Aussie Dollar Channeling Yuan Shows More China Trade

By Candice Zachariahs and Wes Goodman

Nov. 2 (Bloomberg) -- Australia’s dollar is heading toward parity with the U.S. currency for the first time as investors hungry for China’s economic growth buy into the world’s biggest exporter of iron ore used in making steel.

The so-called Aussie has soared 35 percent the past 12 months, more than any other currency tracked by Bloomberg. Citigroup Inc., Calyon, Barclays Capital and National Australia Bank Ltd. forecast it will trade at 1 U.S. dollar next year, implying an additional 11 percent gain. Hedge funds and other large traders have more bets than anytime since July 15, 2008, that the rally will continue, data from the Washington-based Commodity Futures Trading Commission show.

China expanded 8.9 percent in the third quarter, the fastest pace in a year, fueling demand for Australia’s exports of iron ore, wool, coal and wheat. Reserve Bank of Australia Governor Glenn Stevens last month became the first Group of 20 policy maker to raise interest rates this year to curb inflation. He will increase them again tomorrow, according to all 22 economists surveyed by Bloomberg News.

“Australia will benefit from its trade relationship with Asian economies, especially China,” said Masataka Horii, one of four investors for the $48 billion Kokusai Global Sovereign Open, Asia’s biggest bond fund. “They export iron, gold, copper -- everything that China wants to buy. Domestically, Australia is very healthy. The central bank may continue to raise rates.”

Raising Holdings

Kokusai Global Sovereign increased its holdings of Australian dollar-denominated securities to a record 8.8 percent of assets this year from 1.1 percent at the end of 2008, according to Horii.

While the yuan has remained almost unchanged at about 6.83 to the dollar since July 2008, trading in some Australian financial markets has increased. Monthly volume in three-year bond futures, the most active contract on the Sydney Futures Exchange, reached 2,824,442 contracts in June, the most since September 2008, when the collapse of Lehman Brothers Holdings Inc. led investors to flee currencies such as the Aussie.

Stevens raised the overnight cash rate target to 3.25 percent from 3 percent in Sydney on Oct. 6, and will boost it to 3.5 percent when policy makers meet tomorrow, according to 18 of 22 economists surveyed by Bloomberg News. The remaining four expect a 0.5 percentage-point increase.

‘Imprudent’ Policy

In lifting rates last month, Reserve Bank policy makers concluded that a “very expansionary setting of policy was no longer necessary, and possibly imprudent,” according to minutes of the meeting. Gains in the dollar “may help contain inflation,” they said.

Australia’s economy will grow 1.5 percent in the 12 months ending June 30, 2010, compared with a May prediction of a 0.5 percent contraction, Treasurer Wayne Swan told reporters today in Canberra. The central bank is due to publish revised economic forecasts on Nov. 6.

Swaps traders are betting the benchmark rate will increase almost 2 percentage points over 12 months, according to a Credit Suisse Group AG index. Federal funds futures indicate a better than 50 percent chance the U.S. central bank will raise its key rate to 1 percent from its current range of zero to 0.25 percent, allowing traders to continue to borrow in the U.S. and invest the money in nations such as Australia with higher rates.

‘Go Above $1’

“The Aussie will go above $1 and probably stay there for a while,” said Dale Thomas, head of currencies in London at Insight Investment Management Ltd., which oversees about $195 billion. “The RBA in their speeches are just acknowledging the facts of life: The nature of what Australia does has changed, it’s an Asian economy now. It’s a commodity producer to Asia, not an agricultural product producer to the U.K., which it was 30 years ago.”

The U.K. relinquished its post as Australia’s biggest export market in the mid-1960s and is the fifth-largest buyer of the nation’s overseas shipments this year, government data show.

Exports account for about a fifth of the economy, which has expanded this year after shrinking in the three months ended Dec. 31, the first contraction since 2000. Australia is the world’s biggest iron-ore supplier and the International Wool Textile Organization in Brussels says the country is the globe’s largest producer. It also sells gold, crude oil, coal and wheat.

