Lehman Monday Morning Lesson Lost With Obama Regulator-in-Chief

By Alison Fitzgerald and Christine Harper

Sept. 11 (Bloomberg) -- Less than 24 hours after his swearing-in ceremony, U.S. Treasury Secretary Timothy F. Geithner surprised Camden R. Fine with an invitation to a one- on-one meeting about the financial crisis.

“I about fell out of my chair,” said Fine, president of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members. He was in a corner office overlooking the White House at the Treasury Department the next morning, telling Geithner that behemoths such as Citigroup Inc. and Bank of America Corp. were a menace, he said.

“They should be broken up and sold off,” Fine, 58, said he declared, as Geithner scribbled notes before thanking him for his time and ushering him out into the January chill.

The Treasury secretary didn’t follow through on Fine’s suggestion, just as he didn’t act on the advice of former Federal Reserve Chairman Paul A. Volcker, or Federal Deposit Insurance Corp. head Sheila C. Bair, or the dozens of economists and politicians who pressed the White House for measures that would limit the size or activities of U.S. banks.

One year after the demise of Lehman Brothers Holdings Inc. paralyzed the financial system, “mega-banks,” as Fine’s group calls them, are as interconnected and inscrutable as ever. The Obama administration’s plan for a regulatory overhaul wouldn’t force them to shrink or simplify their structure.

Policy of Containment

“We could have another Lehman Monday,” Niall Ferguson, author of the 2008 book “The Ascent of Money” and a professor of history at Harvard University in Cambridge, Massachusetts, said in an interview. “The system is essentially unchanged, except that post-Lehman, the survivors have ‘too big to fail’ tattooed on their chests.”

After the deepest recession since the 1930s, which has seen the world’s largest economy shrink 3.9 percent since the second quarter of last year, and more than $1.6 trillion in worldwide losses and writedowns by banks and insurers, President Barack Obama decided on a policy of containment rather than a structural transformation.

His proposal for revamping the way the U.S. monitors and controls banks doesn’t include taking apart institutions, supported by taxpayer loans, that have grown in scope and size since Lehman imploded. The biggest, Charlotte, North Carolina- based Bank of America, had $2.25 trillion in assets as of June, 31 percent more than a year earlier, and about 12 percent of all U.S. deposits.

Creating Bedlam

Instead, the Obama plan would label Bank of America, New York-based Citigroup and others as “systemically important.” It would subject them to capital and liquidity requirements and stricter oversight, relying on the same regulators who didn’t understand the consequences of a Lehman failure. And while companies could be dismantled if they got into trouble, they, their creditors and shareholders could also be bailed out with taxpayer money, according to the plan.

The chief architects, Geithner, 48, and National Economic Council Director Lawrence H. Summers, 54, say they don’t think it would be practical to outlaw banks of a certain size or limit trading activities by deposit-taking banks, according to people familiar with their thinking. They said the two men, who declined to be interviewed, and others on Obama’s team believe the lines are too fuzzy between banking and investing products and that forcing the divestiture of units and assets would create bedlam.

“It’s a very difficult thing to say as a national policy goal that we’re going to limit the success of an American firm,” said Tony Fratto, 43, a spokesman for President George W. Bush and former Treasury Secretary Henry M. Paulson who now heads a Washington consulting firm.

System Failure

The lesson of Sept. 15, 2008, is that limits may be necessary, according to Fine and other critics of the government’s regulatory proposals.

Lehman, the leading underwriter of mortgage-backed securities in 2008, was done in by too much borrowing and too many real estate investments that couldn’t be sold easily. When the property market turned sour -- home prices fell by 20 percent in the two years preceding the bankruptcy, according to the S&P/Case-Schiller home-price index of 20 U.S. cities -- and creditors wanted more collateral for loans or their money back, the investment bank had to fold.

It had $613 billion in debt and so many deals with so many companies that its bankruptcy set off a chain reaction the government and other Wall Street firms didn’t anticipate. Simon H. Johnson, a former chief economist at the International Monetary Fund, likened it to the fictitious substance ice-nine in the 1963 Kurt Vonnegut Jr. novel “Cat’s Cradle,” one drop of which could crystallize all the water on Earth. The Chapter 11 filing froze the global financial infrastructure.

Obama’s Fix

“This was a failure of the entire system,” Obama said on June 17 when he introduced his blueprint. “A regulatory regime basically crafted in the wake of a 20th-century economic crisis - - the Great Depression -- was overwhelmed by the speed, scope, and sophistication of a 21st-century global economy.”

The president’s fix is to empower the Fed to put the brakes on banks, hedge funds, insurers or other financial firms whose crash could have a crippling domino effect. About 25 companies may qualify based on their assets and on factors such as funding relationships, Fed Chairman Ben S. Bernanke told the House Financial Services Committee on July 24.

Potential Threats

“Most reform proposals acknowledge, perhaps with some consternation, that systemically important institutions are likely to be with us into the indefinite future,” said Daniel K. Tarullo, a member of the Fed’s board of governors, in an interview. “The proposed reforms are oriented toward forcing those institutions to internalize more of the risks they create and thus making it less likely they will create problems for the system as a whole.”

A Financial Services Oversight Council -- made up of the heads of the FDIC, the Securities and Exchange Commission, the Commodity Futures Trading Commission and other agencies -- would advise the Fed on potential threats.

The Treasury would be able to take over and wind down financial institutions with an authority modeled on powers held by the FDIC, which guarantees deposits and can close and sell failing banks under its jurisdiction. A Consumer Financial Protection Agency could restrict what it viewed as unsuitable products for Americans.

‘Crap Loans’

The existence of such a regulatory framework might have averted Lehman’s chaotic end -- and the economic crisis that followed -- because cheap money wouldn’t have been allowed to inflate a real estate bubble with questionable mortgages and mortgage derivatives, according to Austan Goolsbee, a member of the president’s Council of Economic Advisers.

“One of the fundamental principles of the plan is that if you’re menacing to the system, someone is going to regulate you very closely,” said Goolsbee, 40. “They’re going to be in there watching everything you do.”

If a consumer agency had existed, lenders wouldn’t have been able to sell so many complex and costly mortgages, said Ralph L. Schlosstein, chief executive officer of New York investment bank Evercore Partners Inc. and a supporter of Obama’s.

“There has never been decent regulation of the appropriateness of lending products as opposed to investment products, and the fact that that didn’t exist really allowed trillions of dollars of crap loans that were neither affordable nor understood to be made,” said Schlosstein, a co-founder and former president of asset management company BlackRock Inc.

Fatally Flawed

As much as it might mitigate some risks, the Obama strategy is fatally flawed because it fails to force the largest banks to change their behavior, said Johnson, the former IMF economist who is now a professor for finance at the Massachusetts Institute of Technology in Cambridge.

“The biggest problem is it doesn’t deal with too-big-to- fail,” Johnson said. “It doesn’t say anything.”

If constraints aren’t legislated, “complexity will multiply and take on new forms,” and regulators once again won’t be able to keep up, he said. “You have to make things a lot smaller.”

That too-big-to-fail predicament -- the theory that certain businesses can’t be allowed to go bankrupt because of the economic damage that would cause, and that the implicit government guarantee encourages risky behavior -- was discussed in conference rooms and watering holes during the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, in August.

