Dividends Falling Means S&P 500 Is Still Expensive

By Michael Tsang

Feb. 23 (Bloomberg) -- The fastest reduction in U.S. dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century.

U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data.

A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.

“It’s a greater fool theory if we always buy stocks based on earnings and we never get a penny out of it, hoping for someone to buy that stock at a higher price,” said James Swanson, chief investment strategist at MFS Investment Management in Boston, which oversees $134 billion. “Dividends have been a cushion in bad times. If they go to zero it’s a disaster.”

Twenty-five companies in the S&P 500 saved almost $17 billion by cutting or suspending outlays this year, more than all the reductions from 2003 to 2007, when the index returned 83 percent. On a per-share basis, S&P 500 companies may trim payouts 13 percent this year, the biggest drop since 1942, S&P data show.

New York Times

New York Times Co., the third-largest U.S. newspaper publisher, suspended its 6-cent dividend after making steady payments since going public 40 years ago, to lower debt. Midland, Michigan-based Dow Chemical Co., the biggest U.S. chemical maker, cut payouts for the first time since 1912. Milwaukee-based Harley-Davidson Inc., the motorcycle maker, reduced its dividend 70 percent, ending a string of increases dating to at least 1993.

Futures on the S&P 500 climbed 1.5 percent at 10:44 a.m. in London on speculation that the U.S. government will increase its control of New York-based Citigroup Inc. The S&P 500 has lost 51 percent from a record reached in October 2007.

The same model that signals the S&P 500 is too high shows some companies that maintained dividends are cheap after more than $1 trillion in losses and writedowns at the world’s biggest financial institutions sent the U.S., Europe and Japan into the first simultaneous recessions since World War II.

McDonald’s Corp., the world’s biggest restaurant chain, Procter & Gamble Co., the largest consumer products maker, and eight other S&P 500 companies are the most attractive because they have cash to raise payouts, data compiled by Bloomberg show.

‘More Teeth’

Dividends are “the single best tool to understanding a company,” said Matthew McCormick, a money manager at Cincinnati- based Bahl & Gaynor Investment Counsel Inc., which oversees $2.5 billion and owns shares of McDonald’s and P&G. “There’s a lot more teeth to a dividend.”

Without dividends, investing in equities may not be worth the risk. Dividend income accounted for about 70 percent of average U.S. equity returns since 1900 after inflation, according to Elroy Dimson, Paul Marsh and Mike Staunton at the London Business School, in a study published by Zurich-based Credit Suisse this month.

Investors who put $1 in U.S. stocks at the start of the century were paid back $582 with reinvested dividends, adjusted for inflation, the study showed. Price increases alone would have given an investor just $6 after that span, less than the $9.90 from holding long-term government debt, according to the study.

Cash Flow

“Ultimately, what you get out of investing in stocks is the cash flow from dividends,” said Laurence Booth, finance professor at University of Toronto’s Rotman School of Management and a colleague of Myron J. Gordon, who developed the constant growth version of the so-called dividend discount model in 1959.

The measure, which values a stock as the sum of all its future dividends, shows equities are still overpriced. With S&P 500 companies projected to pay a combined $25.27 in dividends this year, the index would need to fall to 526.46 before investors are compensated for owning shares.

The analysis assumes investors expect total returns of 6 percent annually from stocks, including a 1.2 percent increase in dividends, which is the historical average since 1900, adjusted for inflation, according to data from the London Business School.

2008 Slump

The S&P 500 closed last week at 770.05, after dropping 15 percent so far this year and 38 percent in 2008. Treasury notes and bonds of all maturities returned 14 percent last year, according to data compiled by Merrill Lynch & Co.

“Bearing in mind the higher risk, equities obviously become less attractive if the dividend decreases,” said Jörg Boysen, who manages a global equities fund at Frankfurt-based Union Investment, which oversees $182 billion.

Companies raising payouts may become more valuable. Oak Brook, Illinois-based McDonald’s, which returned 8.6 percent during the worst year for U.S. stocks since 1937, is undervalued by 46 percent from last week’s closing price of $54.57, according to a dividend discount model that adjusts for earnings and dividend growth over time.

The company, which boosted its payout every year since 1976, is set to pay $2.17 a share in 2009. That represents an increase of 34 percent from $1.625 last year, according to data compiled by Bloomberg. Spokeswoman Heidi Barker declined to comment on the future of the company’s dividend policy.

‘We’re Confident’

P&G, located in Cincinnati, is worth 42 percent more than its market price of $50.25, according to the measure. Analysts estimate the company, which makes everything from Tide laundry detergent to Charmin toilet paper and has increased its dividend for 52 consecutive years, will give investors $1.625 a share this fiscal year, a 12 percent increase from a year ago.

“We’re confident we can sustain strong dividends,” P&G Chief Executive Officer A.G. Lafley said at an analyst conference in Boca Raton, Florida on Feb. 19.

During the first half of the 20th century, dividend income made up all of the 5.3 percent return U.S. stocks delivered to investors, data compiled by the London Business School show.

At the time, companies paid out most of their earnings to shareholders, compelled by a Treasury Department rule that established penalties for “improper accumulation” of income, according to the sixth edition of Benjamin Graham and David L. Dodd’s “Security Analysis.” The book laid out the principles of value investing followed by billionaire Warren Buffett, the chief executive officer of Berkshire Hathaway Inc. and the world’s most successful investor.

“The prime purpose of a business corporation is to pay dividends to its owners,” Graham and Dodd wrote.

Market History

Between 1980 and 2000, investors increasingly sought price gains as dividends contributed 25 percent of returns. The shift occurred as companies such as Cisco Systems Inc. and WorldCom Inc. increased profits by using excess cash for expansion and acquisitions. In the five-year bull market that ended in 2007, cash to shareholders as a percentage of earnings fell to a record low of 31 percent, based on data compiled by Yale University professor Robert Shiller, as profit growth juiced by borrowed money outstripped dividend increases.

Returning money to shareholders prevents managers from wasting it on investments that may not prove profitable, according to Bahl & Gaynor’s McCormick.

“It forces companies from empire building, stupid acquisitions and nefarious activities,” he said. “You can’t fake the cash.”

Undervalued S&P Companies Based on Dividend Discount Model

(The following non-financial companies raised annual cash payouts
to shareholders every year this decade; are projected to have
higher dividends this year and next; will report an increase in
earnings per share in 2009; and are undervalued by more than 20
percent from their closing price last week based on the Bloomberg
dividend discount model.)

Company                       ‘09E DPS  ‘08 DPS   DDM Pct. Chg

BCR  C.R. Bard                $0.64     $0.62     +59.08%
BDX  Becton, Dickinson        $1.30     $1.14     +54.32%
MCD  McDonald’s               $2.17     $1.63     +46.11%
PG   Procter & Gamble         $1.63     $1.45     +41.94%
ABT  Abbott Labs              $1.57     $1.44     +39.81%
MDT  Medtronic                $0.67     $0.50     +37.36%
GD   General Dynamics         $1.44     $1.40     +34.81%
MKC  McCormick                $0.96     $0.88     +34.70%
PEP  PepsiCo                  $1.84     $1.65     +28.02%
KO   Coca-Cola                $1.65     $1.52     +27.00%

(To save a copy of the equity screen, click here.)

