Economic Calendar

Wednesday, June 20, 2012

England’s Luck Changes at Euros as Officials Miss Ukraine Goal

By Tariq Panja - Jun 20, 2012 8:43 AM GMT+0700

England’s passage to the European Championship soccer quarterfinals as a group winner was eased by a measure of good fortune and controversy in a victory against co-host Ukraine.

England advanced to a meeting with Italy on June 24 after benefiting from a goalkeeping blunder and a refereeing error in a 1-0 win in Donetsk last night. Ukraine was denied a tying goal in the second half when the match officials failed to spot the ball crossing the goal line before being cleared.

England’s victory came two years after officials failed to award a goal when Frank Lampard’s shot against Germany in the World Cup was shown by video replays to have crossed the line. Lampard’s effort would have tied the round-of-16 match, which Germany went on to win 4-1.

“To be successful in these tournaments, because of the standard of teams involved, you need that bit of luck going with you,” England captain Steven Gerrard told reporters. “Two years ago we didn’t get that luck with Frank Lampard’s goal, a big turning point in that game against Germany, and we ended up packing our bags and going home. Today, the luck turned.”

Ukraine’s Marko Devic had his appeals waved away by match referee Viktor Kassai of Hungary last night after John Terry hooked the ball clear in the 62nd minute.

Five Referees

An assistant referee patrolling the goal line about eight yards (7 meters) away didn’t award a goal. Tournament organizer UEFA, whose president Michel Platini has lobbied against the introduction of goal-line technology to assist in such matters, is employing an extra official at each end of the field for the first time at the four-yearly championship.

“There are five referees on the pitch and the ball is 50 centimeters behind the goal line,” Ukraine coach Oleg Blokhin said at a news conference. “Why do we need five officials?”

Soccer’s lawmaking body, the International Football Association Board, will decide July 5 whether to introduce goal- line technology after nine months of testing whittled the options down to two systems. FIFA, the sport’s governing body, tweeted a reminder about the IFAB meeting in Zurich after last night’s match.

Still, that will come too late for Ukraine and Blokhin, who railed at officials at a press conference in which he offered to fight a local journalist who questioned his team’s fitness.

Ukraine needed to win last night to stand a chance of advancing. France, which had led Group D going into the final round of games, dropped into second place and a meeting with defending champion Spain after its 23-match unbeaten run ended in a 2-0 loss in Kiev to Sweden, which had already been eliminated.

Deflections, Fumble

England, which had been outplayed in the first half, got the only goal from Wayne Rooney three minutes after the break. The recalled striker headed into an empty net when goalkeeper Andriy Pyatov failed to gather in Gerrard’s twice deflected cross.

Coach Roy Hodgson said England was due a change in fortune at a major tournament, citing Lampard’s shot against Germany and the referee’s decision in the Euro 2004 quarterfinals to disallow a Sol Campbell goal against host Portugal that would have put England 2-1 ahead. The English lost in a penalty shootout following a miss by David Beckham.

“We don’t have goal-line technology and, even with slow motion, people can’t be 100 percent certain,” Hodgson told reporters. “We’ve suffered pretty much bad luck in those areas, against Portugal and Germany, so if it was good luck today then we got it.”

Drought-Breaking Goal

Hodgson was able to pick Rooney after he was suspended for the opening two games against France and Sweden. He hadn’t scored for England in a tournament since getting two as an 18- year-old against Croatia on June 21, 2004.

The rustiness showed early on when he misplaced passes and failed to head a cross from Manchester United teammate Ashley Young when left free.

Rooney’s luck turned when Gerrard tricked his way down the right past Andriy Yarmolenko and hit a cross that eventually found its way to the striker.

“My overall game could’ve been a bit better but it’s difficult to play a first game for a while,” Rooney told reporters. “The one thing I was delighted with was that I was always putting myself in goal-scoring opportunities. I could’ve done better with a couple more but I got the goal.”

Rooney’s header muted the cries of support from the home crowd at the 56,000-seat Donbass Arena, which included Ukraine President Viktor Yanokovitch, Chelsea owner Roman Abramovich and Rinat Akhmetov, the owner of Shakhtar Donetsk, who play at the stadium. Blokhin said his players hadn’t let their country down.

“We played a very good game and even the England coach said they were lucky,” he said. “I don’t feel ashamed for this team.”

To contact the reporter on this story: Tariq Panja at the Donbass Arena in Donetsk at

To contact the editor responsible for this story: Christopher Elser at


IPad Boom Strains Lithium Supplies After Prices Triple

By Jesse Riseborough - Jun 20, 2012 6:00 AM GMT+0700

Investors from JPMorgan Chase & Co. to BlackRock Inc. are trying to make money from the exploding popularity of iPads and increasing sales of hybrid cars by investing in producers of lithium for batteries.

Prices for the conductive metal, the lightest in the periodic table, have tripled since 2000 in a market now worth $1 billion a year as uses expand in vehicles, ceramics, electronics and lubricants. Apple Inc. (AAPL) and Toyota Motor Corp. (7203), maker of the Prius electric-gasoline car, have few alternatives as they pursue higher performance and mobility, leading Dahlman Rose & Co. analysts to forecast lithium demand will double by 2020.

Talison Lithium Ltd. (TLH), whose shares have gained 26 percent in the last month, together with Soc. Quimica & Minera de Chile SA, Rockwood Holdings Inc. and FMC Corp. (FMC), produce almost 95 percent of world supply. Rio Tinto Group (RIO), the third-biggest mining company, may join the largest suppliers if it goes ahead with a mine in Serbia it says is capable of producing 20 percent of global output of the metal.

“There are some companies now that we think are attractive to get a hold of lithium exposure,” Evy Hambro, who manages about $13 billion in mining stocks for BlackRock in London, said in an interview. “We’ve got a small exposure today and we’re looking for some more,” he said without naming any companies.

Demand for lithium-ion rechargeable batteries out of Asia has helped prices climb threefold in the last 12 years, London- based Roskill Information Services Ltd. analyst Robert Baylis said. Global use doubled from 2000 to 2011 according to Roskill, which has recently consulted on six lithium projects.

Lithium Oligopoly

The advantage of lithium-ion over other battery types is that a typical cell can generate more electricity than competing cells like such as lead-acid.

There is about 0.1 of an ounce of lithium carbonate in a mobile phone and about 1 ounce in a notebook computer, according to Rockwood Chief Executive Officer Seifollah Ghasemi. There will be a “step change,” in the global lithium industry in 2016 or 2017 when electric cars became more commonplace, Ghasemi said. Batteries for such vehicles contain about 50 pounds of lithium.

The four-strong lithium “oligopoly has the capacity to significantly ramp supply higher, but it will take time and significant capital to accomplish,” Dahlman Rose analysts Anthony Young and Anthony Rizzuto said in a May 16th report. “There are a limited number of known high-grade resources that can be economically extracted and there has not been a new lithium mine constructed in the last 25 years.”

Biggest Producer

Global consumption may jump to 300,000 metric tons a year by 2020 from about 150,000 tons now, Dahlman Rose said in a June 7 report. Demand for lithium batteries has been growing at about 25 percent a year, outpacing the 4 percent to 5 percent overall gain in lithium, the firm said.

“Anywhere between a doubling and a tripling of demand in the next 10 years is absolutely our view,” Peter Oliver, CEO of Talison, the biggest producer, said in an interview. “Maybe a doubling is with minimal impact from electric vehicles and if electric vehicles take off in a big way in the next 10 years it could be as much as tripling.”

