Darling Said to Consider Credit Guarantees to Spur U.K. Lending

By Gonzalo Vina and Robert Hutton

Dec. 10 (Bloomberg) -- U.K. Chancellor of the Exchequer Alistair Darling is considering credit guarantees for households and companies to spur bank lending, a person familiar with the plan said.

Darling is looking at a range of options to revive credit including whether to expand a 250 billion pound ($370 billion) Treasury program to support bank debt so that it covers mortgages and other loans, according to the person.

The measures would mark an unprecedented step by U.K. authorities to underwrite commercial loans after a rescue that gave the government stakes in HBOS Plc, Lloyds TSB Group Plc and Royal Bank of Scotland Plc failed to restart bank lending. The economy is sinking into its first recession since 1991.

“It’s critically important that we get the banks lending again,” Darling told journalists in London yesterday. “Price is important, but so too is the availability of credit.”

Prime Minister Gordon Brown made increased lending and lower loan costs part of the “strings attached” to the 50 billion-pound bank bailout announced in October, which included the 250 billion pound credit line to back interbank lending.

Banks and building societies have failed to fully pass on Bank of England interest-rate reductions. Brown’s government hasn’t publicly discussed ways to revive lending if the cuts don’t work. John McFall, the Labour lawmaker who leads Parliament’s Treasury Committee, says Brown must consider the “nuclear option” of full nationalization of banks.

Rate Cuts

The average cost of a two-year fixed-rate mortgage fell by 0.71 of a percentage point to 5.11 percent in November, the Bank of England said yesterday. That’s less than half the 1.5 point reduction the central bank delivered on Nov. 6. It has since cut the rate by a full point to 2 percent, the lowest since 1951.

“Current policy objectives are conflicting and incoherent,” said Michael Coogan, director general of the Council of Mortgage Lenders, which represents banks. “Government needs to decide on its key priority. The tug of war with lenders being pulled in every direction needs to end.”

Banks approved 39,900 loans for house purchases in October worth 5.5 billion pounds, down 52 percent by volume and 57 percent in value from a year ago, according to the CML.

The Conservative opposition used the figures to amplify criticism of Labour’s handling of the credit crunch, saying the government should consider more guarantees to back up bank lending instead of threatening the banks with sanctions for not writing more loans.

Gap Narrows

Brown’s popularity has risen in recent weeks after his bank rescue and a 20 billion-pound fiscal stimulus announced last month.

A Populus Ltd. poll showed Labour at 35 percent, compared with 39 percent for the opposition Conservatives. The four-point gap compares with a 28 point Conservative lead in September.

“Gordon Brown’s big idea is falling apart,” said George Osborne, a Conservative member of Parliament who speaks on finance. “He needs to change his bank-rescue plan so it starts to rescue the economy, not just the banks, and set up a National Loan Guarantee Scheme to get vital credit flowing to businesses.”

Banks are shunning new lending as they rebuild their balance sheets, which were damaged by the global financial crisis. Housing sales fell by the most since 1978 last month, the Royal Institution of Chartered Surveyors said yesterday.

The average standard variable rate for mortgages at U.K. banks slipped to 6.39 percent last month from 6.91 percent, the Bank of England said.

Last week, HBOS,RBS and Nationwide Building Society trimmed their main mortgage rates by less than the one-point reduction announced by the Bank of England Dec. 4.

“We have got to look at the whole monetary transmission mechanism,” said Philip Hammond, a Conservative lawmaker. “We have got to look at the wholesale funding market, and the government may have to be prepared to intervene.”

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.netRobert Hutton in London at rhutton1@bloomberg.net

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U.K. Economy May Be Shrinking the Most Since 1990, Niesr Says

By Brian Swint

Dec. 10 (Bloomberg) -- The U.K. economy may contract at the fastest pace since 1990 in the current quarter as the recession intensifies, the National Institute for Economic and Social Research said.

Gross domestic product fell 1 percent in the three months through November and will probably plunge more than that in the last three months of the year, the London-based institute, whose clients include the central bank, said in a statement today. The economy last shrank at such a speed in the third quarter of 1990, when it contracted 1.2 percent.

“The figures make clear that the rate of output decline is accelerating,” Niesr said in a statement. “The problem that” the government “needs to address very urgently is the availability of bank credit; further interest-rate reductions are unlikely to have much effect.”

Bank of England policy maker Andrew Sentance said yesterday that the recession will likely be as long and deep as any since the 1970s. Prime Minister Gordon Brown has cut taxes and pledged 50 billion pounds ($74 billion) in a bank rescue to bolster the economy, while the central bank has reduced the key interest rate to 2 percent, the lowest since 1951.

Banks are shunning new lending as they rebuild their balance sheets, which were damaged by the global financial crisis. Housing sales fell by the most since 1978 last month, the Royal Institution of Chartered Surveyors said yesterday.

Passing On Cuts

Lenders passed on less than half the 1.5 percentage point Bank of England interest-rate reduction last month to customers, a report showed yesterday. The central bank, which predicted in November that the economy will contract through much of next year, followed up with a one-point cut on Dec. 4.

Manufacturing output fell 1.4 percent in October from September, extending its worst stretch since 1980, the statistics office said yesterday. Jobless claims rose at the fastest pace since 1992 in October.

“This recession is likely to be comparable in length and depth with the previous three major post-war U.K. downturns in the mid-70s, early-80s and early-90s,” Sentance said. “In each of these earlier episodes, the output of the economy fell by at least 2.5 percent over a period of a year or more.”

Brown bolstered his popularity by promising a 20-billion pound stimulus package on Nov. 24, the biggest in two decades, reducing sales tax to bolster consumer spending.

“The government faces the real risk that, despite the measures it took, output will fall more sharply than it expected to the end of next year,” Niesr said. “There is every reason to believe that the output decline in the fourth calendar quarter of the year will be larger than 1 percent in magnitude.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

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Foreign Direct Investment in China Fell 36.5% on Year

By Li Yanping

Dec. 10 (Bloomberg) -- Foreign direct investment in China fell 36.5 percent in November from a year earlier as gains by the yuan stalled and the world’s fourth-biggest economy cooled.

Investment was $5.3 billion, the commerce ministry said on its Web site today, the least in 14 months.

The World Bank is forecasting China’s weakest growth in almost two decades next year after export demand and construction slumped. The central bank has stalled gains by the yuan against the dollar since mid-July and last month slashed interest rates by the most in 11 years.

“Foreign direct investment will continue to shrink slowly as lower interest rates and a weakening yuan squeeze yields for speculators and the outlook for China’s economy dims,” said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. “Many factories that have closed along China’s coastal regions are foreign-invested.”

In the first 11 months, investment rose 26.3 percent to $86.4 billion, the commerce ministry said in the statement. The amount is already higher than last year’s record of $74.8 billion.

