Partners LLC, talk about the outlook for the U.S. stock market. They speak with Stephanie Ruhle and Adam Johnson on Bloomberg Television's "Street Smart." Gary Shilling of A. Gary Shilling & Co. also speaks. (Gary Shilling is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

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April 11 (Bloomberg) -- Todd Schoenberger, managing principal at BlackBay Group, and Bloomberg's Josh Lipton talk about the impact of the Federal Reserve's Beige Book business survey on the U.S. stock market today and the outlook for equities, corporate earnings and the economy. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

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April 11 (Bloomberg) -- Steven Major, global head of fixed-income research at HSBC Holdings Plc, Paul Donovan, deputy head of global economics at UBS AG, and Bill Blain, co-head of the Special Situations Group at Newedge Group Ltd., discuss the outlook for Spanish bonds. This report also contains comments from Spanish Prime Minister Mariano Rajoy and Johannes Jooste, a strategist at Bank of America Corp.'s Merrill Lynch Wealth Management. (Source: Bloomberg)

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April 11 (Bloomberg) -- Timothy Moe, a Hong Kong-based strategist at Goldman Sachs Group Inc., talks about the outlook for Asia stocks Stocks in Asia slipped, with the region’s benchmark index falling for a sixth day, as Spanish bond yields surged closer to levels that prompted Greece, Ireland and Portugal to seek European bailouts. Moe speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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April 11 (Bloomberg) -- Peter Garnry, an equity strategist at Saxo Bank A/S, discusses Alcoa Inc.'s unexpected first-quarter profit reported yesterday, investment strategy for European equities and recommendation of Rolls-Royce Holdings Plc. He speaks from Hellerup, Denmark, with Caroline Hyde on Bloomberg Television's "Countdown." (Source: Bloomberg)

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April 11 (Bloomberg) -- Pelham Smithers, managing director of Pelham Smithers Associates, talks about the outlook for Sony Corp. and Sharp Corp. Sony and Sharp posted losses that together equaled 900 billion-yen ($11 billion) as the first decline in global TV shipments in six years and a stronger yen hurt overseas sales for Japan’s biggest LCD TV makers. Smithers speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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April 11 (Bloomberg) -- Robert Hagstrom, a portfolio manager at Legg Mason Capital Management, talks about the performance of the equity market and investor sentiment. Hagstrom speaks with Betty Liu, Josh Lipton and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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April 11 (Bloomberg) -- Bloomberg’s Stephanie Ruhle, Adam Johnson and Alix Steel report on today’s ten most important stocks including Nike, Apple and Alcoa. (Source: Bloomberg)

Australian one-dollar coins sit with a collection of bank notes arranged for a photograph, in Sydney, Australia. Photographer: Sergio Dionisio/Bloomberg

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Pedestrians are reflected in an electronic stock board outside a securities firm in Tokyo, Japan. Photographer: Haruyoshi Yamaguchi/Bloomberg

The S&P 500 slid 4.3 percent in the previous five sessions as $2 trillion was erased from global equities amid concern Europe’s debt crisis was worsening and weaker-than-forecast U.S. jobs growth. Today’s rebound came as Alcoa’s results boosted optimism at the start of the first-quarter earnings-reporting season, while ECB board member Benoit Coeure spurred speculation the central bank will help reduce Spain’s borrowing costs after 10-year yields touched 6 percent for the first time this year.

“The environment is still very positive for stocks,” Robert Hagstrom, fund manager at Legg Mason Capital Management Inc., said on Bloomberg Television’s “In the Loop” program. Legg Mason manages about $638 billion. Bull markets “need corrections, need a pullback, in order to be sustainable. We think about that all the time. Until we actually go through it,” he said. Then “it’s the risk-off traders, or Chicken Little, maybe, that the world is coming to an end. But it’s not coming to an end.”

‘Modest to Moderate’

U.S. equities held onto gains after the Federal Reserve said the economy maintained its expansion in all 12 of its regions as manufacturing, hiring and retail sales showed signs of strength in the face of higher fuel prices.

“The economy continued to expand at a modest to moderate pace from mid-February through late March,” the Fed said today in its Beige Book business survey, published two weeks before the Federal Open Market Committee meets to set monetary policy. “Hiring was steady or showed a modest increase across many districts.”

