U.K. Has Record July Deficit as Recession Curbs Taxes

By Reed V. Landberg

Aug. 20 (Bloomberg) -- Britain had an 8 billion-pound ($13.2 billion) budget deficit in July, the largest for the month since records began in 1993, as the recession ravaged tax revenue and the cost of unemployment benefits surged.

The shortfall compared with a surplus of 5.2 billion pounds a year earlier, the Office for National Statistics said in London today. It came in a month when the Treasury usually gets a boost from quarterly tax payments. Britain last had a deficit in July in 1996.

The U.K. will have the biggest deficit in the Group of 20 next year, when Prime Minister Gordon Brown faces re-election, according to the International Monetary Fund. Brown is urging G- 20 leaders to keep up a coordinated fiscal stimulus until a world economic recovery is more certain. The Conservative opposition says spending cuts and possible tax increases are needed to curb debt.

“They’re completely disastrous numbers,” Paul Mortimer- Lee, an economist at BNP Paribas SA, said on Bloomberg Television in London. “With the economy in a parlous state, not much tax is being collected. The chancellor’s estimate for the deficit is going to be overshot by a considerable margin.”

The Treasury forecasts a deficit of 175 billion pounds in the fiscal year that began in April. In the first four months, the shortfall was 50 billion pounds, more than triple the level a year earlier.

Market Reaction

British government bonds and the pound fell after the report. The benchmark 10-year gilt’s yield rose 3 basis points to 3.614 percent as of 12:03 p.m. in London. The pound, which traded as high as $1.6608 earlier in the day, slumped to $1.6464.

Two other reports today indicated that the economy may be starting to rebound from the worst recession in at least a generation. Retail sales rose for a second month, the statistics office said. Mortgage approvals by the six biggest U.K. banks climbed to the highest this year, the Bank of England said.

The U.K. deficit this year will touch 11.6 percent of gross domestic product, second only to the U.S. gap of 13.5 percent, the IMF estimates. Next year, the deficit may total 13.3 percent of GDP, almost double the 7.7 percent peak in the 1993-94 fiscal year under Conservative Prime Minister John Major.

Last month’s deficit far exceeded the 600 million-pound shortfall that was the median of 16 forecasts in a Bloomberg survey. The figures are “broadly in line with where we expect them to be,” Chancellor of the Exchequer Alistair Darling said at a press conference in Edinburgh today.

Falling Revenue

Government receipts dropped 15 percent in July from a year earlier, the steepest decline since records began in 1998. Cash receipts from corporate profits fell 38 percent and value-added tax declined 34 percent. Income tax payments dropped 15 percent, reflecting slower wage growth and job cuts at banks including Citigroup Inc. and Royal Bank of Scotland Group Plc.

Spending rose 7.5 percent, with net spending on social benefits jumping 10 percent after unemployment climbed to a 14- year high. Net investment rose 10 percent to 2.9 billion pounds as the government brought forward projects to help the economy.

“It’s essential that at a time like this, it’s necessary for the government to maintain spending,” Darling said. “We need to take steps to reduce our borrowing and we remain committed to doing that. It’s right to remain cautious. There are a lot of uncertainties out there.”

Credit-Rating Warning

The Treasury in April forecast a deficit of 12.4 percent of gross domestic product. To cover the gap, the government said it expects to sell an unprecedented 220 billion pounds of debt, prompting Standard & Poor’s to warn that Britain may lose its AAA credit rating.

Including the liabilities of banks now controlled by the government, such as Bradford & Bingley Plc and Northern Rock Plc, Britain had 800.8 billion pounds of debt in July, or 56.8 percent of GDP. That’s the biggest debt burden since at least 1974-75. In 1976, the U.K. sought an emergency loan from the International Monetary Fund.

A cash method of accounting, known as the public sector net cash requirement, showed a deficit of 200 million pounds, the first borrowing for a July on that measure since 1995. Economists had expected a 5.6 billion-pound surplus.

With Labour trailing the Conservatives in polls 10 months before the general election deadline, Brown has sought to draw dividing lines between continued investment under his government and Conservative cuts. Economists say spending restraint and higher taxes are inevitable, whichever party wins, limiting the pace of economic recovery.

To contact the reporter on this story: Reed Landberg in London at landberg@bloomberg.net.

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Dollar Falls Versus Euro as U.S. Stock Gain Eases Safety Demand

By Ye Xie and Sapna Maheshwari

Aug. 19 (Bloomberg) -- The dollar dropped versus the euro as a rebound in U.S. stocks eased investor demand for safety triggered by a tumble in Chinese shares.

The yen and Swiss franc gained against currencies including the New Zealand dollar as the Shanghai Composite Index briefly fell into a bear market. Sterling weakened versus the euro after minutes of the Bank of England’s policy meeting showed Governor Mervyn King favored a bigger increase in asset purchases.

“In the longer term, medium term, we think it’s a risk- friendly environment,” said Achim Walde, head of currencies at Oppenheim KAG in Frankfurt, where he helps oversee 3 billion euros ($4.3 billion) in assets. “We should see an upward revision in growth.”

The dollar declined 0.7 percent to $1.4233 per euro at 4:04 p.m. in New York, from $1.4136 yesterday. The yen appreciated 0.7 percent to 94 per dollar, from 94.69, after trading at 93.67, the strongest level since July 23. The yen was little changed at 133.80 per euro after touching 132.20, the strongest level since July 22.

Now is a good time to sell the dollar and buy those currencies sensitive to global economic recovery, including the Norwegian krone, according to Walde.

The krone gained 0.8 percent to 6.0603 per dollar after crude oil for September delivery increased 4.4 percent to $72.24 a barrel as U.S. inventories declined the most in more than a year. Norway is the world’s fifth-largest oil supplier.

Dollar Index

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro, yen, pound and franc, dropped 0.6 percent to 78.472, erasing its gain as U.S. equities and crude oil increased.

The U.S. currency’s decline versus the euro accelerated after breaching $1.4175, where traders had preset orders to sell the dollar, said Brian Dolan, chief currency strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey.

The greenback is threatened by the “gusher of federal money” that rescued the financial system, the billionaire investor Warren Buffett wrote in a New York Times commentary.

“Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” Buffett, 78, wrote. The “greenback emissions” will swell the deficit to 13 percent of gross domestic product this fiscal year, while net debt will increase to 56 percent of GDP, he said.

The government is trying to spark business and consumer spending through a $787 billion stimulus plan spanning tax cuts and infrastructure projects, while the Treasury and Federal Reserve spent billions more on separate programs to rescue financial institutions and resuscitate the banking system.

Greenback’s Status

The dollar will drop the most against emerging-market counterparts as it loses its status as the world’s main reserve currency, Curtis A. Mewbourne, portfolio manager at Pacific Investment Management Co., which runs the world’s biggest bond fund, wrote on the company’s Web site.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.

The dollar’s share of global central banks’ foreign reserves increased to 65 percent in the first three months of this year, from 64 percent in the previous quarter, according to the International Monetary Fund. The greenback’s share has been about 65 percent over the past five years after falling from 72.7 percent in 2001.

