Economic Calendar

Tuesday, July 3, 2012

Kim Says World Bank’s First Priority Is to Aid Growth

By Sandrine Rastello - Jul 3, 2012 3:51 AM GMT+0700

Jim Yong Kim, who took over as World Bank president yesterday, said the lender is in a strong financial position to meet loan demand from emerging markets if the global economy deteriorates.

“We feel prepared to tackle crises” and the bank is “monitoring the situation very carefully,” Kim told reporters in Washington today. “Of course it all depends on the scale and the severity of the crisis but the World Bank is on very sound financial footing.”

April 17 (Bloomberg) -- Johannes Linn, a non-resident senior fellow at the Brookings Institution and a former World Bank vice president, talks about the bank's decision to pick Dartmouth College President Jim Yong Kim as its next head. Kim became the first physician and Asian-American to head the lender after emerging markets failed to rally around a challenger to the U.S. monopoly on the job. Linn speaks from Washington with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

April 16 (Bloomberg) -- Domenico Lombardi, a senior scholar at the Brookings Institution, talks about the World Bank's naming of U.S. nominee Jim Yong Kim as president and the outlook for the role of emerging markets at the lender. Lombardi speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." Kim will succeed Robert Zoellick, whose term expires at the end of June. (Source: Bloomberg)

The 52-year-old Kim, the former president of Dartmouth College, succeeds Robert Zoellick at the helm of a poverty- fighting institution that has less leeway to boost lending than it did four years ago. Kim, a physician by training, has little time to ease into a job that stretches beyond his expertise as global growth is threatened by the European debt crisis and a slowdown in China.

“This is about financial crisis management, macroeconomics, understanding the workings of the European monetary union and what the risks are and prioritizing countries” according to their needs, said Uri Dadush, director of international economics at the Carnegie Endowment for International Peace in Washington and a former World Bank director of economic policy.

“It’s not rocket science but it will be a new area for him, one in which he has no experience,” he said, predicting a “steep learning curve” for Kim.

Rebuild Europe

The bank was created at the end of World War II to help rebuild ravaged Europe. Now focused on developing countries, it lends for everything from building roads to supporting education policies, and has expanded its scope to taking stakes in companies and guaranteeing investments.

Kim said he’s open to sharing technical expertise with developed economies, including Greece if asked. That’s in contrast to his predecessor, who said last month he had tried to keep some distance from the country, where the European debt crisis started.

“We only go into countries when we’re asked but I feel that the kind of expertise we have could be relevant in many countries in the world,” Kim said today. “My staff feel that they have relevant experience that could have value.”

Kim, a graduate of Harvard Medical School, breaks the mold of past presidents, who have been drawn from government and finance.

‘Very Confident’

“I don’t bring one of the tools you might want; on the other hand no one” has all the skills, he told reporters today. “I feel very confident in our staff, in our leadership to be able to deal with all the critical problems that we’re facing.”

A HIV/AIDS specialist who co-founded a non-profit organization that has opened clinics in countries including Haiti and Peru, Kim said he has experience working with bank employees in the field.

“I feel that I share a passion for development and poverty alleviation with the World Bank staff,” he said. In a memo sent to employees yesterday, he promised to listen and learn to keep a “consistent and open engagement between the staff and the president.”

Kim SAID that he has had many conversations with top management in the past week about the bank’s finances, which he described as on “solid ground.”

Still, the bank’s lending power is now more constrained than four years ago after stepping up loans to emerging countries hit by the financial crisis.

Capital Cushion

“We went into the 2008 crisis with a big cushion of capital so we could expand in a way that we cannot just repeat today,” said Joachim von Amsberg, the bank’s vice president of operations policy and country services, in a June 26 interview. The bank’s equity-to-loans ratio for the unit that lends to governments fell last year to 29 percent from nearly 38 percent in 2008.

Commitments climbed during the crisis to a record $73 billion in the fiscal year 2010 from $38 billion just two years before, prompting the bank to seek a capital injection from member countries, which it obtained in April 2010.

The additional cash and a gradual decline in lending to about $53 billion in the year ended June 30 helped keep the bank’s equity-to-loans ratio just above its target range. Maintaining that level is important to keep its top credit rating, needed to raise money at low cost.

As a result, the bank is exploring ways to make the most of its resources, von Amsberg said. While demand for loans hasn’t yet increased, many countries are inquiring about precautionary financing, similar to the $1.3 billion Romania received last month, he said.

‘Pivotal Moment’

Kim told reporters the global economy is at a “pivotal moment” as he arrived for work today.

East Asia may grow as little as 5 percent this year if there are disorderly exits from the euro area, even as governments have room to implement fiscal stimulus to spur the economies if needed, according to the bank. The growth outlook for the European Union’s eastern member has also soured as the European turmoil undermines confidence.

Kim’s focus should go beyond the money to make sure the bank remains welcome in the countries it serves, said Simon Evenett, a professor of international trade and economic development at the University of St. Gallen, Switzerland. Kim, who was born in Korea and grew up in the U.S., has said he will serve as a bridge to the developing world.

“You have to be invited to the party first and then you can worry about how much money you want to spend on the bottle of wine,” Evenett said in an interview. “This is not an easy time for international organizations” which need leaders “who can get heads of governments and presidents that answer their phone calls and get things gone,” he said.

“This is the challenge for Dr. Kim.”

To contact the reporter on this story: Sandrine Rastello in Washington at

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


Ex-JPMorgan Trader Feldstein Biggest Winner Betting Against Bank

By Shannon D. Harrington, Mary Childs and Stephanie Ruhle - Jul 3, 2012 6:12 AM GMT+0700

Andrew Feldstein, who bet against JPMorgan Chase & Co. (JPM) before helping the bank unwind more than $20 billion of trades, has emerged as one of the biggest winners among hedge-fund managers profiting from a flawed strategy.

The $4.3 billion flagship fund of Feldstein’s BlueMountain Capital Management LLC returned 9.5 percent this year through June 22, according to a person familiar with the data. That’s up from the 5.4 percent return before JPMorgan announced a $2 billion loss by one of its traders known as the London Whale. BlueMountain, which was on the other side of those wagers, stands to make as much as $300 million, said market participants familiar with the trades.