‘Financial Oligarchy’

The chairman of the regional Fed and the event’s host, Thomas M. Hoenig, 63, had set the tone with speeches over the past year that warned against allowing power to be concentrated in a “financial oligarchy.” Hoenig played on the theme at the opening steak-and-salmon dinner on Aug. 20 at Jackson Lake Lodge, a National Historic Landmark in Grand Teton National Park. Access had to be limited, he said, for fear the group would grow “too big to feed.”

That thread of humor spread as speakers tried to work references to size and failure into their remarks, with varying degrees of success, according to Mark Gertler, 58, a New York University economist and former research partner of Bernanke’s who attended the conference.

Bank of Israel Governor Stanley Fischer, Bernanke’s thesis adviser at MIT, addressed the topic more seriously at lunch on Aug. 21.

“At this stage, we seem to be taking it for granted that we should go back to the structure of the financial system as it was on the eve of the crisis,” Fischer, 65, a former Citigroup vice chairman, told his audience in the lodge’s Grizzly Room. “Even for the largest economies, there is a case for discouraging financial institutions from growing excessively.”

‘Fragile’ System

Fischer’s comments echoed those of Volcker. The 82-year-old head of the president’s Economic Recovery Advisory Board began his campaign for restructuring the basics of U.S. banking 17 months ago in a speech to the New York Economic Club. It was April 8, 2008, three weeks after the Fed helped New York-based JPMorgan Chase & Co. buy Bear Stearns Cos. by extending a $30 billion backstop.

The “demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole, needs repair and reform,” the 6-foot-7-inch (2.01-meter) Volcker said, grasping a podium that reached only to his waist. Before the speech at the Grand Hyatt New York, he belatedly celebrated his 80th birthday by blowing out a candle on a cake shaped like a stack of gift boxes.

Volcker’s Plan

Volcker’s ideas for overhauling the system -- including strict regulation of over-the-counter derivatives trading -- were outlined in an 82-page report prepared by the Group of 30, an organization of current and former central bankers, finance ministers, economists and financiers that Volcker heads.

When he made the document public on Jan. 15, Volcker told reporters that he “sent a copy to some of the people in the new administration that would have an interest in it.” Since then, Volcker, an adviser to Obama during the presidential race, has lobbied Geithner and Summers, according to people familiar with the discussions. The former Fed chairman is taking his case on the road this month, starting with a speech on Sept. 16 to the Association for Corporate Growth in Beverly Hills, California.

Volcker would subject money market funds to the same regulatory burdens as banks, demanding they hold capital to protect against losses like those suffered by the Reserve Primary Fund when Lehman’s bankruptcy touched off a run and more than 60 percent of its assets were withdrawn in two days.

‘Molotov Cocktail’

Another critical change, according to Volcker, would be to prohibit big, interconnected companies that handle essential services such as deposit-taking and business payments from making high-risk bets with their own money in so-called proprietary trading. Volcker also wouldn’t allow non-financial firms to own government-insured deposit-taking companies. The proposals, intended to prevent another ice-nine episode, are similar in some respects to restrictions in place in the U.S. for more than 60 years until the Glass-Steagall Act was overturned by Congress in 1999.

“Does anyone think it’s a coincidence that less than 10 years after they repealed Glass-Steagall, the financial markets collapsed?” said Fine of the community bankers group. He called current rules for banking a recipe for a “Molotov cocktail.”

Bair, the FDIC chairman, has taken a different tack: She wants to check growth by charging fees based on the risks banks take. If Lehman had to pay for its gambles, it might not have held $84 billion in mortgage investments and loaded up on mortgage-backed securities in early 2008, after the subprime crisis began.

Bair, Geithner

“A financial system characterized by a handful of giant institutions with global reach and a single regulator is making a huge bet that those few banks and their regulator over a long period of time will always make the right decisions,” Bair told the Senate Banking Committee in May. She and Geithner have clashed because of her public opposition to his plan to make the Fed the chief overseer of systemically important financial institutions.

For the executives and government officials who met at the New York Fed the weekend before Lehman went bust last September, the right decisions weren’t obvious.

Their focus was on mitigating damage from about 1 million over-the-counter derivatives trades that Lehman had participated in, according to people who attended the meetings. The men and women in the room weren’t prepared when panic struck the $3.6 trillion money market industry, which provides short-term loans called commercial paper used by corporations such as General Electric Co. to pay everyday bills.

Espresso Shot

“They didn’t know who Lehman was intertwined with because they hadn’t done their homework,” said Joseph Stiglitz, a Columbia University economics professor who won the Nobel Prize in economics in 2001 for his analysis of markets with asymmetric information.

That came home to Fratto the Saturday morning before Lehman fell apart. He sat in his West Wing office at the White House, adorned with pictures of his children and an inscribed photograph of Bono, monitoring the negotiations when he got a call from a friend at a New York bank.

Sipping from a cup of Starbucks coffee with an extra shot of espresso, Fratto asked what she was doing at work.

“She told me that every bank in New York City had their back offices filled with people trying to figure out their counterparty risk to Lehman,” Fratto recalled. “I was stunned. Everyone knew that Lehman had been listing for six months.”

‘Web of Counterparties’

Richard Bookstaber, a former trader and risk manager who warned a crisis was likely in his 2007 book “A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation,” testified in Congress in October 2007 and June 2008 that regulators didn’t have adequate information to understand the dependencies between companies. The White House proposal to move over-the-counter derivatives onto clearinghouses and exchanges would help by giving regulators and companies involved in transactions better information, he said.

“You have to know the web of counterparties,” he said in an interview. “Nobody knew that, so they’re really shooting in the dark in terms of what the impact would be of Lehman not being saved and what would be necessary to save Lehman.”

Global Sprawl

By the middle of September 2008, it was too late to save the company, and when profits were rolling in it would have been too early, said Ron Feldman, senior vice president in charge of bank supervision at the Minneapolis Fed and co-author of “Too Big to Fail: The Hazards of Bank Bailouts,” published in 2004.

“When the firms are making a lot of money, it’s very difficult to tell them to stop doing certain things,” Feldman said in an interview. “That’s when all the risks are taken.”

Once losses are overwhelming, regulators may have trouble closing down businesses with depositors and creditors in far- flung places. Lehman was an international company based in New York, and people in cities as distant as Hong Kong lost their savings without any inkling their securities were linked to the investment bank.

Citigroup, the bank that has received the most support from the U.S. government, had $494 billion in deposits at foreign branches on June 30 compared with $317 billion in U.S. deposits, according to the company’s latest regulatory filing. That kind of global sprawl at Citigroup and other big financial institutions would make it difficult for U.S. authorities to wind them down.

Goldman Sachs

“Unless we get an internationally agreed-upon insolvency regime, which I cannot believe is ever going to happen in our lifetime, then you just can’t deal with it,” said Bradley K. Sabel, a partner at Shearman & Sterling LLP in New York who spent 18 years at the New York Fed.

Four U.S. companies -- Bank of America, JPMorgan Chase, Citigroup and San Francisco-based Wells Fargo & Co., which bought Wachovia Corp. eight months ago -- have grown to command 46 percent of the assets of all FDIC-insured banks, up from 37.7 percent a year ago. Bank of America, which agreed to acquire Merrill Lynch & Co. the day before Lehman filed for bankruptcy, has 13.3 percent of the total.