Stronger Yen

Japan’s currency appreciated 0.8 percent to 63.35 against the New Zealand dollar, and the franc advanced 0.3 percent to 1.5161 versus the euro. The yen and franc typically rise during times of financial turmoil because Japan’s and Switzerland’s trade surpluses reduce the nations’ reliance on foreign capital.

The Shanghai Composite Index slumped 4.3 percent, leading other Asian gauges lower. It briefly extended its losses to more than 20 percent from this year’s high reached on Aug. 4, meeting the definition of a bear market. The Standard & Poor’s 500 Index rose 0.7 percent after earlier dropping 0.9 percent.

The sell-off in higher-yielding assets and the yen’s outperformance may be short-lived as the global economic recovery takes hold, according to Dale Thomas, head of currencies in London at Insight Investment Management, which oversees $121 billion.

‘Storm to Pass’

“I don’t think that’s the start of a big new trend,” said Thomas. “We’re pretty much going to sit on the fence” and “wait for the storm to pass,” he said.

The pound weakened 0.9 percent to 86.09 pence per euro and dropped 0.2 percent to $1.6536 after earlier losing 1.1 percent.

The Bank of England’s Monetary Policy Committee voted 6-3 to raise the amount it will spend as part of its quantitative- easing program by 50 billion pounds ($82 billion), according to minutes of the Aug. 6 decision released by the central bank today in London. King, Timothy Besley and David Miles dissented in favor of a 75 billion pound expansion.

The central bank is spending 175 billion pounds to buy assets in a move aimed at pushing down borrowing costs to revive the U.K.’s shrinking economy.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Sapna Maheshwari in New York at smaheshwar11@bloomberg.net

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Marine Harvest Chief Says Salmon Supply Squeeze Will Persist

By Meera Bhatia

Aug. 20 (Bloomberg) -- Marine Harvest ASA, the world’s largest salmon farmer, expects supply to fall short of demand as Chile’s output will take as many as six years to return to levels seen before a virus ravaged its fish farms.

“It will take long for Chile to come back to volumes they used to have,” Chief Executive Officer Aase Aulie Michelet, 56, said in an interview yesterday at the company’s headquarters in Oslo. “We will be undersupplied for a while.”

Salmon export prices from Norway, the biggest supplier ahead of Chile and the U.K., climbed 13 percent this year on a growing world shortage. Global supply is estimated to slump 10.3 percent to 1.3 million metric tons this year after an outbreak of the Infectious Salmon Anemia virus at Chilean farms, according to industry consultant Kontali Analyse AS.

Marine Harvest plans to increase investment in technology, research and development to better understand diseases, the chief executive said. Similar outbreaks in 1970s and 1990s also hurt the industry, which traces its origins to commercial salmon farms in Scotland and Norway in the 1960s.

“The winners will be those who can improve fish health,” Aulie Michelet, whose company was formed in 2006 through the merger of three salmon producers, said. She said she’d “welcome” consolidation to better prevent disease.

Supply Squeeze

Salmon supply has risen about 55 percent this decade, according to Kontali Analyse, in part as health-conscious consumers eat more salmon. Demand has also risen as increased cultivation has driven down prices relative to other foods such as beef and chicken, according to Marine Harvest.

While the company has benefited from the supply squeeze, it was forced to take a $115 million charge in the second quarter for its unit in Chile and has cut its workforce in the country 67 percent to about 1,600 workers. Chile had accounted for 23 percent of its total output.

It plans to further reduce its workforce in Chile “substantially,” the CEO said, adding that it will be in 2014 or 2015 before volumes return to earlier levels. Global volumes will drop 8 percent to 13 percent in second half, she said, adding that she’s “quite positive for the next quarters.”

The company is sending more Norwegian salmon to the U.S, where it set up a processing plant in Miami and will open a plant in Los Angeles to take advantage of the Chilean shortfall.

Quarter Loss

Marine Harvest last week reported a second-quarter loss of 66.1 million kroner, compared with a profit of 22.4 million kroner a year earlier. It had an operating loss in Chile of 380 million kroner, while profit in Norway more than doubled to 393 million kroner. It plans to harvest 313,000 metric tons this year, down from 327,000 tons last year.

The company’s shares have more than tripled in value this year after plunging 70 percent last year.

Marine Harvest is seeking to grow “gradually” in Norway and to expand in Asia by marketing, sales and “other options,” the chief executive said. The strategy doesn’t include investing in more assets in Chile, she said.

“I believe in balanced growth -- say 5 percent year by year,” she said. “If that was the increase over time I think this would be a well developed market.”

The company was formed in 2006 after Marine Harvest’s fish- farming unit was merged with Norway’s Pan Fish ASA and Fjord Seafood ASA, a transaction organized by the company’s main owner, shipping billionaire John Fredriksen.

Michelet has an M.Sc.Pharmacy from University of Oslo and held positions including president of GE Healthcare AS (Norway) before joining Marine Harvest in March last year.

To contact the reporter on this story: Meera Bhatia in Oslo at mbhatia2@bloomberg.net.

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El Nino May Last Into 2010, World Meteorological Group Predicts

By Jae Hur

Aug. 20 (Bloomberg) -- The El Nino warming of the equatorial Pacific, an event that can change weather patterns worldwide, will probably last into the first quarter of next year, according to the World Meteorological Organization.

Sea-surface temperatures had “generally risen to between 0.5 and 1 degree Celsius warmer than normal by the end of June, with similar temperatures observed in July,” the Geneva-based organization said yesterday in an update. “This warming resembles the early stages of an El Nino event.”

El Ninos can disrupt farm output worldwide, parching parts of Asia, while dumping increased rain in California. Indonesia, the third-largest rice grower, cut its 2010 output forecast Aug. 17 on concern the El Nino may curb the expansion of the harvest.

The forecast from the World Meteorological Office is in line with that from the U.S. National Weather Service’s Climate Prediction Center, which said on Aug. 6 that the El Nino will probably intensify and last in 2010.

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

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Asian Stocks Advance as Chinese Shares Rebound; Brambles Gains

By Jonathan Burgos and Shani Raja

Aug. 20 (Bloomberg) -- Asian stocks advanced as China’s benchmark index erased yesterday’s slump, while Brambles Ltd. and QBE Insurance Group Ltd. reported better-than-estimated earnings.

Brambles, the world’s biggest supplier of pallets, and QBE, Australia’s biggest property and casualty insurer, advanced more than 3 percent in Sydney. Isuzu Motors Ltd., Japan’s third- biggest maker of commercial vehicles, rallied 5.4 percent as brokerages recommended buying Japanese automakers. PetroChina Co., the nation’s biggest oil producer, climbed 6.9 percent in Shanghai after crude-oil prices climbed.

The MSCI Asia Pacific Index gained 1.2 percent to 111.67 as of 7:24 p.m. in Tokyo. The gauge has rallied 58 percent from a more than five-year low on March 9 amid growing confidence government stimulus measures and lower borrowing costs will lift the world out of recession.

“Share markets are trying to price in a substantial recovery,” said Jason Teh, who helps manage about $2.8 billion at Investors Mutual Ltd. in Sydney. “Elements of the economy are beginning to appear to have stabilized, but we’ve been through something that hasn’t been witnessed for decades and any recovery is vulnerable to hiccups.”

Japan’s Nikkei 225 Stock Average advanced 1.8 percent to 10,383.41. Hong Kong’s Hang Seng Index climbed 1.9 percent.