“We expect much slower foreign direct investment growth in 2009,” Standard Chartered Bank Plc said in a report last month. “Companies were likely front-loading or exaggerating their investments in order to bring in funds and gain exposure to the yuan” in the first half of this year, the bank said.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net

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Japan Machine Orders Fall 4.4% as Recession Deepens

By Jason Clenfield

Dec. 10 (Bloomberg) -- Japanese machinery orders fell in October as the deepening global recession choked off demand for the country’s cars and electronics.

Orders, an indicator of capital spending in the next three to six months, slid 4.4 percent from September, when they rose 5.5 percent, the Cabinet Office said today in Tokyo. Bookings received from abroad, which are excluded from the headline figures, tumbled 37 percent, the biggest drop in five years.

Falling profit for Japan’s exporters has driven the Topix stock index down 44 percent this year and forced the country’s biggest companies to slash production, fire workers and cut spending. Sony Corp. said yesterday it will eliminate 16,000 jobs and reduce capital investment in its electronics business by 30 percent over the next two years.

“It’s inevitable that business investment will keep falling because the drop in overseas demand is so huge,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo. “The reduction in investment and jobs will make Japan’s recession very deep and prolonged.”

The Topix index of machinery makers lost 0.3 percent as of 10:41 a.m. in Tokyo, compared with a 0.3 percent increase in the benchmark stock gauge. Komatsu Ltd. and Mitsubishi Heavy Industries Ltd. led the declines.

The yen traded at 92.50 per dollar from 92.24 before the report. Japan’s currency has climbed 15 percent since September, compounding exporters’ woes by eroding the value of their earnings made abroad.

Shrinking Economy

The world’s second-largest economy shrank at an annual 1.8 percent pace last quarter, a report showed yesterday, as businesses cut spending and inventories. The recession has since deepened: in October, exports fell at the fastest pace in seven years, production slumped, job prospects fell to a four-year low and household spending tumbled for an eighth month.

Morgan Stanley today cut its outlook for Japan, saying gross domestic product will shrink 2 percent next year, matching the country’s “postwar nadir” of 1998. The impact of the global financial crisis on the economy “is worse than we envisaged,” said Takehiro Sato, chief Japan economist at Morgan in Tokyo.

The Bank of Japan’s quarterly Tankan survey next week will show sentiment among large manufacturers fell the most in 34 years, according to economists surveyed by Bloomberg.

“Japan’s economy is in far worse shape than feared,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “The contraction in capital spending is therefore likely to be particularly severe in the fourth quarter.”

Tool Orders Plunge

The monthly drop in orders was in line with economists’ estimates for a 3.9 percent decrease. Year on year, orders tumbled 15.5 percent, the steepest decline since June 2007.

November bookings for machine tools slid the most in at least 21 years, plunging 62 percent from a year earlier, the Machine Tool Builders Association said yesterday.

Mitsubishi Chemical Holdings Corp. will cut equipment investment 27 percent to 430 billion yen ($4.6 billion) by March 2011, the Tokyo-based company said yesterday.

The Bank of Japan forecasts business investment will stay sluggish for the next several quarters. The central bank cut its benchmark interest rate to 0.3 percent in October, the first reduction in seven years, and some economists predict a return to zero rates in coming months.

“Monetary policy will take on more of the character of fiscal policy, under pressure from the markets,” said Morgan Stanley’s Sato. “We envisage two further rate cuts to get us back to the zero interest-rate policy” by March, he said.

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

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China Will Be Happy Geithner Isn’t a Goldman Guy: William Pesek

Commentary by William Pesek

Dec. 10 (Bloomberg) -- “Why does Goldman Sachs run your government?”

After seven-plus years in Asia, I’m no longer startled by this question. It was posed to me yet again recently -- this time by Kuala Lumpur taxi driver Sumit Kotari.

“What’s wrong with America is that it’s run by investment bankers, mostly from the same bank,” the 49-year-old Malaysian said. “How can Americans stand for it? Is Barack Obama from Goldman Sachs, too?”

No, I tell my driver. Yet I’ve stopped putting up an argument when faced with the common view that Washington is in Wall Street’s pocket. The $700 billion bank bailout, on top of the Federal Reserve’s charity, doesn’t help the perception. Neither does the fact that its architect, Henry Paulson, is a Goldman Sachs Group Inc. alumnus.

It has been reported in Asia that Neel Kashkari, assistant Treasury secretary in charge of the Troubled Asset Relief Program, worked for the same New York-based investment bank. President-elect Obama’s decision to seek advice from other former Goldman Sachs bigwigs, such as Robert Rubin, also grabbed attention.

Even the guy helping choose a replacement for Timothy Geithner at the Fed Bank of New York came from Goldman Sachs. It makes one breathe a sigh of relief that Geithner, who will be the next Treasury secretary, doesn’t have Goldman Sachs on his resume.

Incestuous Ties

The point here isn’t to pick on Goldman Sachs. Yet it is seen by many in Asia as the gold standard of investment banks. Its name also is a byword for the perception of incestuous ties between Wall Street and Washington.

Geithner isn’t untainted, having run the Fed bank that is essentially Wall Street’s connection to the U.S. capital. Many complain that Geithner did little to head off the current crisis and then played a role in letting Lehman Brothers Holdings Inc. fail, deepening the turmoil.

Where Asia is concerned, there are three reasons why a Geithner Treasury Department may be more of an asset than a liability. One, he knows Asia well. Two, the Treasury’s role is about to change. Three, the U.S. is in a weak position and Geithner will come to the job knowing it.

China is a case in point. As Paulson’s tenure winds down and Obama’s team steps up, questions abound about the future of the talks Paulson started. Last week, Zhu Guangyao, an assistant Chinese finance minister, said the “Strategic Economic Dialogue” should continue.

Better Suited

The talks will survive, no question. The real issue is that Geithner may be better suited to oversee such discussions.

Geithner is less “of Wall Street” than Paulson, who spent 32 years as an investment banker before joining the Treasury in 2006. Many in Asia wonder if it’s a conflict of interest for the firm, where Paulson served as chief executive officer, to benefit from U.S. bailouts. Geithner, meanwhile, has lived in China, India, Japan and Thailand and studied Mandarin and Japanese.

With Geithner’s resume, he could just as easily get a top job at the State Department. That’s a significant asset when economic relations with China -- and the rest of Asia -- will require diplomacy as well as deft policy making.

The Strategic Economic Dialogue was a recognition that the U.S. needs China’s help as much as China needs the U.S.’s. Kudos to Paulson for getting that.

Obama’s Universe

The framework still hasn’t achieved anything approaching its promise. One reason Geithner can move things forward is his time with Bill Clinton’s administration. Clinton empowered the Treasury to take on tasks previously carried out by diplomats. Geithner will bring that view into Obama’s universe.

The U.S. simply isn’t in a position to demand this or that from China. Treasury officials no longer have the leverage they once did as Wall Street plunges and the U.S. needs Asia’s money to stabilize its financial system.

This dialogue began when China was growing 10 percent and the Dow Jones Industrial Average was soaring. Geithner will take the reins as China struggles to bolster growth and the U.S. is desperate to keep the biggest holder of Treasuries from dumping dollars.