S&P 500 Companies Cutting or Suspending Dividends This Year

Company                       New DPS   Old DPS   USD Change

AEE  Ameren                   $1.54     $2.54     -$211 MLN
AIV  Apartment Investment     $1.00     $2.40     -$124 MLN
BAC  Bank of America          $0.04     $1.28   -$6.222 BLN
CBS  CBS                      $0.20     $1.08     -$547 MLN
CIT  CIT Group                $0.08     $0.40      -$91 MLN
CMA  Comerica                 $0.20     $1.32     -$169 MLN
CEG  Constellation Energy     $0.96     $1.91     -$170 MLN
DOW  Dow Chemical             $0.60     $1.68     -$998 MLN
HOG  Harley-Davidson          $0.40     $1.32     -$215 MLN
HIG  Hartford Financial       $0.20     $1.28     -$351 MLN
HST  Host Hotels & Resorts    $0.00     $0.20     -$105 MLN
HBAN Huntington Bancshares    $0.04     $0.53     -$179 MLN
JNY  Jones Apparel            $0.20     $0.56      -$31 MLN
M    Macy’s                   $0.20     $0.53     -$139 MLN
MI   Marshall & Ilsley        $0.04     $1.28     -$323 MLN
MAS  Masco                    $0.04     $1.28     -$323 MLN
MOT  Motorola                 $0.00     $0.20     -$453 MLN
NYT  New York Times           $0.00     $0.24      -$34 MLN
NWL  Newell Rubbermaid        $0.42     $0.84     -$116 MLN
PFE  Pfizer                   $0.64     $1.28   -$4.315 BLN
RDC  Rowan                    $0.00     $0.40      -$45 MLN
STT  State Street             $0.04     $0.96     -$397 MLN
STI  SunTrust Banks           $0.40     $2.16     -$623 MLN
XL   XL Capital               $0.40     $1.52     -$370 MLN
ZION Zions Bancorp            $0.16     $1.28     -$129 MLN

Source: Standard & Poor’s

To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net.

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Bolsa Mexicana, Enka, Socotherm Americas: Latin Equity Preview

By Hugh Collins

Feb. 23 (Bloomberg) -- The following companies may have unusual price changes today in Latin American trading. Stock symbols are in parentheses and share prices reflect the previous close.

The MSCI Latin America Index fell 4.8 percent to 1,980.12 on Feb. 20, extending the weekly loss to 10.6 percent. In Brazil, preferred shares usually are the most-traded class of stock.

Markets in Brazil will be closed today and tomorrow for the Carnival holiday, and will open two hours late on Feb. 25.

Argentina

Socotherm Americas SA (STHE AR): Shareholders of the Argentine oil and gas pipe-coasting company approved a plan to restructure 77.5 million pesos ($21.9 million) worth of debt. Italian parent company Socotherm SpA will have 10 days to approve the debt plan, Socotherm Americas said in a filing with the Buenos Aires Stock Exchange. Socotherm Americas fell 3.2 percent to 4.55 pesos.

Colombia

Enka de Colombia SA (ENKA CB): The Medellin-based synthetic fiber exporter had its share price estimate cut to 8.11 pesos from last year’s forecast of 12.20 pesos at Interbolsa SA, which cited “problems” in the Peruvian and Chilean fish industries and growing competition from Asia. Enka rose 2.4 percent to 7.4 pesos.

Peru

Cia. de Minas Buenaventura SA (BVN PE): The world’s seventh- largest gold producer agreed to buy a 20 percent stake in Inversiones Colquijirca, the holding company that owns 51 percent of Soc. Minera El Brocal SA (SMBC PE). Buenaventura will pay Teck Cominco Metals Ltd. $35 million for the shareholding, it wrote in a Feb. 20 e-mailed statement. Buenaventura gained 3.2 percent to $21.87. El Brocal, Peru’s third-largest lead producer, rose 5.6 percent to 14.25 soles.

Mexico

Bolsa Mexicana de Valores SAB (BOLSAA MM): The operator of Mexico’s stock exchange has held talks about various “opportunities,” and will keep discussing possible investments, divestments, joint ventures or other agreements with foreign and domestic companies, Bolsa Mexicana said in an e-mailed statement. Bolsa Mexicana rose 1.1 percent to 9.53 pesos.

To contact the reporter on this story: Hugh Collins in Mexico City at Hcollins8@bloomberg.net

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U.S. Stock-Index Futures Climb; Citigroup, General Motors Gain

By Daniela Silberstein

Feb. 23 (Bloomberg) -- U.S. stock futures rose, indicating the Standard & Poor’s 500 Index will rebound from two straight weeks of losses, as investors speculated the U.S. government may boost control over Citigroup Inc.

Citigroup surged 13 percent in German trading after the Wall Street Journal said the bank is in talks with federal officials that may result in the government holding as much as 40 percent of its common stock. Bank of America Corp. and JPMorgan Chase & Co. added more than 3 percent. General Motors Corp., the largest U.S. automaker, rallied 8.5 percent as the Journal said advisers are mulling a bankruptcy loan.

Futures on the S&P 500 expiring in March rose 1 percent to 777.5 as of 12:04 p.m. in London. Futures on the Dow Jones Industrial Average increased 1 percent to 7,427 after the index dropped to a six-year low on Feb. 20. Nasdaq-100 Index futures climbed 1.1 percent to 1,184.5.

“The news is positive in the sense that we won’t see a bankruptcy or an even worse catastrophe,” said Rudolf Buxtorf, a fund manager at RBS Coutts Bank in Zurich, who manages the equivalent of $114 million. “The government measures will prevent the world from going under.”

The S&P 500 last week extended its worst start to a year to 15 percent as President Barack Obama failed to assuage investors by approving a $787 billion economic stimulus plan that combines tax breaks and government spending meant to resuscitate the moribund U.S. economy. Homebuilders and banks retreated even after Obama announced a plan to stem home foreclosures.

Stocks in Asia and Europe rose today, with the MSCI Asia Pacific Index increasing 0.3 percent and the Dow Jones Stoxx 600 Index gaining 0.6 percent.

Citigroup Stake

Citigroup surged 13 percent to $2.20 in Germany. JPMorgan, the second-biggest U.S. bank, added 3.2 percent to $20.53.

The government may end up owning as much as 40 percent of Citigroup’s common stock, while the bank’s executives would prefer the stake to be closer to 25 percent, the Journal said. Citigroup spokesman Jon Diat declined to comment.

Bank of America climbed 8.2 percent to $4.10. The lender has enough “capital, liquidity and earnings power to make it through this downturn on our own,” Chief Executive Officer Kenneth Lewis, 61, said in a Jan. 20 memo to employees. The company isn’t talking with the government about expanding its ownership stake, spokesman Robert Stickler said yesterday.

Governments across the world are stepping up measures to stem the worst global recession since World War II. Bank of America and Citigroup have received a combined $90 billion in U.S. aid in four months.

Bank Debt

The cost of protecting against a default on senior and subordinated bank debt soared to a record in Europe, credit- default swap prices showed. The iTraxx Financial Index rose 5 basis points to an all-time high of 159, while the subordinated index climbed 15 to 315, according to JPMorgan prices.

The U.S. recession will be the worst in more than three decades as job losses mount and consumers and companies retrench, a survey of business economists showed. Billionaire investor George Soros said the current economic upheaval has its roots in the financial deregulation of the 1980s and signals the end of a free-market model that has since dominated capitalist countries.

GM increased 8.5 percent to $1.92 in Germany trading. Advisers to the U.S. Treasury have taken steps to arrange loans valued at least $40 billion for GM and Chrysler LLC, should the two automakers need the cash, the largest bankruptcy loan ever, the Wall Street Journal reported, citing unidentified people familiar with the situation.

General Electric

Ford Motor Co., the second-biggest U.S. automaker, added 0.6 percent to $1.59.

General Electric Co. advanced 2.8 percent to $9.64. The world’s biggest maker of power-generation equipment will double deliveries of wind turbines to Chinese customers for two years, benefiting from government-funded expansion, said Steve Fludder, head of GE’s environmental product campaign.

Loews Corp. rose 1.5 percent to $20.46. The diversified holding company may rally to almost $30 during the next year if financial markets stabilize and the value of the company’s assets recover, Barron’s reported, without citing anyone.

While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent. A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago.

To contact the reporter on this story: Daniela Silberstein in Zurich at dsilberstei2@bloomberg.net.

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LNG Ltd. Expects Project Approval End-2009 After Golar Accord

By Angela Macdonald-Smith

Feb. 23 (Bloomberg) -- Liquefied Natural Gas Ltd., the developer of export projects too small for major suppliers, said its $500 million plant in Australia is set to get the go-ahead by the year-end after an investment by Golar LNG Ltd.