China, the world’s fastest-growing major economy, is Australia’s second-biggest trading partner, accounting for 13 percent of total trade in 2008, Foreign Minister Stephen Smithsaid Oct. 26. The nation’s 4 trillion-yuan ($586 billion) stimulus package has sparked record imports of iron ore, which grew to 64.55 million tons in September from 32.65 in January, according to the China General Administration of Customs.

Rally Interrupted

China’s manufacturing expanded at the fastest pace in 18 months in October. The Purchasing Managers’ Index rose to a seasonally adjusted 55.2 this month from 54.3 in September, the Federation of Logistics and Purchasing said yesterday in an e- mailed statement in Beijing.

“Australia’s trade links with Asia, and in particular China, have been an important factor,” in keeping the economy from entering recession, Reserve Bank of Australia Assistant Governor Philip Lowe said in an Oct. 19 speech in Sydney.

While Australia’s dollar depreciated 2.5 percent last week it traded at 90.07 U.S. cents as of 11:30 a.m. in Tokyo, up from 66.78 U.S. cents a year ago. Its performance is the best of any of the 171 currencies tracked by Bloomberg. On Oct. 16, Westpac Banking Corp., Australia’s largest lender, raised its year-end forecast to 98 U.S. cents from 88 U.S. cents. Strategists at New York-based Goldman Sachs Group Inc. said Oct. 29 they are targeting 95 U.S. cents.

Inflation Outlook

“We continue to like the Australian dollar and see it as one of the clearest beneficiaries of the commodities-price outlook, on which we remain constructive,” the Goldman strategists, including Thomas Stolper in London, said in a report.

Stevens is banking on a combination of a rising Australian dollar and higher interest rates to curb inflation.

Core inflation in Australia was at 3.8 percent in the third quarter, fueled by electricity and gasoline costs, based on the central bank’s weighted-median measure. The Reserve Bank aims to keep increases to between 2 percent and 3 percent.

The appreciating Aussie may be starting to drive business away from the nation. Warner Bros. decided in October to abandon shooting its “Green Lantern” superhero movie in Sydney, according to a statement from Screen NSW, which cited “fluctuations in currency valuation.”

Hurting Earnings

Chris Pidcock, a strategist at Goldman Sachs JBWere Pty., the affiliate of the world’s most profitable securities firm based out of Sydney and Melbourne, estimates about 35 percent of publicly traded Australian companies are affected by the Aussie’s gains.

Sims Metal Management Ltd., the world’s biggest recycler of scrap metal, said in its annual report that each 10 percent increase in the Aussie reduces post-tax profit by A$3.8 million ($3.42 million). Sims had a A$150 million after-tax loss in fiscal 2009 ended June 30. BlueScope Steel Ltd., Australia’s largest steelmaker, said in August that it swung to a loss of A$473 million in the six months ended June 30 in part because of the stronger Australian dollar.

Morgan Stanley calculated in an Oct. 29 report to clients that Australia’s dollar is 36 percent overvalued, more than any other Group of 10 currency. The firm said gains may be “capped” at 94 U.S. cents, with any appreciation above that putting the Aussie in “unprecedented overvaluation” territory.

Government officials show little concern. Swan said Oct. 14 that the country’s floating exchange rate is “one of those facts of economic life that comes in an international economy.”

Canada’s Concern

Australia’s tolerance of a stronger currency contrasts with governments and central bankers from Canada, Europe, Brazil, Colombia, South Korea and New Zealand. They have voiced concern and some implemented policy measures to restrain the strength of their legal tender against the U.S. dollar.

Mark Carney of the Bank of Canada warned Oct. 20 that the economic recovery was threatened by a stronger Canadian dollar, spurring the biggest decline in the currency in four months.

Brazil’s real dropped after Luiz Inacio Lula da Silva’s government said it would impose a 2 percent tax on foreign purchases of stocks and bonds to curb this year’s best- performing currency after the Seychelles rupee.

There are few hurdles for the Aussie to trade at the same level as the U.S. dollar for the first time in history, according to David Forrester, a currency economist in Singapore at Barclays. The firm forecast Oct. 16 that the Aussie will reach parity in six months.