The China-U.S. relationship was aptly summed up last week by an e-mailed note from Eswar Prasad of the Brookings Institution in Washington. Its title: “Lame Duck Meets Hobbled Panda.”

New Thinking

The U.S. even came in for a gentle rebuke last week when Paulson attended his fifth and final China powwow. In Beijing, Vice Premier Wang Qishan described the financial crisis as “the most pressing task that we are facing” and urged the U.S. to protect Chinese assets in that country.

China’s economy is slowing fast amid recessions in the U.S., Europe and Japan. While a stronger yuan might help China boost domestic demand, it could devastate the all-important manufacturing industries. China won’t go for it.

Geithner won’t waste the amount of time President George W. Bush’s team did figuring that out. Geithner also will be working with Lawrence Summers, tapped by Obama to be White House economic director. Summers last year urged lawmakers to go easy on China’s currency policies.

Obsessing over the yuan has gotten the U.S. nowhere. Perhaps some new thinking at the Treasury will.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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Santos in Talks to Settle Indonesia Mudflow Liability

By Angela Macdonald-Smith

Dec. 10 (Bloomberg) -- Santos Ltd., Australia’s third- biggest oil and gas producer, is in talks about a settlement of its liability for a mudflow disaster in Indonesia, which analysts say could make it a more attractive bid target.

The discussions with Lapindo Brantas Inc., the operator of Santos’s 18 percent-owned exploration venture in East Java, are not complete and there is “no certainty of an outcome,” Adelaide-based Santos said today in a statement to the Australian stock exchange.

A settlement, which would need to be approved by Indonesian regulators, could be reached as early as Dec. 12, the Australian Financial Review reported today, citing a Lapindo Brantas spokesperson that it didn’t identify. Mud started flowing from the Banjar Panji gas exploration well after a blowout in May 2006, inundating homes, rice fields, factories and roads.

The discussions with Lapindo Brantas involve “a practical and appropriate resolution” of Santos’s involvement in the venture as a minority partner with no controlling rights, Santos said in the statement, without elaborating.

Santos’s stake in the mudflow disaster acts as a “poison pill” that is likely to deter potential bidders, Credit Suisse Group said yesterday in a report. The company on Nov. 29 had a 15 percent limit on individual shareholdings removed by the South Australian state government, clearing the way for offers. China National Petroleum Corp. is considering linking with a partner for a bid, the South China Morning Post reported Dec. 8.

‘Downside Risk’

“We think that this mud exposure is an issue for any company contemplating a takeover of Santos,” Credit Suisse said. “We cannot see in its present form, with the continuing uncertainty about where the ultimate liability resides, any corporate wanting to be exposed to any speculated downside risk.”

Santos is in talks to sell its 18 percent stake in the drilling venture to a company related to the Bakrie family, the Review reported, citing the Lapindo spokesperson that it didn’t identify. Lapindo is controlled by the family of Indonesia’s Welfare Minister Aburizal Bakrie.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net

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Crude Oil Rises Amid Speculation Over Size of OPEC Output Cut

By Mark Shenk

Dec. 10 (Bloomberg) -- Crude oil rose for the second time in three days amid speculation over the size of a potential OPEC production cut when the group meets next week to discuss the slump in prices.

OPEC, supplier of 40 percent of world oil, may reduce output by 2 million to 2.5 million barrels a day to reverse recent declines, billionaire hedge-fund manager Boone Pickens said yesterday. Crude fell yesterday after the U.S. forecast that annual demand will decline for the first time since 1983.

“I think we’ll stay in a $40-to-$45 range until we have a better idea what OPEC is going to do,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. The wider economy is currently the main driver of the oil market, he said.

Crude oil futures for January delivery rose 57 cents, or 1.4 percent, to $42.61 a barrel at 11:22 a.m. Sydney time on the New York Mercantile Exchange. Yesterday, futures fell $1.64, or 3.8 percent, to $42.07 a barrel, capping a 23 percent drop since Nov. 26.

Global oil consumption will average 85.75 million barrels a day in 2008, down 50,000 barrels from 2007, the Energy Department said in its monthly Short-Term Energy Outlook yesterday.

Global consumption last fell in each of the four years ended in 1983, according to the department. Demand will decline an additional 450,000 barrels a day next year to 85.3 million barrels a day, the department said.

IEA Forecast

The International Energy Agency and OPEC have also lowered demand forecasts over the past month because of the economic contraction.

The IEA reduced its 2009 estimate by 670,000 barrels a day, or 0.8 percent, to 86.5 million barrels a day in a Nov. 13 report. The agency is scheduled to release its next report on Dec. 11. The Organization of Petroleum Exporting Countries cut its forecast for oil consumption next year by 530,000 barrels a day, or 0.6 percent, to 86.68 million barrels a day, in its monthly oil market report on Nov. 17.

“I look at these numbers as stepping stones,” said Peter Beutel, president Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “They are a lagging indicator and will probably fall further in the months ahead.”

Oil futures, which have dropped 56 percent in New York this year, are heading for the biggest annual decline since trading began in 1983, as global economies falter. The International Monetary Fund sees recessions next year in the U.S., Japan and the euro area.

FedEx, Danaher

U.S. stocks fell after companies from FedEx Corp. to Danaher Corp. forecast earnings that disappointed investors as the recession crimped sales. The Dow Jones Industrial Average declined 242.85, or 2.7 percent, to 8,691.33. The Standard & Poor’s 500 Index dropped 21.03 points, or 2.3 percent, to 888.67.

The decline in crude oil has sent both gasoline futures and pump prices lower this year.

Gasoline for January delivery fell 2.54 cents, or 2.6 percent, to settle at 93.64 cents a gallon in New York. Futures touched 89.5 cents a gallon on Dec. 5, the lowest since the contract was introduced in October 2005.

U.S. pump prices last week fell to $1.699 a gallon, the lowest since February 2004, the Energy Department said Dec. 8.

OPEC should make a “substantial” output cut when it meets, Shokri Ghanem, Libya’s top oil official, said Dec. 8. OPEC agreed to cut daily output by 1.5 million barrels in October.

U.S. Supplies

“OPEC is looking to find a way to bolster prices,” said Steve Maloney, a risk-management consultant for Stamford, Connecticut-based Towers Perrin. “The last cut has clearly not been enough.”

A government report today is forecast to show that U.S. crude-oil inventories rose 1.3 million barrels last week, according to the median of 14 responses in a Bloomberg News survey. The report will probably show that U.S. supplies of gasoline and distillate fuel, a category that includes diesel and heating oil, dropped.

The Energy Department is scheduled to release its weekly report at 10:35 a.m. today in Washington.

“The market will get cues” from the report, said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “There are two bigger events coming up. The IEA report from Paris on Thursday is likely to show that demand destruction is continuing and there is the all-important cartel meeting on Dec. 17.”

Brent crude oil for January settlement declined $1.89, or 4.4 percent, to settle at $41.53 a barrel on London’s ICE Futures Europe exchange.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net

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Yen Falls as Stock Gains Spur Buying of Higher-Yielding Assets

By Stanley White

Dec. 10 (Bloomberg) -- The yen fell against the euro after regional stocks rose, encouraging investors to purchase higher- yielding assets funded with Japan’s currency.