Slump Halted

The S&P 500 ended its longest losing streak since November as financial, consumer-discretionary, telephone and industrial stocks led gains in all 10 of the index’s main industries. Alcoa, Bank of America Corp., JPMorgan and Cisco Systems Inc. rose more than 2 percent to lead the Dow (INDU) higher.

Alcoa marked the unofficial start of an earnings season by reporting a profit of $94 million, or 9 cents a share, after orders rose and the largest U.S. aluminum producer closed higher-cost smelting capacity. Profit excluding restructuring costs and other items was 10 cents a share, compared with the average analyst estimate for a loss of 4 cents.

Analysts project profit growth slowed to 0.8 percent in the first quarter. Google Inc. (GOOG) is scheduled to report results tomorrow after the close of trading, while JPMorgan Chase & Co. and Wells Fargo & Co. will release earnings on April 13.

A rally in Alcoa shares following earnings has foreshadowed gains for the S&P 500 in the past, according to Ryan Detrick at Schaeffer’s Investment Research. Since 2005, the benchmark gauge has risen an average 4 percent in the three-month period that followed a positive reaction to earnings from Alcoa, which is typically the first company in the Dow to report results.

‘Positive Catalyst’

“This earnings season could be a major positive catalyst,” Detrick, senior technical strategist at Schaeffer’s, said in a telephone interview from Cincinnati. “We’ve had a strong selloff ahead of it. Should earnings come in slightly better than expected, that could turn out to be one of those buying opportunities.”

UniCredit SpA (UCG) and Intesa Sanpaolo SpA, Italy’s biggest banks, led a rebound in financial shares, advancing more than 5.4 percent. CGGVeritas SA (GA), the world’s largest seismic surveyor of oil fields, climbed 4.5 percent after saying it boosted vessel production in the first quarter. Givaudan SA, a Swiss maker of flavors and fragrances, gained 3.7 percent as sales increased.

Six countries in Europe sold debt today, with Italy meeting its target and Germany receiving bids for less than its maximum objective.

Germany’s 10-year bund fell, with the yield rising 14 basis points to 1.78 percent. The 10-year Italian bond yield fell 15 basis points to 5.53 percent, while the 10-year Spanish bond yield declined 10 basis points to 5.88 percent. The euro strengthened 0.5 percent to 106.07 yen and gained 0.2 percent to $1.3108.

The yield on the 10-year U.K. gilt increased four basis points to 2.05 percent after its debt agency sold 4.5 billion pounds ($7.2 billion) of September 2017 securities.

Commodities Gain

Lead and aluminum climbed more than 1.6 percent to lead gains in 17 of 24 commodities tracked by the S&P GSCI. Oil increased 1.7 percent to $102.70 a barrel, rebounding from an almost two-month low. Natural gas dropped as low as $1.976 per million British thermal units for the first time in more than 10 years on speculation there won’t be enough weather-driven demand for the fuel in coming weeks to reduce an inventory surplus.

The MSCI Emerging Markets Index (MXEF) slipped 0.1 percent, falling for a sixth straight day and reaching the lowest level since Jan. 30.

The Hang Seng China Enterprises Index (HSCEI) fell 0.9 percent, its third straight decline. The Shanghai Composite Index (SHCOMP) gained 0.1 percent, while benchmark indexes in the Czech Republic and Turkey rallied more than 1 percent.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; 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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Profit Drop at U.S. Banks Imperils Rally

By Dakin Campbell - Apr 12, 2012 3:36 AM GMT+0700

The six largest U.S. lenders, including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co., may post an 11 percent drop in first-quarter profit, threatening a rally that pushed bank stocks 19 percent higher this year.

The banks will post $15.3 billion in net income when adjusted for one-time items, down from $17.3 billion in last year’s first quarter, according to a Bloomberg survey of analysts. Trading revenue at the biggest lenders is projected to fall 23 percent to $18.3 billion, according to Morgan Stanley analysts, who didn’t include their firm or Wells Fargo.

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A Chase bank branch in New York. Photographer: Mark Lennihan/AP Photo

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Pedestrians walk in front of the Wells Fargo & Co. headquarters in San Francisco. Photographer: David Paul Morris/Bloomberg

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JPMorgan Chase & Co. signage is displayed at a bank branch in New York. Photographer: Robert Caplin/Bloomberg

“You can’t expect bank stocks to go straight to the moon,” said Peter Kovalski, a money manager at Alpine Woods Capital Investors LLC in Purchase, New York, which manages about $5 billion. “You have to expect fundamentals to catch up, and there are some headwinds facing the industry. There is a little too much optimism going into this quarter.”