China’s Shanghai Composite Index rose 4.5 percent, following yesterday’s 4.3 percent drop. The gauge briefly fell to bear-market levels yesterday, denoted by a 20 percent decline from its peak this year on Aug. 4. The measure is now down 16 percent from that high.

China Mobile Profit

Among stocks that fell, China Mobile Ltd. lost 0.2 percent in Hong Kong, erasing earlier gains after reporting earnings that missed estimates. CSL Ltd., the world’s second-biggest maker of blood plasma products, and Boral Ltd., Australia’s largest seller of building materials, sank more than 3 percent on brokerage downgrades.

Futures on the Standard & Poor’s 500 Index rose 0.4 percent. The U.S. gauge advanced 0.7 percent yesterday as energy stocks gained, while Merck & Co. led drugmakers higher after a judge upheld a patent.

The Asian gauge fell 3.4 percent this week through yesterday on concern the rally since March had outpaced growth prospects. Companies on the gauge are priced at an average 24 times estimated earnings, compared with 17 times for the S&P 500 and 14 times for the Dow Jones Stoxx 600 Index in Europe.

Reports last week showed Chinese exports dropped in July and investment growth slowed, while Australia’s statistics bureau said wage growth stalled last quarter as the worst global slump since the Great Depression drove up unemployment.

Further Improvement

“The consensus remains among investors that the global economy is on course for a recovery, but we have to see further improvement in the economy and company earnings for markets to go up higher,” said Kiyoshi Ishigane, a strategist at Mitsubishi UFJ Asset Management Co., which oversees about $53 billion.

Brambles jumped 3.6 percent to A$7.15. The company said annual net income fell 30 percent to $452.6 million, exceeding the $419.2 million average of five analyst estimates. QBE rose 6.4 percent to A$22.06 after saying first-half profit climbed 19 percent on premium growth and foreign exchange gains, beating expectations of investors including White Funds Management Pty.’s Angus Gluskie.

A third of the 516 companies in the MSCI Asia Pacific Index that have reported results since early July have beaten analysts’ profit estimates, while 18 percent have missed, according to data compiled by Bloomberg.

Beating Estimates

Bank of Communications Ltd., China’s fourth-largest lender, gained 1.3 percent to HK$9.19 in Hong Kong. The company said net income for the second-quarter was little changed at 7.62 billion yuan ($1.1 billion). That’s higher than the average estimate of 7.24 billion yuan from nine analysts in a Bloomberg survey.

China’s stocks are set to rebound from this month’s plunge on prospects earnings will beat estimates and policy makers will maintain bank lending, Bank of America Corp.’s Merrill Lynch unit said. The Shanghai Composite Index has retreated 15 percent in August.

PetroChina climbed 6.9 percent to 13.88 yuan in Shanghai. Woodside Petroleum advanced 7.3 percent to A$47.53 in Sydney. Inpex Corp., Japan’s largest oil explorer, gained 2.9 percent to 721,000 yen in Tokyo.

Crude oil for September delivery rallied 4.7 percent to $72.42 a barrel in New York. U.S. oil stockpiles dropped 8.4 million barrels last week, the most since the week ended May 23, 2008, a report from the Energy Department showed.

Isuzu, Hino Motors

Isuzu climbed 5.4 percent to 197 yen after Nikko Citigroup Ltd. raised its recommendation to “hold” from “sell.” Hino Motors Ltd. advanced 5.1 percent to 391 yen after upgrades at Nikko Citigroup and Daiwa Securities.

China Mobile, the world’s biggest mobile phone carrier, lost 0.2 percent to HK$82.85 in Hong Kong, having earlier gained as much as 2.4 percent. The company reported second-quarter net income of 30.1 billion yuan ($4.4 billion), lower than the 31.1 billion yuan estimate from a Bloomberg analyst survey.

CSL slipped 3.6 percent to A$31.92 in Sydney. Citigroup Inc. cut the stock to “hold” from “buy,” saying the Australian dollar is likely to rise against the U.S. dollar and euro this year, reducing the value of sales in overseas markets. Macquarie Group Ltd. lowered CSL to “neutral” from “outperform.”

Boral plunged 7.5 percent to A$5.43. Credit Suisse Group AG cut its rating to “underperform” from “neutral.”

To contact the reporter for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.

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Copper Rises From Two-Week Low Before U.S. Leading Indicators

By Anna Stablum

Aug. 20 (Bloomberg) -- Copper rose from a two-week low in New York and London on expectations that U.S. leading economic indicators probably rose for a fourth month, signaling the worst recession since World War II is easing.

The U.S. is the second-largest copper consumer after China and the Conference Board’s gauge of the economic outlook for the next three to six months probably advanced 0.7 percent, according to the median forecast of 52 economists surveyed by Bloomberg. The data is scheduled for 3 p.m. London time.

“The data that is coming out is positive but it is positive in so far as the recovery will start to take place, not that it has started to take place,” Steve Hardcastle, an analyst at Sucden Financial Ltd. in London, said by phone.

Copper for December delivery rose 0.4 percent to $2.781 a pound by 7:56 a.m. on the New York Mercantile Exchange’s Comex. The metal yesterday fell as much as 4.1 percent to $2.66, the lowest intraday price since Aug. 3. Copper for three-month delivery rose $110, or 1.8 percent, to $6,090 a metric ton on the London Metal Exchange.

Copper erased some gains after the Labor Department reported that more Americans unexpectedly filed claims for jobless benefits last week. Applications rose to 576,000 in the week ended Aug. 15 from a revised 561,000 the week before, the Labor Department said today.

The price of copper, used in plumbing and electrical wiring, has almost doubled this year as imports by China more than doubled in the first half. July imports shrank 15 percent from a month earlier, the Beijing-based customs office said.

‘More Subdued’

“With Chinese demand more subdued, we would expect prices to retrace in the short term by around 10 percent,” Investec Asset Management said in a report today. Copper will average $5,000 this year, rising to $5,400 in 2010, Investec said.

Among other LME metals for three-month delivery, aluminum fell 0.8 percent to $1,935 a ton.

“We have been seeing a tightening of market conditions,” Tom Albanese, Rio Tinto Group’s chief executive officer, said in a conference call today. LME-monitored inventories are at a record 4.63 million tons.

“A lot of the inventories are being tied up in financing deals so are not actually available to the market,” Albanese said.

Global aluminum production averaged 98,200 tons a day in July, from 97,600 tons a month earlier, the International Aluminum Institute said today.

In Japan, premiums paid to suppliers may rise to the highest in 14 years in the fourth quarter as reduced shipments from Russia and increased purchases by China boost prices.

The fee may climb to more than $100 a ton over aluminum for immediate delivery, said four executives, representing smelters and buyers. The figure is up from $75 a ton this quarter.

Nickel was up 2 percent at $19,235 a ton. Tin rose 3.2 percent to $14,000 a ton, zinc gained 1.7 percent to $1,839.5 and lead advanced 2.1 percent to $1,850 a ton.

The LME said trading in steel billet reached $1 billion since the contract was introduced in February last year.