Testing Parity

The central bank’s approach “creates a path of least resistance in terms of policy makers and currency strength,” Forrester said.

Australia’s dollar tested parity last year, peaking at 98.50 on July 15, 2008, the strongest since it began trading freely in 1983. It then tumbled 29 percent through the end of that year as Lehman’s collapse froze credit markets and prompted investors to dump all but the safest government assets, such as U.S. Treasuries.

Strategists are having a hard time keeping up with the currency’s rally. The median of 36 estimates in a Bloomberg News survey is for it to end the year at 90 cents. The forecast has increased every month since March.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the Australian dollar compared with those on a drop -- so-called net longs -- was 53,990 on Oct. 20, before easing back to 52,887 on Oct. 27, CFTC data based on contracts at the Chicago Mercantile Exchange show. That compares with net shorts of 19,462 in September 2008.

“Critical markets like China, South Korea, East Asia, India and so on are still exhibiting the requisite strength to underpin the fundamentally positive story about the Aussie dollar,” said Stephen Miller, a managing director in Sydney at BlackRock Inc., which oversees $1.4 trillion.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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Bovespa Index to Rise to 67,000, Credit Suisse Says

By Shiyin Chen

Nov. 2 (Bloomberg) -- Brazil’s Bovespa index may climb to 67,000 by the end of the year, helped by the outlook for earnings, an “attractive” valuation and the impact of the global economic recovery, Credit Suisse Group AG said.

The forecast is higher than an August estimate of 64,500, according to Credit Suisse analysts including Emerson Leite. The analysts added that they are turning “increasingly cautious” on Mexican shares, citing fiscal reform voting, a potential downgrade in the country’s sovereign debt and the market’s valuations.

Credit Suisse’s forecast represents a further gain of 8.8 percent in the Bovespa, which has already rallied 64 percent this year on expectations that a recovery will boost demand for commodities and spur an earnings rebound. That has outpaced a 59 percent gain in the MSCI Emerging Markets Index and a 28 percent increase in Mexico’s Bolsa Index.

“Since we set our target back in August, our aggregate earnings expectations for the Bovespa in 2010 and 2011 rose by some 4 percent,” the analysts wrote in the report dated Oct. 30. “We remain above consensus for 2010 earnings and continue to see upside risk.”

Even after its gains this year, the Bovespa is valued at about 15.5 times reported earnings, in line with the MSCI Emerging Markets Index’s multiple of 15.6 times.

‘Still Low’

The Brazilian benchmark index may top 85,000 by the middle of next year because valuations are “still low,” Goldman Sachs Group Inc. said on Oct. 26. Brazil’s share valuations are not an “impediment” to further gains, JPMorgan Chase & Co. said in a note last week.

“Although multiples look rich versus historical levels, we highlight that the cost of capital is now close to record low levels in Brazil,” the Credit Suisse analysts said. “The spread between the Bovespa’s earnings yield and interest rates also seems attractive.”

Banks, airlines and property stocks are among industries in Brazil where the brokerage has an “overweight” recommendation.

In Mexico, Credit Suisse increased its “overweight” on wireless shares and raised its recommendation for beverage stocks to “overweight” from “market weight.” It upgraded retail companies to “market weight” from “underweight,” according to the report.

The brokerage also downgraded homebuilders and conglomerates to “underweight” from “overweight” and lowered its rating on banks to “underweight” from “market weight.”

Mexico’s lower house of congress yesterday approved increases to sales tax and income tax to boost public revenue amid a recession and declining oil production. The country has a “long way to go” in its efforts to strengthen the economy by reining in its budget deficit and boosting investment in the oil industry, said Tony Garza, former U.S. ambassador to Mexico.

“The Bolsa is vulnerable to a relatively disappointing performance towards 2010,” the Credit Suisse analysts said, adding that they were retaining their year-end forecast of 30,000 for the index.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net

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Baoshan Steel Says Low Prices to Hurt Quarter Profit

By Bloomberg News

Nov. 2 (Bloomberg) -- Baoshan Iron & Steel Co., China’s largest steelmaker, said its fourth-quarter profit will be affected by falling prices and it plans to shutter mills for annual maintenance.