New York-based Goldman Sachs Group Inc., the world’s biggest securities firm before converting to a bank seven days after Lehman went under, ratcheted up its trading risks to a record in the first six months of this year, leading to a 67 percent jump in revenue from trading and principal investments over the same period last year. Goldman Sachs also has international reach, with more than 900 subsidiaries in places including the Cayman Islands, Mauritius, Panama and Liberia, according to an SEC filing for the year 2008.

Restoring Discipline

“Nothing has changed except that we have larger players who are more powerful, who are more dependent on government capital and who are harder to regulate than they were to begin with,” said Nomi Prins, who was a managing director at Goldman Sachs before leaving in 2002 and becoming a writer. “We’re in a far less stable environment.”

The ability to wind down big banks would help restore discipline, according to Deputy Treasury Secretary Neal S. Wolin.

“Special resolution authority would give the government the tools it needs to let firms fail in times of severe economic distress without destabilizing the entire financial system,” Wolin said.

The Treasury would also retain the power to save a company and turn to taxpayers to recapitalize it or pay creditors or shareholders, according to the Obama plan.

‘Permanent TARP’

That bothers Philip L. Swagel, an assistant Treasury secretary under Paulson and now an economics professor at McDonough School of Business at Georgetown University in Washington. He said the White House isn’t doing much to convince investors -- or executives -- that the next bank to wobble won’t be propped up too.

“Their answer is basically a permanent TARP,” Swagel said referring to the $700 billion Troubled Asset Relief Program.

One evening in Jackson Hole, central bankers and economists, sipping cocktails on a patio with a view of the Teton Range, talked about what was really worrying them, according to Gertler, the New York University professor. It was that politicians wouldn’t have the mettle to enact significant changes, he said.

“The broader concern was not so much shaping the details of the policy, but whether the legislation would die in Congress,” he said.

Bank Lobbying

The House Financial Services and Senate Banking committees began holding hearings on regulatory proposals before the August recess. Representative Barney Frank of Massachusetts, the Democrat who heads the House panel, has said it will consider the consumer agency first before moving on to other provisions. In the Senate, the entire package will be taken up as one bill, which is unlikely to reach the floor before next year.

Goldman Sachs, JPMorgan and Citigroup were three of the five biggest donors to federal candidates and political parties in last year’s election cycle, according to data compiled by the Center for Responsive Politics, a Washington research group.

Banking industry trade groups are pushing to kill the consumer agency, which they contend will make it impossible to offer the variety of loans and accounts that customers demand and deserve. Banks are also fighting the Treasury’s proposal to move the $592 trillion over-the-counter derivatives market onto clearinghouses and exchanges.

Capital Ratios

While pieces of the administration’s plan may help stave off future crises, the lesson of the Lehman collapse is that big, global financial institutions can create risks that even experienced regulators and bankers won’t always anticipate or understand, according to critics such as Christopher Whalen, managing director of Torrance, California-based Institutional Risk Analytics, which evaluates banks for investors.

At talks in London that concluded on Sept. 5, finance officials from the Group of 20 agreed that banks should be forced to hold more capital, raise the quality of assets they keep in reserve and curtail leverage. The Financial Stability Board, a committee of regulators based in Basel, Switzerland, will flesh out the details before leaders of G-20 countries, which include the U.S., Japan, China and members of the European Union, meet in Pittsburgh on Sept. 24.

“Our objective is to reach agreement by the end of next year on a new standard that will raise capital and liquidity requirements and dampen rather than amplify future credit and asset-price bubbles,” Geithner said in London.

Changing Behavior

The G-20 proposal doesn’t address the right issues, according to Institutional Risk Analytics’ Whalen.

Every big firm that got into trouble last year had a ratio of capital to risk-weighted assets exceeding government minimums, regulatory filings show.

Fifteen days before its bankruptcy, Lehman estimated its Tier 1 capital ratio was 11 percent, up from 10.7 percent at the end of May, the investment bank said in a Sept. 10, 2008, press release. SEC rules obliged Lehman to notify the agency if its total ratio, of which Tier 1 was just a piece, slipped under 10 percent or was expected to do so.

“It was the activities of the banks -- not their lack of capital -- that caused the problem,” Whalen said. “We have to change the behavior of these institutions, and higher capital requirements are not going to change their behavior.”

Some financial executives have applauded the Geithner proposals. Walid Chammah, co-president of Morgan Stanley, said at a banking conference this week in Frankfurt that he doesn’t believe breaking up banks is the right approach. Instead, they should be required to hold more capital and liquid assets.

‘Break the Power’

The White House proposals are meek compared with what the U.S. did under President Franklin Delano Roosevelt, according to Charles R. Geisst, a finance professor at Manhattan College in Riverdale, New York, and author of “Wall Street: A History.”

The Glass-Steagall Act of 1933 forced then-mighty J.P. Morgan & Co. to split in two, creating Morgan Stanley as a standalone investment bank.

Roosevelt’s effort was “antitrust legislation to break the power of the New York City money-center banks,” Geisst said. While today’s titans such as JPMorgan Chase and Goldman Sachs “have the same sort of influence, for some reason most people here do not want to alienate them.”

To contact the reporters on this story: Alison Fitzgerald in Washington at afitzgerald2@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

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Dollar Index Falls for Longest Run Since March on China Growth

By Yoshiaki Nohara and Ron Harui

Sept. 11 (Bloomberg) -- The Dollar Index fell for a sixth day, its longest losing streak since March, after reports showed China’s factory output and lending gained by more than economists estimated, spurring demand for emerging-market assets.

The euro rose to a nine-month high against the dollar on signs Europe’s recession is abating. The pound climbed to the strongest in a month versus the dollar before a U.K. report forecast to show producer prices gained a second month. The yen strengthened for a second day against the euro amid speculation Japanese exporters are repatriating earnings.

“Solid data in China show economic fundamentals are improving, weighing down on the dollar,” said Koji Fukaya, a senior currency strategist in Tokyo at Deutsche Bank AG. “Risk appetite is coming back.”

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, retreated to 76.675 as of 9:14 a.m. in London, from 76.817 yesterday in New York. The gauge earlier touched 76.511, the weakest level since Sept. 25, 2008.

The euro rose to $1.4589, from $1.4582. It earlier gained to $1.4627, the highest level since Dec. 18. The yen appreciated to 132.79 per euro, from 133.76. Japan’s currency was at 91.02 per dollar, from 91.73. It touched 90.68, the strongest since Feb. 13.

The pound appreciated to $1.6668, from $1.6651. It earlier touched $1.6742, the highest level since Aug. 7.

China Production, Lending

China’s industrial production expanded 12.3 percent in August from a year earlier, the statistics bureau reported today in Beijing. Economists surveyed by Bloomberg News forecast an 11.8 increase. New lending unexpectedly climbed in August and money supply rose by a record. Banks extended 410.4 billion yuan ($60.1 billion) of local-currency loans, up from 355.9 billion yuan in July, the People’s Bank of China said today.

German exports, adjusted for working days and seasonal changes, rose 2.3 percent in July from June, the Federal Statistics Office said in Wiesbaden on Sept. 8.

“The euro-zone economy is gradually recovering,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The euro will probably trade in a firm manner.”

‘Uptrend’

The euro is likely to climb toward $1.4719, a level that represents a 100 percent Fibonacci retracement from the six- month low of $1.2457 reached on March 4, said Masashi Hashimoto, a Tokyo-based senior analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. Daily momentum indicators such as the moving average convergence/divergence chart show buy signals for the euro against the dollar, he said.