The yen also declined against the dollar on speculation Japanese importers are buying foreign currencies to pay their bills before the year ends.

“Yen sellers have the advantage,” said Tadahiko Nashimoto, director of foreign exchange at Barclays Bank Plc in Tokyo. “There’s some yen selling demand as companies have to settle their accounts this month. Stocks are also up.”

The yen fell to 119.59 per euro as of 10:06 a.m. in Tokyo from 119.07 late yesterday in New York. Against the dollar, it declined to 92.54 from 92.13 yesterday. It rose to 91.60 on Dec. 5, the highest since Oct. 24. The euro was little changed at $1.2929. The yen may fall to 93 per dollar and 120 versus the euro today, Nashimoto said.

The MSCI Asia-Pacific index of regional shares rose 0.06 percent for the fourth day of gains. In carry trades investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.3 percent target rate is the lowest among developed nations.

Many Japanese companies close their accounts on the fifth, 10th, 15th, 20th, 25th and the last business day of every month. These days are known as “Gotobi” in Japanese.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net

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Indonesian Dollar Bonds Discounted for Default Lure Fortis Fund

By Lilian Karunungan

Dec. 10 (Bloomberg) -- The 31 percent drop in Indonesia’s international bonds is proving irresistible to Fortis Investments betting that the biggest economy in Southeast Asia will avoid a default.

“Valuations are attractive,” said Ernesto Bettoni, who helps oversee the equivalent of $266 billion as a London-based investment specialist at Fortis, a unit of the Belgian financial services company. “We don’t expect a default in Indonesia.”

Indonesia’s more than $50 billion of foreign-currency reserves are sufficient to cover short-term obligations, even after falling 12 percent since the end of September, Bettoni said in an interview on Dec. 9. President Susilo Bambang Yudhoyono can shore up finances through loans from Australia and members of the Association of Southeast Asian Nations, he said.

The government’s dollar-denominated bonds have lost 31 percent this year, according to indexes compiled by HSBC Holdings Plc, as slowing global economic growth and the seizure of credit markets drove investors away from emerging-market securities. Only Pakistan’s debt has done worse among the 11 Asian dollar indexes compiled by HSBC, dropping 51 percent.

Indonesia’s 6.875 percent dollar bond that matures in January 2018 yielded 11.80 percent late yesterday in Jakarta, almost twice as much as when the security was issued in January, according to data compiled by Bloomberg. The price has rebounded to 73.00 cents on the dollar, from as low as 54.50 on Oct 24. The benchmark Jakarta Composite stock index is down 54 percent this year, while the rupiah has lost 14 percent.

Moody’s Rating

The world’s most populous Muslim nation had to seek $25 billion in funds from the Washington-based International Monetary Fund between 1997 and 2003 to help rescue Indonesia’s banking system as Asian currencies tumbled in tandem. The government has had to reorganize its borrowing plans again this year after the Sept. 15 failure of Lehman Brothers Holdings Inc. shut off access to foreign-currency debt market funding for most developing nations.

“Indonesia is not going to face this sort of financial collapse that they experienced during the 1997- 1998 crisis,” said David Cohen, director of Asian forecasting at Action Economics in Singapore. “They have not faced the need to approach the IMF this time.”

Foreign Debt

Indonesia’s short-term foreign-currency and rupiah- denominated debt is rated B by Standard & Poor’s, five levels below investment grade. The country had $147 billion in external debt outstanding as of the third quarter, according to Bank Indonesia in Jakarta.

Indonesia lowered its economic growth forecast for next year to 4.5 percent, as a worldwide recession saps demand for the nation’s exports, Finance Minister Sri Mulyani Indrawati said Dec. 2. The government expects the economy to expand 6.1 percent in 2008.

“Next year, we will see the dollar come back in full force again” and weaken Asian currencies, said Joseph Tan, Asian chief economist at Credit Suisse Group in Singapore. “Jobs are still being lost, growth is still being revised down.”

The rupiah may weaken to 12,250 by March, according to the median estimate of 22 analysts and strategists in a Bloomberg News survey. The rupiah reached 10,920 yesterday, near the highest level in a month.

Credit Quality

Moody’s Investors Service said on Dec. 2 that Indonesia’s rating of Ba3, three levels below investment grade, is stable, while warning the global financial crisis may erode sovereign credit quality more than anticipated.

The government plans to borrow $2.8 billion from the World Bank and other multilateral lenders to help finance the 2009 budget deficit, Finance Minister Sri Mulyani Indrawati said on Dec. 5.

Assuming a “worst case scenario” of reserves being wiped out, Indonesia “could potentially access $13 billion to $18 billion from combining IMF funds and swap lines with ASEAN and Australia,” Bettoni said.

Reserves dropped to $50.18 billion in the first week of December from $57.11 billion in late September as Bank Indonesia sold foreign exchange to stem declines in the rupiah.

The currency weakened 22 percent against the dollar since the end of July, the second-worst performer among the 10 most-traded Asian currencies excluding the yen, and touched 13,150 on Nov. 21, the lowest level in a decade.

Credit Default Swaps

Foreign ownership of the country’s bonds slumped to 87 trillion rupiah ($8 billion) as of Dec. 5 from a peak of 106.66 trillion rupiah in August, data on the Finance Ministry’s Web site showed. Indonesia’s international debt accounted for 4.2 percent of Fortis’s emerging-market dollar bond portfolio.

Indonesia credit-default swaps, which decline as perceptions of credit quality improve, fell 25 basis points to 776 basis points on Dec. 8, according to data compiled by Bloomberg. The cost to protect $10 million of the government’s debt from default for five years is equivalent to $776,000 annually.

President Yudhoyono will strive to avoid any default because of the “high political cost,” Bettoni said.

To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net.

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Australia Dollar May Reach 1.12 Per Singapore Dollar, Saxo Says

By Patricia Lui

Dec. 10 (Bloomberg) -- Australia’s dollar may rise to near 1.12 against the Singapore currency should it break above 1.02 and close there, said Saxo Capital Markets Pte, citing technical charts.

Australia’s dollar may be in the process of forming an inverse head and shoulders pattern on the daily chart and will need to close above the so-called neckline of 1.02 to validate the formation, said Jeffrey Halley, head of Asia Pacific foreign- exchange trading at Saxo Capital in Singapore.

“The target would be from the head to the neckline, taking you to at least 1.1180,” said Halley. “That makes sense as the next congestion line is also around 1.1150 to 1.1180 where the cross tested that level four times on the way down before finally breaking it on the fifth round.”

Australia’s dollar traded at 0.9898 to the Singapore currency as of 8:30 a.m. in Singapore, according to data compiled by Bloomberg.

Australian’s currency has plunged 22 percent this year from a close of 1.2623 at the end of 2007 as the U.S. sub-prime mortgage crisis morphed into a global credit crunch and a worldwide recession, spurring investors to flee high-yielding assets as risk appetite vanished.