Neil Gregson, manager of about $6.9 billion in natural resource assets at JPMorgan Asset Management, said he’s studying investing in the industry. “It’s a very interesting area.”

Rio is researching the development of its Jadar lithium- boron operation at a time when other suppliers are expanding output to meet rising demand. Talison, the Perth-based company with a market share of about 32 percent, completed an expansion at its Greenbushes mine in Western Australia this month that has allowed it to double production capacity.

Ponce, Kravis

SQM, controlled by billionaire Julio Ponce, is the second- largest followed by Rockwood (ROC), which is backed by Henry Kravis’s KKR & Co., and Philadelphia-based FMC. SQM stock has risen 2.1 percent this year, Rockwood 17 percent and FMC 20 percent.

Chile, the second-biggest producing country behind Australia, last week said it will award 20-year concessions to exploit lithium brine in salt lakes. The plan allows developers to mine as much as 100,000 metric tons of the mineral over 20 years, Pablo Wagner, a government undersecretary, said June 12.

Rio’s Jadar project is in pre-feasibility, which involves conducting studies to better understand the parameters of the deposit and any social and environmental impacts, the company said in an e-mailed response to questions.

Lithium is “going to be so critical to that future world of electric vehicles and hybrids,” Tom Albanese, CEO of Rio Tinto, said April 19 in London. “We’ve got a lot of interest from Japanese companies, from Korean companies that actually want to be in the forefront of hybrid and lithium technologies so I’m actually pretty excited about the project.”

Prius Sales

Toyota’s Prius, a niche vehicle when it went on sale 15 years ago, jumped to the world’s third best-selling car line in the first quarter as U.S. demand and incentives in Japan turned the hybrid into a mainstream hit. In the quarter, sales soared to 247,230 cars.

“It’s less than 1 percent of the market now,” Talison’s Oliver said of lithium’s use in batteries for electric vehicles. “We do tend to try and portray a fairly conservative view, but if some of these new technologies take off its going to be a very exciting time for us.”

Since the start of Prius sales in Japan in 1997, Toyota has sold 4 million hybrid-electric vehicles worldwide, including 1.5 million in the U.S., the company said May 22. Makers of lithium- ion batteries are also benefiting from the rise in demand for the vehicles.

Tablet Computers

The global market for tablet computers is growing faster than expected, with Apple’s iPad widening its lead as consumers’ top choice, market researcher International Data Corp. said June. 14. Worldwide shipments of tablets this year will be 107.4 million units, up from an earlier projection of 106.1 million, Framingham, Massachusetts-based IDC said.

Worldwide shipments of tablets should reach 142.8 million next year and 222.1 million by 2016, IDC said.

“One can claim that without lithium, the whole mobile technology would not have been possible,” Rockwood’s Ghasemi told a Deutsche Bank AG conference June 13. “You use the product every single day.”

Battery-maker A123 Systems Inc. (AONE) rose 52 percent in New York trading on June 12 after saying it had developed an improved lithium-ion cell that can cut costs of rechargeable and hybrid vehicles. The new cells will be produced next year and can perform better in extreme heat and cold than competing packs, it said.

Golden Goose

Expanding battery sales to automakers is seen as the “golden goose” for the lithium industry, according to Roskill, and has spurred new entrants such as Galaxy Resources Ltd. and underpinned expansions by existing producers. Lithium-ion batteries are the biggest application for the material, accounting for about 22 percent of use.

“This is an industry which is consumer led,” Iggy Tan, managing director of Australia’s Galaxy, which made the first sale of a lithium product last month, said in an interview from Perth. “Once it takes off it’s a bit like mobile phones, it’s exponential.”

A123 supplies batteries for General Motors Co. (GM)’s Spark electric car, Bayerische Motoren Werke AG’s BMW 5 Series hybrid sedan, rechargeable and hybrid cars from China’s SAIC Motor Corp., buses made by Daimler AG and Volvo AB, and delivery trucks built by Smith Electric Vehicles Corp.

General Motors’ Chevrolet Volt was the best-selling rechargeable auto in the U.S. in May, topping Toyota’s Prius and Nissan Motor Co.’s all-electric Leaf hatchback.

Better Batteries

Deliveries of the GM plug-in sedan more than tripled in the month. Suppliers of lithium have benefited as some car-makers switch from older model nickel-cadmium batteries to lithium-ion.

Rockwood on May 14 proposed a price increase of $1,000 a ton, or about 22 percent, for lithium salt sold to customers in the year starting July 1. It said the higher price would allow it to fund expansion of its mines. Talison’s Oliver said he raised prices 15 percent in the first-half and is expects to increase prices again in the second-half.

“The outlook for lithium is very strong in light of some of the uncertainty of other metals such as copper and many of the industrial metals,” Jonathan Lee, a battery materials and technologies analyst at Byron Capital Markets, said in an interview. “Lithium has grown roughly at 10 to 15 percent over the past two years on a per-annum basis. We’re having another strong year this year.”

To contact the reporter on this story: Jesse Riseborough in London at

To contact the editor responsible for this story: John Viljoen at


Paulson Says Harm to U.S. From Europe Crisis is Minimal

By Anna Edney - Jun 20, 2012 3:09 AM GMT+0700

Former Treasury Secretary Henry Paulson said the U.S. will emerge relatively unharmed from the debt crisis in Europe as efforts by Greece, Spain and other nations to stabilize their economies persist for the long-term.

“Although Europe is a drag, the U.S. will continue to muddle along with growth that really isn’t enough to make a dent in employment,” Paulson, who was Treasury secretary from July 2006 through January 2009, said at a biotechnology industry conference in Boston today. Europe will eventually stabilize and avoid a “catastrophic outcome,” he said.

Former U.S. Treasury Secretary Henry Paulson in New York. Photographer: Todd Heisler/The New York Times via Redux

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U.S. President Barack Obama and German Chancellor Angela Merkel are among world leaders meeting in Mexico this week to attempt to fix the European debt crisis that’s threatening to plunge the global economy back into recession. They gathered after Spain’s borrowing costs soared to a euro-era record and elections in Greece failed to damp the threat of contagion.

“It’s hard for people over here to understand how committed the Europeans are to the monetary union,” Paulson told executives during the Biotechnology Industry Organization conference. “The monetary union isn’t sustainable unless you forge something that is more like a political union. That’s much more different. You’ve got 17 different countries over there.”

Under the best circumstances, “this will drag on over time,” he said.

Blaming Banks

Paulson, a former chairman and chief executive officer of Goldman Sachs Group Inc. (GS), was joined at the conference by former Treasury Secretary Robert Rubin. They discussed the U.S. financial crisis, with Paulson saying government was more to blame than the banks. Government policies encourage people to save too little and borrow too much, he said.

“From the beginning of time, we’ve had financial crises,” said Paulson, who is now chairman of the Paulson Institute at the University of Chicago. “People always blame the banks and for good reason. When you look for the root causes, they’re almost always failed government policies.”

More regulation is not the answer, he said.

“If you ever have to rely on regulation to save us that won’t be enough because unless you think the banks are trying to blow themselves up you’re never going to uncover all the problems in advance,” Paulson said.

Paulson left New York-based Goldman in 2006 to serve as Treasury secretary and held that position during the majority of the U.S. recession that began in December 2007 and ended in June 2009. He said he has faith in current Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke. His pessimism in the short term stems from politics.

The main policy lawmakers can change that would make a significant difference is the tax structure, he said. Paulson said he is against the current debate in Congress where Republicans have refused to raise any taxes and Democrats have advocated for increasing taxes on the rich only.