U.S. lenders, struggling to expand in commercial banking years after the housing collapse, haven’t matched last year’s overall results, even as bond and equity markets strengthened. Making matters worse, loan balances increased less than the economy, bucking a trend in previous recoveries, said Brian Foran, a New York-based analyst at Nomura Holdings Inc.

‘Complete Reversal’

Loans at the top 25 domestically chartered commercial banks rose 0.4 percent in the quarter through March 28, slowing from 1 percent growth in the previous three months, according to the Federal Reserve. Loans fell to $4.04 trillion from a peak of $4.24 trillion in the fourth quarter of 2008, according to the Fed. The U.S. economy expanded 2 percent in the first quarter, according to estimates from 72 economists surveyed by Bloomberg.

“There will be times in this cycle, like this quarter, when GDP growth and loan growth don’t necessarily track each other,” Foran said in an interview. “It’s a complete reversal of the fourth quarter, when capital markets were weak and loan growth was strong.”

The results may disappoint investors who piled into banking stocks on a bet the industry was inexpensive and set to benefit from a strengthening economy, he said.

The KBW Bank Index (BKX) of 24 companies climbed 26 percent in the first quarter, led by Bank of America Corp.’s 72 percent gain and Regions Financial Corp.’s 53 percent. Financial services topped all sectors in the Standard & Poor’s 500 Index. (SPX)

Over the past five trading days ending yesterday, the KBW Index fell 6.4 percent. That may mean fewer investors sell shares if first-quarter results disappoint, Kovalski said.

The gauge rose 2.1 percent today in New York trading, led by Bank of America, up 3.8 percent, and KeyCorp, with a gain of 3.4 percent. JPMorgan rose 2.4 percent.

Book Values

Still, lenders are cheaper than they were last year, as measured by the ratios of their stock prices to earnings estimates over the next 12 months and to book values. The price- to-earnings ratio for the KBW Index was 10.8 as of yesterday, down from 13.7 on April 11, 2011. The ratio of price to tangible book value, a measure of what investors are willing to pay for a company’s equity after removing intangible items such as goodwill, stood at 1.22 compared with 1.53 a year earlier.

Investors will get a first look at results when JPMorgan and Wells Fargo (WFC) kick off earnings, about an hour apart, on April 13. Citigroup Inc. (C) is set to announce results April 16, followed by Goldman Sachs Group Inc. (GS), Bank of America and Morgan Stanley.

JPMorgan, the largest and most profitable U.S. lender, may say net income fell 19 percent, adjusting for one-time items, from the same period a year earlier to $4.53 billion, according to the average estimate of 19 analysts surveyed by Bloomberg. Earnings per share will fall to $1.18, the analysts estimate. Revenue at the New York-based bank is projected to fall 4.1 percent to $24.2 billion.

Wells, BofA

Profit at San Francisco-based Wells Fargo, the most valuable U.S. bank and biggest home lender, is estimated to climb 7.8 percent to $3.85 billion, analysts estimate. Revenue probably was little changed at about $20.4 billion.

Bank of America, second by assets to JPMorgan and based in Charlotte, North Carolina, may post $1.73 billion in adjusted earnings, about 1 percent less than the year-earlier period, according to the Bloomberg survey. Citigroup may report a 7 percent gain in adjusted profit to $3.21 billion. Goldman Sachs’s net income is projected to fall 29 percent to $1.81 billion. Citigroup and Goldman Sachs are based in New York.

Joe Evangelisti, a spokesman for JPMorgan, declined to comment, as did Wells Fargo’s Mary Eshet, Bank of America’s Jerry Dubrowski, Goldman Sachs’s Michael DuVally and Citigroup’s Shannon Bell.

Trading Revenue

For those banks with the largest capital-markets operations, the bond markets provided one bright spot.

Underwriters sold more than $628 billion in U.S. corporate debt in the first quarter, increasing from less than $561 billion in the prior year’s first three months, according to data compiled by Bloomberg. JPMorgan ranked first, selling $79.7 billion, and Citigroup came in second with $62.2 billion. Wells Fargo was 10th, with $25.5 billion in sales. Wells Fargo, whose 12-month stock performance has outpaced its largest peers, depends the least on capital markets for profit.