To contact the reporter on this story: Anna Stablum in London at astablum@bloomberg.net

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Iowa Corn Yields May Rise in Western Part of State, Tour Shows

By Elizabeth Campbell

Aug. 20 (Bloomberg) -- Corn yields may rise in western Iowa, the biggest U.S. producer, based on field inspections during the 17th annual Pro Farmer Midwest Crop Tour. Soybean-pod counts sampled by the tour were higher.

The tour estimated yields at 186.1 bushels an acre, from 122 samples taken in Iowa. In 2008, the average estimated yield in the area was 171.7 bushels, Pro Farmer data show. On Aug. 12, the U.S. Department of Agriculture said the average yield in the state would rise 8.2 percent to 185 bushels.

The Iowa corn crop looked “phenomenal,” said Denny Rollenhagen, a tour participant who farms about 1,200 acres of corn and soybeans in Wells, Minnesota. “They got it planted right. They got the rains when they needed it,” he added.

The tour attempts to gauge corn and soybean yield potential by sampling crops every 20 miles (32 kilometers). The Pro Farmer newsletter will release its own crop estimates on Aug. 22, based partly on the tour’s findings.

Soybean fields yielded an average 1,218.8 pods per 3- square-foot area, based on 117 samplings, up from an estimate of 1,043.8 to 1,160.4 pods from the same area a year earlier. The USDA forecast average yields in the state would rise 13 percent to 52 bushels an acre.

“Farmers today are taking care of their weeds and also are spraying for insects,” said Lawrence Landsteiner, a tour participant who farms about 3,500 acres of corn and soybeans in Minnesota Lake, Minnesota. “That’s why soybeans are doing better.”

Tour participants include farmers, analysts, agronomists, journalists and grain buyers who this week will inspect the main corn- and soybean-growing regions in seven states. The U.S. is the largest grower and exporter of both crops.

Iowa may harvest 2.47 billion bushels of corn, up 13 percent from 2.189 billion last year, the USDA said last week, based on conditions as of Aug. 1. Soybean production in the state may rise 14 percent to 506 million bushels from 444.8 million last year, the department said.

To contact the reporter on this story: Elizabeth Campbell in New York at ecampbell14@bloomberg.net



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Japan’s Topix Index Rises Most in a Month on Analyst Upgrades

By Masaki Kondo

Aug. 20 (Bloomberg) -- Japan’s Topix index rose the most in a month after analysts boosted their investment ratings on airlines and automakers on the outlook for improved earnings.

All Nippon Airways Co. gained 4.4 percent after Mitsubishi UFJ Financial Group Inc. said the stock is “about to take off.” Isuzu Motors Ltd. and Hino Motors Ltd. jumped more than 5 percent after Nikko Citigroup Ltd. said there are “clear signs” earnings will improve. Panasonic Corp., an electronics maker aiming to boost profit in emerging markets, rose 2.5 percent as a gain in Chinese equities bolstered sentiment.

“The consensus remains among investors that the global economy is on course for a recovery,” said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees $53 billion. “We have to see further improvement in the economy and company earnings for markets to go up higher.”

The Topix advanced 1.6 percent to close at 958.59 in Tokyo, its steepest climb since July 21, and all 33 industry groups rose. The Nikkei 225 Stock Average added 1.8 percent to 10,383.41. Yesterday, both gauges sank to their lowest levels this month.

The Nikkei’s 47 percent rally since a more than quarter- century low on March 10 has lifted the average price of shares in the gauge to 47 times estimated earnings, compared with 17 times for the Standard & Poor’s 500 Index in the U.S. and 14 times for Europe’s Dow Jones Stoxx 600 Index, according to data compiled by Bloomberg.

The Nikkei accelerated gains this afternoon as the Shanghai Composite Index rose more than 3 percent. Yesterday, Japan’s market deepened its slump in the final 30 minutes of trading as Chinese equities fell.

‘Clear Signs’

All Nippon, Japan’s No. 2 carrier, rose 4.4 percent to 285 yen, the highest close since July 9. Mitsubishi UFJ lifted its rating to “outperform” from “market perform,” saying the stock was “cheap” relative to its earnings prospects for 2010 and onwards.

Isuzu, Japan’s No. 1 maker of light-duty trucks, jumped 5.4 percent to 197 yen. Rival Hino Motors climbed 5.1 percent to 391 yen. “We are starting to see clear signs that truckmaker earnings could turn around in the second half,” said Nikko Citigroup, which raised the stocks to “hold” from “sell.”

Panasonic advanced 2.5 percent to 1,466 yen. Canon Inc., the world’s biggest maker of digital cameras, added 4.1 percent to 3,540 yen, the highest close since Nov. 5. Electronics makers contributed the most to the Topix’s gain.

‘Double-Digit Growth’

Last year, the Chinese government said residents in the smaller towns and villages will get discounts of as much as 13 percent on purchases of electronics and appliances to stimulate the economy. Panasonic said in January that it aims to keep “double-digit growth this year by all means” in such countries as China and Vietnam.

“With its vast land and population, people tend to think China has a very large influence over the global economy,” said Mitsubishi UFJ’s Ishigane. “If you ponder for a moment whether a country with a much smaller economy and consumer spending than the U.S. can lead the global economy, you will see that it can’t.”

Nikkei futures expiring in September added 1.5 percent to 10,360 in Osaka and rose 1.7 percent to 10,360 in Singapore.

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

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Switzerland Selling UBS Stake After U.S. Tax Accord

By Josh Fineman and Elena Logutenkova

Aug. 20 (Bloomberg) -- The Swiss government is selling its 6 billion-Swiss franc ($5.6 billion) investment in UBS AG, the country’s biggest bank, a day after signing an agreement with the U.S. on data on bank clients suspected of evading taxes.

The government chose three banks to sell 332.2 million UBS shares, Peter Siegenthaler, director of the federal finance administration, said by phone. The state is selling the shares at 16 francs to 16.50 francs apiece, according to terms of the offering obtained by Bloomberg News. UBS rose as much as 4.5 percent to 17.50 francs in Swiss trading today.

The Swiss government bought UBS mandatory convertible notes last year to help the Zurich-based bank split off toxic assets amid the worst economic crisis since the Great Depression. The settlement of a U.S. lawsuit that sought data on 52,000 UBS clients and the bank’s 3.8 billion-franc capital increase in June strengthened confidence in the bank, the government said.

“The exit is a positive signal, as it shows the confidence of the Swiss government regarding the situation of UBS,” Stefan Schuermann, an analyst at Vontobel with a “hold” rating on the stock, said in a note. “The placement increases UBS’s flexibility in rebuilding its franchise and will help to keep or hire key employees.”

UBS was 75 centimes, or 4.5 percent, higher at 17.49 francs by 12:20 p.m. in Swiss trading. UBS shares have risen 16 percent since the U.S. and Switzerland said they had reached an agreement in principle on the tax lawsuit on July 31.

Profit on Sale

The Swiss Confederation will waive its right to receive future coupons on the mandatory convertible notes for a cash amount of approximately 1.8 billion francs, representing the present value of the future coupon payments, UBS said.

The government expects to make a “significant profit” on the stake sale, Siegenthaler said. The offering was 4.5 times oversubscribed, he said.

Swiss and U.S. authorities said yesterday that UBS will divulge information on 4,450 accounts to settle a U.S. lawsuit that sought names of American clients suspected of evading taxes. The bank, which won’t pay any fine under the agreement, will transfer the data to the Swiss government, which will then decide what information gets passed on.