Instead, corporate loopholes should be eliminated and businesses should all be on a level playing field, he said.

“I would like to do away with the preferences,” Paulson said. “Politically, I think it’s very difficult to get done.”

To contact the reporter on this story: Anna Edney in Washington at

To contact the editor responsible for this story: Reg Gale at


Stocks Advance as Dollar Weakens on Fed Stimulus Bets

By Stephen Kirkland and Michael P. Regan - Jun 20, 2012 3:41 AM GMT+0700

Global stocks rose for a fourth day, the longest rally since April, and the U.S. dollar weakened as investors speculated the Federal Reserve may announce more stimulus measures. The euro climbed as Spanish bond yields fell after the government met its target at a bill auction.

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

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The MSCI All-Country World Index added 1.2 percent at 4 p.m. in New York and the Standard & Poor’s 500 Index (SPX) climbed 1 percent to 1,357.98, with both reaching the highest level in more than a month. The dollar depreciated versus 15 of 16 major peers, with the euro strengthening 0.9 percent to $1.2688. The yield on Spain’s ten-year note dropped 12 basis points to 7.04 percent, retreating from a euro-era record. Corn led gains in commodities as crop conditions deteriorated in the U.S. Midwest because of hot, dry weather. Oil rallied 0.9 percent.

Signs of faltering growth with inflation below a 2 percent target mean the Fed will announce new steps to boost the economy as soon as this week’s meeting, according to 12 of the 21 primary dealers who trade with the central bank. Group of 20 leaders were focusing their response to Europe’s financial crisis at a summit in Mexico as Greece’s creditors appeared set to ease bailout terms following elections.

“It’s possible that the Federal Reserve will do something else,” said David Kelly, who helps oversee about $394 billion as chief market strategist at JPMorgan Funds in New York. “They seem overly sensitive to the possibility that the market will react badly to them not taking action.”

Market Leaders

Shares of commodity producers, financial firms and industrial companies rose more than 1.2 percent to lead gains among seven of the 10 main groups in the S&P 500 today. Nvidia Corp. rallied 6.7 percent after Microsoft Corp. said its Surface tablet computer will be powered by the company’s Tegra processor. Microsoft rose 2.9 percent, while Apple Inc., maker of the iPad tablet, added 0.3 percent.

Oracle Corp., the world’s largest maker of database software, climbed 3.1 percent after fiscal fourth-quarter profit topped analysts’ estimates, buoyed by sales of new software licenses.

Bank of America Corp. jumped 4.5 percent to lead a rally in all 24 stocks in the KBW Bank Index, which jumped 2 percent. The Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, plans to help banks avoid being forced to buy back mortgages as it becomes concerned that lenders are tightening standards even for the most creditworthy home buyers.

The S&P 500 plunged 9.9 percent from a four-year high on April 2 through June 1 amid signs economic growth was slowing as Europe struggled to contain its debt crisis. It has rebounded more than 6 percent since then after the slump dragged the gauge’s valuation to 12.9 times companies’ reported earnings, the cheapest level since November, and investors speculated global policy makers will take additional steps to spur growth.

‘Clearly Unsure’

The Fed is scheduled to release its statement on interest rates and the economy tomorrow at 12:30 p.m. in Washington. The central bank kept the economy growing for nine-straight quarters by pumping $2.3 trillion into the financial system starting in November 2008 and shifting $400 billion into longer-term debt.

“There is no doubt the economy stinks but the Fed is quite clearly unsure, correctly or not, that it has the tools to affect outcomes in a sustainable manner,” Dan Greenhaus, chief global strategist at BTIG LLC in New York, said in a note to clients.

The Dollar Index, a gauge of the U.S. currency against six major peers, dropped 0.7 percent. The currencies of Brazil, South Africa and Mexico led gains against the U.S. dollar, strengthening at least 1 percent.

Commodities Gain

The S&P GSCI Index of commodities climbed 0.8 percent. Corn, coffee, sugar and cotton surged more than 3.5 percent as 15 of 24 materials tracked by the index advanced. Hot, dry weather in the next three days will increase stress on about a third of the Midwest crop, Commodity Weather Group LLC said in a report.

About 10 shares advanced for every one that declined in the Stoxx Europe 600 Index (SXXP), sending the gauge up 1.6 percent to its highest level in more than a month. Home Retail Group Plc surged 24 percent as sales at the Argos chain beat estimates. Whitbread Plc jumped 6.4 percent as first-quarter revenue increased. SAP AG rose 2.1 percent after Oracle’s results. Danone tumbled 6 percent after the world’s biggest yogurt maker cut its profitability forecast.

The cost of insuring Spanish sovereign debt fell from an all-time high as the nation sold 3.04 billion euros ($3.8 billion) of bills, compared with a target of 3 billion euros. Credit-default swaps on Spain fell 20 basis points to 601. The yield premium investors demand to own Spanish debt over benchmark German bunds narrowed 23 basis points to 551 basis points.

Spanish Auction

Spain’s government sold 2.4 billion euros of 12-month bills at an average rate of 5.074 percent, up from 2.985 percent paid on May 14. It also sold 639.3 million euros of 18-month debt at 5.107 percent, compared with 3.302 percent last month, the Madrid-based Bank of Spain said today.

The Italian 10-year bond yield fell 17 basis points to 5.92 percent.

The Helsinki 25 Index of Finland’s most-traded stocks rallied 2.2 percent and the nation’s 10-year bond yield rose 12 basis points to 1.91 percent. Finland raised its forecast for economic growth as private consumption is expected to offset slowing exports. Gross domestic product will expand 1 percent this year, 1.2 percent in 2013, and 2.1 percent in 2014, the Finance Ministry said. It had predicted growth of 0.8 percent for this year in an April forecast.

Euro Strengthens

The euro gained against 12 of its 16 major counterparts, strengthening 0.7 percent versus the yen.

Greece’s benchmark ASE Index of stocks surged 3.3 percent today and has rebounded 26 percent from a 22-year low on June 5.

A first step for Greece to renegotiate its bailout will be when the still to-be-formed government requests modifications to the 240 billion-euro ($303 billion) rescue programs, leading to a revision of Greece’s economic-performance targets sometime before September, a European official told reporters in Brussels today.

The MSCI Emerging Markets Index climbed 1 percent, gaining for a third day. India’s Sensex advanced 0.9 percent. Egypt’s EGX 30 Index tumbled 4.2 percent to the lowest level since January as a power struggle between civilian politicians and the ruling generals threatened to derail the country’s transition to democracy.

To contact the reporters on this story: Stephen Kirkland in London at; Michael P. Regan in New York at

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


Dimon Tells Congress JPM Complied With Disclosure Rules

By Dawn Kopecki, Steven Sloan and Phil Mattingly - Jun 20, 2012 1:47 AM GMT+0700

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon told U.S. House members that he complied with disclosure rules in warning investors about changes that contributed to the bank’s trading loss of at least $2 billion.

Jamie Dimon, chief executive officer of JPMorgan Chase & Co., speaks during a Senate Banking Committee hearing in Washington, D.C. Photographer: Andrew Harrer/Bloomberg

Thomas Curry, comptroller of the U.S. currency, arrives to a House Financial Services Committee hearing in Washington, D.C. on, June 19, 2012. Photographer: Andrew Harrer/Bloomberg

Scott Alvarez, general counsel with the board of governors of the U.S. Federal Reserve, listens during a House Financial Services Committee hearing in Washington, D.C. on June 19, 2012. Photographer: Andrew Harrer/Bloomberg

Mary Schapiro, chairman of the U.S. Securities and Exchange Commission (SEC), left to right, Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission (CFTC), Martin Gruenberg, acting chairman of the Federal Deposit Insurance Corp. (FDIC), and Scott Alvarez, general counsel with the board of governors of the U.S. Federal Reserve, testify during a House Financial Services Committee hearing in Washington, D.C. on June 19, 2012. Photographer: Andrew Harrer/Bloomberg

“We disclosed what we knew when we knew it,” Dimon told lawmakers today at a House Financial Services Committee hearing in Washington that lasted more than four hours.