Andrew Feldstein, chief executive officer and chief investment officer of BlueMountain Capital Management LLC, speaks during the Bloomberg Link Hedge Funds 2010 conference in New York. JPMorgan hired Feldstein in 1992, as it was developing a new market that allowed banks to pay investors to take on the risk of losses in their businesses. Photographer: Jin Lee/Bloomberg

Feldstein, a former JPMorgan executive who helped the company create the credit-derivatives market, profited by exploiting price distortions caused by the outsized bets and then aiding the bank in unwinding the trades as it sought to cap the loss, according to four people with knowledge of the strategy who asked not to be identified because the matter is private. BlueMountain enabled JPMorgan to unload more than $20 billion of its bets on a credit-swaps index, two of the people said.

“Andrew Feldstein is one of the most creative and sophisticated investors in fixed income,” said Sarah Quinlan, founder of hedge-fund advisory firm QAM in New York and a former BlueMountain investor. “It is not surprising that JPMorgan would reach out to him to assist in the unraveling of this complicated and very public situation.”

Helping JPMorgan

By assisting JPMorgan in unwinding its trades, Feldstein, 47, enabled the bank to take losses in the second quarter and move ahead with less uncertainty, said Adrian Miller, director of global markets strategy at GMP Securities LLC in New York. BlueMountain also helped JPMorgan Chief Executive Officer Jamie Dimon put behind him a trading debacle that brought scrutiny from Congress and regulators and tarnished his reputation as one of the industry’s best risk managers.

Dimon “will be judged by how this problem is rectified,” Miller said.

Feldstein’s profit from betting against JPMorgan probably exceeds that of Boaz Weinstein, the Saba Capital Management LP founder who gained media attention for recommending the trade at a February hedge-fund conference in New York. His main fund, with $5 billion in assets, is up 2.3 percent this year as of June 22, according to a person familiar with Saba’s returns.

Doug Hesney, a spokesman for BlueMountain, declined to comment, as did Kristin Lemkau of JPMorgan.

Obama Basketball

JPMorgan hired Feldstein, a graduate of Georgetown University and Harvard Law School, in 1992, as it was developing a new market that allowed banks to pay investors to take on the risk that companies default on their debt. Those financial instruments, known as credit-default swaps, evolved into a market with more than $62 trillion of outstanding contracts at its peak in 2007.

A former Harvard Law classmate of Barack Obama’s who played pickup basketball with the future U.S. president, Feldstein has kept a low profile outside financial markets, rarely giving interviews. He lives in Scarsdale, New York, in a home he and his wife purchased for $4.6 million in 2006, according to real estate records, and contributed to both Obama and Republican candidate John McCain in 2007. In her 2009 book “Fool’s Gold,” about JPMorgan’s creation of the credit-swaps market, Gillian Tett described him as introverted and “exceedingly bright.”

‘No Ego’

“He’s a very modest individual,” said William S. Demchak, president of Pittsburgh-based regional lender PNC Financial Services Group Inc. (PNC), who hired Feldstein at JPMorgan. “The reason he doesn’t talk publicly is he has no ego. He’s not a master of the universe and wanting to make big bets and be a hero. He comes to work every day and tries to, with his team, earn a sensible return on the money they’re investing.”

Feldstein and Demchak later teamed up to raise money for the Darfur Project, which from 2007 to 2009 sponsored airlifts of food and medicine to those affected by conflict in Sudan’s Darfur region.

Since starting New York-based BlueMountain in 2003 with Harvard Law friend Stephen Siderow in a spinoff from BlueCrest Capital Management LLP, Feldstein has earned a reputation as a master arbitrager. His hedge fund has generated almost 10 percent annual average returns largely by spotting abnormalities in the price relationships in credit swaps. Rather than bet on whether the price of a company’s debt will rise or fall, the fund often takes both sides of the trade and profits when the price relationships revert to normal.

“Our objective is to avoid placing any bets on these macro outcomes,” Feldstein said in a Bloomberg Television interview that aired Dec 22. “We don’t think they’re very predictable.”

Goldman Counterparty

With complex trades that can sometimes have more than 100 separate pieces, that strategy also has helped make BlueMountain one of Wall Street’s biggest clients.

By June 2008, BlueMountain was Goldman Sachs Group Inc. (GS)’s fourth-largest counterparty in the credit-derivatives market, with $590 billion of outstanding contracts, bigger than that of banking giants Barclays Plc and Credit Suisse Group AG, according to a 2010 report by the Financial Crisis Inquiry Commission, a U.S. panel that investigated the credit seizure.

Goldman Sachs at the time was acting as a prime broker for BlueMountain, loaning money and securities and clearing credit- swaps transactions, according to two people familiar with the firm, who asked not to be identified because they aren’t authorized to discuss the business.

Saving BlueMountain

The hedge fund’s trading book reached the size it did in large part because, rather than tear up the bulk of its swaps when it was ready to close out a position, BlueMountain put on offsetting trades to cancel them out, the people said.

After Lehman Brothers Holdings Inc.’s 2008 bankruptcy, as fears of a cascade of bank and hedge-fund failures gripped markets, BlueMountain faced an exodus of investors, even as its flagship Credit Alternatives Master Fund outperformed an industry average tenfold. Feldstein moved to bar withdrawals and freeze $3.1 billion of assets.

BlueMountain shifted almost all of its trades out of Goldman Sachs. Most of those went to JPMorgan, now the fund’s biggest prime broker, perceived by the market at the time as a more creditworthy counterparty, according to a person familiar with the fund. Tiffany Galvin, a Goldman Sachs spokeswoman, declined to comment.

Feldstein laid out a plan to restructure the fund, and investors owning 80 percent of the assets agreed to keep their money in place while markets improved, according to a November 2008 letter to investors, a copy of which was obtained at the time by Bloomberg News.

Gap Arbitrage

The credit-alternatives fund, which lost 6 percent in 2008, went on to return 24.4 percent in the first eight months of 2009 as markets recovered from the crisis, according to a letter to investors at the time.

One of the trades BlueMountain has mastered better than almost any other hedge fund, according to market participants, involves arbitraging the gap between credit-swaps indexes and contracts on the companies tied to those benchmarks. When the cost to buy protection on the index drops below the average cost of swaps on the companies, the fund will purchase protection on the benchmark and sell it on its constituents, profiting when the swaps converge.

That was the opportunity that funds from BlueMountain to Saba noticed last year as a trader in JPMorgan’s chief investment office in London, Bruno Iksil, began making outsized bets on the Markit CDX North America Investment Grade Index Series 9. The index, known as IG9, is tied to 121 companies that were investment-grade when it was created in September 2007, including now junk-rated bond guarantor MBIA Insurance Corp., a unit of MBIA Inc., and retailer J.C. Penney Co.