A head of shoulders is a reversal pattern in technical charts which forms at the end of a rising trend to signal a change in direction. An inverse head and shoulders takes place at the end of a downtrend. The target for both patterns is the length of the head to the base of the neck. The magnitude of that length is added to the point of breakout in the neckline.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

To contact the reporter on this story: Patricia Lui in Singapore at plui4@bloomberg.net.

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Australian, New Zealand Dollars Advance as Regional Stocks Rise

By Candice Zachariahs

Dec. 10 (Bloomberg) -- The Australian and New Zealand dollars advanced as regional equities gained, prompting speculation investors will buy higher-yielding assets.

The currencies rose as Australian and Japanese stocks jumped and a report showed Australian consumer confidence increased in December for a second month.

“Markets have shown themselves to be resilient,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp. “The risks are that we see further waves of bad news and not just in the U.S.” Gains in the Australian dollar towards 66.50 cents and in the New Zealand currency towards 55 cents are selling opportunities, Rennie said.

Australia’s currency rose 0.6 percent to 65.92 U.S. cents as of 11:26 a.m. in Sydney from 65.54 cents late in Asia yesterday. The currency advanced 0.3 percent to 60.97 yen.

New Zealand’s dollar gained 0.2 percent to 54.23 U.S. cents from 54.15 in Asia yesterday. It bought 50.13 yen from 50.19.

A sentiment index in Australia jumped 7.5 percent to 92 points, according to a Westpac Banking Corp. and Melbourne Institute survey of 1,200 consumers conducted between Dec. 1 and Dec. 7 and released today in Sydney. The index has since February held below 100, which indicates pessimists outnumber optimists.

Reserve Bank of Australia Governor Glenn Stevens said yesterday that economic growth slowed “more quickly than anyone had forecast” in China, the nation’s biggest trading partner.

RBC Capital Markets revised its forecast for the Australian dollar, saying the currency will reach a low point of 55 U.S. cents in mid-2009, after previously forecasting it would bottom at 60 cents. New Zealand’s currency will reach a trough at 43 cents, wrote Sydney-based Sue Trinh, a senior currency strategist with RBC Capital Markets, in a research note yesterday.

Benchmark interest rates of 4.25 percent in Australia and 5 percent in New Zealand, compared with 0.3 percent in Japan and 1 percent in the U.S., attract some investors to the South Pacific nations’ assets using funds borrowed in yen. The risk in such trades is that currency market moves will erase profits.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net

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Australia Stocks: Commonwealth Bank, Iluka, OneSteel, Westpac

By Ian C. Sayson

Dec. 10 (Bloomberg) -- The S&P/ASX 200 Index fell 15.80 points, or 0.4 percent, to 3,588.50 as of 10:34 a.m. in Sydney. The broader All Ordinaries Index fell 11.30, or 0.3 percent, to 3,522.40 while the futures contract due in December lost 0.1 percent to 3,611.

Commonwealth Bank of Australia (CBA AU), the nation’s largest mortgage lender, dropped A$1.01, or 3.4 percent, to A$28.99 after it said it will sell up to A$750 million ($495 million) in stock to Merrill Lynch & Co. The stock price-target was also cut by Morgan Stanley to A$31.80 from A$33.50

Iluka Resources Ltd. (ILU AU), the world’s biggest zircon producer, gained for the sixth-day, adding 8 cents, or 1.7 percent, to A$4.78. The company raised its 2008 profit forecast 20 percent to about A$60 million because of the falling Australian currency.

Linc Energy Ltd. (LNC AU), an Australian energy company planning to convert coal into diesel, declined 4 cents, or 1.6 percent, to A$2.46. The company said it extended an option to sell fuel to BP Plc from its planned gas-to-liquids plant in southern Australia. The option allows BP to buy 14,000 barrels a day of diesel, or 70 percent of the planned daily output of 20,000 barrels.

OneSteel Ltd. (OST AU), the second-largest Australian producer of the alloy, sank 25 cents, or 11 percent, to A$2.10, set for its biggest loss since Nov. 20. The company said today that it doesn’t expect extraordinary profit in the first half.

Wesfarmers Ltd. (WES AU), which operates businesses ranging from groceries to coal mining, increased 34 cents, or 2.1 percent, to A$16.90. The company said production from its Curragh mine will meet its fiscal year forecast even after damage to one of the five draglines at the mine.

Westpac Banking Corp. (WBC AU), Australia’s second-largest bank, decreased A$1.63, or 9.1 percent, to A$16.25, set for its biggest drop since Nov. 13. The bank said it raised A$2.5 billion from the sale of shares at A$16 apiece yesterday. The price was 11 percent lower than the closing price on Dec. 8.

To contact the reporter on this story: Ian C. Sayson in Manila at isayson@bloomberg.net.

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Asian Technology Stocks Gain, Led by Hynix; Westpac Bank Falls

By Chua Kong Ho

Dec. 10 (Bloomberg) -- Asian technology stocks rose as Hynix Semiconductor Inc. won financial support from creditors, countering declines among financial shares.

Hynix, the world’s second-largest computer memory chipmaker, surged 8.9 percent after creditors said they are considering providing 800 billion won ($556 million). Westpac Banking Corp. slumped 7.9 percent in Sydney, leading declines among financial companies, after selling stock at a discount. Sony Corp. lost 2.8 percent after saying it will cut 16,000 jobs due to a bigger-than-expected deterioration of the economy.

The MSCI Asia Pacific Index added 0.4 percent to 83.95 as of 10:14 a.m. in Tokyo, taking a four-day advance to 5.7 percent. Seven of 10 industry groups advanced. The measure has slumped 47 percent this year, taking its valuation to 12.1 times estimated profit, about a third lower than at the start of 2008.

Japan’s Nikkei 225 Stock Average added 0.3 percent to 8,417.80. South Korea’s Kospi Index advanced 1.2 percent. Australia’s S&P/ASX 200 Index gained 0.6 percent in Sydney as confidence among Australian consumers rose for a second month.

In New York, the Standard & Poor’s 500 Index fell 2.3 percent yesterday as companies from FedEx Corp. to Danaher Corp. forecast earnings that disappointed investors.

Slower Growth

MSCI’s Asian index is set for the worst annual performance in its two-decade history. Stocks have fallen as the credit crisis sent the U.S., Europe and Japan into the first simultaneous recession since World War II, eroding demand for Asian exports.

Global gross domestic product will likely increase by 0.9 percent in 2009, the weakest rate since records became available in 1970, the World Bank said. Meanwhile, international trade will shrink in for the first time in more than 25 years according to the institution.

Japanese machinery orders fell 4.4 percent in October from September, Japan’s Cabinet Office said today in Tokyo. Economists surveyed by Bloomberg News predicted a 3.9 percent decrease.

In Australia, consumer sentiment index jumped 7.5 percent to 92 points, according to a Westpac Banking Corp. and Melbourne Institute survey released today in Sydney. The index has since February held below 100, which indicates pessimists outnumber optimists.