It was Dimon’s second appearance on Capitol Hill in less than a week to explain how the firm lost control of its derivatives trades. Securities and Exchange Commission Chairman Mary Schapiro, speaking from the same witness table earlier, said the agency has a “wide panoply” of penalties at its disposal in pursuing sanctions against JPMorgan. The bank could pay penalties if investigators find that it violated disclosure or other rules, she said.

Since Dimon announced the loss on May 10, investors and regulators have questioned JPMorgan’s disclosures of changes to its “value at risk” or VaR calculation. Dimon told investors on May 10 that the company used a new model, which later proved to be “inadequate,” to calculate VaR some time during the first quarter.

He told lawmakers today the the model change didn’t directly cause the loss.

“It may have aggravated what happened,” he said. “I wouldn’t say it was the cause of what happened.”

VaR is a measure of how much a company estimates it could lose on securities on 95 percent of days.

Loss Growing

Dimon has warned that the $2 billion loss could balloon as the bank unravels some of its troubled trades. He told lawmakers that he won’t provide an update on the loss until the bank releases its second quarter earnings on July 13.

As he testified about losses centered in London, Dimon encouraged Congress to limit the international reach of swaps regulations required under the Dodd-Frank Act.

“If JPMorgan overseas operates under different rules than our foreign competitors, we can no longer provide the best products and services to our U.S. clients or our foreign clients,” Dimon said. “They will go elsewhere if we can’t give them the best possible deal.”

The Commodity Futures Trading Commission, the main U.S. derivatives regulator, is poised to propose guidance on June 21 that would extend swaps rules to foreign branches and subsidiaries of JPMorgan, Goldman Sachs Group Inc., Citigroup Inc. and other U.S. banks.

Senate Contrast

When Dimon appeared before the Senate Banking Committee on June 13, he was cordially received and asked his opinion on subjects including the European debt crisis and how U.S. lawmakers should resolve the so-called fiscal cliff at the end of the year. Today’s hearing was more contentious.

Representative Stephen Lynch, a Massachusetts Democrat, pressed House Financial Services Committee Chairman Spencer Bachus, an Alabama Republican, to require Dimon to testify under oath. Bachus declined, saying it wasn’t the committee’s tradition to require witnesses to deliver sworn testimony.

JPMorgan’s Lobbying

Dimon didn’t hesitate to push back against lawmakers who criticized the bank’s lobbying or size. He said big banks like JPMorgan provide loans for homeowners and businesses of all sizes.

“I assume you want us to do that,” he said. “We’re the biggest small, or one of the biggest small business lenders in the United States. We raised four or five hundred billion dollars for the biggest American corporations. We bank some of those corporations in 20 countries around the world.”

“That’s what we do,” he said.

Representative Maxine Waters, a California Democrat, asked Dimon to explain why JPMorgan has lobbied against provisions of the 2010 Dodd-Frank Act which overhauled financial regulation. Dimon has been especially outspoken in his opposition to the so- called Volcker rule, which bans banks from engaging in most proprietary trading.

“Lobbying is a constitutional right and we have a right to have our voice heard,” Dimon said.

Dimon said it wasn’t necessary, however, for his voice to be heard in the boardroom of the Federal Reserve Bank of New York, where he is a director. Senator Bernie Sanders, a Vermont Independent, introduced legislation on May 22 that would ban employees of bank holding companies or other firms regulated by the Fed from serving on regional Fed bank boards.

Dimon reminded lawmakers that Congress is responsible for writing the laws that govern the central bank and said his role at the New York Fed is limited. He doesn’t vote on the New York Fed’s president or get involved in supervision, he said.

“It’s more of an informational advisory group,” he said.

Regulators Grilled

At the start of the hearing, the heads of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Securities and Exchange Commission and CFTC and a senior Federal Reserve official were grilled over how they could have missed the trading debacle.

“Just as JPMorgan should be and is being held accountable for its risk management failures, accountability must also be demanded of the federal regulators who oversee the bank’s activities,” Bachus said.

In the wake of the loss, Comptroller of the Currency Thomas J. Curry said his agency is reviewing its staffing inside JPMorgan’s London operations, where the trades under scrutiny occurred.

“We will use our experience here, our review of JPMorgan Chase, to reevaluate the numbers and strength of the personnel in our London office,” he said.

To contact the reporters on this story: Phil Mattingly in Washington at; Dawn Kopecki in Washington at; Steven Sloan in Washington at

To contact the editors responsible for this story: Maura Reynolds at; David Scheer at


Austerity Doesn’t Pay as Debt Markets Ignore Rating Cuts

By John Detrixhe, Zeke Faux and Katie Linsell - Jun 20, 2012 2:28 AM GMT+0700

Britain is forcing Stephen Jobling and his stroke patients to defend the nation’s AAA credit rating.

Staffing at the National Health Service hospital ward where Jobling works was reduced by about half in the U.K.’s deepest drive since World War II to shrink its deficit. The goal was to avoid losing the top credit score, which might risk higher interest expenses, according to the government of Conservative Prime Minister David Cameron.

Moody's Investors Service Inc. headquarters in New York. Photographer: Scott Eells/Bloomberg

June 19 (Bloomberg) -- U.K. Prime Minister David Cameron, U.K. Chancellor of the Exchequer George Osborne, Nobel Laureate Paul Krugman and former Bank of England policy maker David Blanchflower comment on U.K. fiscal policy. (Source: Bloomberg)

A sale sign outside a French Connection shop in London. Photographer: Suzanne Plunkett/Bloomberg

The Standard & Poor's Financial Services LLC in New York. Photographer: Scott Eells/Bloomberg

Nobel laureate economics professor at Princeton University Paul Krugman said, “You’re kind of in an endless downward loop here, where you cut and the fiscal prospect looks worse, so to keep the rating agencies happy, you cut more.” Photographer: Ramin Talaie/Bloomberg

The government of Conservative Prime Minister David Cameron seeks to shrink its deficit to avoid losing the nation's AAA credit rating. Photographer: Chris Ratcliffe/Bloomberg

“If they could see these people suffering while we have two members of nursing staff running round trying to wash, dress and feed 20 patients, they would think twice,” says Jobling, 27, a nurse at Lincoln County Hospital in eastern England. “You should be looking after your people. You shouldn’t be bothering about some credit agency from somewhere else.”

The bond market says he’s right. After Moody’s Investors Service issued a “negative” outlook for U.K. debt on Feb. 13, yields on government securities relative to benchmark U.S. Treasury debt fell over the next month, instead of rising.

“I don’t think we should be slaves to the ratings agencies,” Mervyn King, governor of the Bank of England, told lawmakers on Feb. 29. “What we’ve seen is, the action they took recently did actually have no impact on the yield that people in the market were willing to lend to the U.K. government at.”

Market Rejection

It’s not just Britain. After Standard & Poor’s stripped France and the U.S. of AAA grades, interest rates paid by the countries to finance their deficits dropped rather than rose. For investors and policy makers, predicting the consequences of a rating change by S&P or Moody’s -- the dominant issuers of debt scores -- may be little different from flipping a coin.