London Whale

Dimon, 56, transformed the chief investment office in recent years to make bigger and riskier speculative trades with the bank’s money, Bloomberg News first reported April 13, based on information provided by five former employees. Iksil managed a portfolio of credit swaps that, Dimon told the Senate Banking Committee June 13, was intended to profit in a financial crisis and make “a little money” in a benign market.

Iksil’s group was instructed to cut positions in December in anticipation of new capital rules, Dimon told the Senate panel. Instead Iksil, who became known as the London Whale for the size of his bets, sought to offset the hedges by selling protection on the IG9 index through December 2017 to dealers such as Bank of America Corp. and Citigroup Inc., which in turn sold that protection to money managers including BlueMountain and Saba, market participants said.

Iksil’s Bets

In the 14 weeks ended April 6, outstanding bets on the index using credit swaps surged an unprecedented 65 percent to $148.2 billion, according to the Depository Trust & Clearing Corp., which runs a central registry for the market.

The net amount of credit-derivatives protection the bank sold on investment-grade companies using contracts expiring in more than five years doubled to $101.3 billion in the three months ended March 31, Federal Reserve data shows.

Iksil’s bets were so large that he drove the price of the index far below the average of the underlying companies. That made the price of the index equivalent to buying $1 of protection for about 80 cents, market participants said. Hedge funds could arbitrage the gap and build positions against JPMorgan by buying swaps on the index and selling CDS on the constituent companies.

Saba, BlueCrest

The potential gains lured BlueMountain, Saba and other hedge funds including BlueCrest and Hutchin Hill Capital LP to buy more protection as Iksil continued offering to sell to brokers -- even as it initially led to losses because the JPMorgan trader’s bets moved the index lower.

BlueCrest founder Michael Platt said in a May 21 interview with Bloomberg News that the $32 billion hedge fund traded in a “small way” to profit from the distortions.

After JPMorgan announced the $2 billion loss, the cost of the IG9 index surged in anticipation the bank would unwind its bets. The swaps, which had fallen to as low as 102 basis points in March, jumped to 175 on June 5, or $175,000 a year to protect $10 million of debt, according to data provider CMA.

“It could easily get worse,” Dimon said of the loss on a May 10 conference call with investors and analysts, when buying protection on the index cost less than 127 basis points, or $127,000 annually for every $10 million insured. A basis point is one-hundredth of a percent.

‘Treacherous Landscape’

Exiting the index bets quickly was difficult because they were large relative to the amount that trades on any given day, DTCC data show. Unlike the current version of the index known as Series 18, on which an average $27.6 billion trades each day, $5.5 billion of IG9 exchanged hands each day in the 12 weeks ended June 22.

“When you put on a large trade, it’s hard for people not to notice what you’re doing,” Scott MacDonald, head of research at MC Asset Management Holdings LLC in Stamford, Connecticut, said in a telephone interview last month. “It’s a treacherous landscape to be unwinding the trade in.”

That’s where BlueMountain came in. Because the hedge fund executes so many trades in credit swaps to support its arbitrage strategies, and it falls outside the typical web of market- makers, it was in a better position than JPMorgan to take the bank out of a large chunk of its losing bets without tipping off other investors, said two market participants familiar with credit-swaps trading.

“Feldstein is a former JPMorgan exec and likely has a good relationship with senior management,” said Miller of GMP Securities. “Since transacting these trades with as little market knowledge as possible is the key to not creating big price fluctuations, who better to go to than a trusted prior colleague?”

IG9 Protection

Within the past few weeks, BlueMountain, which oversees $9.2 billion across all of its funds, has been buying default protection on IG9, a position that would offset the bets JPMorgan already has, and then selling it to the bank.

The transactions, first reported by Bloomberg News on June 20, are among trades that may have helped reduce the bank’s exposure to the index by more than half, according to estimates from market participants familiar with trading activity.

Both Saba and Hutchin Hill have exited their bets against JPMorgan, people familiar with the funds said last week. Hutchin Hill returned 2.46 percent this year through the end of May, according to a letter to investors obtained by Bloomberg News. That compares with a 1.5 percent gain for hedge funds worldwide over the same period, according to Chicago-based Hedge Fund Research Inc.’s benchmark HFRX Global Hedge Fund Index. The benchmark had a 1.1 percent gain through June 22.

Loss Estimates

During the three weeks ended June 22, as the cost of the IG9 index contracts fell to 159 basis points from as high as 175, swaps dealers cut the net amount of protection they had sold on the index by 65 percent, DTCC data show. JPMorgan is the only one of the six biggest U.S. banks to have sold more protection on investment-grade companies than it had bought, Fed data through the end of March show.

Dimon said on May 10 that the bank’s loss could reach $3 billion or more. Charles Peabody, an analyst at Portales Partners LLC in New York, estimated the amount could be between $4 billion and $5 billion. JPMorgan hasn’t disclosed how much of the money-losing trades it’s still holding. The bank has said it will provide an update on the loss and where its position stands when it reports earnings July 13.

To contact the reporters on this story: Shannon D. Harrington in New York at; Mary Childs in New York at; Stephanie Ruhle in New York at

To contact the editor responsible for this story: Alan Goldstein at


Twitter User-Detail Inquiries From Governments Surge

By Brian Womack - Jul 3, 2012 6:04 AM GMT+0700

Twitter Inc., the micro-blogging service, said it received more requests from governments for user information in this year’s first half than it had for all of 2011.

Twitter, in its first Transparency Report, said 80 percent of the 849 queries it received from governments worldwide came from within the U.S. The San Francisco-based company fully or partially complied with 75 percent of the U.S. inquiries, Jeremy Kessel, its manager of legal policy, said in a blog post today releasing the study.

The company, which has grown to more than 140 million users, is trying to shed light on efforts by governments worldwide and what they want with user data. Twitter was told last month it must turn over information about an Occupy Wall Street protester’s posts, in an order from a New York judge who compared the duties of social media sites to those of witnesses to a street crime.

The July 4 Independence Day holiday in the U.S. is “an important reminder of the need to hold governments accountable, especially on behalf of those who may not have a chance to do so themselves,” Kessel said in his post.

Today’s inaugural report is similar to one produced by Google Inc. (GOOG), the world’s largest Internet search company, and closely held Twitter plans to publish updates twice a year. The report includes government requests for user information and to withhold content, as well as requests related to copyright.

In addition to the new report, the company is working with Herdict, a project of the Berkman Center for Internet & Society at Harvard University that monitors Web access around the world. The new partnership intends to drive more traffic and attention to Herdict, the company said.