Golar, a Norwegian operator of LNG tankers, will take a 40 percent stake in the project in Queensland state and invest about $100 million of equity in the venture, Maurice Brand, managing director of Perth-based LNG Ltd., said today. LNG Ltd. rose the most in almost three months in Sydney trading after announcing the agreement.

LNG Ltd.’s Fisherman’s Landing project at Gladstone port is due to start production in 2012, in advance of larger rival ventures planned in the area by companies including BG Group Plc and Santos Ltd. The agreement makes Golar the first company that has agreed to buy output from one of the Australian projects planning to convert coal-seam gas into LNG and helps ensure LNG Ltd.’s project will be the first of the ventures to start up.

The accord with Golar “is a milestone event for the company today but there is a lot more to be done as we move forward to close the project out during 2009,” Brand said on a conference call. Government approvals for the plant are expected by July, while the port licenses should be in place by September, he said.

Golar will also buy all the output from the 1.5 million metric tons-a-year plant, which will be half funded by debt, Brand said. The estimated cost doesn’t include investments for the supply of gas by Arrow Energy Ltd., he said. Hamilton, Bermuda-based Golar is already LNG Ltd.’s largest shareholder with a 16 percent stake.

‘Best Outcome’

LNG Ltd. gained as much as 11 Australian cents, or 17 percent, to 77 cents on the Australian stock exchange and was at 69 cents at 12:15 p.m. Sydney time. The advance compared with a drop of as much as 3.1 percent in the exchange’s benchmark energy index.

LNG Ltd.’s directors considered that Golar’s proposed investment “would deliver the best outcome for the company and materially assist with first LNG delivery in late 2012,”, Brand said today in a statement to the exchange.

LNG Ltd. also renewed an initial agreement with Brisbane- based Arrow, Royal Dutch Shell Plc’s Australian partner in coal seam gas, for the supply of gas to the project. Under the accord, which is due to be firmed into a contract in September or October, Arrow has the exclusive right to supply gas to the first production plant and an option to supply gas for a second unit.

Arrow is bidding against BG Group Plc for Pure Energy Resources Ltd., a coal-seam gas explorer in Queensland, as it seeks to build reserves for LNG supply projects. It may also supply gas extracted from coal seams to an LNG venture being studied by Shell in Gladstone, Shaun Scott, chief executive officer of Arrow’s Australian business, said earlier this month.

Shell’s potential venture is a longer-term project and isn’t in competition with the Fisherman’s Landing venture, Brand said today.

LNG is gas chilled to liquid form for transportation by tanker to destinations not connected by pipeline.

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

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Total Explosion Trial Comes as Record Profits Sour Public Image

By Heather Smith and Tara Patel

Feb. 23 (Bloomberg) -- Total SA, France’s biggest company, will be fighting more than criminal charges when its trial over a 2001 factory explosion opens. It may also have to counter public resentment of record oil profits at a time of economic crisis.

On Sept. 21, 2001, a Total-owned chemicals plant in Toulouse, France, exploded, killing 31 people in a blast that measured 3.4 on the Richter scale. Total and a former factory manager face charges of manslaughter and property destruction. The trial starting today in Toulouse comes the same month Total reported a record 13.9 billion euros ($17.8 billion) in adjusted net profit for 2008.

“The public is already having trouble digesting the company’s announcement of record profits right in the middle of an economic crisis,” said Chicuong Dang, an analyst at KBL Richelieu Gestion, which has about $5 billion under management. He added that “Total is operating in a sector that isn’t exactly environmentally friendly and is inherently riskier than other industries.”

Prosecutors found the blast was the result of an ammonium nitrate chemical mix. Total’s AZF Grande Paroisse de Toulouse and Serge Biechlin were charged with manslaughter and property destruction. Fines could add up to 300,000 euros ($379,000).

Biechlin may face as much as three years in jail if convicted. They deny the allegations, saying tests by Total in the Netherlands, Siberia and the U.S. haven’t found a clear cause of the blast.

“The scientific community in Toulouse is divided about the exact causes of the explosion,” said Marie-Helene Manero, a chemical engineer who was at a school across the street where she teaches when the blast occurred. Still, the trial “will help people turn the page, do their mourning.”

Prosecutors will be joined by 1,600 civil parties who may speak about the blast’s impact on their lives. Almost 2 billion euros have already been given to victims, payments that don’t “mean culpability, just humanity,” Total lawyer Daniel Soulez- Lariviere said in an interview at his Paris offices.

“Criminal trials allow civil parties a forum that’s not granted in civil trials,” said Stephane Bonifassi, a lawyer in Paris who isn’t involved in the case. Allowing so many participants “turns the trial into a parade of mourning.”

To contact the reporters on this story: Heather Smith in Paris at hsmith26@bloomberg.net and; Tara Patel in Paris at tpatel2@bloomberg.net.

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Vattenfall Is Close to Buying Nuon-Unit Stake for EU3.5 Billion

By Rebecca Evans and Fred Pals

Feb. 23 (Bloomberg) -- Vattenfall AB is close to a deal to buy nearly half of Nuon NV’s utility unit for about 3.5 billion euros ($4.5 billion), the Wall Street Journal reported, citing people familiar with the matter.

Nuon, based in Amsterdam, would be the second Dutch utility to sell part of its production and supply business after RWE AG last month said it is buying Arnhem-based Essent NV for 9.3 billion euros. That deal excludes Essent’s distribution networks and waste-management unit.

The four biggest Dutch utilities are required by law to separate their production, trading and sales units from grid operations by Jan. 1, 2011. The unbundling is aimed at promoting competition and encouraging grid investment.

“We only communicate on done deals, we do not comment on rumors,” Erik von Hofsten, head of Vattenfall media relations Nordic, said by telephone today, when asked about the WSJ report.

Nuon also declined to comment on the newspaper report, spokeswoman Melanie Poort said today when contacted by Bloomberg News.

European utilities have bucked a trend for fewer mergers and acquisitions as changes in European Union law provide incentives for combining. Cost-cutting, diversification and declining stocks have made targets cheaper. The pace of mergers and takeovers fell 39 percent to $2.48 trillion last year as a credit squeeze hampered financing, according to data compiled by Bloomberg.

Seeking Foreign Partner

Nuon said last year it was looking for a foreign partner to complement its production and supply business. That followed the failure of merger talks with Essent.

Nuon has said it plans to sell 40 percent of the company’s retail, power generation and trading business. Power and grid assets are not included in the deal. Nuon Chief Executive Officer Oystein Loseth said last month he expected to complete the sale process before the summer.

Nuon, which has about 10,000 employees, said Feb. 16 that fourth-quarter profit fell 62 percent as production declined and operating expenses increased. Net income fell to 79 million euros from 210 million euros a year earlier. Sales dropped to 1.62 billion euros from 1.78 billion euros.

Vattenfall and Denmark’s Dong Energy A/S were cited as possible bidders by De Volkskrant on Jan. 23. The newspaper said then that Nuon’s value was 7 billion euros.

Eni Spa Chief Executive Officer Paolo Scaroni also said this month Italy’s biggest energy company was “considering” bidding for Nuon assets as it tries to sell more natural gas in Europe.

“We have not yet decided if we want to make an offer,” Scaroni told Bloomberg Television in an interview in London on Feb. 13. “We want to know exactly how the business is, how it will fit with our strategy.”

To contact the reporters on this story: Fred Pals in Amsterdam on fpals@bloomberg.netRebecca Evans in Sydney at revans6@bloomberg.net

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Korean Won Pressured by Eastern Europe Debt Risks, Goldman Says

By Patricia Lui

Feb. 23 (Bloomberg) -- South Korea’s won may be pressured by the worsening financial crisis in Eastern Europe because of links between the country and the region, according to Goldman Sachs Group Inc.

About 62 percent of South Korea’s external debt is owed to European banks, which are in turn “heavily exposed” to Eastern Europe, Kwon Goohoon, a Seoul-based economist at Goldman wrote in a report today. A worsening of the financial crisis there could make it difficult for Korean banks to roll over their European debt, he added.

Korean exports will be negatively impacted as the nation ships up to 6.5 percent of its goods to Eastern Europe, the note read. Finally, Korean companies account for about 10 percent of foreign direct investments in Eastern Europe, largely in the automobile, retail and banking sector and these firms may incur losses as the currencies there depreciate, Kwon said in the note.