While trading probably fell short of last year, analysts estimate it jumped from the fourth quarter. Revenue in the fixed-income, currencies and commodities-trading divisions at Bank of America, Citigroup, JPMorgan and Goldman Sachs probably totaled $14.3 billion in the first quarter, Betsy Graseck, a Morgan Stanley (MS) analyst, estimated in an April 3 report. That would be an 18 percent decline from the $17.5 billion generated a year earlier and more than double the fourth quarter, when it slumped to $6.9 billion, Graseck wrote.

‘More Defensive’

Equity-trading revenue may have fallen 34 percent to $4 billion and fees from underwriting equities may have dropped 18 percent to $1.15 billion over the prior year, according to the estimates. Revenue from mergers and acquisitions advice may have declined 30 percent.

Trading got a lift from rising asset prices with those banks bringing the largest inventories into the quarter likely doing the best, according to Charles Peabody, an analyst at Portales Partners LLC in New York. U.S. investment-grade and high-yield corporate debt rose 3 percent in the first quarter, according to Bank of America Merrill Lynch Index data.

“We’ve gotten more defensive in the last several weeks,” Peabody said in a phone interview. “Fee income will be pretty strong given fixed-income results and asset appreciation. By contrast, we think top-line and the basic banking business will be disappointing.”

Peabody said bank stocks could fall 20 percent to 30 percent from their recent highs.

Net Interest Margins

Central bankers aren’t helping. Fed officials affirmed their projection, first announced in January, that subdued inflation and economic slack probably will warrant low rates through late 2014, according to minutes of the March policy meeting released this month. That cuts into net interest margins, the difference between what banks earn on loans and what they pay for funds. At the four largest U.S. banks by assets, margins dropped to 2.99 percent in the fourth quarter from 3.17 percent a year earlier.

“It will be a while until the industry gets back to its optimal returns,” said Kovalski of Alpine Woods Capital Advisors. “We had a lot of underweighted portfolios quickly increasing their allocation to the sector. Now the question is will they hold it there, or will they get antsy that the group isn’t generating the quick turnaround that was expected?”

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net

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

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U.S. Files Antitrust Lawsuit Against Apple, Hachette

By Bob Van Voris - Apr 11, 2012 9:27 PM GMT+0700

The U.S. sued Apple Inc. (AAPL), Hachette SA, HarperCollins, Macmillan, Penguin and Simon & Schuster in New York district court, claiming the publishers colluded to fix eBook prices.

CBS Corp. (CBS)’s Simon & Schuster, Lagardère SCA’s Hachette Book Group and News Corp. (NWSA)’s HarperCollins settled their suits today, two people familiar with the cases said.

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Ebook on an iPad in New York on April 11, 2012. Photographer: Scott Eells/Bloomberg

Apple and Macmillan, which have refused to engage in settlement talks with the Justice Department, deny they colluded to raise prices for digital books, according to people familiar with the matter. They will argue that pricing agreements between Apple and publishers enhanced competition in the e-book industry, which was dominated by Amazon.com Inc. (AMZN)

The Justice Department is probing how Cupertino, California-based Apple changed the way publishers charged for e- books on the iPad, a person familiar with the matter said last month. The Justice Department said it would announce an “unspecified” antitrust settlement today.

Pearson Plc (PSON)’s Penguin Group (PNGN) was also preparing to fight the U.S. Justice Department in court if necessary, two people familiar with knowledge of the matter told Bloomberg News April 5.

Gina Talamona, a spokeswoman for the Justice Department’s antitrust division, and representatives of Apple, Simon & Schuster, HarperCollins, Hachette, Penguin and Macmillan, which is a unit of Verlagsgruppe Georg von Holtzbrinck GmbH, declined to comment on prospects for lawsuits or settlements.

Agency Model

Apple, Penguin and Macmillan want to protect the so-called agency model that lets publishers -- not vendors -- set e-book prices, said the people on April 5, who declined to be identified because they weren’t authorized to speak publicly.

The government is seeking a settlement that would let Amazon and other retailers return to a wholesale model, where retailers decide what to charge customers, the people said. A settlement could also void so-called most-favored nation clauses in Apple’s contracts that require book sellers to provide the maker of the iPad with the lowest prices they offer competitors, the people said.