In the report, Twitter said it fully or partially complied with 63 percent of user information requests on average around the world since Jan. 1. The U.S. led with 679 requests for user information, followed by Japan with 98.

To contact the reporter on this story: Brian Womack in San Francisco at

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


Volatility Surges in S&P 500 With Volume Lowest in Decade

By Whitney Kisling - Jul 3, 2012 3:16 AM GMT+0700

Volatility in the Standard & Poor’s 500 Index is returning to levels that drove valuations and stock volume down to rates not seen since at least 2003.

Average daily price changes in the benchmark gauge for American equities doubled to 1 percent in June, according to data compiled by Bloomberg. At the same time, U.S. trading has plunged to 6.8 billion shares a day and valuations are 16 percent below the five-decade mean. Reaching those levels in tandem is unprecedented in at least nine years, the data show.

The S&P 500 rallied 2 percent to 1,362.16 last week, bringing the monthly return to 4 percent, the most for June since the gauge added 5.4 percent in 1999. Photographer: Scott Eells/Bloomberg

June 27 (Bloomberg) -- Kyle Harrington, founder of Harrington Capital Management, and Edward Dempsey, chief investment officer at Pension Partners LLC, talk about the outlook for U.S. stocks, commodity markets and their investment strategies. They speak with Cory Johnson and Alix Steel on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

A trader works on the floor of the New York Stock Exchange in New York. Photographer: Michael Nagle/Bloomberg

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Investors whipsawed by volatility that reached twice the 50-year average in 2011 have pulled about $300 billion from mutual funds since the bull market began three years ago. With the third quarter marking the worst S&P 500 returns in election years since World War II, bears say widening price swings will keep individuals from returning to the market. Bulls say their exodus helped pull stocks lower just before growth in earnings and the economy helped spur the biggest June rally since 1999.

“We still believe in the bull market,” Laszlo Birinyi, president of Birinyi Associates Inc., said in a June 29 phone interview from Westport, Connecticut. “I’m just telling people to turn the page to the investments, the things that you can really quantify and put your fingers on. Stick to what truly matters: the company fundamentals.”

European Deal

The S&P 500 rallied 2 percent to 1,362.16 last week, bringing the monthly return to 4 percent, the most for June since the gauge added 5.4 percent in 1999. European leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy, boosting stocks globally even as first-time claims for U.S. unemployment benefits were higher than economists forecast.

The gauge declined 9.9 percent from its high on April 2 through June 1 after climbing 12 percent in the first three months, the best start to a year since 1998. Shares in the S&P 500 are up 101 percent since March 2009, and remain 13 percent below the all-time high of 1,565.15 in October 2007. The index rose 0.3 percent to 1,365.51 today.

Mutual funds that invest in U.S. equities saw $1.8 billion in outflows for the week ending June 20 and $620 million in the previous period, according to data from the Washington-based Investment Company Institute. More than $190 billion has been taken out of American equity funds in the 13 months through May, while more than $200 billion has gone into bonds, the data show.

‘Frozen’ Investors

“A lot of investors are just frozen, unsure what to do, so they do nothing,” Howard Ward, who helps oversee $35 billion at Gamco Investors Inc. in Rye, New York, said June 26. “There are no raging bulls looking to leverage up on margin and risk their savings. Everyone is cautious, with some more so than others.”

Withdrawals are coming as swings in stocks from L-3 Communications Holdings Inc. (LLL) to Deere & Co. widen. The S&P 500 moved an average 1 percent each day in June, almost doubling from the previous five months, data compiled by Bloomberg show.

Volatility is rising toward its level in 2011, when price changes were 1.3 percent between April and the end of December, twice the five-decade average, according to data compiled by Bloomberg. Daily swings reached 4 percent in December 2008, data using 50-day moving averages compiled by Bloomberg show.

The flight from mutual funds helped lower daily volume for U.S. exchange-listed stocks to 6.8 billion shares in 2012, down 44 percent from its peak in October 2008, according to data compiled by Barclays Plc and Bloomberg.

Light Volume

Volume hasn’t been this light at the same time that valuations were below their historic average since at least 2003, when the data began. Of the 500 companies in the benchmark U.S. equity index, 262 of them saw June volume that fell from a year ago, Bloomberg data show.

“Investors are feeling the market as a roller coaster ride,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees about $40 billion said June 27. “All those gains that got made in the first quarter got wiped out in a month’s time. There’s just too much uncertainty to be making decisions, and there’s the risk that they’re going to get whipsawed again.”

Widening stock swings are a reversal of the first quarter, when daily changes narrowed to 0.5 percent, the smallest since 1995, the data show. The decline from the previous year was the biggest reduction since 1934, according to Bloomberg data.

Equity Funds

Calmer stock markets attracted more money to mutual funds over the last decade. U.S. funds added $14.5 billion in the first quarter of 2007, when the average daily swing was 0.5 percent, data compiled by Bloomberg and ICI show.

More than $700 billion has been erased from American equity values since this year’s S&P 500 high of 1,419.04 on April 2, according to data compiled by Bloomberg. The retreat has trimmed the gauge’s 2012 advance to 8.3 percent from 13 percent.

Equities may be entering the worst period of the year, if history is any guide. The index has gained an average of 0.1 percent in third quarters before a presidential vote since 1945, the lowest return of the year, according to S&P. U.S. shares gained 5.7 percent in election years since World War II, the second-worst performance during executive branch terms.

“Most of the volatility is a lack of conviction on the part of the market,” Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, which oversees $14.7 billion of assets, said June 28. “It creates this element of fear because one sector is rocky one day and another sells off the next day. That dissuades people from committing any money.”

European Shares

European leaders dropped requirements that taxpayers get preferred creditor status on aid to Spain’s banks and opened the way to recapitalize lenders directly after a two-day summit last week. Two years of losses have pushed European stocks near the lowest valuations ever, as the Euro Stoxx 50 Index fell to 0.9 times book value, cheaper than any time except the week markets bottomed in March 2009, data compiled by Bloomberg show.

Eric Teal, at First Citizens Bancshares Inc., said the corporate earnings season will convince investors to come back to the market. New York-based Alcoa Inc., the country’s largest aluminum producer, is scheduled to be the first Dow Jones Industrial Average (INDU) company to report results, on July 9.

“The lower-return environment and less appetite for risk- taking is having a compounding negative effect on the stock market,” Teal, chief investment officer at First Citizens, which manages $4.5 billion in Raleigh, North Carolina, said June 26. “Second-quarter earnings and more policy initiatives in the coming months will provide relief.”