“We see upside risk from the possible turmoil in Eastern Europe to our dollar-won forecasts of 1,450, 1,400 and 1,300 on a three, six and 12-month horizons,” Kwon wrote.

The won traded at 1,506.30 as of 9:20 a.m. in Seoul, according to Seoul Money Brokerage Services Ltd. The currency fell to 1,515.25 on Feb. 20, the weakest since Nov. 24. It reached 1,524.50 on Nov. 21, the lowest in more than a decade.

To contact the reporters on this story: Patricia Lui at plui4@bloomberg.net

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Australian, N.Z. Dollars Gain as U.S. May Raise Citigroup Stake

By Candice Zachariahs

Feb. 23 (Bloomberg) -- The Australian and New Zealand dollars rose as investors sold the U.S. currency on speculation President Barack Obama’s government will increase its ownership of Citigroup Inc.

The Australian dollar also strengthened against the yen as Japan’s deteriorating economy prompted investors to sell the low-yielding currency. Citigroup is in talks with federal officials that may increase state ownership of the bank to as much as 40 percent, the Wall Street Journal reported, citing people familiar with the situation it didn’t identify.

“We’re in for a fairly aggressive down-move in the U.S. dollar across the board,” said Paul Milton, chief foreign- exchange dealer at Societe Generale Australia Ltd. in Sydney. “I can’t see any reason why the Aussie can’t go back to the 66 U.S. cent-level over the next couple of days on the back of weak dollar sentiment,” he said, referring to the currency by its nickname.

Australia’s currency rose 0.8 percent to 65.01 U.S. cents as of 2:25 p.m. in Sydney from 64.53 cents in New York late last week. The currency advanced 0.3 percent to 60.44 yen.

New Zealand’s dollar gained 0.3 percent to 51.32 U.S. cents from 51.14 from Feb. 20. It bought 47.74 yen from 47.70. The so- called kiwi may bounce to 55 U.S. cents, Milton said.

New Zealand’s currency fell earlier as ANZ National Bank Ltd. said the nation’s economy may contract about 3 percent this year and the jobless rate may advance to a 15-year high. ANZ National, the nation’s biggest lender, said the New Zealand dollar will slump to 41 U.S. cents by the fourth quarter as the currency acts as “the release valve for the economy.”

Futures Traders

Futures traders increased bets the Australian dollar will decline against the U.S. currency, figures from the Washington- based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a drop in the Australian currency compared with those on a gain -- so-called net shorts -- was 7,290 on Feb. 17, compared with net shorts of 5,848 a week earlier.

The extra yield Australian states pay to borrow compared with the federal government rose by the most in 10 weeks after Standard & Poor’s cut Queensland state’s rating on Feb. 20. The premium the state pays on 2013 debt over the Australian government rose 22 basis points to 122 basis points, the biggest jump since Dec. 10. The spread for New South Wales 2014 notes added 15 basis points. A basis point is 0.01 percentage point.

Australian government bonds rose. The yield on the benchmark 10-year note fell three basis points to 4.14 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 gained 0.256, or A$2.56 per A$1,000 face amount, to 109.06. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 3.29.

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

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Asian Currencies Rise as Citigroup Talks Boost Risk Appetite

By Bob Chen

Feb. 23 (Bloomberg) -- Asian currencies rose, led by South Korea’s won, as speculation the U.S. government will increase its ownership of Citigroup Inc. helped shore up demand for riskier assets.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies excluding the yen, climbed from the lowest level in three months after the Wall Street Journal reported that the U.S. may end up holding as much as 40 percent of Citigroup’s common stock, citing people it didn’t identify. The won snapped a nine-day slide on speculation policy makers intervened to stem losses.

“The market found some support in the last few minutes, supporting Asian currencies” said Daniel Soh, an economist at Forecast Pte. in Singapore. Investors “reacted positively to the Citigroup news.”

The won gained as much as 2 percent to 1477.00 a dollar before trading at 1489.00 as of 12:28 p.m. local time, according to Seoul Money Brokerage Services Ltd. Singapore’s dollar rose 0.8 percent to S$1.5229 and Malaysia’s ringgit advanced 0.7 percent to 3.6625.

The won gained the most in a month after it last week declined below 1,500 per dollar for the first time since November.

Defending Currency

South Korea’s currency, the region’s worst performer, plunged 15 percent against the dollar this year on concern sliding exports will drag the economy into its first recession in more than a decade.

South Korea is ready to support its falling currency, Finance Minister Yoon Jeung Hyun said yesterday in an interview from Phuket, Thailand. “Intervention is necessary” in some situations, he said, adding he couldn’t rule out using the country’s foreign reserves of almost $202 billion to arrest the won’s slide.

“The government is trying to defend the currency to calm jitters rather than stem the won’s loss,” said Oh Suk Tae, an economist with Citibank Inc. in Seoul. “The intervention will be limited should the wobbles in the U.S. and Europe continue to test investor confidence.”

Central banks intervene in currency markets by arranging sales or purchases of foreign exchange to influence rates.

Bilateral Swaps

Asian nations agreed yesterday to pool $120 billion of foreign-exchange reserves to help fend off currency speculators amid a global financial crisis. The amount is 50 percent more than was proposed last May, and a broadening of the current arrangement called the Chiang Mai Initiative that allows only bilateral currency swaps.

“It is a step towards more coordination in the region,” said Sebastien Barbe, a strategist at Calyon in Hong Kong, the investment banking unit of France’s Credit Agricole SA. “The countries which have the most financial fragilities are the biggest beneficiaries of this swap, like South Korea and Indonesia. It is to avoid a one-off sharp depreciation or crisis in one or two countries.”

The Philippine peso strengthened 0.4 percent to 48.095 a dollar, according to Tullet Prebon Plc, and the Thai baht advanced 0.3 percent 35.60, according to data compiled by Bloomberg.

Most Asian currencies have tumbled in the past year as regional economies deteriorated. Thailand’s economy shrank for the first time in a decade in the fourth quarter, according to data released today. Reports due this week will show Hong Kong contracted the most since 1999 and Malaysia and India expanded at the slowest pace in at least four years, according to economists in Bloomberg News surveys.

Technical Chart

The yen climbed against the dollar on speculation the global slowdown will increase credit-market losses at international financial institutions, boosting the haven appeal of Japan’s currency.

The dollar dropped against all the 16 major currencies after the Wall Street Journal report on Citigroup.

The yen climbed 0.6 percent to 92.80 a dollar in Tokyo and the euro traded at $1.2913 versus $1.2826 late in New York on Feb. 20.

The ringgit also rose against the dollar as a technical chart traders monitor suggested recent declines were excessive.

The Malaysian currency’s 14-day relative strength index, a comparison of the magnitude of gains and losses, was 70.4 at the end of last week, according to data compiled by Bloomberg. A level above 70 or below 30 signals a reversal may occur.

“The ringgit is oversold and the market may have already priced in most of the bad news in store,” said Suresh Kumar Ramanathan, a rates and currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur.

Gains in the ringgit may be limited before a central bank report this week that economists surveyed by Bloomberg predict will show the economy expanded 1.4 percent from a year earlier in the final quarter of 2008, the slowest in seven years.

Elsewhere, Taiwan’s dollar gained 0.4 percent to NT$34.68 against the U.S. currency and Indonesia’s rupiah was little changed at 11,950, compared with 11,960 on Feb. 20. Vietnam’s dong traded at 17,480.50, versus 17,482.50 last week.

To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net.

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Dollar Declines on Speculation U.S. to Increase Citigroup Stake

By Ron Harui and Yasuhiko Seki

Feb. 23 (Bloomberg) -- The dollar fell for a third day against the euro on speculation the government will take larger stakes in U.S. banks, adding to signs the credit crisis may deepen the nation’s recession.

The dollar headed for its longest losing streak versus the euro this year after the Wall Street Journal reported the government may raise its stake in Citigroup Inc., citing unidentified people familiar with the situation. Japan’s currency may gain versus the euro on speculation the global slowdown will increase credit-market losses at international financial institutions, boosting demand for the yen as a haven.