To contact the reporter for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

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Citigroup Short Sales Increase Most on New York Stock Exchange

By Eric Martin

Dec. 9 (Bloomberg) -- Citigroup Inc. had the biggest increase in shares sold short among New York Stock Exchange companies in the second half of November as the world’s biggest financial-services company tumbled 60 percent on concern about toxic assets and a capital shortage.

Citigroup short selling increased by 56.1 million shares, or 44 percent, to 182.5 million shares between Nov. 14 and Nov. 28, according to exchange data compiled by Bloomberg. Citigroup dropped to a 15-year low of $3.77 on Nov. 21, two days before the firm received a $20 billion capital injection from the U.S. government. The stock then more than doubled through Nov. 28 and added 7 cents to $8.54 today.

U.S. stocks fell in the first half of the period covered by the NYSE report, with the Standard & Poor’s 500 Index falling 14 percent through Nov. 20 before rebounding 19 percent.

In a short sale, a trader tries to profit from a price decline by selling borrowed shares in the hope of repaying the loan with cheaper stock.

Short selling of Bank of America Corp., the nation’s third- largest lender, rose by 18.9 million shares for the second- biggest jump among stocks listed on the NYSE. Bank of America retreated 31 percent from Nov. 14 through Nov. 20 before rebounding 44 percent following Citigroup’s rescue. Bank of America lost 89 cents, or 5 percent, $16.95 today.

Borrowed shares of Alcoa Inc., the largest U.S. aluminum producer, increased 29 percent to 61 million as the industrial metal fell to a three-year low. Alcoa lost 0.7 percent overall during the period and dropped 3 cents to $9.55 today.

Short selling of Procter & Gamble Co., the world’s largest consumer-goods company, declined the most among NYSE companies, dropping by 35.9 million shares, or 50 percent, to 36.5 million. The Cincinnati-based company had the biggest increase in shares sold short in the first half of the month.

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.

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Canada Stocks Fall on Royal Bank Share Sale, BCE; Barrick Gains

By John Kipphoff

Dec. 9 (Bloomberg) -- Canadian stocks fell the first time in three days, led by financial companies, after Royal Bank of Canada said it will sell stock at a discount to shore up capital reduced by writedowns related to U.S. debt investments.

Royal Bank paced finance shares’ biggest drop since Dec. 1 after announcing the sale of as much as C$2.3 billion ($1.84 billion) of stock. The move overshadowed a deeper-than-forecast interest rate cut by the Bank of Canada, which said that the nation’s economy is “now entering a recession” as the global slump deepens.

“Royal’s issue has shaken market confidence a bit,” said Michael Sprung, president of Sprung & Co. Investment Counsel, which manages $50 million in Toronto. “The public’s constantly told how strong the banks are, and yet they have to come to market at depressed prices. It’s not good for shareholders.”

Mining shares advanced, led by Barrick Gold Corp., as bullion prices gained. The Standard & Poor’s/TSX Composite Index fell 2 percent to 8,397.56 in Toronto as more than three stocks declined for every two that rose advanced.

Canada’s main stocks benchmark rose 5.6 percent yesterday, led by energy, mining and financial shares, on speculation that President-elect Barack Obama’s plan to implement the largest spending plan for public works since the 1950s may revive the U.S. economy, and demand for commodities. The S&P/TSX is down 39 percent in 2008, poised for its worst year ever.

Royal Bank, the country’s biggest lender, slid 5.9 percent to C$35.29. It’s selling 56.8 million shares at C$35.25 apiece in a transaction scheduled to close Dec. 22. The banks managing the sale have an option for another 8.51 million shares.

Target Rate

Bank of Canada Governor Mark Carney and his rate-setting panel cut the target rate for overnight loans between commercial banks by 75 basis points to 1.5 percent, the lowest since 1958. The move was predicted by only two of 23 economists surveyed by Bloomberg, with 20 calling for a half-point cut.

“The fact that they’re cutting this much is making people wonder if things are even worse than thought,” said Sprung. “The hopes of an Obama stimulus are dissipating to some extent. People are realizing there’s no quick fix.”

Toronto-Dominion Bank fell 7.5 percent to C$42.10. The nation’s second-largest bank sold said it will sell as much as C$1.38 billion in stock this month after posting a 7.3 percent drop in profit to C$1.01 billion on credit trading losses.

Reluctant Lenders

Canadian Imperial Bank of Commerce, Bank of Montreal, Bank of Nova Scotia and National Bank of Canada joined Toronto- Dominion and Royal Bank in not immediately matching the Bank of Canada’s interest-rate cut today, lowering their prime lending rates by 50 basis points to 3.5 percent.

Banks have been reluctant to lend since October after mounting credit losses at institutions worldwide sent the cost of interbank borrowing in Canadian dollars to the highest in at least 18 years. CIBC fell 5.6 percent to C$50.31. Bank of Montreal dropped 4.4 percent to C$34.65. Scotiabank slid 7 percent to C$32.34. National Bank fell 7.1 percent to C$34.87.

A measure of financial stocks in the S&P/TSX, the biggest by value in the index, fell 4.9 percent. A gauge of phone companies fell 3.2 percent, led lower by BCE Inc.

BCE dropped 8.7 percent to C$22.50, the most since Nov. 26. Canada’s biggest phone company hired PricewaterhouseCoopers LLP in an effort to salvage its C$52 billion ($41.5 billion) takeover by a group led by Ontario Teachers’ Pension Plan.

BCE’s leveraged buyout was put in doubt last month when KPMG LLC auditors told BCE the deal would push it into insolvency. PwC was hired to help persuade KPMG to reverse its opinion, Montreal-based BCE said yesterday. If KPMG holds its ground, the deal, set to close by Dec. 11, probably will fail.

Gold rose a second day on speculation the U.S. dollar’s rally will stall, boosting the investment appeal of the metal.

Barrick Gold, the biggest bullion mining company in the world, rose 3.8 percent to C$35.10. Rival Goldcorp Inc., which traded today without the right to its 1 cent-a-share dividend, climbed 2.8 percent to C$30.94.

To contact the reporter on this story: John Kipphoff in Toronto at jkipphoff@bloomberg.net.

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Stocks in Europe Gain for Second Day; PPR, Daimler, Yara Climb

By Sarah Jones

Dec. 9 (Bloomberg) -- European stocks rose for a second day as optimism that stimulus plans will boost the global economy lifted retailers and automakers, while investor confidence in Germany unexpectedly improved.

PPR SA, owner of the Gucci luxury-goods brand, and Daimler AG, the world’s second-largest maker of luxury cars, jumped more than 4 percent. Yara International ASA climbed 9.2 percent after the biggest fertilizer maker said it expects strong results this year. Q-Cells SE sank 19 percent as the solar company reduced its profit forecasts for 2008 and 2009.

The Dow Jones Stoxx 600 Index added 1.3 percent to 205.33 as 17 out of 19 industry groups advanced. The measure has rebounded 13 percent since this year’s low Nov. 21 as governments from the U.S. to India announced stimulus plans to buoy the global economy and prevent earnings from tumbling.