L-3, Life

L-3 Communications is down 15 percent in the past 12 months even as the company boosted its full-year profit forecast in April. The stock rose or fell 1.3 percent a day in June, up from 0.7 percent in the first five months of the year, data compiled by Bloomberg show. Daily trading in L-3, a maker of military communications and electronics equipment, fell 30 percent last month from the average in 2011.

Trading in Life Technologies Corp. (LIFE), the provider of gene- analysis tools based in Carlsbad, California, was 42 percent lower last month than a year ago. The stock fell 7.9 percent in the second quarter even after Life posted better-than-forecast earnings. Daily moves rose to 2 percent in June from 1.2 percent in the previous five months.

Deere Swings

Average swings in Deere (DE), the largest maker of agricultural equipment, surpassed last year’s level to 1.7 percent from 1 percent between January and May, according to Bloomberg data. Volume in the shares has decreased to 3.6 million shares a day this month, 24 percent below the 2011 average. The shares are down 1.9 percent in the past year, even after Moline, Illinois- based Deere reported better-than-estimated earnings for all four quarters of 2011.

S&P 500 earnings have exceeded analyst projections for three years even as the world’s largest economy expands at its slowest post-recession rate in six decades, Bloomberg data show. They are forecast to surpass $100 a share for the first time this year and to rise 13 percent in 2013 while economists say the U.S. will expand 2.2 percent in 2012 and 2.4 percent next.

Higher profits kept the price-to-earnings ratio at an average 13.8 in the first six months of 2012, 16 percent less than the 16.4 mean since 1954.

“That’s one of the favorable things that is going on, corporate earnings are coming through,” Byron Wien, vice chairman of Blackstone Advisory Partners LP, said in a June 26 interview with Ken Prewitt and Tom Keene in Bloomberg Radio’s “Bloomberg Surveillance.” “The market is cheap. The problem is investors don’t have any confidence in the future because they are so confused.”

To contact the reporter on this story: Whitney Kisling in New York at

To contact the editor responsible for this story: Lynn Thomasson at


Dollar Gains as U.S. Factory Gauge Drops; Real Climbs

By Joseph Ciolli - Jul 3, 2012 4:24 AM GMT+0700

The dollar rose against the euro, reversing its biggest loss in eight months, as a gauge of U.S. manufacturing unexpectedly fell, fueling bets economic growth may be faltering and stoking investor demand for safety.

The euro dropped against the yen as unemployment in the 17 nations sharing the European currency reached a record. The yen rose versus all of its major peers except Brazil’s real as the Institute for Supply Management’s U.S. factory index contracted for the first time in almost three years. The real climbed against the yen and dollar after the nation’s central bank backed it with currency swap auctions last week.

Japanese yen and U.S. dollar notes are arranged for a photograph in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

July 2 (Bloomberg) -- Kathleen Brooks, research director at, a unit of online currency trading company Gain Capital Holdings Inc., talks about foreign-exchange markets. She speaks with Guy Johnson on Bloomberg Television's "The Pulse." (Source: Bloomberg)

July 2 (Bloomberg) -- Derek Halpenny, European head of global currency-markets research at Bank of Tokyo-Mitsubishi UFJ Ltd., talks about European Central Bank interest rates and the outlook for the euro and dollar. He speaks with Linzie Janis on Bloomberg Television's "On the Move." (Source: Bloomberg)

“The ISM report was substantially worse than anybody would have expected,” Alessio De Longis, a money manager at OppenheimerFunds Inc. in New York, said in a telephone interview. “We were ready for a negative surprise, just to a smaller magnitude. The world economy is in a recession at the moment, at least from a manufacturing-expectation standpoint.”

The dollar appreciated 0.7 percent to $1.2576 per euro at 5 p.m. New York time after dropping 1.8 percent June 29, the most since Oct. 27. The shared currency fell 1 percent to 100.03 yen after rising 2.2 percent on June 29, the steepest advance on a closing basis since March 2011. The Japanese currency advanced 0.4 percent to 79.51 to the dollar.

The euro slid against the greenback and the yen as the jobless rate in the currency bloc rose to 11.1 percent in May from 11 percent in April, the European Union’s statistics office in Luxembourg said today. It was the highest since the data series started in 1995. The European Central Bank will probably cut interest rates on July 5, a Bloomberg News survey showed.

ECB Pressured

“The data backdrop in Europe remains relatively challenging,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, said in a telephone interview. “The unemployment number puts some pressure on the ECB and their response in terms of monetary- policy easing.”

The dollar gained versus 10 of its 16 most-traded counterparts tracked by Bloomberg after the ISM’s U.S. factory index fell to 49.7 in June, the lowest since July 2009, from 53.5 in May. Figures less than 50 signal contraction. The median forecast in a Bloomberg News survey called for a decline to 52.

Brazil’s real advanced to a level stronger than 2 per dollar for the first time in more than a month, appreciating 1.2 percent to 1.9854.

Shielding Real

The nation’s central bank sold 180,000 swap contracts worth a total $8.98 billion in auctions June 27, 28 and 29 to shield the real from European sovereign-debt turmoil. The swaps were a reversal of the bank’s dollar purchases, which increased to $7.2 billion in April, the most in 13 months, to support Brazilian exporters.

Mexico’s currency touched the strongest level against the greenback since May 8, 13.2505 pesos, as Enrique Pena Nieto, a member of the Institutional Revolutionary Party, claimed victory in the nation’s election on a pledge to boost economic growth and private investment. The party ruled the nation for more than 70 years until 2000.

The peso briefly erased gains after the ISM said manufacturing contracted in the U.S., Mexico’s biggest trade partner. It traded later at 13.3386, up 0.2 percent.

South Africa’s rand erased gains after the factory gauge damped demand for riskier assets. The currency traded little changed at 8.1570 per dollar after touching 8.1082, its strongest level since May 14.

The Dollar Index (DXY) increased 0.3 percent to 81.89. Intercontinental Exchange Inc. uses the gauge to track the greenback against the currencies of six U.S. trading partners.

Euro Crisis

The euro jumped at the end of last week after leaders in the currency bloc dropped the requirement that governments get preferred creditor status on crisis loans to Spain’s banks. Lenders can also be recapitalized directly with European bailout funds rather than being channeled through governments, European Union President Herman Van Rompuy said June 29 after a summit. The decisions eased concern Europe’s debt crisis is worsening.

The ECB will lower its main refinancing rate to 0.75 percent at its meeting this week, according to economists in a Bloomberg survey.