“This news indicates that the financial crisis in the U.S. is deepening rather than easing,” said Takashi Matsumura, a Tokyo-based economist at Mizuho Research Institute Ltd., a unit of Japan’s second-largest banking group. “The dollar may fall toward 90 yen.”

The dollar dropped to $1.2909 per euro as of 1:54 p.m. in Tokyo from $1.2826 late in New York on Feb. 20. It weakened to 92.94 yen from 93.35 late last week. The U.S. currency slid to $1.4529 versus the pound from $1.4433, and declined to 1.1501 Swiss francs from 1.1560.

The euro traded at 119.97 yen from 119.68 yen in New York on Feb. 20. Europe’s single currency traded at 88.86 British pence from 88.91 pence, and advanced to 1.4848 francs from 1.4820.

Citigroup

The U.S. government may end up holding as much as 40 percent of Citigroup’s common stock, while bank executives prefer the stake to be closer to 25 percent, the Journal said.

Senate Banking Committee Chairman Christopher Dodd said on Feb. 20 some banks may have to be taken over for “a short time.” His House counterpart, Financial Services Committee Chairman Barney Frank, along with Republican Senator Jon Kyl rejected having the government step in to run banks.

Citigroup and Bank of America Corp., which received $90 billion in U.S. aid in four months, each tumbled as much as 36 percent on Feb. 20 on concern the U.S. may take over the banks. The Obama administration in response said a “privately held” banking system is the “correct way to go.”

The ICE’s Dollar Index, which tracks the greenback against six major trading partners such as the euro and the yen, declined for a third day, falling 0.5 percent to 86.079.

Limited Gains

Gains in the euro were limited by speculation financial turmoil in eastern Europe will deepen the recession in the 16 nations that share the currency.

Dutch Prime Minister Jan Peter Balkendende said on Feb. 22 that euro-region states are concerned about the stability of the single-currency area amid strains caused by the financial crisis.

“Of course we’re talking about this issue,” said Balkendende in an interview in Berlin after a meeting of European leaders in the Group of 20 states. “We’re aware of the fact that there are risks. We have to find the right approach.”

The cost of insuring Irish, Greek and Spanish debt against default has climbed to records, and mounting losses in eastern Europe among Austrian banks sent that nation’s bond-yield premiums to an unprecedented level.

“There is concern that credit losses at European financial institutions may swell due to their huge exposure to the Middle East and Eastern Europe,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “This is likely to drag on the euro.”

The ECB will reduce the 2 percent main refinancing rate by half a percentage point at its March 5 meeting, according to the median forecast of economists surveyed by Bloomberg News.

European Central Bank President Jean-Claude Trichet will speak at a Securities Regulation Forum in Paris today, while ECB Executive Board member Jose Manuel Gonzalez-Paramo will appear at the fifth International Conference on ABC Europe and America.

Trade Deficit

Demand for the yen may peter out before a government report this week which economists say will show Japan posted a trade deficit for the fourth straight month.

“Japan’s trade balance is worsening, so the yen is losing some of its safe-haven status,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “There is a risk the yen may be sold” to 93.70 versus the dollar and 120 per euro today, he said.

The Finance Ministry’s custom-cleared trade balance statistics on Feb. 25 may show Japan logged a trade deficit of 1.18 trillion yen ($12.6 billion) in January, according to a Bloomberg News survey of 26 economists.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

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Bringing Down House With Credit Default Swaps May Hit Yen Too

By Chris Fournier

Feb. 23 (Bloomberg) -- Six months ago, Lee Hardman didn’t care how much it cost to protect government bonds from losses. Now the Bank of Tokyo-Mitsubishi UFJ Ltd. strategist studies derivatives that provide such insurance to predict currency moves -- and he’s betting against the yen and the pound as a result.

“We wouldn’t really have looked at sovereign credit- default swaps in any great detail before” the September bankruptcy of Lehman Brothers Holdings Inc. caused credit markets to freeze, said Hardman, who is based in London. “It’s an area which potentially is going to see increasing focus as a driver of currency rates.”

Traders are starting to use the speculative contracts blamed for fueling Wall Street’s meltdown last year to measure currency strength as countries increase debt sales after pledging at least $2.4 trillion to kick-start their economies. Interest rates are becoming less useful for predicting foreign exchange as central banks slash borrowing costs to zero, narrowing differences between government debt yields.

“The credit-default swap market has taken a lot of bad press,” said Andrea Cicione, a credit strategist in London at BNP Paribas SA, in a Feb. 20 telephone interview. “The traders and the investors who have been involved in the CDS market understand that it’s operating just fine and there’s no need to throw it down a hole.”

Correlated Yen

Originally conceived to protect against corporate defaults, credit-default swaps are now being used to predict the direction of everything from the Canadian to New Zealand dollars. The swaps pay buyers the face value of a bond in exchange for the underlying securities or the cash equivalent if borrowers fail to adhere to debt agreements. Prices of the contracts, increasingly used to speculate on government bonds, rise as the perception of an issuer’s ability to pay decreases.

Since January, the correlation between the yen and the cost of protecting against a default on Japanese government bonds swung to negative 43 percent, showing investor concerns are increasing. The yen and cost of credit-default swaps moved in tandem 88 percent of the time last year.

Government reports show Japan is sinking deeper into recession, with fourth-quarter gross domestic product contracting at an annual rate of 12.7 percent, the most since the 1974 oil shock. The yen slumped 2.9 percent against the dollar this year to 93.35, and is headed for its worst month since April. The yen appreciated 23 percent in 2008.

‘In Play’

The pound traded at a negative correlation of 94 percent in the past year against U.K. debt swaps, showing the currency is weakening as credit perceptions worsen. Sterling dropped 26 percent in that period to 1.4433 per dollar.

Ron Leven, an executive vice president and senior currency strategist at Morgan Stanley in New York, doesn’t buy the argument that swap prices influence currency movements.

“If anything, the currencies are telling you what the swap spreads are going to do,” Leven said in a Feb. 9 interview. Still, every couple of days he updates his charts that show differences in prices of swaps on U.K. and U.S. debt and between New Zealand and U.S. bonds. A year ago he never looked at sovereign swaps.

Eric Lascelles, chief economics strategist at TD Securities Inc. in Toronto, said sovereign swaps don’t trade enough to make a good forecasting tool. Prices are often unavailable in the Canadian swap market, he said in a Feb. 9 interview.

Government bond swaps are “in play and getting the attraction that a moving variable deserves” because the global recession and increasing bond sales boosted the default risks for many countries, Lascelles said.

Regulatory Reform

Credit-default swaps dealers are under pressure from governments and central banks to increase transparency in the unregulated $28 trillion market and to create a body that will arbitrate disputes. The firms agreed to process the derivatives transactions through a clearinghouse following the failure of Lehman, one of the largest dealers.

Derivatives are financial contracts whose value is derived from interest rates, the outcome of specific events or the price of underlying assets such as debt, equities and commodities.

The cost of protecting against default by Lehman, Bear Stearns Cos. and American International Group Inc. rose as high as 7.07 percent before the companies collapsed. Richard Fuld, the former chief executive officer of Lehman, blamed speculation in the market for helping to speed the companies’ demise.

Swap Prices

While swaps don’t suggest Japan is close to default, the cost of protecting Japanese government bonds more than doubled to 1.21 percent of the face value on Feb. 17, from 0.49 percent on Jan. 30, according to CMA Datavision. A basis point, or 0.01 percentage point, on a credit-default swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year, or $121,000 for the Japanese bond.

The U.K.’s swap price increased to 1.75 percent, or $175,000, on Feb. 17, from 1.23 percent. The pound declined 0.8 percent since Jan. 30.

Before Lehman’s failure, neither country’s swap price exceeded 0.74 percent. Hardman said the ballooning costs signal further depreciation. He expects the pound to drop to 1.35 per dollar by the end of the first quarter and yen to weaken to 100 per dollar by the end of 2009.