“The euro is in an uptrend,” Hashimoto said yesterday. “The euro used to drop quickly following moderate gains in June and August, but its recent rally bucks that trend.”

The 16-nation currency may rise toward a resistance level of $1.4866 should the currency climb above $1.4719, Hashimoto said. Resistance is where sell orders may be clustered.

The pound was poised for a second weekly advance versus the dollar as the price of goods at U.K. factory gates climbed 0.3 percent in August, the same pace as in July, according to a Bloomberg News survey of economists. The Office for National Statistics will release the data today in London.

Rising Pound

“Sentiment is emerging that the recession in economies around the world, including the U.K.’s, is ending,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “Risk-taking appetite is benefiting the pound.”

The Bank of England yesterday held interest rates at 0.5 percent and kept its bond-buying program unchanged in a sign policy makers believe the economy is recovering. The decision by the BOE’s nine-member Monetary Policy Committee, led by Governor Mervyn King, was forecast by all 35 economists in another survey.

The yen advanced against all 16 major counterparts amid speculation Japanese companies are bringing back money earned abroad to take advantage of a tax break that went into effect this fiscal year.

“Japan’s exporters are bringing home their earnings, a typical move in September toward the end of the third quarter,” said Takashi Kudo, director of foreign-exchange sales at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “As a result, the yen is rising across the board.”

The Japanese government announced earlier this year that it would waive taxes on repatriated profits from April 1 to help support the economy. Under previous laws, companies had to pay a combined 40 percent tax on overseas earnings.

The dollar headed for a fifth weekly loss against the yen. If the dollar falls below the key psychological level of 90 yen, the greenback will be caught in a “downward spiral,” said Yoh Nihei, trading group manager at Tokai Tokyo Securities Co. in Tokyo. Declines in the dollar will cause a sell-off in shares of export-dependent companies in Japan, he said.

“As stocks decline, investors will buy Treasuries as a refuge,” Nihei said. “The resultant drop in yields will put more downward pressure on the dollar.”

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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Codelco to Stem Output Drop With $11 Billion Program

By Matthew Craze and James Attwood

Sept. 11 (Bloomberg) -- Codelco, the world’s largest copper producer, will boost output for the first time in five years as an $11 billion investment program revamps aging mines.

Production will increase by “at least” 120,000 metric tons, or about 8 percent more than last year’s 1.55 million tons, as the company produces for a full year at the Gabriela Mistral mine, Santiago Gonzalez, Chilean Mining Minister and chairman of state-owned Codelco, said in an interview.

Santiago-based Codelco is developing new deposits as metal runs out at mines including century-old Chuquicamata. Four years of falling output at Codelco, which produces about a 10th of the world’s copper, helped prices surge sixfold between 2003 and May 2008, when futures for the metal used in plumbing and wiring rose to a record $4.2605 per pound.

New Codelco supplies “will increase the likelihood of a medium-term pullback” in prices, Matthew Zeman, a trader at LaSalle Futures Group in Chicago, said in an interview yesterday. “That will add a little fuel to the fire.”

Zeman predicts prices may decline to $2.50 a pound. Copper futures fell 4.75 cents, or 1.6 percent, to $2.8765 a pound in New York yesterday as inventories rose in London Metal Exchange- monitored warehouses.

Stockpiles tracked by exchanges in London, New York and Shanghai have risen 17 percent this year to 452,541 tons as of yesterday, data compiled by Bloomberg showed. That was the highest since May 11.

Purchases by China, the world’s largest consumer, tumbled for a second month as stores of the metal rose. Imports plunged to 325,098 tons in August, the customs office said today. That’s 20 percent down from a month ago, according to Bloomberg data.

Gabriela Mine

Codelco’s production rose 15 percent in the first half of 2009 as the Gabriela Mistral mine boosted the company’s total.

Last year, Codelco’s contract workers went on strike at three of the company’s mines and mudslides curbed output at the El Teniente mine.

“If these events don’t reoccur then production should increase,” Gonzalez said yesterday in Santiago.

Chile’s total copper output may increase by between 3 and 5 percent this year because of gains at Codelco, Gonzalez said.

Gonzalez also said the government may increase its estimate for this year’s average copper price to about $2.16 a pound, from $1.95 currently, on Chinese purchases of the metal used in power cables and electrical wire.

Copper prices have more than doubled in 2009 as imports by China climbed to a record in the first half.

To contact the reporters on this story: Matthew Craze in Santiago at mcraze@bloomberg.net; James Attwood at jattwood3@bloomberg.net

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Billionaire Palmer Seeks Hong Kong Listing This Year

By Rebecca Keenan and Jesse Riseborough

Sept. 11 (Bloomberg) -- Clive Palmer, Australia’s fifth- richest man, expects to complete an initial public offering of his Resourcehouse mining group in Hong Kong by the end of the year to benefit from demand for resources in China.

“There is a big need in China for growth for resources,” Palmer said today in a phone interview from Perth. He said he’s still deciding what mining assets the IPO will include, and wouldn’t give a value.

Palmer, planning a A$7.5 billion ($6.5 billion) coal project and an iron ore mine, is seeking to take advantage of surging interest in IPOs in Hong Kong, on target for its busiest month for such shares sales since 2007. He may sell between $2 billion and $3 billion in shares, the South China Morning Post reported today, citing people it didn’t identify.

“It’s still a very, very big lick, it would need a lot of interest from China and Hong Kong to get behind it,” said Peter Arden, a Melbourne-based analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co. “The window for IPOs is opening.”

Australasian Resources Ltd., 66 percent owned by Palmer, advanced 4.4 percent to 47 cents at the 4:10 p.m. Sydney time close on the Australian stock exchange. The stock has risen 27 percent this year.

Soccer Club

Palmer, chairman of the closely held coal and iron ore company Mineralogy Pty., was the only person in the top-10 of Business Review Weekly Magazine’s annual rich 200 list whose wealth increased last year. Palmer’s fortune more than doubled to A$3.4 billion, according to the list that was published in May. He also owns the Gold Coast United soccer club.

China’s industrial production grew at a faster pace than forecast in August and new lending unexpectedly accelerated, indicating a strengthening recovery in the world’s third-biggest economy. Urban fixed-asset investment for the eight months to Aug. 31 climbed 33 percent, the statistics bureau said today.

“One thing that is clear is the Chinese are planning to move another 350 million people to the cities from rural areas and that is going to increase demand for commodities,” Palmer said.

Resourcehouse may include Queensland coal assets held by Palmer and joint venture partner state-owned China Metallurgical Group Corp., Palmer said. It’s unlikely to include the iron ore operations Palmer controls in Western Australia or the Yabulu nickel refinery he bought from BHP Billiton Ltd. in July.

Talks between Australasian and Chinese partner Shougang Corp. for financing of Palmer’s proposed A$2.7 billion iron ore project in Western Australia had not been successful, Perth- based Australasian said in July.

UBS, Macquarie

Funds from the proposed IPO, being managed by UBS AG and Macquarie Group Ltd., will be used to develop resources, he said.

Waratah Coal Inc., the joint venture that owns the coal projects in Queensland and is chaired by Palmer, signed an agreement in May with China Metallurgical to get funding for up to 70 percent of the project. Waratah will fund the remaining 30 percent, Palmer said then. Mineralogy bought Waratah last year for C$85.8 million ($80 million).