“At the moment, it wouldn’t be a bad deal” to sell the UBS investment, Swiss Finance Minister Hans-Rudolf Merz said at a press conference in Bern.

Note Conversion

The government intends to convert the mandatory convertible notes on Aug. 25, when UBS will also make the cash payment in lieu of future coupons, the bank said in a separate statement.

The government intends to sell UBS shares to institutional investors.

The transaction will have no material effect on the bank’s third-quarter earnings, though it will reduce its Tier 1 capital ratio by 60 basis points, UBS said in a statement. A basis point is 0.01 of a percentage point.

UBS, the world’s second-biggest manager of money for the rich, admitted in February to participating “in a scheme to defraud the U.S.” and agreed to pay $780 million and disclose the names of more than 250 clients who allegedly hid assets from the IRS. A day later, the IRS sued the bank for information on as many as 52,000 clients.

Capital Ratio

UBS Chief Executive Officer Oswald Gruebel and Chairman Kaspar Villiger have said they aim to wean the bank off government support as quickly as possible. Gruebel has cut 7,500 jobs, sold a Brazilian unit, replaced three executive board members and tapped investors for more capital since joining UBS in February to help restore the bank’s profitability and reputation.

The bank’s Tier 1 capital ratio, a gauge of its ability to absorb losses, rose to 13.2 percent at the end of the second quarter from 10.5 percent at the end of March after the bank cut assets on the balance sheet by 261 billion francs and sold new shares in June.

To contact the reporters on this story: Josh Fineman in New York at jfineman@bloomberg.net; Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

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VW Common Shares Fall for Sixth Day; Short Interest Increases

By Alexis Xydias

Aug. 20 (Bloomberg) -- Volkswagen AG common shares extended their decline in the past six days to 38 percent as Porsche SE exits the carmaker’s securities and short-sellers increase bets the losses may grow.

The ordinary shares slipped 3.7 percent to 140.64 euros as of 11:53 a.m. in Frankfurt. The preferred stock dropped 5.7 percent to 64.51 euros, paring its 15 percent jump yesterday. Porsche climbed 1.7 percent to 55.11 euros, a seventh advance.

VW’s common stock has retreated since Porsche, which held about 20 percent of options to buy the securities, said Aug. 14 it’s selling a majority of them to Qatar. The emirate paid 80 euros for the carmaker’s common shares, Manager-Magazin said yesterday, citing unidentified people close to Porsche. The magazine added that Porsche also held options on VW’s preferred stock and is selling them to Qatar.

“What’s currently happening is what everyone expected one day would occur: the common shares have to return to their fair value,” said Robert Heberger, an analyst at Merck Finck & Co. in Munich. “Since the consensus seems to be a fair value of around 100 euros, then we may still have another 40 euros to drop. That said, with VW shares you cannot exclude they remain at incredible levels for a longer time.”

About 32.8 percent of the common shares available for loan were borrowed as of Aug. 18, according to Data Explorers in London, most likely by short-sellers who sell borrowed stock on expectations the securities will decline. That is the highest so-called short interest since March 13, the data show.

Voting Rights

The common securities carry a voting right that has proved worthless because the state of Lower Saxony has a blocking minority. The preferred shares don’t have a vote.

Wolfsburg, Germany-based Volkswagen and Stuttgart-based Porsche are negotiating a combination after Porsche’s plans to take over VW stumbled upon a veto from Lower Saxony and growing debt. Porsche said Aug. 14 that Qatar will become a shareholder in the combined company by buying a 10 percent stake in Porsche and taking over most of its options on VW common shares. VW plans to buy a 42 percent stake in Porsche’s automotive unit.

VW common shares have more than tripled since 2006 as Porsche built a stake of more than 70 percent in VW through stock and options during a four-year plan to take over Europe’s largest carmaker. Porsche has declined about 10 percent in that period.

Frank Gaube, a spokesman for Porsche, wasn’t immediately available to comment, while Christine Ritz, spokeswoman for VW, declined to comment. Gaube declined yesterday to speak about Porsche’s plans for its VW holdings.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.

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U.K. Stocks Climb as Mining Shares Gain; Antofagasta Advances

By Sarah Jones

Aug. 20 (Bloomberg) -- U.K. stocks advanced for a third day, led by a rally in commodity producers as base metals rebounded in London.

Antofagasta Plc, Kazakhmys Plc and Xstrata Plc climbed more than 3 percent as copper rallied. Rio Tinto Group, the world’s third-largest mining company, added 1.4 percent even as profit fell. Royal Dutch Shell Plc led energy shares higher as crude oil traded near a two-month high.

The FTSE 100 Index added 60.27, or 1.3 percent, to 4,749.94 at 12:21 p.m. in London, as all but three stocks advanced. The FTSE All-Share Index increased 1.3 percent today, while Ireland’s ISEQ Index surged 1.6 percent.

“Mining shares are enjoying another day of decent gains,” said Tim Hughes, London-head of sales trading at IG Index. “Investors still seem to have the view that there is more to come from this sector and dips are treated as opportunities to buy in.”

The FTSE 100 has rebounded 35 percent since March 3, led by a rally in mining and bank shares amid optimism the worst global recession since World War II is easing. The measure is trading at 59.9 times the earnings of its companies, near the highest level since September 2002, according to Bloomberg data.

U.K. retail sales increased for a second month in July as shoppers bought more furniture and electrical goods, a sign consumer spending is reviving as the recession eases.

Antofagasta

Antofagasta led mining shares higher as copper advanced from a two-week low in London. Lead, nickel, tin and zinc also gained on the London Metal Exchange. The owner of copper mines in Chile climbed 3.6 percent to 744 pence.

Kazakhmys, Kazakhstan’s biggest copper producer, increased 3.1 percent to 905.5 pence and Xstrata, the world’s fourth- largest copper producer, jumped 5 percent to 810 pence.

Rio Tinto added 1.4 percent to 2,344.5 pence even after first-half profit dropped 65 percent to $2.5 billion. Underlying earnings, which exclude some one-time items, were $2.6 billion, missing the $2.73 billion median estimate of seven analysts surveyed by Bloomberg News. The mining company also said it may pay a final dividend for 2009.

Shell, Europe’s largest oil company, increased 1.4 percent to 1,609.5 pence as oil traded near the highest since June after U.S. inventories of crude declined the most in 15 months, signaling a rebound in demand.

BP Plc, the region’s second-biggest oil company, added 1.3 percent to 516 pence, while BG Group Plc, U.K.’s third-largest natural gas producer, increased 1.7 percent to 1,043 pence.

The following stocks also gained or fell in the U.K. market. Stock symbols are in parentheses.

Premier Foods Plc (PFD LN) gained 1.36 pence, or 3.2 percent, to 44. The maker of Mr. Kipling cakes granted consent for Warburg Pincus LLC to buy up to 2 percent more of its shares.

SIG Plc (SHI LN) rallied 9.5 pence, or 7.6 percent, to 134.4 after Europe’s largest supplier of insulation and roofing extended a cost cutting program and forecast a turnaround in its markets next year.

SIG eliminated 553 jobs and closed 17 more branches since the end of June. That brought annual savings since its cost reductions started in 2008 to a net 92 million pounds ($131 million), beating a previous target of 74 million pounds.