Japan’s Prime Minister Taro Aso announced plans in December to inject as much as 12 trillion yen ($127.6 billion) into the nation’s banks. The government cut its assessment of the economy for a fifth month last week, fanning speculation more fiscal stimulus will be needed.

‘Falling Apart’

“Should these conditions continue, we could say that the Japanese economy is at risk of falling apart,” Finance Minister Kaoru Yosano said in the Diet in Tokyo on Feb. 18.

The British currency fell to a two-week low that day after the Daily Telegraph said the country’s credit rating may be lowered by Standard & Poor’s as the government increases borrowing to bail out banks. U.K. policy makers voted 8-1 on Feb. 5 to cut the main interest rate by half a percentage point to 1 percent.

President Barack Obama enacted a $787 billion economic- stimulus package last week. China is rolling out 4 trillion yuan ($586 billion) to prop up domestic demand. European leaders pledged to spend a combined 200 billion euros ($257 billion) to haul their economies out of recession.

Traders are looking at credit-default swaps in part because interest rates are losing their effectiveness as a tool for predicting currencies’ direction after central banks in 11 of the world’s largest economies lowered borrowing costs an average 2.2 percentage points last year, according to data compiled by Bloomberg. Rates are below 1 percent in the U.S., Japan and Switzerland.

‘Nothing to Distinguish’

“You have nothing to distinguish any more in terms of monetary policy,” said Michael Hart, a London-based analyst at Citigroup Inc. “Several countries are at or near zero, so interest rates are reflecting credit concerns much more than anything else.”

The market for sovereign contracts had 132,200 outstanding contracts with an underlying value of $1.69 trillion as of Feb. 13, representing about 5.9 percent of the total market for credit default swaps, according to the Depository Trust and Clearing Corp.’s Web site. Swaps on financial institutions are the largest segment, with a notional value of $3.2 trillion.

Swap prices have increased the most for the U.K., Sweden and Australia since Lehman’s collapse, according to Hart. Currencies of those countries were three of four worst performers since August, when measured in trade-weighted terms, Hart said in a Feb. 2 report. The New Zealand dollar was the other.

“Default swaps will become increasingly important, given the issuance tsunami awaiting us,” Hart said in an interview. “The credit-default market is a better indicator of fiscal concerns with respect to each country.”

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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Rubber Drops as Slumping Global Economy Deepens Demand Concern

By Jae Hur

Feb. 23 (Bloomberg) -- Natural rubber futures declined on speculation that the deepening global recession may reduce demand for the commodity used for tires and tubes.

Rubber prices lost 6.6 percent last week, the most since Dec. 5, as carmakers in Japan and other countries slashed output. Asia stocks rallied after falling 7 percent last week, the most since Oct. 24 as the economic slowdown hurts corporate profits. Crude oil dropped for a second day.

“Declining stocks and crude oil sent rubber futures lower,” Jun Nishimuta, an analyst at Kanetsu Asset Management Co. in Tokyo, said today by phone. Prices were also under pressure as the contract for February delivery expired at a lower price today than it did in January, he said.

Rubber for July delivery, the most-active contract, fell as much as 2.3 percent to 131.1 yen a kilogram ($1,409 a metric ton) and was at 132.3 yen by the 11 a.m. midday break on the Tokyo Commodity Exchange. The spot February contract expired at 123.6 yen today, compared with 125 yen in the previous month.

Crude oil for April delivery declined as much as 1.3 percent to $39.53 a barrel in after-hours electronic trading on the New York Mercantile Exchange. A drop in crude oil prices often makes natural rubber less competitive than synthetic rubber.

The MSCI Asia Pacific Index gained 1.1 percent to 76.88 after trading between 75.16 and 76.90. The yen rose for a second day against the dollar, rising as much as 0.6 percent to 92.84 yen. The yen’s advance against the dollar also reduced the value of Japanese currency-based rubber futures, Nishimuta said.

Toyota Motor Corp., the world’s biggest carmaker, will slash domestic output 54 percent in the current quarter as demand falls in the U.S. and Japan. Production, excluding its Daihatsu Motor Co. and Hino Motors Ltd. units, will drop to about 519,000 in the March quarter from 1.13 million units a year earlier, according to figures derived from Toyota’s latest full-year forecast.

May-delivery rubber on the Shanghai Futures Exchange, the most-active contract, rose 1.2 percent to 12,970 yuan ($1,898) a ton by 10:43 a.m. local time.

To contact the reporter on this story: Jae Hur in Singapore at jhur1@bloomberg.net

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Copper Rises From One-Month Low in London on Signs of Buying

By Li Xiaowei

Feb. 23 (Bloomberg) -- Copper rose from the lowest close in a month in London amid signs that price declines driven by the global recession may have encouraged buying of the metal.

Canceled warrants, or metal booked for withdrawal from London Metal Exchange-monitored warehouses, jumped 52 percent to 19,075 metric tons on Feb. 20, with the greatest increase in Asia. China’s January refined copper imports were 41 percent more than a year earlier, even after declining 15 percent from December.

“The jump in cancelled warrants implies buying occurred,” Zhao Kai, an analyst at Jinrui Futures Co., said from Shenzhen. “After last week’s rebound ended, we deem $3,050 to be next support level for London copper.”

Copper for three-month delivery on the LME rose as much as 2.7 percent to $3,235 a ton before trading at $3,225 a ton at 10:57 a.m. in Shanghai. The metal dropped to $3,150 on Feb. 20, the lowest closing price since Jan. 22.

Copper for May delivery on the Shanghai Futures Exchange advanced 0.5 percent to 26,670 yuan ($3,902).

Metals in London also rose after the dollar dropped, reducing the purchasing cost for holders of other currencies. The dollar fell after the Wall Street Journal reported that Citigroup Inc. is holding talks with federal government officials that may increase the government’s ownership of the bank.

Among other LME-traded metals, aluminum was up 0.2 percent at $1,308 a ton, zinc added 0.4 percent to $1,109, nickel rose 1.8 percent to $9,675 and tin gained 0.5 percent to $10,575.

To contact the reporter for this story: Li Xiaowei in Shanghai at xli12@bloomberg.net

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SPDR Gold Trust Holdings Climbed 4.4% to Record Last Week

By Claire Leow

Feb. 23 (Bloomberg) -- Gold holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, advanced 4.4 percent to a record last week, according to figures on the company’s Web site.

The fund held 1,028.98 metric tons of bullion as of Feb. 20, just behind the 1,040 tons held by Switzerland, the sixth- largest stockpile. Gold for April delivery surpassed $1,007 an ounce in New York on Feb. 20, the highest for a most active contract since March. Gold for immediate delivery was little changed at $990.76 an ounce at 10:40 a.m. in Singapore today.

To contact the reporter for this story: Claire Leow in Singapore at cleow@bloomberg.net

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Gold Little Changed After Gain Over $1,000, Highest Since March

By Claire Leow

Feb. 23 (Bloomberg) -- Gold was little changed after rallying above $1,000 an ounce last week for the first time in almost a year as investors sought a haven from slumping equities.

Gold for immediate delivery traded at $987.03 an ounce after reaching $1,006.29 on Feb. 20, the highest since March. The metal has soared 45 percent from an October low of $682.41 as investor confidence in financial assets eroded and central banks pumped trillions of dollars into the banking system.

Investors are protecting their wealth by turning to gold from the Japanese yen, Morgan Stanley currency strategist Ned Rumpeltin said in a report. The yen has gained 18 percent in the past six months, the only major currency to advance against the dollar, almost matching the 20 percent gain in gold.

“In place of the Japanese yen, gold has made a comeback as a safe haven of choice” for some investors, the report said. Japan’s fourth quarter contraction of 13 percent at an annual rate, caused by a 35 percent shrinking of exports from a year earlier, “has seen some investors call the yen’s safe haven status into question.” The yen fell 1.6 percent last week.

Global stocks tracked by the MSCI World Index of 1,684 stocks dropped for a second week last week, chalking up an 11 percent decline in two weeks on concern the economic slump may worsen. Investor demand for a haven has pushed gold holdings in exchange-traded funds to records.