Palmer planned a A$5 billion IPO of his company Resource Development International Ltd., owner of iron ore, steel, nickel and energy assets, in July last year, aiming to be dual listed in Hong Kong and Australia. The proposal was shelved after an unsuccessful exploration campaign, he said today.

“The worry I see is that it’s possibly a bit early and my sense of what he’s trying to do, and it’s not a criticism of him, A$5 billion was a very big ask last time,” said Minnett’s Arden. “That’s where he ran into trouble.”

To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Jesse Riseborough in Melbourne at jriseborough@bloomberg.net.

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Gold Heads for Fourth Weekly Gain as Dollar’s Drop Fuels Demand

By Kim Kyoungwha

Sept. 11 (Bloomberg) -- Gold climbed above $1,000 an ounce for the third day this week, poised for a fourth weekly advance as a declining dollar bolsters demand for the precious metal as an alternative investment.

Bullion traded near the highest since March 2008 as deficit spending by governments around the world erodes the value of paper currencies relative to gold and commodities. Gold has risen 14 percent this year, while the Dollar Index, a six- currency gauge of the dollar’s value, shed 5.6 percent.

“Customers remain positive about the longer-term prospects for gold, but are concerned that following the recent run-up in gold that speculative positions are a little overblown,” John Reade, a strategist with UBS AG, wrote in a note.

Gold for immediate delivery rose as much as 0.7 percent to $1,003.10 an ounce, before trading at $1,001.20 at 2:33 p.m. in Singapore. The metal, which touched $1,007.70 an ounce on Sept. 8, the highest this year, closed last week at $994.40.

Holdings in the SPDR Gold Trust, the biggest exchange traded fund backed by bullion, were unchanged for a third day at 1,077.63 metric tons yesterday, according to figures on the company’s Web site.

To be sure, gold’s rally to more than $1,000 an ounce may not be sustainable, said Karen Jones, a technical analyst at Commerzbank AG, citing the metal’s relative strength index.

Gold’s relative strength index was above 70, a level that some investors and analysts use as an indication that prices are poised to fall.

Among other precious metals for immediate delivery, silver jumped 1.1 percent to $16.8450 an ounce, platinum added 0.4 percent to $1,288.75 an ounce and palladium added 0.7 percent to $293.50 an ounce.

To contact the reporter on this story: Kyoungwha Kim in Singapore at Kkim19@bloomberg.net

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China’s Steel Output Rises 22% to Record in August

By Bloomberg News

Sept. 11 (Bloomberg) -- Steel production in China, the world’s largest maker, jumped 22 percent to a record in August from a year earlier, as government spending spurred building and manufacturing demand.

Output reached 52.3 million metric tons last month, the National Bureau of Statistics said today in a briefing in Beijing. That’s 3.2 percent higher than the 50.7 million tons in July and is the fourth straight monthly gain, according to Bloomberg data.

China is spending 4 trillion yuan ($586 billion) to revive its economy, bolstering demand for steel used in cars, houses and railways. The rising production has led to an 18 percent decline in benchmark Chinese steel prices in the past five weeks.

Urban fixed-asset investment for the eight months ended Aug. 31 climbed 33 percent, the statistics bureau also said today. That was more than a 32.9 percent gain through July and the 32.7 percent median estimate in the survey of economists.

To contact the reporter on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

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Iron Ore Imports by China Drop 15% to a Six-Month Low

By Bloomberg News

Sept. 11 (Bloomberg) -- Iron ore imports by China, the world’s biggest buyer, dropped to the lowest level in six months as mills and traders cut purchases on declining steel prices.

China bought 49.7 million metric tons of the steelmaking ingredient in August, general customs said today on its Web site. Shipments were 15 percent lower than the 58.1 million tons in July, according to data compiled by Bloomberg.

Steel prices in China have fallen 18 percent in the past five weeks after an earlier gain spurred record production by mills including Baosteel Group Corp. Declining prices and iron ore imports may help the China Iron & Steel Association argue its case for lower ore prices from Vale SA, Rio Tinto Group and BHP Billiton Ltd.

“Steelmakers have been using their ore inventories instead of importing after steel prices fell,” said Hu Kai, a Shanghai- based analyst with industry publication Umetal.

Fortescue Metals Group Co., Australia’s third-largest iron ore exporter, fell 0.9 percent to A$4.22 in Sydney at 2:50 p.m. local time. Rival Murchison Metals Ltd. fell 3.2 percent to A$1.815.

Falling Prices.

Cash prices for iron ore delivered to China from India have fallen 26 percent to $82 a ton since August, according to Metal Bulletin prices for the week ended Sept. 4. Iron ore from Australia has fallen 28 percent since Aug. 13 to $76.1 a ton yesterday, according to the Steel Index.

Iron ore inventories at China’s major ports reached 76.5 million tons for the week ended Sept. 4, the highest level this year, according to data provided by Beijing Antaike Information Development Co.

For the first eight months, iron ore imports gained 32 percent to 405 million tons from a year ago, customs said.

Steel production rose 22 percent to a record 50.7 million tons last month, the National Bureau of Statistics said today, a fourth straight month of gains.

Steel-product exports from China were 2.08 million tons last month, the customs said. The shipment fell 68 percent to 13.2 million tons for the first eight months from a year ago, the customs said.

China became a net crude-steel importer for the first time in three years in March as the government’s 4 trillion yuan ($586 billion) stimulus spending spurred domestic demand even as exports collapsed.

--Helen Yuan. Editors: Tan Hwee Ann, Indranil Ghosh.

To contact the reporter on this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

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Japanese Stocks Decline on Slower Economic Growth, Stronger Yen

By Masaki Kondo

Sept. 11 (Bloomberg) -- Japanese stocks declined, led by car manufacturers and steelmakers, after the nation’s economy grew less than estimated in the second quarter and the dollar weakened against the yen.

Toyota Motor Corp., which gets 31 percent of its revenue in North America, slid 1.8 percent. Nippon Steel Corp., the world’s No. 2 maker of the alloy, fell 2.3 percent on concern the incoming government’s proposals to cut greenhouse gases will raise production costs. Haseko Corp., a condominium builder, tumbled 22 percent after saying it will sell convertible bonds.

“It has yet to be seen if the global economy will be able to stand on its own legs after the effects of inflated fiscal and monetary supports fade away,” said Hiroshi Morikawa, a senior strategist at MU Investments Co., which manages the equivalent of $14 billion in Tokyo.

The Nikkei 225 Stock Average lost 0.7 percent to close at 10,444.33 in Tokyo. The broader Topix index fell 0.8 percent to 950.41 after changing direction 13 times. This week, the Nikkei advanced 2.5 percent, and the Topix added 1.6 percent.

The Nikkei climbed for a sixth-straight month in August, the longest stretch of increases since the nine months ended January 2006, as stimulus measures globally propped up demand and company earnings. Stocks on the gauge trade at 6.8 times estimated cash flow, lower than 9.4 times for the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.

Japan’s economy expanded at an annual 2.3 percent pace in the three months ended June 30, the Cabinet Office said in Tokyo. Economists surveyed by Bloomberg News had forecast a 3.7 percent expansion, unchanged from the preliminary report.

Stronger Yen

Toyota, the world’s biggest carmaker, dived 1.8 percent to 3,840 yen and was the most actively traded stock by value. Closest domestic rival Honda Motor Co. lost 2.1 percent to 2,865 yen. Automakers as a group were the biggest drag on the Topix.