(For an interactive graphic, click here.)

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

The rating companies are still warning of downgrades while defending their assessments against critics. Moody’s said June 8 that all sovereign ratings in Europe would be reviewed, including Germany’s Aaa, if Greece leaves the region’s monetary union. The credit standings of Cyprus, Portugal, Ireland, Italy and Spain are deteriorating, the company said. The U.S. may have another downgrade by 2014, S&P said June 8.

Big Influence

The ratings “have more potential to do harm than good,” said John Hund, a finance professor at Rice University in Houston, in an interview. Hund wrote his doctoral dissertation on sovereign debt-market volatility and measures of sovereign risk. “It’s hard for me to see their value.”

Credit grades on government bonds have influence far beyond their technical role of describing the likelihood a nation will fail to service its debts. S&P’s downgrade of the U.S. last year contributed to a global stock-market rout that erased $6.1 trillion in value between July 26 and Aug. 12. In response to the lowered rating, the market sent yields on Treasury bonds to record lows rather than driving up rates.

They’ve stayed there. The U.S. government sold $29 billion of seven-year notes at a record low yield of 1.203 percent on May 24. The Federal Reserve has helped drive down yields by selling short-term U.S. bonds while buying longer-term securities.

Austerity Hurts

The austerity policies prized by the rating companies have the global economy on the brink of renewed recession, according to Paul Krugman, the Nobel laureate economics professor at Princeton University. As government funding shortfalls from the U.S. to France to Spain widened during the recession, S&P and Moody’s stepped up warnings and downgrades of sovereign debt.

“Their austerity is leading to depressed economies, which is worsening fiscal prospects,” Krugman said in an interview May 9. “You’re kind of in an endless downward loop here, where you cut and the fiscal prospect looks worse, so to keep the rating agencies happy, you cut more.”

As part of the deal that raised the U.S. debt limit three days before S&P’s downgrade, $1.2 trillion in automatic spending cuts over the next decade will begin to take effect at the end of this year unless Congress and President Barack Obama block them. The tax cuts enacted by George W. Bush in 2001 are set to expire Jan. 1. That fiscal cliff may send the U.S. into recession again, the Congressional Budget Office said in May.

Economies Stagnate

The U.K. scaled back public spending over the next four years by 81 billion pounds ($127 billion) while raising taxes, including what critics called a “granny tax” on the elderly. The austerity moves eliminating thousands of government jobs helped push the British economy back into recession in the fourth quarter, according to David Blanchflower, a former Bank of England policy maker. France and Spain took similar steps to shrink deficits even as the global economy stagnated.

The U.K. economy may grow 0.8 percent this year, according to the International Monetary Fund, while euro-area output contracts 0.3 percent and the U.S. expands at a 2.1 percent rate. The IMF has lowered its forecast for every EU country since last year.

The U.S., even with little likelihood of a default, fought the prospect of a downgrade. Treasury officials exchanged at least 158 e-mails with S&P from April 2011 until the rating change last August, according to materials obtained by Bloomberg under the Freedom of Information Act.

U.S. Downgrade

John Chambers, managing director of sovereign ratings at S&P, sent a draft of the company’s first-ever downgrade of the U.S. to the Treasury at 1:42 p.m. on Aug. 5, according to documents obtained by Bloomberg. Chambers e-mailed Matthew Rutherford, then the Treasury’s deputy assistant secretary for federal finance, less than three hours later to say that the company was rechecking the fiscal scenario baseline and would call in a moment. S&P downgraded the U.S. at about 8:20 p.m.

S&P’s decision was flawed by a $2 trillion error, according to the Treasury Department. Moritz Kraemer, S&P’s head of sovereign ratings for Europe, the Middle East and Africa, said April 24 that “there was no mistake” and that the discussion hinged on which nonpartisan Congressional Budget Office fiscal scenario baseline to use in the rating company’s credit analysis. S&P said using the department’s preferred spending measures in its analysis didn’t affect its credit grade.

AAA Subprime

Moody’s and S&P were already controversial after they helped fuel a global housing bubble by awarding AAA scores to subprime mortgage investments, creating demand for the flawed issues, which led to more bad mortgages being made. The rating companies engaged in a “race to the bottom,” inflating credit grades to win business from Wall Street banks, a Senate panel reported last year.

Thousands of these bonds plunged in value in 2008, which led to worst financial crisis since the Great Depression. Those soured securities were part of the reason the U.S. set up a $700 billion program in 2008 to bolster the financial industry. The crisis also spurred $787 billion of tax cuts and spending to help the U.S. economy. The U.K. created a 500 billion pound package to rescue its banks, and the European Union started a 200 billion euro ($252 billion) stimulus program.

Now, after governments widened their deficits to stem the crisis, their credit grades are under pressure from the same rating companies whose actions helped cause the financial turmoil.

“How do you have any faith in them given they were part problem?” Blanchflower said.

Special Standing

S&P’s roots go back to 1860, when Henry Varnum Poor published a comprehensive report on the financials of U.S. railroads. Journalist John Moody published his first railroad ratings in 1909.

In 1936, the U.S. Comptroller of the Currency banned banks from holding bonds that were below investment grade. In 1975, the Securities and Exchange Commission began using credit ratings in its rules, specifying that the only companies whose grades qualified were S&P, Moody’s and Fitch Ratings. The SEC designated them as nationally recognized statistical rating organizations, or NRSROs. There are now nine of them.

“That increased the monopoly power of Moody’s and Standard & Poor’s and Fitch,” said Richard Sylla, a financial historian at New York University’s Stern School of Business, in an April 27 telephone interview. “It was a bad move on the part of the government. It was a big favor to the rating agencies.”

Now S&P provides 42 percent of all credit ratings, and Moody’s, 37 percent, according to the SEC. The firms are for- profit units of publicly traded companies. S&P is part of McGraw-Hill Cos. (MHP) and Moody’s is a unit of Moody’s Corp. (MCO) Fitch is half-owned by Hearst Corp., the publishing company.

Germany’s Yield

S&P and Moody’s rate thousands of sovereign debt issues from the top score of AAA down, 21 steps lower to D for S&P and 20 levels to C for Moody’s. Germany, with a top ranking, can borrow for 10 years at 1.4 percent. Greece, with an S&P rating 17 steps lower and a bottom-rung Moody’s grade of C, has to pay 18 times as much.

Investors also sometimes disregard ratings on corporate debt. For example, after Moody’s lowered its assessments last month on DNB Bank ASA of Norway and Nordea Bank AB and Svenska Handelsbanken of Sweden, yields on their bonds fell rather than rose. Investors said they were relying more on their own analysis than the credit scores.

Voter Unrest

Deficit-cutting policies have fueled Occupy protest movements, contributed to the election defeats of governments in Greece and France and eroded support for German Chancellor Angela Merkel. Newly elected French President Francois Hollande in May pressed European Union leaders to abandon austerity and fuel growth.

Regulators and politicians in the U.S. and Europe are considering proposals to replace ratings by S&P and Moody’s on sovereign debt. In April, Bertelsmann Foundation, a private organization founded by the former head of Europe’s largest media company, proposed a “blueprint” for creating a nonprofit sovereign credit-rating entity.

U.S. regulators, required by Congress to remove credit ratings from banking rules, devised a plan in December that would base bank capitalization requirements on classifications by the Organization for Economic Cooperation and Development. That intergovernmental group, two-thirds of whose members are European Union countries, considers most EU sovereign bonds risk-free.