Consumers and competition could be hurt if several companies sign contracts that refer to prices charged to rivals even if those firms aren’t dominant, said Fiona Scott-Morton, a Justice Department economist, in an April 5 speech in Washington, signaling the antitrust division’s thinking on the issue of most-favored-nation clauses.

More Control

Upholding the agency model would give publishers more control over pricing and limit discounting, helping the industry avoid sales losses as more consumers buy books online.

Sales of e-books rose 117 percent in 2011, generating $969.9 million, Publishers Weekly reported Feb. 27, citing estimates from the Association of American Publishers. By eliminating printing and shipping costs, digital versions generate higher profit margins than physical copies.

When Apple came out with the iPad in 2010, it let publishers set their own prices for e-books as long as it got a 30 percent cut and the publishers agreed to offer their lowest prices through Apple. This agency model overtook Amazon’s practice of buying books at a discount from publishers and then setting its own price for e-reader devices.

The results of a settlement or lawsuit wouldn’t necessarily kill the agency model or prevent other publishers from continuing to set their own prices for e-books, one of the people said.

Random House Inc., based in New York, has agreements with Apple and Amazon that lets the book publisher set prices for e- books, the essence of the agency model. The company isn’t a part of the U.S. inquiry.

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net

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

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Zuckerberg Threatened to Disable Ceglia Site Amid Dispute

By Bob Van Voris - Apr 11, 2012 11:00 AM GMT+0700

Facebook Inc. (FB) cofounder Mark Zuckerberg threatened in 2004 to disable part of the website he was working on for Paul Ceglia, the New York man now suing him for part-ownership of the multibillion-dollar company, according to copies of e-mails filed by Facebook in federal court.

Zuckerberg worked for Ceglia in 2003 and 2004, while he was attending Harvard University and building the website that would become the world’s biggest social network. In an e-mail to Ceglia, Zuckerberg demanded payment for work on Ceglia's website, StreetFax.com, warning that if he didn’t get the money that was coming to him, he would take down part of the site.

Mark Zuckerberg, chief executive officer of Facebook Inc., listens to a question at the Web 2.0 Summit in San Francisco. Photographer: Tony Avelar/Bloomberg

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Facebook Inc. cofounder Mark Zuckerberg threatened in 2004 to disable part of the website he was working on for Paul Ceglia, the New York man now suing him for part-ownership of the multibillion-dollar company, according to copies of e-mails filed by Facebook in federal court. Photographer: Bob Van Voris/Bloomberg

“I must receive $5,000 by next Saturday at midnight, or the scroll search functionality will be removed from the site,” Zuckerberg wrote in a message to Ceglia on Feb. 21, 2004, about two weeks after he put “Thefacebook.com” online. Zuckerberg told Ceglia he owed him $10,500 of the $19,500 he’d been promised, according to the e-mails, filed by Facebook as part of the lawsuit in Buffalo, New York.

Facebook last month asked the judge to throw out the lawsuit. The incident supports Zuckerberg’s defense that the contract on which Ceglia bases his claim to half of the CEO’s Facebook holdings is a fake, defense attorney Orin Snyder of Gibson Dunn & Crutcher LLP said in an e-mail April 9. A different contract Facebook claims is the actual agreement between the men shows Ceglia hired Zuckerberg for the StreetFax work alone, the lawyer said. Zuckerberg never acted on the threat to disable Ceglia’s website, according to Snyder.

‘Cyber-Briber’

Zuckerberg’s 2004 e-mail to Ceglia prompted a lawyer connected to StreetFax at the time to refer to him as the “brat programmer” and “cyber-briber,” according to messages included in Facebook’s court papers. The company said it found the e-mails in Ceglia’s electronic files.

The contract Facebook claims is genuine would have permitted Zuckerberg “to offline the site Streetfax.com and remove his program” for non-payment. The contract Ceglia claims Zuckerberg signed gives him no such right. In its court papers seeking dismissal of the suit, Facebook said Ceglia never paid Zuckerberg the remaining $10,500. The two last communicated in May 2004, according to Facebook.

Facebook has disclosed in court papers 15 of about 300 e-mails the company said it recovered from Zuckerberg’s Harvard e-mail account, consisting of communications with Ceglia and others working for StreetFax at the time.

Frequently Demands Money

In the e-mails, Zuckerberg frequently demands money he claims Ceglia owes him, while Ceglia asks for more time to pay. The 15 messages span almost nine months, from Aug. 15, 2003, to May 7, 2004, shortly before Zuckerberg left Harvard for Palo Alto, California, where he ran Facebook until moving it last year.