The yen appreciated to as much as 91.17 against the dollar before stock trading finished in Tokyo today, a level not seen since Feb. 13. A stronger yen reduces the value of overseas sales at Japanese companies when converted into their home currency.

“There are likely investors looking at the recent trend of the yen and imagining it continuing past 90,” said Tomomi Yamashita, a Tokyo-based fund manager at Shinkin Asset Management Co., which oversees about $5.5 billion. “They want to sell stocks while they still can.”

Nippon Steel lost 2.3 percent to 348 yen, and Daido Steel Co. slipped 2.7 percent to 358 yen. Yukio Hatoyama, whose Democratic Party of Japan won the national election by a landslide last month, pledged on Sept. 7 to cut Japan’s greenhouse-gas emissions 25 percent by 2020 from 1990 levels.

‘Huge’ Costs

Once enacted, the proposal will add “huge” costs to Japanese steelmakers as companies may have to take such measures as lowering production or buying carbon credits, Rajeev Das and Tomofumi Noguchi, analysts at Goldman Sachs Group Inc., wrote in a report yesterday.

Haseko tumbled 22 percent to 94 yen, the steepest plunge since August 2002 and the biggest loser on the Topix. The company yesterday said it will sell 15 billion yen ($165 million) of convertible bonds, prompting Credit Suisse Group AG to downgrade the stock to “neutral” from “outperform.”

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

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Lead Heading for Worst Week Since February on China Surplus

By Glenys Sim

Sept. 11 (Bloomberg) -- Lead slumped for a third day, heading for the worst week since February, on concern that supply may outpace demand this year in China, the world’s largest producer and consumer of the metal.

China is estimated to produce 3.14 million tons and consume 2.87 million tons of the metal this year, according to Feng Juncong, an analyst at state-backed researcher Beijing Antaike Information Development Co. The metal has more than doubled this year, and surged 12 percent last month on speculation that China’s crackdown on lead smelters after thousands of children were poisoned would cut production.

“The estimates from Antaike are bearish for a market which was already overextended,” Chen Yonglin, an analyst at CITIC Newedge Futures Co., said from Shanghai. “Prices had gone up too much too fast as investors overreacted to the poisoning.”

Lead for delivery in three months fell as much as 2.3 percent to $2,067 a ton and traded at $2,090 a ton at 1:51 p.m. in Singapore. The metal, which plunged 12 percent yesterday, has tumbled 9.2 percent this week.

“The speculative bubble in lead has finally burst as investors turn their attention to the fundamentals,” Zhu Bin, president of futures research at Nanhua Futures Co., said from Hangzhou.

The medium-term impact of China’s crackdown on the lead smelting and refining industry is expected to be negligible as new smelting capacity comes onstream in the next three to four years that will use more environmentally friendly technologies, Macquarie Group Ltd. analysts said Sept. 1.

China’s lead production expanded to 365,000 tons in August, from 345,000 tons in July, according to official data today. Global lead production was about 4.241 million tons in the first half of this year, in line with metal usage of 4.204 million tons, according to estimates from the International Lead and Zinc Study Group.

To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

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Asian Stocks Advance on China Economy Data; Japan Shares Fall

By Patrick Rial and Shani Raja

Sept. 11 (Bloomberg) -- Asian stocks rose and the MSCI Asia Pacific Index had its biggest weekly advance since July after Chinese economic data beat economist estimates. Japanese shares dropped on a worse-than-expected economic growth report.

Poly Real Estate Group Co., China’s second-largest developer by market value, advanced 3.3 percent in Shanghai after government reports showed industrial production and investment growth accelerated. Cnooc Ltd., China’s third-biggest oil company, rose 2.6 percent in Hong Kong as crude oil rose to the highest in more than a week. Dentsu Inc., Japan’s largest advertising agency, dropped 2.7 percent after the government revised economic growth figures lower and the yen strengthened.

The MSCI Asia Pacific Index added 0.3 percent to 117.55 as of 3:36 p.m. in Tokyo. It advanced 4.2 percent in the past five days, the most since the week ended July 24. The gauge has surged 60 percent in the past six months as economies recovered from the first global recession since World War II.

“There’s a lot of expectation priced in after the recent rally,” said Matt Riordan, who helps manage about $4.1 billion at Paradice Investment Management in Sydney. “Still, the economic data globally and earnings have tended to surprise on the upside.”

China’s Shanghai Composite Index rose 2.2 percent, while Hong Kong’s Hang Seng Index climbed 1.1 percent after the Chinese statistics bureau said industrial production increased 12.3 percent in August from a year earlier. Japan was the only market in Asia to drop, dragging the Nikkei 225 Stock Average down by 0.7 percent.

Oil Forecast

In Tokyo, IHI Corp., a Japanese maker of heavy machinery, gained 2.6 percent after Goldman Sachs Group Inc. said a return to profitability in its energy plant division indicates the shares are poised to rise. Nippon Electric Glass Co. climbed 2 percent after a rival lifted its sales outlook. KB Financial Group Inc. rose to a record in Seoul on a brokerage upgrade.

Futures on the Standard & Poor’s 500 Index slipped 0.1 percent. Treasuries declined, sending the yield on the 10-year note up by two basis points, before an industry report that economists predict will show U.S. consumer confidence improved for the first time in three months.

The S&P 500 added 1 percent yesterday after the Labor Department reported the number of Americans filing first-time claims for unemployment benefits dropped more than economists had estimated. Treasury Secretary Timothy Geithner also said the government is preparing to withdraw some of its support for financial markets.

China’s Premier Wen Jiabao signaled he will maintain unprecedented government spending because China’s economic rebound “is unstable.” The Shanghai Composite Index has climbed 61 percent this year amid surging loan growth.

Chinese Economy

Poly Real Estate advanced 3.3 percent to 25.73 yuan. Hitachi Construction Machinery Co., which generated the largest portion of its revenue from China last quarter, gained 2.6 percent to 1,996 yen. Gome Electrical Appliances Holdings Ltd., China’s second-biggest electronics retailer by market value, jumped 2.7 percent to HK$2.30 in Hong Kong.

The climb in August industrial production was higher than the 10.8 percent increase the previous month and beat the 11.8 percent estimate of economists surveyed by Bloomberg News. Urban fixed-asset investment for the eight months to Aug. 31 rose 33 percent. Economists in the survey expected 32.7 percent.

“It’s positive news overall,” Liu Hong, Shanghai-based senior portfolio manager at Fortis Haitong Investment Management Co., which oversees about $7.9 billion in assets. “Most of the data is better than expected.”

Oil Demand

China Mobile Ltd., the world’s largest mobile phone operator by subscribers, rose 2.3 percent to HK$81.45 after the company’s chairman said the company is already working on selling shares on the mainland stock market.

Cnooc rose 2.6 percent to HK$11.06, while PetroChina Co., China’s largest oil producer, gained 2.1 percent to HK$9.23. In Sydney, Santos Ltd., Australia’s No. 3 oil and gas producer, added 1.5 percent to A$15.88.

The International Energy Agency increased its 2010 estimate for global demand because of stronger sales in North America and China, helping crude oil futures to advance 0.9 percent to the highest settlement since Aug. 28.

The MSCI Asia Pacific climbed for a sixth-straight month in August, the longest stretch of gains since the 10 months ended July 2007. Stocks on the gauge are priced at an average 1.6 times book value, up from 1 at the index’s low in March, according to Bloomberg data.