Chinese steelmakers have slashed prices because of oversupply and higher inventories, Vice President Chen Ying told investors today in an online conference. The Shanghai-based mill said it may cut product sales by 200,000 metric tons in the fourth quarter from the previous three months because of maintenance plans.

“Steel prices have fallen significantly in the fourth quarter and we will arrange annual maintenance, leading to less output than the third quarter,” General Manager Ma Guoqiang said at the same conference.

Benchmark Chinese steel prices have fallen 20 percent from a 10-month high on Aug. 4 as production overwhelmed demand fueled by the nation’s 4 trillion-yuan ($586 billion) stimulus spending. Angang Steel Co., posting the best quarterly profit in a year, last month forecast that its earnings this quarter will be below the third quarter.

Baoshan Steel rose 2.3 percent to 7 yuan in Shanghai trading. The conference started after the market closed.

Baoshan Steel may post earnings per share of 0.13 yuan in the fourth quarter, according to the mean estimate of three analysts compiled by Bloomberg, down 24 percent from the 0.17 yuan for the three months ended Sept. 30. Baoshan’s third- quarter profit was its highest in five quarters.

Normal Orders

“The weakness in steel pipes and heavy plates demand, as well as the annual maintenance would affect our output and profit in the fourth quarter,” said Chen.

The mill won “normal” order levels for November, Chen said. Its stainless steel unit posted a profit in the third quarter, though earnings will be affected in the current quarter by lower prices and rising material costs, she also said.

Losses for its heavy plate and specialty steel business narrowed in the third quarter, the company said today.

Baoshan has cut monthly prices twice since September. Hebei Iron & Steel Group, China’s second-biggest mill, and Jiangsu Shagang Group Co. have also dropped prices.

Baoshan Steel will derive a higher proportion of its output from cold-rolled steel and pipes in the next two years, General Manager Ma said. Cold-rolled steel is the company’s most profitable product.

The company is targeting annual sales of 145.7 billion yuan for 2009, Ma said.

--Helen Yuan. Editors: Tan Hwee Ann, Wendy Pugh.

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

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Rubber Tumbles Most in 7 Weeks as Economic Recovery May Falter

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By Aya Takada

Nov. 2 (Bloomberg) -- Rubber slumped by the most in seven weeks as a drop in U.S. consumer spending and the bankruptcy of CIT Group Inc. stoked concern that an economic recovery may falter, curbing demand for the commodity used in tires.

Futures in Tokyo settled down 3 percent, the largest daily loss since Sept. 14. New-York based CIT Group, a 101-year-old commercial lender, filed for bankruptcy on Nov. 1 after a U.S. bailout and debt exchange offer failed. Americans cut spending 0.5 percent in September, the first decline in five months, the Commerce Department reported Oct. 30.

“Investors reduced holdings of equities and commodities as they question a rosy scenario that global economic growth may accelerate,” Kazuhiko Saito, chief analyst at commodity broker Fujitomi Co. in Tokyo, said today by phone. “Rubber was sold together with oil and other industrial commodities.”

April-delivery rubber fell as much as 4.5 percent to 220.8 yen a kilogram ($2,453 a metric ton) on the Tokyo Commodity Exchange before settling at 224.3 yen, the lowest closing price since Oct. 19. The price gained 18 percent in October, the largest monthly gain since July.

Futures trimmed losses after data showed Japan’s auto sales grew 13 percent in October from a year earlier, the third straight month of expansion.

Sales of cars, trucks and buses, excluding minicars, rose to 263,506 vehicles in October, the Japan Automobile Dealers Association said in a statement today. Toyota Motor Corp. and Honda Motor Co., Japan’s two biggest automakers, led the growth.