Ceglia’s lawyer, Dean Boland, said his client’s computer experts aren’t able to determine whether the Harvard e-mails are genuine or complete because they haven’t had access to the Harvard e-mail server. Facebook, now based in Menlo Park, California, has also had exclusive access to computers Zuckerberg used in 2003 and 2004, and evidence from suits filed against the company by Facebook co-founder Eduardo Saverin, and by Tyler and Cameron Winklevoss and Divya Nirendra, Boland said.

The plaintiffs in the two cases, former Harvard students who claimed a role in founding Facebook, eventually settled.

Ceglia, 38, sued Zuckerberg, 27, and Facebook in 2010, claiming he signed a contract with Zuckerberg in April 2003 that made them partners in exchange for an investment in the project. Zuckerberg said in court papers that the contract he signed related only to his StreetFax work and had nothing to do with Facebook.

Traffic Intersections

StreetFax, which Ceglia started to sell pictures of traffic intersections to insurance companies, is no longer in business. Facebook, which in February filed for an initial public offering to raise $5 billion, is worth an estimated $95.8 billion, according to SharesPost.com, which tracks nonpublic companies.

Facebook said in its request to dismiss Ceglia’s suit that the complaint is a fraud on the court. Facebook claimed Ceglia hopes to use the litigation to “leverage his fraud by disrupting Facebook’s highly publicized initial public offering.”

After Zuckerberg sent the 2004 message threatening to disable the StreetFax site, Ceglia contacted Jim Kole, a lawyer Facebook described in court papers as “an initial member of StreetFax,” for advice on what to do, according to a separate e-mail exchange made public by Facebook in the case.

Written Assurance

In messages dated March 4 and 5, Kole called Zuckerberg “the brat programmer,” suggesting that Ceglia offer to pay him some money, to be held in escrow until Zuckerberg “provides his written assurance that he will not access or disable any portion of the site.” Kole, formerly with Sidley Austin LLP, didn’t return a call and e-mail seeking comment on the case.

“Mabe I am a littel to emotionally charged about this but I think that after him illegally removing functionality from the site that I dont want to pay this kid another dime,” Ceglia wrote in an e-mailed response filed in court papers.

“I think I’ll just make a veiled reference to payments that could be made if he settles the matter as a businessman rather than a cyber-briber,” Kole answered in a handwritten note, according to the Facebook court filings. “PLEASE, PLEASE fax me the contract.”

Facebook’s forensic computer experts, from the firm Stroz Friedberg LLC, said they discovered an image of the Ceglia e-mails, with the handwritten note, in one of Ceglia's e-mail accounts, which they were permitted to access by order of the judge. The e-mail exchange was included in a report by Stroz Friedberg filed by Facebook with the court.

‘Smoking Gun’

Facebook said Ceglia responded to Kole’s fax request by sending him a copy of what the company says is the real StreetFax contract, with no mention of a stake in the social network. The company claims those e-mails and the attached contract provide “smoking gun” proof in its defense.

In a March 8, 2004, e-mail, about two weeks after the threat to disable StreetFax, Zuckerberg told Ceglia “The need for my immediate payment has been resolved for now, and so I guess it is to my advantage to allow you to continue to use the site, as long as you can make monthly payments.”

“I really appreciate you not doing anything rash,” Ceglia answered, according to the e-mails.

Later that month, Ceglia proposed giving Zuckerberg 1 percent of StreetFax as security for the money he owed him.

‘Giving Myself Ulcers’

“I am giving myself ulcers trying to get your money to you before you take aggressive action against the site again,” Ceglia said, according to the e-mail provided by Facebook.

In a hearing last week, U.S. Magistrate Judge Leslie Foschio ruled that Ceglia’s lawyers may question Facebook’s expert-witnesses in computer forensics, documents, paper and ink, who have said Ceglia’s contract and the e-mails he produced in the case are fake.

Foschio barred Ceglia from seeking more evidence from Facebook, including Zuckerberg’s Harvard computers. The judge has yet to rule on Facebook’s motion to dismiss the case.

The case is Ceglia v. Zuckerberg, 1:10-cv-00569, U.S. District Court, Western District of New York (Buffalo).

To contact the reporter on this story: Bob Van Voris in U.S. District Court for the Western District of New York in Buffalo at rvanvoris@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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