The European Parliament’s economic and monetary affairs committee voted today in Brussels to scrap most of a proposal to force businesses to rotate the credit-ratings company they hire to assess their debt, while backing tighter restrictions on sovereign-debt ratings.

European Alternative

France has led calls to create a European alternative to S&P and Moody’s. Hollande advocated a government-funded agency as he campaigned against Nicolas Sarkozy, who watched as France lost its AAA rating even after his push for austerity. Denmark, which holds the rotating European Union presidency, said May 21 that it won backing in the 27-nation bloc to curtail the influence of rating companies and pledged to push for more competition in the industry.

“It’s almost as if they’re trying to admonish the countries to get their financial books in order,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. “They’re really doing the world a huge disservice by frightening financial markets.”

The rating companies say they aren’t prescribing policy. S&P says its sovereign ratings have a “robust long-term track record.” Moody’s bills its grades as a “credit passport” for capital.

Moody’s Comment

“The rating agency is not trying to predict the direction that credit spreads will move over the next few months,” said Richard Cantor, chief credit officer at Moody’s, in an e-mail. “We have only one objective, which is to assign ratings that are indicative of the relative risk of default and losses.”

Market reactions to rating moves can involve “non-rational behavior,” said Peter Rigby, director of rating services at S&P. For example, if S&P issues a “negative” outlook, investors may drive the yield up too far because they don’t know how many steps a country’s debt may be downgraded, he said. Rates may then ease after the company issues its new credit assessment.

“If we do change a rating -- lower a rating -- that in essence maybe sets a floor,” Rigby said. “So actually prices would tighten up to the new level.” Comparing market reactions with outlook and rating changes “would completely miss that phenomena,” he said.

Growth Threat

S&P’s credit downgrades in Europe reflected threats to economic growth as well as risks including “tightening credit conditions,” the company said in January. It warned that “a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls.”

Bloomberg compiled data on changes in credit outlook and ratings along with bond yields for 30 countries as far back as 1974. They are Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Columbia, Denmark, Finland, France, Germany, Greece, Indonesia, Ireland, Italy, Japan, Mexico, The Netherlands, New Zealand, Norway, Portugal, Russia, South Korea, Spain, Sweden, Turkey, the U.K. and the U.S.

To adjust for variations in market sentiment, the data compared yields with U.S. Treasuries. American debt serves as a benchmark because it is issued in the global reserve currency. In the case of the U.S., absolute yields fell. Measuring variations after 30 days allowed time for markets to adjust to assessment changes while minimizing the effects of subsequent unrelated events.

Credit Derivatives

Other organizations have also used market prices to study the effectiveness of credit grades, including the International Monetary Fund, the European Central Bank and academics at Rice University, Indiana University and American University. In a January analysis of Moody’s rating changes, researchers at the IMF used credit derivatives to show that prices moved in the expected direction 45 percent of the time for developed countries and 51 percent for emerging economies. For outlook changes, the ratios were 67 percent and 63 percent.

Like Cameron, France’s Sarkozy in June 2010 made protecting the country’s top credit rating a priority. His government raised the national retirement age to 62 from 60. That September, he announced the deepest budget cuts in two decades, citing the need to defend the credit ranking.

Sarkozy’s Austerity

S&P rewarded those moves on Dec. 23, 2010, affirming France’s AAA rating because of the “wealth and depth” of the economy and the view that Sarkozy’s government would narrow its budget gap. Within the next year, the credit rating became a sideshow as the Greek credit crisis put the stability of the euro and the country’s banks in play.

By last December, Sarkozy was saying a downgrade “would be an additional difficulty, but it’s not insurmountable,” in an interview with Le Monde. S&P cut its rating to AA+ from AAA on Jan. 13, saying policy initiatives “may be insufficient” to address “systemic stresses in the euro zone.”

The bond market balked at the ruling, making it cheaper for France to borrow after the downgrade. Sarkozy’s budget cuts contributed to his defeat last month as French voters elected Hollande, an advocate of growth rather than austerity. The new president is moving to reinstate retirement at age 60 for some workers.

Spain’s Struggle

Spanish Prime Minster Mariano Rajoy on June 9 accepted a 100 billion euro bailout from the European Union to defend the country’s banks and the government’s ability to finance its deficit. Since his election last November after promising not to raise taxes, not to make firing workers cheaper and not to cut spending on education and health, he did all of those things in Spain’s deepest austerity drive in more than three decades. The economy is heading for a decline of 1.7 percent this year.

The goal is to convince investors the country won’t default as borrowing costs exceed 7 percent, Rajoy said. The yield on 10-year Spanish bonds jumped to 7.29 percent yesterday after declining to 6.1 percent on June 7.

Spain paid 0.18 percentage point less to borrow than the U.S. as recently as April 2010, even after S&P cut the country’s top grade in January 2009. Moody’s stripped Spain of its Aaa rating in September 2010.

Moody’s has downgraded Spain four times since then, most recently by three steps to Baa3 from A3 last week, and S&P cut its rating to BBB+ in April, citing the risk that the government might not meet its deficit-cutting targets.

‘Falling Apart’

Spaniards are paying higher taxes and losing government services. In Valencia, 50-year-old Palmira Castellano says she can’t get out of the house since the end of a benefit that enabled her to hire someone to care for her disabled daughter Sara a few hours at a time.

“Everything is falling apart -- look at the health system, education,” Castellano says. “All the rights that were acquired over so many years are put into question.”

Austerity came to Britain after elections in May 2010 brought a coalition led by Cameron to power. Chancellor of the Exchequer George Osborne set out to reduce the national deficit to 1.1 percent of economic output by 2015-16 from more than 10 percent in 2010. The government delayed and reduced future pensions for workers like Jobling and tripled university fees.

Revenue increases include freezing a tax allowance for people over 65 which was introduced in the 1920s by Winston Churchill, according to Osborne’s most recent budget in March. The Office for Budget Responsibility says the government’s plan will cut more than 700,000 public jobs --including teachers, nurses, prison officers and police.

Austerity Drive

Protecting Britain’s credit rating “was the be-all and end-all” for Osborne, said Blanchflower, who is now an economics professor at Dartmouth College in Hanover, New Hampshire, and a contributing editor for Bloomberg Television. Credit ratings are “making everything more difficult than it could be without them.”

Osborne said April 13 that S&P’s AAA rating on British gilts “is a reminder that Britain is weathering the international debt storms because of the policies we have adopted and stuck to in tough times.”

Britain’s austerity drive has made the stroke ward at Lincoln County Hospital seem “like a battlefield” at times, says nurse Jobling. During some shifts, staff reductions have left 20 patients in the care of himself and two assistants, down from seven or eight workers, he said.

Choosing Patients

One night last winter, one of the wards ran out of space for patients, and two octogenarian women were left unattended at 2 a.m. in a waiting area pending their discharge the next day, Jobling says. In another case, he and two assistants struggled to care for a patient who had stopped breathing while another one was choking on dinner, he says.

“It’s just crazy,” Jobling says. “We had to choose which patients to save.”

Under the Cameron-Osborne austerity program, he says, his pay probably won’t rise from 21,000 pounds annually, after a 250 pound raise in April, and he fears losing his job. According to the Royal College of Nursing, as many as 61,000 National Health Service positions may be eliminated. The Department of Health disputes that estimate.

“The U.K. shouldn’t care at all what its rating is,” says Vincent Truglia, managing director of New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s. “A rating is not what you’re supposed to be interested in. You’re supposed to be interested in the right public policy.”