Investors “have to rely on the European Central Bank to produce magic from nowhere,” Kit Juckes, head of currency research at Societe Generale SA in London, said on Bloomberg Television’s “Lunch Money” with Sara Eisen and Adam Johnson. “We’ll get another rate cut on Thursday. The greatest thing they can do for growth right now is get interest rates down.”

Moving Average

The shared currency may weaken almost 6 percent to a two- year low against the dollar if it fails to trade back above its June 18 high of $1.2748 or the 55-day moving average at $1.2766, according to Michael Hewson, a London-based markets analyst at CMC Markets Plc.

The euro fell 2.8 percent over the past three months in the biggest loss among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen was the best performer, with a 7.6 percent gain, while the greenback appreciated 2.9 percent.

The shared currency’s risk-adjusted loss of 0.33 percent against the dollar this year was the third-biggest out of the 16 major currencies, the Bloomberg Riskless Ranking showed. The euro was last on a straight-return basis with a loss of 3 percent.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

Japan Manufacturers

Japan’s largest manufacturers expect the yen to trade at an average of 78.93 per dollar in the second half of this fiscal year, the Bank of Japan (8301)’s quarterly Tankan report showed today. They forecast 78.24 in a March survey.

Manufacturer sentiment rose to minus 1 in June from negative 4 in March, according to the report. The BOJ is scheduled to start a two-day policy meeting July 11.

The Australian dollar touched an almost two-month high amid speculation the central bank will leave interest rates on hold tomorrow. The Reserve Bank of Australia will keep its cash-rate target at 3.5 percent at tomorrow’s policy meeting, according to all 28 economists in a Bloomberg survey.

The Aussie reached $1.0278, the strongest since May 4, before trading at $1.0249, up 0.1 percent.

New Zealand’s dollar gained 0.3 percent to 80.37 U.S. cents after climbing as much as 2 percent on June 29. It touched 80.51 cents earlier today, the highest level since May 3.

To contact the reporter on this story: Joseph Ciolli in New York at

To contact the editor responsible for this story: Dave Liedtka at


Manufacturing in U.S. Unexpectedly Contracted in June

By Shobhana Chandra - Jul 3, 2012 3:21 AM GMT+0700

Manufacturing in the U.S. unexpectedly shrank in June for the first time since the economy emerged from the recession three years ago, indicating a mainstay of the expansion may be faltering.

The Institute for Supply Management’s index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May, the Tempe, Arizona-based group’s report showed today. Figures less than 50 signal contraction. Measures of orders, production and export demand dropped to three-year lows.

An employee welds an aluminum seal to the casing for a security camera at Memac Industries Inc. in Lancaster, Ohio. The ISM index fell from 53.5 a month earlier. Photographer: Ty Wright/Bloomberg

July 2 (Bloomberg) -- Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ, discusses the Institute for Supply Management’s June manufacturing index released today. The ISM's index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May, the Tempe, Arizona-based group’s report showed today. (Source: Bloomberg)

July 2 (Bloomberg) -- Mohamed El-Erian, chief executive officer and co-chief investment officer of Pacific Investment Management Co., talks about the European debt crisis, and the outlook U.S. markets and the economy. El-Erian also discusses investment strategy and global bond markets. He speaks with Betty Liu, Dominic Chu, Joshua Lipton and Alix Steel on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Employee John Carrier pushes a rod through the center of a part to check that it was properly drilled at the Mennie Machine Co. in Mark, Illinois. The ISM’s U.S. production index decreased to 51, the lowest since May 2009, from 55.6. Photographer: Daniel Acker/Bloomberg

Employee William Meznarich reassembles the die for a punch press at the Badge-A-Minit facility in Oglesby, Illinois. The ISM’s U.S. production index decreased to 51, the lowest since May 2009. Photographer: Daniel Acker/Bloomberg

An employee welds an aluminum seal to the casing for a security camera at the Memac Industries Inc. in Lancaster, Ohio. The ISM index fell from 53.5 a month earlier. Photographer: Ty Wright/Bloomberg

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Treasury yields fell on concern Europe’s debt crisis and a slowdown in Asia are taking a bigger toll on the world’s largest economy and hurting manufacturers like DuPont Co. (DD) and Steelcase Inc. (SCS) Assembly lines are at risk of slowing further as consumers temper purchases and companies cut back on investment.

“Manufacturing is gearing down,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York, whose 50.5 forecast was the lowest in the Bloomberg survey. “It’s consistent with the idea that the uncertainty is weighing on businesses. Europe is taking a bite out of the export sector.”

The yield on the benchmark 10-year Treasury note declined to 1.59 percent from 1.65 percent on June 29. The Standard & Poor’s 500 Index erased earlier losses after last week capping its best June rally since 1999. The S&P 500 climbed 0.3 percent to 1,365.51 at the close in New York.

The ISM index, which dropped to its lowest level since July 2009, was less than the median forecast of 52 in the Bloomberg survey. Estimates of 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 the prior year.

No Recession

Today’s reading is well above the 42.6 level that generally indicates the economy as a whole is expanding, according to ISM.

“We are not yet in recession territory,” Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, said in an e-mail to clients. “Recessions are usually accompanied by ISM readings in the low-40s. And the construction news is improving, while consumers are being helped by tumbling gasoline prices.”

A separate report today from the Commerce Department in Washington showed the improvement in the housing market helped boost construction spending in May to the highest level in two years. Housing demand has shown a gradual recovery. Purchases of new houses rose 7.6 percent in May to reach the highest level since April 2010, recent data showed.

Manufacturing is also weaker in the rest of the world. The industry in the euro-area contracted for an 11th straight month in June as Europe’s debt crisis sapped demand. A measure of the region’s factories held at 45.1, London-based Markit Economics said.

Europe’s Economy

Euro-area unemployment reached the highest on record in May, other figures showed. The jobless rate in the 17-nation region rose to 11.1 percent, the highest since the data series began in 1995, from 11 percent a month earlier, the European Union’s statistics office in Luxembourg said.

A manufacturing purchasing managers’ index for China fell to 48.2 in June from 48.4 a month earlier, HSBC Holdings Plc and Markit said today.

The ISM’s U.S. production index decreased to 51, the lowest since May 2009. The new orders measure dropped to 47.8, the weakest since April 2009, from 60.1. The drop in demand from the previous month was biggest since October 2001, after the September 11 terrorist attacks.

The employment gauge decreased to a three-month low. The index of prices paid decreased to 37 from 47.5.

Manufacturing accounts for about 12 percent of the economy and has been at the forefront of the recovery that began June 2009.