Investor Demand

Investment demand for bullion, including exchange-traded funds, coins and bars, almost tripled to 399 tons in the fourth quarter as total demand climbed 26 percent to 1,036.5 tons, the London-based World Gold Council said on Feb. 18.

Platinum for immediate delivery was little changed at $1,081 an ounce at 11:58 a.m. Singapore time after gaining in each of the past five weeks. Silver for immediate delivery declined 0.6 percent to $14.35 an ounce. The metal has surged 26 percent this year and is the best performer among the 26 contracts on the UBS Bloomberg Constant Maturity Commodity Index. The metal fell 23 percent in 2008.

To contact the reporter for this story: Claire Leow in Singapore at cleow@bloomberg.net

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Oil Trades Near $40 a Barrel on Concern Recession Will Deepen

By Christian Schmollinger and Angela Macdonald-Smith

Feb. 23 (Bloomberg) -- Crude oil traded near $40 a barrel in New York as traders weighed the risk of a deepening global recession against government measures to revive economic growth.

The Organization of Petroleum Exporting Countries may make another production cut should oil prices continue to fall, Chakib Khelil, the Algerian oil minister and former OPEC president, said yesterday. The dollar fell on speculation the U.S. government will take larger stakes in the nation’s banks.

“Crude really has been seeking direction from other markets,” said Victor Shum, a senior principal at consultants Purvin & Gertz Inc. in Singapore. “In the near term, the rather dismal macro-economic backdrop will put a lid on oil prices.”

Crude oil for April delivery was at $40.26 a barrel, up 23 cents, in after-hours electronic trading on the New York Mercantile Exchange at 12:05 p.m. Singapore time. It earlier fell as much as 50 cents, or 1.3 percent, to $39.53 a barrel.

The government may increase its stake and end up holding as much as 40 percent of Citigroup Inc.’s common stock, the Wall Street Journal reported.

Oil was supported as the dollar fell to a one-week low against the euro. The decline in the U.S. currency draws investors to commodities as an inflation hedge.

Asian Stocks

Asian stocks rose, with the MSCI Asia Pacific Index gaining 1.1 percent to 76.86 at 11:46 a.m. in Tokyo after falling 1.1 percent. The gauge lost 14 percent this year as the worsening economic slowdown hurt corporate profits.

On Feb. 20, the April crude oil contract declined 15 cents, or 0.4 percent, to $40.03. The March future expired that day at $38.94 a barrel. Oil lost as much as 6.6 percent on Feb. 20 as the Dow Jones Industrial Average fell below its lowest close since 1997.

“We are looking at oil consumption this year down by more than a million barrels a day,” said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. “That certainly is significant and puts pressure on OPEC to try and balance against it.”

Brent crude oil for April settlement was at $42.01 a barrel, up 12 cents, on London’s ICE Futures Europe exchange at 12 p.m. Singapore time. It earlier declined as much as 39 cents, or 0.9 percent, to $41.50 a barrel

Barclays Capital on Feb. 19 cut its forecast for the average 2009 Brent crude price to $60 a barrel from $71 because of the weakening global economic outlook. The bank expects world oil demand to drop 1.25 million barrels a day this year.

Royal Dutch Shell Plc’s Chief Executive Officer Jeroen van der Veer said the falling price of oil won’t hamper the company’s $31 billion investment program planned for this year.

“For our projects, we never took into account that oil prices would remain so high for so long,” Van der Veer said on Dutch public television. “So, all our investments - and the few we postponed - can perfectly withstand current oil prices.”

Longs Increase

Oil companies are reining in capital spending and putting projects on hold following the 54 percent drop in crude last year, the first annual decline since 2001. Shell delayed a decision on the second-phase expansion of its Athabasca oil- sands project in Canada in October and cut 2008 spending plans.

Hedge-fund managers and other large speculators increased their net-long position in New York crude-oil futures in the week ended Feb. 17, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 45,016 contracts on the New York Mercantile Exchange, the Washington-based commission said in its Commitments of Traders report. Net-long positions rose by 28,438 contracts, or 172 percent, from a week earlier.

To contact the reporters on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net; Christian Schmollinger in Singapore at christian.s@bloomberg.net

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Hong Kong Stocks Gain on Citigroup Report; Li & Fung Advances

By Hanny Wan

Feb. 23 (Bloomberg) -- Hong Kong stocks rose on expectations the U.S. government will raise its stake in Citigroup Inc., reducing the risk of bank failures.

HSBC Holdings Plc, a bank that gets a quarter of its revenue in North America, added 1.3 percent. Li & Fung Ltd., the biggest supplier of toys and clothing to U.S.-based Wal-Mart Stores Inc., gained 4.1 percent, on speculation demand for its products can be sustained. Sun Hung Kai Properties Ltd., the city’s No. 1 developer by market value, climbed 2 percent after saying it will raise prices for a project.

“It’s the right move” for the U.S., said Winson Fong, who helps oversee $2 billion at SG Asset Management Hong Kong Ltd. “This should have happened much earlier. To rescue a bank, you need to give it more capital.”

The Hang Seng Index added 256.37, or 2 percent, to 12,955.54 as of 11:28 a.m. local time. The Hang Seng China Enterprise Index, which tracks so-called H-shares, rose 1.4 percent to 7,164.90.

The main Hang Seng Index has lost 10 percent this year as mounting signs of an economic slowdown dragged its valuation to 10 times estimated earnings, down from 18.7 times at the beginning of 2008.

HSBC, which owns a mortgage business in the U.S., added 1.3 percent to HK$55.50. Li & Fung jumped 4.1 percent to HK$16.76.

Government Ownership

Citigroup, the recipient of $45 billion in U.S. government aid, is in talks with federal officials that may increase state ownership of the bank to as much as 40 percent of its common stock, the Wall Street Journal said, citing people familiar with the situation whom it didn’t identify. Citigroup proposed that the government convert a large portion of its preferred shares into common stock, the Journal reported.

Banks may have to be nationalized for “a short time” to help lenders such as Citigroup survive the worst economic slump in 75 years, Senate Banking Committee Chairman Christopher Dodd said on Feb. 20.

“It’s a matter of time before governments, not just the U.S., but also European governments, become real equity owners of these banks,” Fong said. “Owning preferred shares doesn’t make the governments the real owners. That doesn’t really help. It only increases the banks’ debt, instead of giving them more capital.”

Sun Hung Kai climbed 2 percent to HK$61.40. The company is raising prices for the Cullinan, a new luxury residential project, by 5 percent after selling 150 units in 10 days. Henderson Land Development Co., a Hong Kong-based developer, rose 3.3 percent to HK$25.45.

Hang Lung

Hang Lung Properties Ltd., a Hong Kong-based developer which also invests in mainland China, surged 5.6 percent to HK$14.42. China Overseas Land & Investment Ltd., a developer controlled by China’s construction ministry, rose 3 percent to HK$10.84.

China is devising a stimulus plan for the real-estate industry, which will replace energy as the 10th sector to get a stimulus program, Shanghai Securities News said, citing Cheng Siwei, a former vice-chairman of the China National People’s Congress, without elaboration.

The China Securities Journal said the government may remove restrictions on the purchase of second-hand homes and cut taxes on transactions to stimulate the housing market, citing an unnamed source.

All but five stocks on the 42-member Hang Seng Index advanced. February futures climbed 2.5 percent to 12,960.

To contact the reporter on this story: Hanny Wan in Hong Kong at hwan3@bloomberg.net

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Asian Stocks, U.S. Futures Advance on Citigroup Speculation

By Shani Raja and Chan Tien Hin

Feb. 23 (Bloomberg) -- Asian stocks and U.S. futures rose on optimism that the U.S. government will raise its stake in Citigroup Inc., reducing the risk of bank failures. Treasuries and the dollar fell.

KB Financial Group Inc., which controls South Korea’s largest lender, gained 1.8 percent as the Wall Street Journal said Citigroup had proposed that the U.S. convert a large portion of its preferred shares into common stock in a transaction that wouldn’t cost taxpayers more money. Samsung Electronics Co. rose 1.7 percent in Seoul as the government pledged measures to bolster the economy. Ten-year Treasuries fell on reduced demand for safe-haven assets.