To contact the reporters on this story: John Detrixhe in New York at; Zeke Faux in New York at; Katie Linsell in London at

To contact the editors responsible for this story: Dave Liedtka at; Alan Goldstein at; Paul Armstrong at


U.S. Stocks Advance to One-Month High as Fed Meets

By Rita Nazareth - Jun 20, 2012 3:33 AM GMT+0700

U.S. stocks advanced, sending the Standard & Poor’s 500 Index to the highest level in more than a month, as investors speculated the Federal Reserve will announce more measures to stimulate the world’s largest economy.

Concern about a global slowdown and a worsening of Europe’s debt crisis put the S&P 500 on the brink of a so-called correction this month. Photographer: Richard Drew/AP Photo

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

Bank of America Corp. (BAC) climbed 4.5 percent as the Federal Housing Finance Agency said it plans to help banks avoid being forced to buy back mortgages amid concern lenders are tightening standards even for the most creditworthy buyers. FedEx Corp. (FDX), operator of the largest cargo airline, jumped 2.8 percent after pledging “significant cost reductions.” Microsoft Corp. (MSFT) increased 2.9 percent after unveiling a tablet computer.

The S&P 500 rose 1 percent to 1,357.98 at 4 p.m. New York time, gaining for a fourth day. The Dow Jones Industrial Average added 95.51 points, or 0.8 percent, to 12,837.33. Trading volume for exchange-listed stocks in the U.S. was about 6.8 billion shares, or almost in line with the three-month average.

“It’s possible that the Federal Reserve will do something else,” said David Kelly, who helps oversee about $394 billion as chief market strategist at JPMorgan Funds in New York. “It’s possible that they will do some further extension of Operation Twist. They seem overly sensitive to the possibility that the market will react badly to them not taking action.”

Signs of slowing growth amid Europe’s turmoil could mean the Fed, which began a two-day meeting today, could extend its so-called Operation Twist, according to JPMorgan Chase & Co. (JPM) and Jefferies & Co. The program involves selling short-term debt and buying longer-term bonds. A more aggressive response could be warranted if the Fed see high costs in a slowdown of growth.

Fed’s Options

The central bank may expand its balance sheet, extend Operation Twist and/or lengthen its short-term interest rate guidance beyond late 2014, Goldman Sachs Group Inc. chief economist Jan Hatzius wrote today.

“A decision not to ease is tantamount to a tightening,” he wrote in an e-mailed report to clients today. “At this point we’d be quite surprised if we saw no easing.”

Expectations for further policy action gave stocks their first back-to-back weekly gain since April on June 15. The S&P 500 earlier this month was on the brink of a so-called correction, or a 10 percent drop from a recent peak, on concern about a global slowdown and a worsening of Europe’s crisis.

Equities briefly pared gains as a German official said the Group of 20 leaders didn’t discuss any specific plans for Europe’s rescue funds to buy the bonds of euro-area governments. Haggling among Greek political leaders is set to continue for a third day over a coalition that will seek relief from austerity measures tied to emergency loans, with Pasok leader Evangelos Venizelos saying a new government could be ready by midday tomorrow. Spanish bond yields fell after yesterday’s surge.

100 Days

The S&P 500 (SPX) traded near its average price of the last 100 days of about 1,359. A rally above that level could be considered a harbinger of more gains, according to analysts who study charts to make forecasts. The Chicago Board Options Exchange Volatility Index, which measures the cost of using options as insurance against S&P 500 losses, rose 0.3 percent to 18.38, after slumping 25 percent in three days.

Seven out of 10 groups in the S&P 500 rose today as commodity, financial and industrial shares had the biggest gains. The Morgan Stanley Cyclical Index of companies most-tied to the economy increased 2 percent. The KBW Bank Index rallied 2 percent as all of its 24 stocks advanced.

Bank of America surged 4.5 percent to $8.11. The FHFA will detail flaws that would trigger a putback request, Stefanie Johnson, a spokeswoman for the FHFA, said in a statement.

Wealth Manager

Julius Baer Group Ltd. is in talks with Bank of America about acquiring its Merrill Lynch wealth management business outside the U.S. The Bank of America wealth unit may fetch about $2 billion, said a person familiar with the matter.

JPMorgan added 2.2 percent to $35.38. Chief Executive Officer Jamie Dimon told U.S. House members that he complied with disclosure rules in warning investors about changes that contributed to the bank’s trading loss of at least $2 billion. It was his second appearance on Capitol Hill in less than a week to explain how the firm lost control of its derivatives trades.

FedEx, which is considered an economic bellwether, gained 2.8 percent to $91.01. The company’s express unit, which accounts for the bulk of sales, is developing a detailed strategy to improve efficiency in its operating expenses, Chief Financial Officer Alan Graf said on an earnings call.

Microsoft added 2.9 percent to $30.70. The Windows-powered tablet computer called Surface alters the company’s strategy of focusing on software and relying on partners to make the machines, in a renewed attempt to take on Apple Inc. (AAPL)’s iPad. Nvidia Corp. (NVDA) rallied 6.7 percent to $13.24. Microsoft said the tablet computer will be powered by its Tegra processor.

Oracle’s Results

Oracle Corp. (ORCL) advanced 3.1 percent to $27.96. The world’s largest maker of database software reported that fiscal fourth- quarter profit topped analysts’ estimates, buoyed by sales of new software licenses.

Goodyear (GT) Tire & Rubber Co. and Cooper Tire & Rubber Co. (CTB) rose as a global rubber deficit is projected to turn into a surplus in the second half, driving down the price tiremakers pay for the raw material. Goodyear increased 5.6 percent to $11.53. Cooper Tire added 3.2 percent to $17.23.

MetLife Inc. (MET) jumped 5 percent to $30.88. The largest U.S. life insurer got more time to submit a fresh capital plan to the Fed as the firm seeks to raise its dividend and resume buybacks after being twice blocked by the regulator.

Take Over

J.C. Penney Co. (JCP) tumbled 8.6 percent to $22.25, the lowest since 2010. The company’s merchandising and marketing chief is leaving, and Chief Executive Officer Ron Johnson will take over his duties, following a marketing strategy that has flopped with shoppers. The departure comes as Johnson struggles to remake the retailer’s image and overhaul its pricing strategy.

“They weren’t happy with the marketing direction, and it wasn’t resonating with consumers,” said Lizabeth Dunn, an analyst with Macquarie Group in New York. “They really want to emphasize price and product more obviously in marketing.”

Walgreen Co. (WAG) dropped 5.9 percent to $30.09. The largest U.S. drugstore chain agreed to pay $6.7 billion for a 45 percent stake in the U.K.’s Alliance Boots, with an option to gain full control in about three years.

Barnes & Noble Inc. (BKS) slumped 4 percent to $14.63. The largest U.S. bookstore chain posted fourth-quarter revenue that trailed analysts’ estimates.

The peak in stock trading during the market’s decline after April was less than half the volume triggered during the slumps in 2011 and 2010, a sign bears could come back in force, according to Bank of America.

Changed Hands

About 4.67 billion shares changed hands on the New York Stock Exchange on June 1, the busiest trading since the S&P 500 started its retreat from this year’s high in April, according to data compiled by Bank of America and Bloomberg. That compared with peak volume of more than 9.5 billion in the previous two years, the data show.

The S&P 500 tumbled 9.9 percent from April 2 through June 1 and has since risen 6.3 percent. The relatively slow trading during the retreat suggests a lack of “volume shakeout” and means bears may still have the power to drive the market lower, according to Mary Ann Bartels, a New York-based technical analyst at Bank of America.

“While the short-term technicals support the case for a rally, the risk is that sellers are not yet completely exhausted and an adverse macro news event could trigger a future shakeout,” Bartels wrote in a note dated yesterday.