Jobless Rate

Slower hiring and an unemployment rate exceeding 8 percent may keep restraining household spending, which accounts for about 70 percent of the economy. Cars and light trucks sold at a 13.7 million annual rate in May, the weakest this year and down from April’s 14.4 million pace, Ward’s Automotive Group data showed.

Executives at Wilmington, Delaware-based DuPont said while growth in North America is holding up, the third-largest U.S. chemical maker is concerned about a slowdown in China and Germany’s dependence on exports.

“My number one worry is what will happen in Europe over the next six to nine months,” Diane Gulyas, group vice president of DuPont’s performance-materials segment, said on a conference call with analysts on June 14.

Steelcase Sales

Steelcase, a Grand Rapids, Michigan-based maker of office furniture, said first-quarter sales fell in most major markets in the region that includes Europe, Middle East and Africa.

“Uncertainty in the global economy continues to take its toll on specific parts of our business,” Chief Financial Officer David Sylvester said on a conference call on June 21.

The U.S. economy expanded 1.9 percent in the first quarter, the same as previously estimated and following a 3 percent pace in the prior three months, revised data showed last week.

To combat flagging growth, Federal Reserve policy makers said they are ready to take more steps should the U.S. expansion slacken.

Fed officials said in a policy statement on June 20 that they expect “economic growth to remain moderate over coming quarters and then to pick up very gradually.”

To contact the reporter on this story: Shobhana Chandra in Washington at

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


Bond Market Backs Obama With Record Demand for New Debt

By Daniel Kruger - Jul 3, 2012 1:23 AM GMT+0700

Investors are plowing cash into new U.S. Treasuries at a record pace, making economic growth rather than budget austerity a key issue as President Barack Obama and Mitt Romney face off in November’s presidential election.

Bidders offered $3.16 for each dollar of the $1.075 trillion of notes and bonds auctioned by the Treasury Department this year as yields reached all-time lows, above the previous high of $3.04 in all of 2011, according to data compiled by Bloomberg. The so-called bid-to-cover ratio was 2.26 from 1998 to 2001 when the nation ran budget surpluses.

President Barack Obama during an campaign stop in Atlanta. Photographer: Carolyn Kaster/AP Photo

July 2 (Bloomberg) -- Mohamed El-Erian, chief executive officer and co-chief investment officer of Pacific Investment Management Co., talks about the European debt crisis, and the outlook U.S. markets and the economy. El-Erian also discusses investment strategy and global bond markets. He speaks with Betty Liu, Dominic Chu, Joshua Lipton and Alix Steel on Bloomberg Television's "In the Loop." (Source: Bloomberg)

June 26 (Bloomberg) -- Jeremy Hill, chief operating officer of the U.S. research department at Societe Generale, talks about hedge fund trades. He spoke on June 21 with Deirdre Bolton on Bloomberg Television's "Money Moves." (Source: Bloomberg)

The U.S. Department of the Treasury building in Washington. Photographer: Andrew Harrer/Bloomberg

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Even as Romney and fellow Republicans assail Obama for presiding over the increase of U.S. publicly-owned debt to $10.5 trillion from $5.75 trillion in 2009 amid the worst financial crisis since the Great Depression, the bond market is showing growing investor confidence in the safety of dollar assets.

“The perceived stability of the U.S. financial system, where you have an active and aggressive Federal Reserve, and a broad $15 trillion-plus economy means the U.S. is going to continue to be regarded as a deep, liquid, strong area to invest in,” Rick Rieder, chief investment officer of fundamental fixed income at New York-based Blackrock Inc., which manages $3.68 trillion, said in a June 29 telephone interview. “Rates are going to stay low for a long time.”

Yields Lower

Yields on 10-year Treasury notes declined three basis points last week, or 0.03 percentage point, to 1.65 percent and have fallen from 1.88 percent at the end of 2011 and this year’s high of 2.4 percent on March 20. The benchmark 1.75 percent security due May 2022 rose 8/32, or $2.50 per $1,000 face amount, to 100 30/32. The government sold $29 billion of seven- year notes at a record low yield of 1.075 percent on June 28.

The 10-year note yield declined seven basis points to 1.58 percent at 2:20 p.m. in New York, according to Bloomberg Bond Trader prices.

The 3 percent return on Treasuries in the second quarter exceeded the 2.25 percent return on company debt and the 1.11 percent gain for mortgages, according to Bank of America Merrill Lynch bond indexes. The S&P 500 stock index dropped 3.3 percent last quarter while the Thomson Reuters/Jefferies CRB Index of raw materials fell 7.9 percent.

Demand for new issues from the U.S. Treasury has accelerated as investors seek assets in the world’s reserve currency. The dollar has gained 6 percent against the euro and 2 percent against the British pound since the end of March as Europe’s sovereign debt crisis worsened, the U.K. entered another recession and U.S. growth cooled.

Dollar Haven

Risk-adjusted returns, which account for volatility, show Treasuries topped other major sovereign debt markets including Germany, the U.K., Japan, Canada and Switzerland, data compiled by Bloomberg show. The dollar had the second highest risk- adjusted return after the Japanese yen since March 31.

The dollar is a “haven and if you’re going to buy dollars you’re by and large going to be investing in Treasuries,” James Kochan, chief fixed-income strategist in Menomonee Falls, Wisconsin, at Wells Fargo Funds Management LLC, which manages $232 billion, said in a June 28 telephone interview. “They’re really one and the same trade.”

Even as the bond market rallies, politicians have made reducing the budget deficit a top issue for November’s election. Obama and Republican challenger Romney have each pledged to cut spending with the budget deficit poised to exceed $1 trillion for a fourth year and debt rising to 69.4 percent of gross domestic product from 37.5 percent in 2008.

Government Spending

Romney has slammed Obama for expanding borrowing to fund budget deficits, a $787 billion fiscal stimulus package and loans to General Motors Co. and Chrysler Group LLC, likening the rise in U.S. debt to a prairie fire visible in the distance.

“You don’t say, ‘I’m going to go to bed, because the wind might change,’ you instead look for someone that says, ‘I’m going to take responsibility and fix this -- put it out,’” Romney said on May 16. “It’s high time that we have a president that will stop this spending and borrowing inferno, and I will.”

The government’s budget deficit through May was $844.5 billion, the smallest at this point in the fiscal year since Obama has been in office. The shortfall was $1.3 trillion in fiscal 2011 ended Sept. 30.