“The downside risk on equity markets is now quite low and the technical rally we have had over the past few days could extend into January,” said Bob Parker, vice chairman of Credit Suisse Asset Management in London, which oversees about $600 billion. “Very low interest rates and expectations of lower interest rates are driving investors, who are cash rich, back into equities,” he told Bloomberg Television.

Germany’s ZEW Center for European Economic Research said today its index of investor and analyst expectations for Europe’s largest economy rose to minus 45.2 this month from minus 53.5 in November. Economists in a Bloomberg News survey expected a drop to minus 57.

National Markets

National benchmark indexes increased in 15 of the 18 western European markets. The U.K.’s FTSE 100 added 1.9 percent and France’s CAC climbed 1.6 percent. Germany’s DAX rose 1.3 percent as Daimler climbed.

Iceland’s key index tumbled 40 percent after Straumur- Burdaras Investment Bank hf, the only one of Iceland’s four largest banks left standing amid the Atlantic island’s financial crisis, and Exista hf resumed trading.

The Stoxx 600 has retreated 44 percent this year as more than $31 trillion has been erased from the value of global equities and credit-related losses and writedowns at banks and insurers approach $1 trillion.

PPR led retail shares higher today, rallying 12 percent to 40.91 euros. Home Retail Group Plc, owner of Britain’s Argos stores, jumped 5.9 percent to 241 pence. Carrefour SA, Europe’s biggest retailer, added 4 percent to 30.13 euros.

LVMH Moet Hennessy Louis Vuitton SA, the world’s largest maker of luxury goods, jumped 6.6 percent to 48.81 euros. Chairman Bernard Arnault purchased 1 million stock options in main shareholder Christian Dior SA. Arnault, the biggest investor in LVMH and Dior, bought the Dior options for 5.11 euros each on Nov. 28, according to a statement from France’s market regulator.

Carmakers

Daimler rose 4.4 percent to 25.67 euros, pacing gains among automakers. Renault SA, France’s second-largest carmaker, increased 2.2 percent to 18.25 euros. Fiat SpA, Italy’s biggest, climbed 4.8 percent to 5.63 euros.

Yara climbed 9.2 percent to 119 kroner. The company said it expects to deliver strong results this year as the economic slowdown forces the company to take measures to counter lower fertilizer sales.

Imperial Energy Plc jumped 18 percent to 1,002 pence after the U.K.-based explorer operating in Siberia confirmed that Oil & Natural Gas Corp. will go ahead with its bid priced at 1,250 pence a share in cash, the same amount it offered in August.

Solar Energy

Q-Cells sank 19 percent to 22.22 euros. The world’s largest maker of solar cells said net income for 2008 will be 185 million euros ($237 million) as weakening demand caused customers to postpone deliveries. That’s down from an earlier prediction of 215 million euros.

Renewable Energy Corp. ASA, the biggest producer of polysilicon used in solar panels, tumbled 10 percent to 59.7 kroner.

Infineon Technologies AG, Europe’s second-largest semiconductor maker, declined 11 percent to 79 cents. Texas Instruments Inc. reduced its profit and sales forecasts as the economic slump cut into demand for electronics, while National Semiconductor Corp. predicted third-quarter revenue that trailed analysts’ estimates.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

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Brazilian Stocks Drop on Rate, Retail Outlook; Bolsa Climbs

By Alexander Ragir and William Freebairn

Dec. 9 (Bloomberg) -- Brazilian stocks fell for the first time in three days as faster economic growth spurred traders to pare bets the central bank will cut borrowing costs and an analyst said tighter credit will hurt retailer profits.

Cia. Brasileira de Distribuicao Grupo Pao de Acucar, the country’s biggest food retailer, and Globex Utilidades SA fell as much as 6.5 percent after Credit Suisse Group AG cut its rating on the stocks, citing slowing sales. Banco Itau Holding Financeira SA dropped for the first time in six days as a 6.8 percent jump in third-quarter gross domestic product cemented expectations the central bank will leave interest rates unchanged tomorrow.

“The consumer sector is the most affected by rates,” said Julio Martins, who oversees $173 million as investment director at Banco Prosper in Rio de Janeiro. “The downgrades of Globex and Pao de Acucar raised concern about how they’ll be hit by the credit crunch.”

Brazil’s Bovespa Index dropped 0.8 percent to 37,968.11. The BM&FBovespa Small Cap index slipped 0.4 percent. The BM&FBovespa MidLarge Cap index fell 0.5 percent. Chile’s Ipsa rose 0.1 percent, and Mexico’s Bolsa gained 1.3 percent.

Itau retreated 0.9 percent to 29.65 reais.

The yields on Brazil’s interest-rate futures contracts and local bonds rose for the first time in more than a week after the GDP report showed an unexpected acceleration in growth. Investors yesterday pushed yields to an eight-month low on expectations that a worsening economic outlook would damp inflationary pressures, prompting policy makers to begin cutting interest rates in the months ahead.

Maintaining Rates

Brazil’s central bank is forecast tomorrow to leave its benchmark interest rate unchanged at 13.75 percent, according to the median forecast of 46 economists in a Bloomberg survey.

Pao de Acucar fell 6.3 percent to 35.60 reais. Credit Suisse cut the retailer to “underperform.”

“Following the easing of commodity prices (especially after the global credit crisis), we expect same-store sales to decelerate over the next few quarters,” analyst Marcel Moraes wrote in a note yesterday.

Globex, the owner of Brazil’s Ponto Frio consumer- electronics and home-appliance stores, dropped 3.3 percent to 6.19 reais after declining as much as 6.5 percent. Moraes cut its rating on the stock to “underperform” from “neutral,” saying that it is “highly exposed” to tighter credit.

The Bovespa has fallen 41 percent this year, poised for its worst year on record, as the biggest economic crisis since the Great Depression hurt growth prospects and slowed demand for raw materials.

Mexico’s Bolsa Advances

Mexico’s Bolsa index rose for a third day, led by cement- maker Cemex SAB on speculation it could gain from a U.S. plan to stimulate the economy by spending on roads and bridges.

Cemex, North America’s largest cement producer, gets about a fourth of revenue from the U.S. On Dec. 6, President-elect Barack Obama said he would propose the biggest infrastructure spending plan since the 1950s. Cemex also gained as pending sales of existing homes fell less than economists forecast in October. Cemex climbed the most in the Bolsa index, advancing 7.4 percent to 13.58 pesos.

Empresas ICA SAB, Mexico’s biggest construction company, rose to the highest in two months after it authorized the Aramburuzabala family to raise its stake to as much as 10 percent. The Aramburuzabalas said they owned about 5.1 percent of stock in ICA in a filing yesterday with the U.S. Securities and Exchange Commission. ICA rose 7 percent to 21.91 pesos.

Argentina’s Merval climbed 2.1 percent, Colombia’s IGBC gained 2.4 percent and Peru’s Lima General index climbed 5.1 percent.

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net; William Freebairn in Mexico City at wfreebairn@bloomberg.net.