Volatile Markets

Greater-than-expected profit reports have fueled the rally. Among the 642 companies on the MSCI Asia Pacific Index that reported quarterly net income in the past two months, 35 percent have beaten analyst estimates, while 21 percent have missed.

“The market has been a bit volatile lately, but some of the big money managers are increasingly putting money in, so there’s a firm bottom under it,” said Hiroaki Kuramochi, head of equity sales at Tokai Tokyo Securities Co.

Dentsu fell 2.7 percent to 2,140 yen. Nissan Motor Co., the nation’s third-largest automaker, lost 2.7 percent to 615 yen. Japan’s Cabinet Office reported today that the country’s economy grew at a 2.3 percent annual rate in the second quarter, lower than the 3.7 percent expansion originally estimated.

Stocks also fell as the yen strengthened to as much as 91.24 versus the dollar, the highest since February, depressing the local value of Japanese companies’ overseas sales.

“It has yet to be seen if the global economy will be able to stand on its own legs after the effects of inflated fiscal and monetary supports fade away,” said Hiroshi Morikawa, a senior strategist at MU Investments Co., which manages the equivalent of $14 billion in Tokyo.

Government Support

Haseko Corp., one of Japan’s largest construction companies, tumbled 22 percent to 94 yen, the biggest plunge since 2002, after saying it will issue moving-strike convertible bonds, prompting Credit Suisse Group AG to cut the shares to “neutral” from “outperform.”

IHI rose 2.6 percent to 196 yen. Kunio Sakaida at Goldman Sachs lifted the stock’s target price by 16 percent to 220 yen, as the risk of losses in its energy plant business are diminishing, while the company’s nuclear and natural gas businesses have a strong medium-term outlook.

Nippon Electric Glass, the world’s third-biggest maker of glass for flat-panel televisions, jumped 2 percent to 956 yen. Rival Asahi Glass Co. added 2.1 percent to 780 yen.

Corning Inc., the world’s biggest maker of glass for liquid-crystal display panels, said yesterday fourth-quarter orders probably will be stronger than forecast as sales of flat- screen television pick up in the U.S. and Japan.

KB Financial added 4.1 percent to 58,800 won. The owner of South Korea’s biggest bank was lifted to “outperform” from “neutral” by Macquarie Group Ltd.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.

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U.K. Stocks Rise, Extending Weekly Gain; BHP, Rio Tinto Climb

By Adam Haigh

Sept. 11 (Bloomberg) -- U.K. stocks climbed, extending their weekly advance, on speculation equities have yet to price in fully a recovery in the economy and growth in earnings.

The benchmark FTSE 100 Index added 29.09, or 0.6 percent, to 5,016.77 as of 8:33 a.m. in London, bringing this week’s increase to 3.4 percent. The FTSE All-Share Index climbed 0.6 percent today and Ireland’s ISEQ Index rose 1 percent.

Earnings at companies from Goldman Sachs Group Inc. to Roche Holdings AG and an unexpected return to growth in the French and German economies have boosted global stock markets since March. The FTSE 100 has soared 43 from its low on March 3.

“With earnings momentum likely to strengthen further as economic conditions continue to improve, equity returns are, in our view, also likely to strengthen further,” Darren Winder and Robert Griffiths, U.K. equity strategists at JPMorgan Cazenove, wrote in a report dated yesterday. “Our stance on equities therefore remains positive.”

The six-month rally has pushed the FTSE 100’s price-to- earnings ratio to 76, the most expensive level in seven years, according to data compiled by Bloomberg based on reported results.

BHP Billiton, the world’s largest mining company, added 1.8 percent to 1,695.5 pence. Rio Tinto, the third biggest, gained 1.8 percent to 2,590 pence.

China’s industrial production rose at a faster pace than forecast in August and new lending unexpectedly climbed, indicating growth in the world’s third-biggest economy is likely to accelerate.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net.

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European, Asian Stocks Advance on Economic Reports From China

By Sarah Jones

Sept. 11 (Bloomberg) -- European and Asian stocks rose, sending the MSCI World Index higher for a seventh day, as Chinese economic data that exceeded estimates and increased forecasts for oil demand bolstered the earnings outlook for commodity producers.

Total SA climbed for a sixth straight day and BHP Billiton Ltd. gained 1.5 percent as crude and copper advanced and reports showed industrial production and investment growth in China accelerated. Axa SA and Old Mutual Plc rose more than 1.7 percent after Bank of America Corp. upgraded the insurers.

The MSCI World of 23 developed countries gained 0.4 percent at 8:12 a.m. in London, while Europe’s Dow Jones Stoxx 600 Index advanced 0.6 percent. The regional gauge has climbed 3.4 percent this week, the biggest advance since July. The rally has driven valuations on the index to 46.4 times profit, the highest level since 2003, weekly Bloomberg data show.

U.S. stocks capped a five-day rally yesterday, the longest streak for the Standard & Poor’s 500 Index since November, as the International Energy Agency said China’s consumption and stronger-than-estimated oil use in the U.S. will boost demand. Treasury Secretary Timothy Geithner also said the government is preparing to withdraw some of its support for financial markets as it moves from “crisis response to recovery.”

U.S. Futures

Futures on the S&P 500 were little changed today, while the MSCI Asia Pacific Index gained 0.3 percent. China’s Shanghai Composite Index rose 1.8 percent after the statistics bureau said industrial production rose 12.3 percent in August, up from the previous month.

Total added 0.4 percent to 41.90 euros as crude oil for October delivery increased as much as 0.6 percent to $72.38 a barrel in New York.

World oil demand is likely to average 85.7 million barrels a day next year, according to a monthly report from the IEA. That’s 450,000 barrels a day more than estimated in August.

BHP, the world’s largest mining company, added 1.5 percent to 1,689.5 pence and Rio Tinto Group, the third-biggest, increased 1.7 percent to 2,587 pence. Copper and tin climbed on the London Metal Exchange.

ArcelorMittal, the world’s largest steelmaker, increased 1.7 percent to 26.43 euros after Steel Dynamics Inc., the third biggest U.S. steelmaker, said third-quarter profit will be higher than the company forecast in July, helped by strong orders for flat-rolled steel.

ThyssenKrupp AG, Germany’s biggest steelmaker, gained 1 percent to 24 euros.

Axa advanced 2.6 percent to 17.05 euros after Bank of America raised Europe’s second-largest insurer to “buy” from “neutral.” Old Mutual added 1.7 percent to 94.75 pence. Bank of America upgraded the biggest insurer in Africa to “neutral” from “underperform.”

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

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Mexico Equity Bears Capitulate as JPMorgan Sees 16% Bolsa Rally

By Alexander Ragir and Michael Patterson

Sept. 11 (Bloomberg) -- Traders who bet against Mexican equities in record numbers two months ago are closing out their positions as Latin America’s second-largest economy heads for the steepest recovery worldwide.

The amount of borrowed shares in the 10 biggest Mexican companies dropped last week to the lowest level this year, according to New York-based Data Explorers, which follows trading by more than 100 securities-lending firms and 20,000 funds. Data Explorers estimates most of the stock loans are used in short sales, when traders borrow shares and sell them to profit from a decline by buying them back at a lower price.

Emerging Markets Management LLC and Deltec Asset Management say Mexican equities are cheap next to U.S. stocks. JPMorgan Chase & Co.’s Latin America research team sees the Bolsa index to rising 16 percent by yearend. Billionaire Carlos Slim said this week that Mexico’s worst slump since the 1930s has bottomed. The International Monetary Fund estimates the country’s gross domestic product will grow 3 percent in 2010 after shrinking 7.3 percent this year, the widest swing in the world’s biggest economies.