Auto Sales

Auto sales in Japan reversed a yearlong slide in August as government rebates and tax cuts for fuel-efficient vehicles helped lift demand for Toyota’s Prius and Honda’s Insight hybrid cars. Honda almost tripled its full-year profit estimate last week and raised its forecast for domestic vehicle sales to 665,000 from 635,000, citing the stimulus effect.

“Japanese car sales were positive, but auto data from the U.S. tomorrow may not be as good as Japan,” Saito said. U.S. auto sales plunged 23 percent in September, and the seasonally adjusted annual sales rate fell to 9.22 million units, according to industry researcher Autodata Corp. Sales slumped after a government purchasing incentive program ended in August.

Asian stocks dropped, tracking a 2.8 percent decline in the Standard & Poor’s 500 Index Oct. 30. CIT, which filed the fifth- largest bankruptcy by assets, said it plans to exit quickly due to support from bondholders, who voted in favor of a so-called prepackaged plan. CIT listed $71 billion in assets and $64.9 billion in debt in a Chapter 11 filing in U.S. Bankruptcy Court in Manhattan.

January-delivery rubber on the Shanghai Futures Exchange slipped 2 percent to close at 18,960 yuan ($2,777) a ton. Prices fell after the Shanghai exchange reported Oct. 30 that natural rubber stockpiles monitored by the bourse increased 6,230 tons to 116,913 tons, the highest level since November 2004.

To contact the reporters on this story: Aya Takada in Tokyo atakada2@bloomberg.net

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Copper Trims Losses in Shanghai on Chinese Manufacturing Data

By Glenys Sim

Nov. 2 (Bloomberg) -- Copper trimmed losses in Shanghai after two separate reports showed China’s manufacturing in October expanded at the fastest pace in 18 months, boosting the outlook for metals demand.

Manufacturing in China, the world’s largest metals user, grew to a seasonally adjusted 55.4 from 55 in September, according to a purchasing managers’ index released by HSBC Holdings Plc today. The government-backed PMI released yesterday rose to 55.2. A reading above 50 indicates expansion.

“If you examine the data, you’ll find that exports are falling at a slower rate, while employment is on the rise,” said He Ruiyan, head of research at Xiamen International Trade Futures Co. “These are encouraging numbers.”

January-delivery copper on the Shanghai Futures Exchange ended the day 1.5 percent lower at 50,520 yuan ($7,399) a metric ton. Earlier, the most-active contract lost as much as 2.2 percent.

Copper for delivery in three months on the London Metal Exchange gained 0.5 percent to $6,515 at 3:52 p.m. in Singapore, trimming a decline of 2.8 percent on Oct. 30.

An index of Chinese export orders increased to the highest level since June 2007 and job creation was the strongest since the survey began in April 2004, according to the HSBC report. The government-backed PMI also showed gains in overseas demand.

Slowing Stimulus

Still, the data raised speculation stimulus measures may be reduced in the coming months. The $586 billion Chinese government spending plan spurred raw material purchases, driving copper imports to record levels and doubling prices this year.

“The markets have been holding up well because of the various stimulus packages around the world,” Liu Biyuan, an analyst at GF Futures Co., said from Guangzhou today. “Some investors are beginning to doubt the sustainability of the recovery if some of those measures are being taken away.”

Among other LME-traded metals, aluminum was little changed at $1,910 a ton, zinc gained 0.6 percent to $2,173 a ton and lead slid 0.7 percent to $2,290 a ton. Nickel dropped 0.8 percent to $18,100 a ton, while tin hadn’t traded as of 3:58 p.m. in Singapore.

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

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Gold May Advance as Equity Slump Boosts Demand for Haven Assets

By Kim Kyoungwha

Nov. 2 (Bloomberg) -- Gold, little changed, may rebound on speculation that investors will seek safer assets after equities slumped and the bankruptcy of lender CIT Group Inc. sapped confidence in an economic recovery.

CIT Group, a 101-year-old commercial lender, filed for bankruptcy after a government bailout and debt exchange offer failed. U.S. stocks dropped after a Commerce Department report on Oct. 30 showed consumer spending fell 0.5 percent in September after a 1.4 percent jump in August. The MSCI Asia Pacific Index of regional stocks fell as much as 1.8 percent.