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

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


Microsoft Unveils Surface Tablet Computer to Rival IPad

By Dina Bass, Andy Fixmer and Cliff Edwards - Jun 20, 2012 3:34 AM GMT+0700

Microsoft Corp. (MSFT) unveiled its own Windows-powered tablet computer called Surface, altering its strategy of focusing on software and relying on partners to make the machines in a renewed attempt to take on Apple Inc. (AAPL)’s iPad.

Panos Panay, general manager of Surface at Microsoft Corp., during the launch of the Surface tablet computer in Los Angeles on June 18, 2012. Photographer: Jonathan Alcorn/Bloomberg

Steve Ballmer, chief executive officer of Microsoft Corp., speaks at a news conference launching the company's Surface tablet computer at Milk Studios in Los Angeles, on June 18, 2012. Photographer: Jonathan Alcorn/Bloomberg

Microsoft said the Surface’s price will be announced closer to when the devices are available and will be “competitive with a comparable ARM tablet or Intel Ultrabook-class PC.” Photographer: Jonathan Alcorn/Bloomberg

The tablet has a 10.6-inch display and will run the new version of Microsoft’s operating system, Chief Executive Officer Steve Ballmer said at an event yesterday at Milk Studios in Los Angeles. The device’s cover serves as a full keyboard with a track pad. Surface will be available later this year.

The world’s largest software maker is stepping up its assault on the tablet market as consumers choose the devices over laptops, weakening personal-computer sales and curbing Windows revenue. The new strategy threatens to sour Microsoft’s relationship with some PC makers, many of which have been investing to develop their own Windows 8 tablets and may not want to compete directly with Microsoft.

“What can I say? Hell froze over -- this is totally antithetical to their core business,” said Michael Gartenberg, an analyst at Gartner Inc. “They’re taking their destiny into their own hands. It’s a bold move, but it’s a very risky one. This could turn into Microsoft’s next Zune or its next Xbox.”

Microsoft advanced 2.9 percent to $30.70 at the close in New York, and has climbed 18 percent this year. Apple increased 0.3 percent to $587.41.

Two Versions

The company wants to release Windows 8, the new version of its software that is optimized for touch-screen tablets, in time for the end-of-year holidays and will have a version for x86 chips from Intel Corp. and for ones based on ARM Holdings Plc’s technology, which is also used in the iPad. The Surface tablet will be available in versions running both chip designs.

Microsoft said the Surface’s price will be announced closer to when the devices are available and will be “competitive with a comparable ARM tablet or Intel Ultrabook-class PC.”

The version for ARM will go on sale when Windows 8 is released. The Intel-based version will be available about 90 days later, Microsoft said in a statement.

The ARM version of Surface weighs less than 1.5 pounds (680 grams), is 9.3 millimeters (0.37 inches) thick, has a magnesium case and will be powered by an Nvidia Corp. (NVDA) Tegra processor, the company said at the event. Surface also has a built-in kickstand.

“The Surface is something new that we think people will absolutely love,” Ballmer said.

PC Market

Windows 8 will arrive amid a deteriorating PC market -- research firm Gartner Inc. on June 15 cut its 2012 PC shipment growth forecast to 2.7 percent from 4.4 percent. Tablet shipments, by comparison, are forecast to almost double to 116 million units this year, Gartner estimates.

Microsoft’s entry into the tablet market also comes as challengers such as Hewlett-Packard Co. (HPQ) and Research In Motion Ltd. have failed to derail Apple’s dominance with their own tablets. The worldwide tablet market is estimated to reach $78.7 billion this year, according to research firm DisplaySearch.

LG Electronics Inc. (066570), the world’s No. 4 mobile-phone maker, will sideline tablet development to focus more on smaller devices rather than compete head-on with Apple Inc.’s iPad, the Seoul-based company said in an e-mail today. LG introduced its second tablet, named Optimus Pad LTE, earlier this year.

Microsoft is also teaming up with PC makers like Acer Inc., Toshiba Corp. and Asustek Computer Inc. to build tablets with Windows 8, which will be called Windows RT for versions running on ARM-based chips.

Apple’s Dominance

Working with partners is Microsoft’s more traditional way of operating. Apple’s success with the iPad may be pushing the company to seek greater control over the hardware design so it works seamlessly with the software, like Apple does.

Still, gaining ground against Apple won’t be easy. Even as companies including Inc. (AMZN) and Samsung Electronics Co. release new tablets running Google Inc. (GOOG)’s Android operating system, Apple’s iPad continues to dominate the market. Researcher IDC predicts the iPad will account for 62.5 percent of global shipments this year, up from 58.2 percent last year.

The last time Microsoft opted to make its own hardware because its partners weren’t gaining traction against Apple, the company produced the Zune music player. It didn’t fare any better against the iPod, and Microsoft discontinued the product last year.

‘Software Assets’

At the other end of the spectrum, Microsoft’s Xbox console is now the top-selling game machine, with 67 million units shipped. The Xbox 360 device, which also streams television and media content, has helped Microsoft stake a claim to customers’ living rooms.

Sarah Rotman Epps, an analyst at Forrester Research, said Microsoft’s focus on trying to best Apple in hardware design could backfire if Surface tablets don’t offer software that stands out.

“What they didn’t show were Kinect, SmartGlass and other software assets that could be key differentiators against the iPad,” she said. “The months are ticking by, and the announcement left more questions than answers about how successful these devices will be.”

After seeing early prototypes from its hardware partners, Microsoft probably wanted to show the industry what it thinks is a good implementation of its tablet ambitions, said Ben Bajarin, an analyst at technology consulting firm Creative Strategies.

Shifting Focus

“A lot of their traditional partners have not really been focused on the tablet market, and were planning early on to go after new designs for traditional notebooks and desktops,” Bajarin said. “This is an effort to drive the category in the right direction.”

In what may be a concession to PC partners, Microsoft will sell the device only online and in its own retail stores, which will number 20 by the end of the month, Gartenberg said. Microsoft also could let vendors build their own Surface tablets, which may sell for $499 to $699, and pay for marketing the devices, Bajarin said.

Since the release of International Business Machines Corp.’s first PC in 1981, Microsoft has focused on software for the machines and left design and branding to hardware makers. While the company has in the past decade played a larger role in working with some PC makers on design, it has shied away from developing the machines and selling them under the Microsoft brand.

Profit Margins

Ballmer’s comments at the event indicated that Microsoft no longer wanted to rely on its hardware partners to translate its vision for Windows into compelling devices, said Gartenberg and Rob Enderle, principal analyst at the Enderle Group.

“They clearly want to make sure at least one Windows 8 tablet is seen as a premium product, offering a premium experience to consumers,” Enderle said. “Now they need to execute, or they just handed Apple an early Christmas present.”

The addition of a tablet or other hardware device may erode profitability in the Windows business, which now sells just software with operating margins of more than 60 percent. By comparison, computer maker Dell Inc.’s operating margin for the most recent fiscal year was about 7 percent.

“We are certainly running a business,” Ballmer said backstage at yesterday’s event, though he declined to discuss financial details. “There won’t be an advantage from a cost perspective over our OEMs,” he said, referring to PC partners.

Sales in Microsoft’s Windows division have fallen short of analysts’ estimates in four of the past six quarters, partially because consumers are defecting to the iPad.

“Investors will like the device initially and then will go through the question of what does this do to profit margins,” said Brendan Barnicle, an analyst at Pacific Crest Securities in Portland, Oregon, who rates the shares “sector perform.”

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