The decision by the Fed and Chairman Ben S. Bernanke to hold borrowing costs at about zero since December 2008 combined with $1.3 trillion of bond purchases helped to reduce government and private sector borrowing costs. Interest expense on the deficit was 3 percent of the economy in fiscal 2011, down from 4 percent in 1999, according to data compiled by Bloomberg.

Rising Ratio

The bid-to-cover ratio has risen from $2.50 during Obama’s first year in office in 2009. The ratio was $2.99 in 2010, data compiled by Bloomberg show.

Rising demand for government debt has pushed down borrowing costs for companies and individuals. Average yields on investment and speculative-grade corporate bonds fell to 4.23 percent last week from more than 5.65 percent in early 2010, based on Bank of America Merrill Lynch indexes. The average rate for a 30-year mortgage has fallen to 3.66 percent from more than 5.5 percent in 2009, according to a Freddie Mac survey.

Investors are hanging on to dollar assets. Average weekly trading volume since April among the 21 primary dealers was $530.8 billion, or 5.1 percent of the amount outstanding. That’s down from $649 billion in June 2007, or 15 percent of the $4.3 trillion outstanding. Back then, the 10-year note yield reached 5.32 percent.

Term Premium

By some measures, Treasuries are overvalued. The term premium, a model created by economists at the Fed, was negative 0.86 on June 26, near the record low of negative 0.94 on June 1. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

An investor buying the current 10-year note would lose 7 percent, including interest, if the yield rose to the 2.5 percent median estimate of more than 60 economists and strategists surveyed by Bloomberg by mid-2013.

“One of the ideas that the market is very complacent about is that rates could actually go up,” said Kathleen Gaffney, co- manager of the $20.9 billion Boston-based Loomis Sayles Bond Fund, in a June 28 telephone interview. “When they move, they move very fast.”

A lasting solution to Europe’s debt turmoil might send rates up. Global stocks jumped, with the MSCI All-Country World index soaring 3.03 percent on June 29 after a meeting in Brussels of EU leaders ended with officials paving the way for cash-strapped financial institutions to tap Europe’s bailout fund directly once they establish a single banking supervisor.

Falling Yields

Yields on Italy’s 10-year bonds tumbled 38 basis points to 5.82 percent, while those in Spain plunged 61 basis points to 6.33 percent.

For all the progress, it might take several months or a year to implement the plans, according to German Chancellor Angela Merkel, and may not be enough, said Italian Prime Minister Mario Monti. Two rescue funds, the European Financial Stability Facility and the yet-to-start European Stability Mechanism, may only amount to about 20 percent of the debt of Italy and Spain.

“As long as Europe continues to make headlines with its bailout process, which is taking much longer than the market would like it to, we should continue to see a bullish underpinning to Treasuries from that flight to quality dynamic,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut, in a June 26 telephone interview.

Slowing Growth

Obama said June 8 that the slowing European economy was dragging down U.S. growth. Gross domestic product in the U.S. rose 1.9 percent in the first quarter, reflecting an increase in consumer spending that now shows signs of cooling as the labor market weakens, the Commerce Department said June 28.

The median forecast of 70 economists in a Bloomberg survey is for 2012 growth of 2.2 percent, below the 2.7 percent average from 2002 to 2007. The Fed has cut its projections for 2013 six times since January 2011. That level of expansion won’t be robust enough to cut an unemployment rate that has remained above 8 percent for 40 months before next year, according to the central bank’s forecasts.

The economy faces the prospect of diminished fiscal stimulus, with $1.2 trillion in automatic federal spending cuts poised to take effect at year-end.

“Investors have generally looked through the fiscal cliff” of expiring George W. Bush tax rates and mandatory spending cuts, as well as “the deficit position and overall debt issues with respect to the U.S,” Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York, said in a June 29 telephone interview. “The first choice among investors in terms of flight-to-quality or safety is the U.S.”

To contact the reporter on this story: Daniel Kruger in New York at

To contact the editor responsible for this story: Dave Liedtka at


Microsoft Writing Down $6.2 Billion After AQuantive Sputters

By Dina Bass - Jul 3, 2012 5:51 AM GMT+0700

Microsoft Corp. (MSFT) is taking a $6.2 billion writedown for almost the entire amount it paid for Internet-advertising company AQuantive Inc., signaling that its online division will perform worse than the company projected.

The grand opening of a new Microsoft Store at University Village in Seattle. Photographer: Stuart Isett/Bloomberg

The non-cash charge means the company will probably post a loss for the quarter, which ended in June. Before the statement, analysts had predicted that Microsoft would report profit of $5.3 billion in the period, data compiled by Bloomberg show.

Microsoft bought AQuantive for about $6.3 billion in 2007 to catch Google Inc., amid an acquisition spree for companies that specialize in online advertising. The deal failed to accelerate growth as much as anticipated at the company’s money- losing online division, Microsoft said. The company won’t reverse losses as quickly as it intended, said a person with knowledge of the matter, who’s not authorized to speak publicly.

“Online services is the biggest drag on the company right now,” said Colin Gillis, an analyst at BGC Partners LP in New York, who has a buy recommendation on Microsoft.

Even as the AQuantive deal didn’t meet projections, Microsoft said its online division has shown improvement in other areas, including revenue per search and market share gains for the Bing search engine.

Operating losses in online services narrowed to $1.45 billion in the nine months through March 31, from $1.91 billion a year earlier, Microsoft said in April. Sales gained 11 percent to $2.13 billion in the period.

‘Slow Improvement’

“It’s the classic come-front-behind, slow, incremental improvement,” Gillis said. “Bing has made incremental gains.”

Microsoft agreed to buy AQuantive weeks after Google said it would acquire DoubleClick Inc., which also handles online advertising.

The company had to take the writedown because the online business isn’t growing as quickly as forecast, and it’s taking longer to turn around than Microsoft expected, said the person. The company hasn’t boosted revenue per search as much as it had projected. What’s more, distribution deals in which Microsoft pays companies like Dell Inc. (DELL) and Verizon Wireless have added customers -- though at a high cost, the person said.

“This is an accounting decision that the company made based on how the business is performing relative to the projections we had made during the past five years,” Microsoft Chief Executive Officer Steve Ballmer and online unit President Qi Lu, wrote in an e-mail to employees obtained by Bloomberg.

“We want to be very clear that we are strongly committed to a strong and financially successful” online division, according to the memo, whose authenticity was confirmed by Microsoft.

Microsoft was little changed at $30.56 at the close today in New York. It has climbed 18 percent this year.

To contact the reporter on this story: Dina Bass in Seattle at

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