Wellstream Holdings Plc (WSM LN) slid 51.1 pence, or 9.5 percent, to 485.9. The maker of oil and natural-gas pipelines said first-half net income fell 40 percent to 16.8 million pounds because of lower prices and production delays at its Newcastle factory. The company said “challenging” market conditions point to second-half earnings that will only be “slightly ahead” of results achieved in the first six months of the year.

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

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Ex-Bear Hedge Manager Allegedly Sought to Use Funds for Condo

By Patricia Hurtado

Aug. 20 (Bloomberg) -- Former Bear Stearns Cos. hedge fund manager Ralph Cioffi, indicted for an alleged fraud that helped bring down the securities firm, attempted to use his $2 million redemption from a fund he supervised as collateral for a condominium, U.S. prosecutors said.

Cioffi, 53, also “rarely” heeded compliance trading measures, the government said in a court filing in Brooklyn, New York, federal court. Cioffi and another former Bear Stearns hedge fund manager, Matthew Tannin, 47, were indicted last year for misleading investors about the health of two hedge funds that failed in July 2007, costing investors $1.6 billion. The implosion helped trigger the credit crunch and the eventual sale of Bear Stearns to JPMorgan Chase & Co.

Cioffi, who managed the two funds, is also charged with insider trading for redeeming $2 million from the Bear Stearns Enhanced Fund, one third of the amount he’d invested in the funds. The U.S. says Cioffi used non-public, material information to make the withdrawal and save his investment before both funds collapsed in July.

“These prior uncharged acts provide probative evidence that Cioffi knowingly engaged in insider trading,” prosecutors said in a letter filed with the court Aug. 18. “The government will prove that the defendant redeemed his investment in the Enhanced Fund so that he could re-invest the $2 million in another, more profitable fund under his control.”

Sought to Pledge

Last month, U.S. District Judge Frederic Block in Brooklyn, New York, rejected Cioffi’s bid to get the insider-trading charge dismissed on grounds that he didn’t owe a duty to his clients. Cioffi’s lawyer, Dane Butswinkas, couldn’t be reached for comment.

The government says that in 2006, prior to the funds’ collapse, Cioffi sought to pledge his investment in the fund as collateral for a building loan for a “luxury condominium complex” which he and his brother were building in Sarasota, Florida.

Bear Stearns learned of Cioffi’s attempt to use the redemption as collateral for the condominium development and refused to permit him to encumber his holdings in the fund, prosecutors said.

“Cioffi became extremely upset and accused the general counsel of BSAM of being behind the decision,” the U.S. said in court papers.

Under Scrutiny

Prosecutors seek to have evidence of Cioffi’s failed loan bid be heard at his trial. The U.S. says it is evidence Cioffi knew he was supposed to inform Bear Stearns about his sale of securities and that he later intentionally concealed the $2 million transaction to make other investments, according to the court filing.

“Cioffi knew that his request to withdraw money from the Enhanced Fund would have been scrutinized and, in all likelihood, refused by Bear Stearns Asset Management,” the U.S. said.

“The government will show that this anticipated denial contributed to Cioffi’s decision conceal the existence of his redemption from relevant management, and in particular, the general counsel” of Bear Stearns Asset Management.

Conflicted Transactions

Prosecutors also said that while Cioffi was “repeatedly counseled” by Bear Stearns compliance staff, he nevertheless engaged in conflicted transactions and “rarely adhered” to trading compliance measures regarding transactions. The government also asked to introduce testimony from conversations he had with Bear Stearns compliance personnel about conflicts of interest.

“Hundreds of transactions that presented conflicts did not obtain the approvals required by federal law and by the offering memoranda,” Assistant Brooklyn U.S. Attorney James McGovern said in the letter filed with the court.

The U.S. said that of the transactions that required prior approval by Unaffiliated Directors, 78.95 percent were missing such approval in 2006, 58.66 percent were missing in 2005, 29.73 percent were missing in 2004 and 18 percent were missing in 2003.

To remedy the poor compliance, Bear Stearns placed a moratorium on all trades between Bear Stearns Co. and Bear Stearns Asset Management in late 2006. Cioffi was also advised that he needed to “develop and enforce procedures” to ensure the notification of the Unaffiliated Directors,” the government said.

Both men are scheduled to go on trial in Brooklyn federal court Oct. 13, in a case that was filed last year by the office of Brooklyn U.S. Attorney Benton Campbell.

Cioffi, now with Tenafly, New Jersey-based RCAM Capital LP, and Tannin face as many as 20 years in prison if convicted of conspiracy to commit securities fraud. Cioffi faces an additional 20-year term if found guilty of insider trading.

The case is U.S. v. Cioffi, 08-CR-00415, U.S. District Court, Eastern District of New York (Brooklyn).

To contact the reporter on this story: Patricia Hurtado in federal court in Brooklyn at pathurtado@bloomberg.net.

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European, Asian Stocks Advance, Led by China; U.S. Futures Gain

By Daniela Silberstein

Aug. 20 (Bloomberg) -- European and Asian stocks climbed, led by the biggest surge in Chinese shares since March, as an advance in commodities lifted raw-material producers.

Royal Dutch Shell Plc, Europe’s biggest oil company, and BHP Billiton Ltd. added more than 1.2 percent as crude traded near the highest level since June and copper rallied. Holcim Ltd. surged 6.7 percent after earnings beat estimates. UBS AG advanced 3.9 percent after the Swiss government said it plans to sell its $5.6 billion stake in the country’s biggest bank.

Europe’s Dow Jones Stoxx 600 Index climbed 1.1 percent to 228.92 at 1:36 p.m. in London, as all 19 industry groups rose. The gauge has soared 45 percent since March 9 as companies from Roche Holding AG to Johnson & Johnson reported better-than- estimated results and Germany and France unexpectedly returned to economic growth. The increase left the measure valued at 40.3 times the profits of its companies, near the most expensive level since 2003, data compiled by Bloomberg show.

“The markets still feel constructive,” Neil Dwane, who helps oversee $80 billion as chief investment officer at Allianz Global Investors’ RCM unit in Frankfurt, said in a Bloomberg Television interview. “There have been concerns about China but on the other side there’s good corporate news. Earnings are coming in strong.”

Asian, U.S. Shares

The MSCI Asia Pacific Index increased 1.4 percent, while China’s Shanghai Composite Index rallied 4.5 percent after briefly falling into a bear market yesterday.

Standard & Poor’s 500 Index futures expiring in September pared an earlier advance of 0.7 percent and were little changed after a Labor Department report showed more Americans unexpectedly filed claims for jobless benefits last week.

Shell gained 1.2 percent to 1,607 pence as oil traded above $72 a barrel after U.S. inventories declined the most in 15 months.

BHP Billiton, the world’s biggest mining company, rose 2.3 percent to 1,569 pence and Alcoa Inc., the largest U.S. aluminum producer, gained 1.5 percent to $12.67 in German trading. Copper rallied from a two-week low in London.

Rio Tinto Group added 1.4 percent to 2,344 pence even after the world’s third-largest mining company said first-half profit tumbled 65 percent to $2.5 billion. Chief Executive Officer Tom Albanese, speaking on a conference call, said the company is in “early stage” talks with Aluminum Corp. of China on cooperation on operations. Rio also said it may pay a final dividend for 2009.