“News that the government is increasing its stake will inject some confidence to investors that no matter what happens, these mega banks will not be allowed to fail, and that what ever losses they have can be absorbed by the government,” said Nicole Sze, a Singapore-based investment analyst for Bank Julius Baer & Co, which manages $350 billion.

The MSCI Asia Pacific Index gained 0.6 percent to 76.49 at 12:59 p.m. in Tokyo, having earlier fallen 1.1 percent. The gauge lost 15 percent this year as the worsening economic slowdown hurt corporate profits. Most key Asian indexes rose, led by South Korea’s Kospi Index, which climbed 2 percent.

Japan’s Nikkei 225 Stock Average lost 0.9 percent to 7,350.50. Toshiba Corp., Japan’s biggest chipmaker, slumped 7.8 percent after the Yomiuri newspaper reported the company is considering raising funds to strengthen its finances. BlueScope, Australia’s largest steelmaker, tumbled 8 percent in Sydney after saying it may have a loss this half.

Government Action

Futures on the U.S. Standard & Poor’s 500 Index rallied 1.2 percent today following the Citigroup report. The gauge dropped 1.1 percent on Feb. 20. Citigroup tumbled 22 percent as Senator Christopher Dodd, chairman of the Banking Committee, said it may be necessary to nationalize some banks for “a short time.” The company’s Tokyo-listed shares dropped 2.9 percent to 232 yen.

The dollar dropped to $1.2914 per euro from $1.2826 late last week in New York. It declined to 92.88 yen from 93.35.

Governments have been stepping up measures to revive financial systems burdened with more than $1 trillion of writedowns and losses tied to U.S. credit investments. Bank of America Corp. and Citigroup have received a combined $90 billion in U.S. aid in four months.

Japan’s Norinchukin Bank said on Feb. 20 that it will raise 1.9 trillion yen ($20.2 billion) as it declared $10 billion of losses on asset-backed securities, the most by any Asian lender. That announcement helped drag the Nikkei down by 2.8 percent earlier today.

‘Deteriorating Profitability’

Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank, lost 1.4 percent to 423 yen, having earlier risen 1.4 percent on the Citigroup report. Sumitomo Mitsui Financial Group Inc. lost 1.9 percent to 2,910 yen, after earlier rising 0.8 percent.

“It’s difficult to justify the enthusiasm for the plan, given that it indicates the actions taken to date have been inadequate in arresting the decline of the financial system,” said Tim Schroeder, who helps manage about $2.6 billion at Pengana Capital Ltd. in Melbourne. “We’re dealing with deteriorating profitability and balance sheets.”

KB Financial climbed 1.5 percent to 27,750 won. Samsung Electronics, the world’s largest memory-chip maker, rose 1.7 percent to 475,500 won in Seoul. South Korea is prepared to support its currency and add to a bank recapitalization fund should the economic slump worsen, Finance Minister Yoon Jeung Hyun said.

Yield on 10-year Treasuries increased one basis point to 2.81 percent, according to BGCantor Market Data. The price of the 2.75 percent security due in February 2019 fell 3/32, or $0.94 per $1,000 face amount, to 99 1/2. A basis point is 0.01 percentage point.

“It’s an unwinding of the flight to quality,” said Kazuaki Oh’e, a Tokyo-based debt salesman at Canadian Imperial Bank of Commerce, Canada’s fifth-biggest bank. Treasuries may give up gains from Feb. 20, when the 10-year notes rose 14/32, he said.

To contact the reporter for this story: Shani Raja in Sydney at sraja4@bloomberg.net.

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Japanese Stocks Drop on Capital Concern; Gold Producers Surge

By Masaki Kondo

Feb. 23 (Bloomberg) -- Japanese stocks fell as the bankruptcy of lender SFCG Corp. stoked concern more financial companies will fail as the economy weakens. Sumitomo Metal Mining Co. led gains by gold producers as prices for the metal jumped.

Orix Corp., the nation’s largest non-bank lender, fell 8.2 percent. Mizuho Financial Group Inc., the Asian bank with the biggest subprime writedowns, slid 2.7 percent after Norinchukin Bank said it had losses on securities and will raise new funds. Sumitomo Metal added 6.1 percent as bullion exceeded $1,000 an ounce for the first time since March. Stocks trimmed losses after the Wall Street Journal said the U.S. government may increase its ownership of Citigroup Inc.

The Nikkei 225 Stock Average fell 64.64, or 0.9 percent, to 7,351.74 as of 12:39 p.m. in Tokyo, after losing as much as 2.8 percent. The broader Topix index retreated 7.68, or 1 percent, to 731.85, with more than two stocks slumping for each that rose.

“It’s increasingly clear Japan’s economy is in deep trouble, and SFCG’s collapse reflects that,” said Naoteru Teraoka, who helps oversee $21 billion at Tokyo-based Chuo Mitsui Asset Management Co. “We’ll likely see more financial companies report losses on securities writedowns and provisions for bad loans in coming months.”

The Nikkei has lost 16 percent in 2009, the second-worst performer in Asia after Vietnam, with $514 billion having been erased from the nation’s market value. Bankruptcies among Japan’s listed companies reached 33 last year, an annual postwar record according to Tokyo Shoko Research Ltd. Ten more companies have gone bust this year.

SFCG Failure

The Standard & Poor’s 500 Index fell 1.1 percent in New York on Feb. 20. Citigroup and Bank of America Corp. tumbled as Senator Christopher Dodd, chairman of the Banking Committee, said it may be necessary to nationalize some banks for “a short time.”

Citigroup is in talks with the government that may lead to the state owning as much as 40 percent of Citigroup’s common stock, the Wall Street Journal said, citing people familiar with the situation it didn’t identify.

SFCG, a Tokyo-based lender to small companies, today said it filed for protection from creditors with 338 billion yen in liabilities, making it Japan’s biggest bankruptcy in more than a year. The company’s finances worsened because of difficulties in collecting loans and getting credit, SFCG said.

Orix, which provides corporate loans and develops real estate, plummeted 8.2 percent to 2,185 yen, leading peers to the biggest drop among 33 industry groups on the Topix. Aiful Corp., Japan’s No. 1 consumer finance company by assets, dropped 15 percent to 109 yen, and has fallen by more than half this year.

“The collapse of SFCG will likely affect many small businesses,” Kenichi Hirano, general manager at Tokyo-based Tachibana Securities Co., said in an interview with Bloomberg Television. “Unless the government takes necessary steps promptly, the deeply troubled Japanese economy will plunge into even a worse state.”

Norinchukin’s Investment

Mizuho, Japan’s No. 2 listed bank, dropped 2.7 percent to 183 yen, extending its slump to a sixth day, while Sumitomo Trust & Banking Co. retreated 3.9 percent to 345 yen. Aozora Bank Ltd., controlled by Cerberus Capital Management LP, dived 7.8 percent to 94 yen.

Norinchukin, owned by more than 4,000 shareholders including farm, fishing and forestry cooperatives, lost at least $10 billion on overseas asset-backed securities following the collapse of the American housing market. It still had 6 trillion yen of such securities at the end of December, more than the market value of Wells Fargo & Co. The bank said it would raise 1.9 trillion yen in new funds.

Toshiba Corp., Japan’s biggest chipmaker, sank 6.1 percent to 216 yen, headed for the lowest close since February 1981. The company is considering raising more than 300 billion yen through a share sale, the Yomiuri newspaper reported on Feb. 20.

Sumitomo Metal Mining, Japan’s largest producer of gold, jumped 6.1 percent to 1,086 yen, and was the most actively traded stock by value in Tokyo. Mitsubishi Materials Corp., which produces gold, silver and copper, gained 2.6 percent to 234 yen. Gold rose 2.6 percent to $1,002.20 on Feb. 20 as investors flocked to the metal as a safe haven. Prices dipped 1.2 percent today.

Nikkei futures expiring in March fell 0.5 percent to 7,340 in Osaka and dropped 0.5 percent to 7,345 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net.

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