“The valuations look quite good,” said John Ditierri, a money manager at Arlington, Virginia-based Emerging Markets Management who helps oversee about $11 billion in equities. “Any kind of recovery is going to help Mexico.”

Banorte, Walmex

Shares on loan for Grupo Financiero Banorte SAB, the nation’s biggest publicly traded lender, dropped 39 percent since July, Data Explorers figures show. The amount slid 53 percent for Wal-Mart de Mexico SAB, Latin America’s largest retailer. Short interest in the U.S.-traded iShares MSCI Mexico Investable Market Index Fund declined 39 percent from a July record, New York Stock Exchange data show.

The Bolsa Index trades at a lower valuation than the Standard & Poor’s 500 Index and the MSCI Emerging Markets Index, though analysts forecast profits at Mexican companies will climb 9.8 percent this year while those in the U.S. and developing nations decline. A rebound in demand from the U.S., which buys 80 percent of Mexico’s exports, led Barclays Capital and BNP Paribas SA analysts to predict last month that the worst is over for the nation’s economy.

The Bolsa rose to the highest level since June 2008 yesterday, gaining 0.8 percent to 29,318.42. The 35-company index climbed for six consecutive months through August, the longest stretch of gains since January 2007.

Swine Flu, Deficit

The gauge’s 31 percent advance this year trails a 67 percent rally for the MSCI EM Latin America Index, a 56 percent increase for MSCI’s global emerging markets index and a 56 percent gain for the Bovespa index of shares in Brazil, Latin America’s biggest economy. The S&P 500 climbed 16 percent this year and China’s Shanghai Composite Index, a benchmark for companies in the biggest developing economy, added 61 percent.

The Bolsa lagged behind other indexes as Mexico’s economy shrank 10.3 percent last quarter from a year earlier and an outbreak of swine flu contributed to a 10.6 percent drop in industrial output in June. S&P said in May it may lower Mexico’s BBB+ credit rating, the third-lowest investment grade, should President Felipe Calderon fail to rein in the budget deficit. His 2010 plan cuts spending by 218 billion pesos ($16.3 billion), the Finance Ministry said this week.

Worsening violence in Mexico also weighed on stocks. El Universal newspaper reported that 4,881 people died this year as a result of organized crime as of Sept. 5.

‘Too Tame’

“The narco-trafficking situation is worrisome, the possibility of swine flu to have another big impact on Mexico is there,” said William Landers, who oversees about $6 billion in Latin America stocks at BlackRock Inc. in Plainsboro, New Jersey, and is “underweight” Mexican shares. “The discussions of the budget also aren’t going to be easy.”

Calderon’s budget proposal is “too tame” to avoid a credit- rating cut, UBS AG said in a report to clients on Sept. 9.

“There are other places more attractive” in Latin America, said Martin Herbon, who helps oversee about $900 million at Geneva-based Union Capital Group SA and prefers shares in Brazil and Peru, where the Lima General Index has climbed 104 percent this year.

Stock on loan for Monterrey-based Banorte climbed to 2.2 percent of shares outstanding in July from 1.4 percent at the beginning of 2009 as speculators stepped up bets the economic slump would increase credit losses. The shares have gained 31 percent the past two months, bringing the year-to-date advance to 67 percent.

Walmex Rally

Mexico City-based Wal-Mart de Mexico has jumped 26 percent since July 10, burning traders who had borrowed and sold about 1.2 percent of the shares outstanding. Morgan Stanley, Credit Suisse AG, Bank of America Corp. and Citigroup Inc. upgraded the company since mid-July after second-quarter earnings topped analysts’ estimates.

Declines in short interest foreshadowed previous rallies. The Bolsa index jumped by an average of 33 percent in the 12 months following monthly drops of at least 20 percent in short interest on the iShares Mexico fund, according to data compiled by Bloomberg since 2000.

The iShares fund had average daily volume of $146 million in the past three months, compared with $420 million on the entire Mexico Stock Exchange, Bloomberg data show.

Brazil Short Sales

The iShares MSCI Brazil Index Fund, which holds Brazilian shares and trades on the NYSE, has had a 33 percent jump in short interest since mid-July. Stock on loan rose for a sixth month in August to a one-year high of 25.9 billion reais ($14.3 billion), according to the country’s clearing and depository corporation known as CBLC.

Short sales in Mexico climbed to 78.2 million shares in July, the highest since at least January 2007, according to data from Bolsa Mexicana de Valores SA. Alberto Maya Sánchez, a spokesman for the exchange, said short-sale data for August isn’t available yet.

JPMorgan, voted the best Latin America research firm this year in Institutional Investor magazine’s annual poll of money managers, made Mexico its “top pick” among Latin American stocks last month. Ben Laidler, the New York-based head of Latin America equity research, predicts the Bolsa will rise to a record 34,000 by December and says the market is valued at 13.3 times analysts’ earnings estimates for next year, below the five-year average of 15.6.

Cheaper Valuations

The Bolsa trades for 18.5 times the reported profit of its companies during the past 12 months, compared with 20 times for MSCI’s global emerging-markets gauge and 19.3 times for the S&P 500, according to Bloomberg data. Earnings growth in Mexico may accelerate to 19 percent next year as the economy recovers, JPMorgan said.

Slim, 69, the world’s third-richest man and controlling shareholder of Mexico City-based Telefonos de Mexico SAB, said Sept. 7 that the economy’s “greatest decline happened in the second quarter.”

“For the rest of the year, Mexico could be an outperformer,” said Cristian Moreno, a Banco Santander SA strategist in New York who raised the nation’s stocks to “overweight” from “underweight,” according to an Aug. 26 research note.

The disparity between Mexico’s stock performance and other Latin America stocks, combined with prospects for a U.S. economic rebound makes the market attractive, said Greg Lesko, head of equity at Deltec.

“The Mexico call makes a lot of sense,” said Lesko, who helps manage $625 million in New York and has been adding to holdings of Mexican shares. “As the U.S. recovers, some of the more dramatic turns will take place in Mexico.”

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net.

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Abbott, Morgan Stanley, Plum Creek, Quidel: U.S. Equity Preview

By Lu Wang

Sept. 11 (Bloomberg) -- Shares of the following companies may have unusual moves in U.S. trading. Stock symbols are in parentheses.

Abbott Laboratories (ABT US): The drug company said it agreed to buy Evalve Inc., the maker of heart valve repair devices, for as much as $410 million.

Morgan Stanley (MS US): John Mack, the company’s chairman and chief executive officer for more than four years, will hand off his CEO duties at the end of the year to Co-President James Gorman.

National Semiconductor Corp. (NSM US): The company, whose chips control power in electronic devices, reported a 63 percent drop in profit last quarter as the recession crimped orders.

Plum Creek Timber Co. (PCL US): The forest-products company was upgraded to “neutral” from “underperform” at Credit Suisse Group AG, which said the stock is no longer overvalued.

Quidel Corp. (QDEL US): The maker of tests for pregnancy and infectious diseases said it expects record revenue and operating profit in the third quarter on strong demand for flu products.

Steel Dynamics Inc. (STLD US): The third-largest U.S.-based steelmaker by sales boosted its forecast, saying it expects to earn at least 20 cents a share in the third quarter.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

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