Holcim, UBS

Holcim climbed 6.7 percent to 69.8 Swiss francs. The world’s second-biggest cement maker raised its 2009 savings target by 60 percent to 600 million francs ($563 million) after reaching the previous full-year goal in the first half alone. Second-quarter profit fell 35 percent to 453 million francs. That beat a median estimate of 436 million francs of seven analysts surveyed by Bloomberg News.

UBS gained 3.9 percent to 17.39 francs. The Swiss government said it plans to sell its 6 billion-franc investment in the bank by today after signing an agreement with the U.S. yesterday over data on bank clients suspected of evading taxes.

Royal Ahold NV climbed 2.4 percent to 8.34 euros. The biggest Dutch food retailer posted second-quarter profit that beat analysts’ estimates as price cuts lured more shoppers.

Voestalpine AG rallied 3.5 percent to 21.35 euros. Austria’s biggest steelmaker reiterated that it expects to make a profit in fiscal 2010. The company reported a first-quarter net loss after payment to hybrid bondholders of 67.3 million euros ($95.8 million), narrower than the 92.8 million-euro median forecast of nine analysts surveyed by Bloomberg News.

YIT Jumps

YIT Oyj soared 6.1 percent to 9.56 euros. Finland’s biggest builder raised its annual sales growth target to an average 5 to 10 percent per year. Previously the target was for “positive growth.”

Royal Boskalis Westminster NV climbed 9.2 percent to 20.51 euro, the steepest gain in the Stoxx 600. The world’s largest dredging company said second-half earnings will be comparable to the first half, when net profit was 102.7 million euros.

SIG Plc, Europe’s largest supplier of insulation and roofing, rose 7.6 percent to 134.4 pence after deepening a program of cost cutting and predicting a turnaround in its markets next year.

Hochtief AG gained 5.9 percent to 51.90 euros after Deutsche Bank AG upgraded Germany’s biggest construction company to “buy” from “hold.”

Brambles Ltd. jumped 3.6 percent to A$7.15 in Australia. The world’s biggest supplier of pallets said annual net income fell 30 percent to $452.6 million, exceeding analysts’ estimates.

Bank of Communications

Bank of Communications Ltd. gained 1.3 percent to HK$9.19 in Hong Kong. China’s fourth-largest lender said net income for the second-quarter was little changed at 7.62 billion yuan ($1.1 billion). That topped than the average estimate of 7.24 billion yuan from nine analysts in a Bloomberg survey.

The Conference Board’s gauge of the U.S. economic outlook for the next three to six months rose 0.7 percent for a second month, according to the median forecast of 52 economists surveyed by Bloomberg News. Other reports may show first-time jobless claims fell and manufacturing in the Philadelphia region contracted at a slower pace.

U.K. retail sales increased for a second month in July as shoppers bought more furniture and electrical goods, the Office for National Statistics said today in London, a sign consumer spending is reviving as the recession eases. Mortgage approvals by the six biggest U.K. banks climbed to the highest this year, the Bank of England said today.

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

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Pension Plans’ Private-Equity Cash Depleted as Profits Shrink

By Jason Kelly and Jonathan Keehner

Aug. 20 (Bloomberg) -- U.S. pension funds contributed to the record $1.2 trillion that private-equity firms raised this decade. Three of the biggest investors, state pensions in California, Oregon and Washington, plunked down at least $53.8 billion. So far, they only have dwindling paper profits and a lot less cash to show the millions of policemen, teachers and other civil servants in their retirement plans.

The California Public Employees’ Retirement System, the Washington State Investment Board and the Oregon Public Employees’ Retirement Fund -- among the few pension managers to disclose details of their investments -- had recouped just $22.1 billion in cash by the end of 2008 from buyout funds started since 2000, according to data compiled by Bloomberg. That amounts to a shortfall of 59 percent. In total, they haven’t reaped a paper gain from funds formed in the past seven years.

The wisdom of those investment decisions hangs on the remaining value private-equity firms assign to companies they snapped up in 2006 and 2007, during the peak of the buyout boom. For the California, Oregon and Washington plans, that figure totaled $15.8 billion at the beginning of the year.

While some investors say they’re confident the private- equity industry’s traditional practice of taking over companies will pay off, others have been shaken by a credit contraction that froze deal-making, eroded the value of the assets on private-equity firms’ books and prevented them from cashing out in public share sales.

‘Can’t Eat IRRs’

Now pension managers on both ends of the spectrum are looking skeptically at the so-called internal rate of return buyout firms calculate to gauge their results.

“I work for over 400,000 employees, and they can’t eat IRRs,” said Gary Bruebaker, the chief investment officer of the Washington State Investment Board. “At the end of the day, I care about how much do I give you, and how much money do I get back.”

Private-equity firms pool money from so-called limited partners -- pension funds, endowments, wealthy families and sovereign wealth funds -- and use that cash, along with money borrowed from banks, for corporate takeovers. The buyout managers aim to boost profits through cost cuts, acquisitions or added lines of business, then reap a return for themselves and their investors in a public stock offering or a sale to another buyer.

The buyout firms also levy fees, typically 2 percent of the assets they oversee annually and 20 percent of profits from successful investments. That’s helped make the titans of the industry into billionaires.

Avago IPO

Stephen Schwarzman, the 62-year-old co-founder and chairman of Blackstone Group LP, the biggest private-equity firm, ranked 261st on the 2009 Forbes list of the world’s richest people, with an estimated net worth of $2.5 billion. KKR & Co. LP co- founder Henry Kravis, 65, topped that with $3 billion, while Carlyle Group co-founder David Rubenstein, 60, weighed in at $1.4 billion.

Buyout managers, and some pension funds, downplay their cash returns so far this decade and counsel patience, saying that investments often look worse in the years immediately after they’re made. Blackstone’s Schwarzman told backers on an Aug. 6 conference call he expected his New York-based firm to take some of its companies public in 2010. KKR, also in New York, sold shares in Avago Technologies Ltd. through an IPO earlier this month, raising $648 million.

Harvard’s Sales

Pension funds also say that over time, private-equity returns compare favorably to the Standard & Poor’s 500 Index, which declined 28 percent from the beginning of 2000 through the end of last year. Bruebaker says his Washington fund had an 8.2 percent average annual gain from its buyout investments in the past 10 years, compared with a 3.9 percent drop in the S&P.

While investors can sell publicly traded stocks as needed, buyout funds keep money tied up for years, said Steven Kaplan, a professor at the University of Chicago’s Booth School of Business.

“With private equity, you’re taking on a liquidity risk, which people did miscalculate,” said Kaplan, who has studied takeover returns.

University endowments and philanthropic foundations hurt by the worst economic crisis since the Great Depression have struggled to sell their stakes in private-equity funds to raise cash. Investors including Harvard University, in Cambridge, Massachusetts, planned to raise more than $100 billion through so-called secondary sales of limited partnership interests, some at discounts of at least 50 percent, people familiar with the effort said last year.

‘Money in the Ground’

Rubenstein, of Washington-based Carlyle, acknowledges that the buyout industry faces tough questions.