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U.S. Stocks Retreat on Profit Outlook; FedEx Shares Tumble

By Whitney Kisling

Dec. 9 (Bloomberg) -- U.S. stocks slid, halting a two-day advance, after companies from FedEx Corp. to Danaher Corp. forecast earnings that disappointed investors as the deepening recession crimps sales.

FedEx tumbled 14 percent, its steepest loss in 21 years, after the second-biggest U.S. package-shipping company projected profit below analysts’ estimates amid a “significantly weaker” economy. Danaher, maker of Craftsman tools, slid 4.2 percent. JPMorgan Chase & Co. and Wells Fargo & Co. dropped almost 7 percent as yields on three-month Treasuries turned negative for the first time, signaling increasing stress in credit markets.

“Investors have been schizophrenic here for a couple months, and I don’t see any change in that,” said Henry Herrmann, chief executive officer of Waddell & Reed Financial Inc. in Overland Park, Kansas, which manages about $50 billion. “We still have very thin trading, and there’s a lot of nervousness.”

The S&P 500 lost 2.3 percent to 888.67, extending declines late in the day as a drop in oil snuffed out gains in energy shares. The Dow Jones Industrial Average declined 242.85 points, or 2.7 percent, to 8,691.33 and the Nasdaq Composite Index slipped 1.6 percent to 1,547.34. About three stocks fell for each that rose on the New York Stock Exchange.

Rebound from 11-Year Low

All 10 industry groups in the S&P 500 retreated a day after the benchmark gauge of U.S. equities extended its gain from an 11-year low last month to 21 percent. About 1.4 billion shares changed hands on the floor of the NYSE, 12 percent less than the three-month daily average.

The S&P 500 yesterday marked a technical end to the 14- month bear market as President-elect Barack Obama pledged the biggest public-works spending package since the 1950s. The index has fallen 43 percent from its 2007 record as the collapse of the subprime mortgage market curbed earnings for five straight quarters.

European shares rose for a second day and Asian stocks climbed for a third on expectations stimulus plans from the U.S. to India will buoy the global economy. PPR SA, owner of the Gucci luxury-goods brand, and Daimler AG, the world’s second- largest maker of luxury cars, jumped more than 4 percent, while Australia’s BHP Billiton Ltd. climbed 4.5 percent.

Stocks will climb in 2009 in the face of falling earnings and a slowdown in economic growth because of cheap valuations, according to strategists at Credit Suisse Group AG, Deutsche Bank AG and Merrill Lynch & Co. The S&P 500 may rise to 1,050 by the end of 2009 from yesterday’s close, a team of Credit Suisse strategists wrote in a note today. Goldman Sachs Group Inc.’s chief investment strategist David Kostin projected a 21 percent gain by the end of next year as the economy stabilizes.

FedEx, Con-Way

FedEx fell $10.78 to $63.65 after saying annual profit may be as much as one-third lower than analysts expected. Larger rival United Parcel Service Inc. fell $4.11 to $54.51, the most since Oct. 22.

FedEx dragged industrial companies in the S&P 500 down 3.3 percent collectively. Union Pacific Corp. slid 7.4 percent to $46.90 after Merrill Lynch & Co. cut the railroad operator’s shares to “neutral” from “buy.”

Con-way Inc., the second-biggest U.S. trucker, reduced its full-year 2008 earnings forecast to as much as 20 percent less than analysts’ average estimate as freight demand fell to 2003 levels. The company also cut 1,450 jobs. The shares slid 14 percent to $22.19, the lowest level in more than seven years.

Danaher Corp. fell 4.2 percent to $49.78. The company said fourth-quarter profit will be lower than previously forecast. Danaher will close 13 factories and cut 1,700 jobs because of the deteriorating economy.

‘The Real Economy’

“You’re going to have to get used to this for the next three months; you’re going to see lowering of guidance,” said Robert Lutts, president and chief investment officer at Cabot Money Management, which oversees $400 million in Boston. “This is the real economy.”

Kroger Co. helped lead a group of companies that sell consumer staples down 2.7 percent after saying third-quarter profit fell because of insurance costs related to Hurricane Ike. Shares of the biggest U.S. grocery chain fell 6.7 percent to $25.47. Safeway Inc., the third-largest, lost 6.7 percent to $22.04.

Wal-Mart Stores Inc. fell 3 percent to $55.81 after the world’s largest retailer said it’s “temporarily” suspending a share repurchase program because of “instability in credit markets” and the shrinking economy.

Profit Slump

The 496 companies in the S&P 500 that reported third- quarter results saw an average 18.3 percent decline in profits, prompting analysts to cut estimates for next year. They now project profit growth of 8.2 percent for S&P 500 companies in 2009, about one-third of their forecast of 23 percent at the end of the third quarter, according to data compiled by Bloomberg.

Fewer Americans signed contracts to buy previously owned homes in October, signaling the housing slump will extend into a fourth year. The index of signed purchase agreements, or pending home resales, fell a less-than-forecast 0.7 percent to 88.9 from a revised 89.5 in September, according to a report from the National Association of Realtors. Gains in the South and Northeast offset weakness in the West and Midwest.

General Motors Corp., the largest U.S. automaker whose shares surged 21 percent yesterday, fell 4.7 percent to $4.70. Congressional Democrats sent President George W. Bush a draft proposal for a $15 billion, short-term aid package for U.S. automakers. Some Senate Republicans have expressed doubt about the plan, with one top Republican saying disputes remain over a “deeply flawed” proposal.

‘Implosion’

General Motors has lost more than half its value this quarter alone, as it pleaded for a multibillion-dollar government bailout to keep it from collapsing.

Ford Motor Co., the second-biggest U.S.-based automaker, declined 4.4 percent to $3.23.

The U.S. government may end up holding stakes in GM, Ford and Chrysler LLC if Congress and the White House reach agreement. Under the proposed rescue, details of which are still being discussed, the Treasury would get warrants for stock equivalent to 20 percent of any government loans. With GM seeking as much as $10 billion and valued at $3 billion, the government may become the biggest shareholder.

“The thing that has shaken people more than anything else is the implosion of these major household names,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, which manages $30 billion. “When the auto industry looked like it was on the verge of disappearance the market hit a low. That really shakes people.”

Negative Yields

S&P 500 financial companies, which have rebounded 39 percent collectively from a 13-year low on Nov. 20, dropped the most of 10 industry groups today, losing 4.9 percent.

JPMorgan fell 6.9 percent to $33.96, while Wells Fargo Co. slid 6.6 percent to $30.50.

Yields turned negative after the Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

T. Rowe Price Group Inc. was cut to “sell” from “neutral” at Goldman Sachs Group Inc. on “rising fundamental headwinds.” T. Rowe, the Baltimore-based money manager, slid 6.9 percent to $34.13, the first decline in six trading sessions.

SunTrust Banks Inc., Georgia’s largest lender, declined 11 percent to $30.04, while Bank of New York Mellon Corp. slid 10 percent to $27.63.

More than $31 trillion has been erased from the value of global equities this year, while debt losses and writedowns at the world’s largest lenders and insurers approach $1 trillion.

To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net.

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