“People have a lot of money in the ground and today it’s probably not worth what they had intended, but a turn-around in valuations is now beginning,” Rubenstein said in an interview. “You’ll probably see general partners and limited partners focused more on multiples of equity rather than just IRRs.”

Representatives of Washington, Calpers and Oregon all said they remain committed to private equity, and pointed to the long-term nature of the investments.

“The market is in a trough,” Oregon spokesman James Sinks said. “The picture would’ve looked different at the end of 2007.” Calpers spokesman Clark McKinley noted that Calpers in June raised its target commitment to private equity to 14 percent of assets from 10 percent.

“That’s an affirmation of our confidence in the asset class,” he said.

Schwarzman and Kravis declined to comment for this article.

‘A Snapshot’

“We are hopefully toward the end of the absolute worst recession of our lifetimes,” said Washington’s Bruebaker. “If you take a snapshot right now, things might not look good. These are 10- to 12-year investments and we believe they’ll be much better than what we see today.”

Bruebaker’s fund and the Oregon Public Employees’ Retirement Fund warmed to buyouts during the 1980s, and Calpers joined in 1990. Today, among U.S. pension plans, Calpers is the largest investor in private-equity funds, while Washington and Oregon are the third- and fourth-biggest, respectively, according to San Francisco-based consulting firm Probitas Partners Inc.

The three state funds, which serve more than 2 million people, collectively more than doubled their buyout commitments in 2005, to $8 billion from $3.1 billion. They ramped up even more the next year, when commitments climbed to $18.7 billion, the data show.

Chrysler, TXU

All told, private-equity firms raked in $1.2 trillion from 2000 through 2008, according to London-based researcher Preqin Ltd. The influx of money, coupled with cheap debt-funding from Wall Street banks eager to collect fees, fueled record-setting takeovers. Nine of the 10 biggest deals were announced from 2005 to mid-2007 as buyout firms acquired the likes of hotel operator Hilton Hotels Corp. and power producer TXU Corp.

The buyouts ground to a halt after the subprime-mortgage market collapsed in late-2007, extinguishing investor demand for high-yield, high-risk debt. The dollar value of deals has dwindled to $42.2 billion so far this year from $212.2 billion in 2008, according to data compiled by Bloomberg.

Private-equity firms unable to cash out of investments have spent much of the credit crisis reworking the capital structures of their debt-laden companies. Chrysler LLC, the carmaker that Cerberus Capital Management LP bought in 2007 for $7.4 billion, and doormaker Masonite International Corp., which KKR purchased in 2005 for C$3 billion ($2.4 billion), filed for bankruptcy this year.

Marked-to-Market

At the same time, changes in accounting rules have cast a spotlight on the current value of private-equity investments.

The Financial Accounting Standards Board’s so-called Statement No. 157, which went into effect at the end of 2007, requires investors, including private-equity managers, to gauge the fair value of holdings that aren’t traded. While most buyout firms typically carried their investments at cost, FAS 157 mandates quarterly assessments of current value.

Such marking-to-market means private-equity funds must tell investors how much their stakes are worth at that moment, even if the managers are planning to hang onto them for years.

“Getting carried away by looking at mark-to-market in my personal view can lead you to an incorrect conclusion for the longer term,” Blackstone’s Schwarzman said on the Aug. 6 conference call.

Blackstone spokesman Peter Rose says it’s premature to judge recent investments, such as those made by the $21.7 billion fund the firm set up in 2007.

‘Profound Losses’

Schwarzman, who created Blackstone in 1985 with Peter G. Peterson, has said their unspent capital -- about $29 billion -- will enable them to buy companies at depressed prices and generate profits as the global economy recovers.

Others see signs that the private-equity business is undergoing a transformation. Carlyle’s Rubenstein predicted that deals in the current environment will be smaller and less reliant on debt. Individual funds already being marketed to investors won’t top $10 billion, and subsequent efforts won’t exceed $5 billion to $6 billion, he said.

“These are major structural changes taking place,” said Dayton Carr, founder of VCFA Group, a New York-based firm that buys interests in private-equity and venture-capital funds. “The basic economy has had huge issues. A lot of the funds will be smaller.”

The upheaval is reflected in the attitudes of pension-fund investors, who are watching and waiting for cash to come in the door.

“When managers are forced to put a hard value on their holdings, we’re seeing some profound losses,” said William Atwood, the executive director of the Illinois State Board of Investment, an $9 billion pension fund. “The rubber hits the road when cash is returned.”

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net.

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U.S. Stocks Fluctuate After Jobless Claims Top Forecasts

By Kayla Carrick

Aug. 20 (Bloomberg) -- U.S. stocks drifted between gains and losses after an unexpected increase in jobless claims tempered speculation the worst recession in seven decades is almost over. Treasuries and crude oil were little changed.

Sears Holdings Corp., the biggest U.S. department-store company, tumbled 12 percent after reporting an unexpected second-quarter loss. Google Inc. added 1.9 percent after being added to Goldman Sachs Group Inc.’s “conviction buy” list. Investors will also watch data on leading economic indicators and manufacturing in the Philadelphia region.

The Standard & Poor’s 500 Index added 0.2 percent to 998.32 at 9:35 a.m. in New York. The Dow Jones Industrial Average rose 9.75 points, or 0.1 percent, to 9,288.91. The Nasdaq Composite Index increased 0.3 percent to 1,974.45.

“We’ve had a spurt of really good numbers over the last few months and we’ve come away from the abyss,” said Michael Vogelzang, chief investment officer of Boston Advisors LLC, which manages $1.7 billion. “But we can’t lose sight of the fact that we’re in a very murky environment for the general economy. You’re going to get good numbers and bad numbers. With these mixed signals, we’re going to have a pretty choppy September.”

Stock-index futures erased earlier gains before the open of exchanges as the Labor Department said applications for jobless benefits rose to 576,000 in the week ended Aug. 15 from a revised 561,000 the week before. The number of people collecting benefits the week earlier was little changed at 6.24 million.

Rally Built on Recovery Speculation

The S&P 500 has climbed 47 percent from a 12-year low in March amid speculation the worst of the recession has passed. Edward McKelvey, a senior economist at Goldman Sachs Group Inc., said yesterday the contraction may already be over. He cited the gain in industrial production in July, helped by the government’s cash-for-clunkers program, along with the likelihood that output will continue to grow because of depleted inventories.

The Conference Board’s gauge of the economic outlook for the next three to six months rose 0.7 percent for a second month, according to the median forecast of 52 economists surveyed by Bloomberg News. The report is due at 10 a.m. Washington time. Other data may show manufacturing in the Philadelphia region contracted at a slower pace.

Sears tumbled 12 percent to $65.20. The second-quarter loss was triggered by pension-plan expenses, severance payments to fired employees and costs to close stores. The net loss was $94 million, or 79 cents per share. The average analyst estimate was for earnings of 35 cents per share.

Google, the owner of the world’s most popular search engine, climbed 1.9 percent to $452.44.

Per-share profits topped analysts’ estimates by an average of 9.9 percent for the companies in the S&P 500 that have reported results since June 17, data compiled by Bloomberg shows. Earnings slid 29 percent on average, a record eighth straight quarter of falling profits.

To contact the reporter on this story: Kayla Carrick in New York at kcarrick1@bloomberg.net

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