“I believe we will see the gold price settle higher this week as investors flock to safety once again in the wake of uncertainty in financial and equity markets,” said Gavin Wendt, resource analyst with Mine Life Pty Ltd. in Sydney.

Gold for immediate delivery traded at $1,046.50 an ounce at 2:11 p.m. in Singapore, compared with $1,045.40 at the end of last week. The precious metal has gained 18.6 percent this year.

Bullion, which typically moves inversely to the dollar, fell 1 percent last week as the U.S. currency rallied from a 14- month low against the euro. Gold topped a record $1,070.80 an ounce on Oct. 14.

“The U.S. dollar is still hovering near very low levels, which makes more cash flow into the market, so there’s still a great chance for a higher price,” said Kate Harada, a senior trader with Mitsubishi Corp. Futures & Securities Ltd. in Tokyo.

Gold holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, fell 0.1 percent to 1,103.52 metric tons as of Oct. 30, according to the company’s Web site.

Among other precious metals, silver added 0.8 percent to $16.435 an ounce, platinum was little changed at $1,324 an ounce and palladium added 0.8 percent to $323 an ounce.

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

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U.S. Stocks May Be Starting ‘Real Correction,’ CLSA’s Wood Says

By Patrick Rial

Nov. 2 (Bloomberg) -- U.S. equities may be headed lower as technical indicators point to weakness and as economic data disappoint investors hoping for a recovery, according to Christopher Wood, chief strategist at CLSA Ltd.

The Standard & Poor’s 500 Index dropped 2.8 percent to 1,036.19 on Oct. 30, and is down 5.6 percent from its peak for the year on Oct. 19. Declines have brought the benchmark below its 50-day exponential moving average, an indicator cited by Wood, which stands at 1,047.2, according to Bloomberg data.

An exponential moving average differs from a simple moving average by assigning more weight to recent data points. A drop below the 50-day moving average indicates to some investors that stocks may fall further.

“After Friday’s stock market action, the risk of the first real correction since the March bottom has risen significantly,” the strategist wrote in a report released today. “Fundamentally, it is also interesting that the American stock market has finally started to respond to disappointing consumption data.”

Wood predicted in 2003 that the explosion of mortgage securitization in the U.S. would lead to a boom and bust for the housing market. In September 2007, he began recommending investors sell short banks in the U.S. and Europe. The KBW Banks Index plunged 50 percent in 2008. Last week he recommended shorting the S&P 500 for investors looking to hedge their long exposure to Asian equities.

“If Asia does its normal thing and corrects more than the U.S., it will mark a great buying opportunity,” Wood said in his report.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.

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Rice Rallies to Highest in Over Nine Months as India to Import

By Luzi Ann Javier

Nov. 2 (Bloomberg) -- Rice advanced for a fifth straight day to the highest in more than nine months as India, the world’s second-largest rice grower, returns to the import market and cyclones reduce production in the Philippines.

India’s state-owned PEC Ltd. and MMTC Ltd. are seeking 10,000 metric tons each for delivery during November and December. State Trading Corp. will seek a similar amount, a government official, who didn’t want to be identified before the bids are called, said Oct. 30. That will be the first imports since the 2005-2006 marketing year, according to U.S. Department of Agriculture data.

Rice has “its own individual fundamentals, particularly the issues that we’re seeing out of Southeast Asia and the talk that India is looking to buy rice,” Luke Mathews, a commodity strategist at Commonwealth Bank of Australia in Sydney said by phone today. “That’s supporting that particularly market,” as other grains declined, he said.

Rice for January delivery added as much as 0.8 percent to $14.805 per 100 pounds in after-hour electronic trading, after jumping 7.3 percent last week, the biggest such gain for the most-active contract since the week ended March 20. The futures were at $14.79 per 100 pounds, up 0.7 percent at 1:39 p.m. Singapore time.

India, the world’s second-largest rice consumer, may import as much as 3 million tons next year, making it a net importer for the first time in 21 years, and potentially sparking the kind of “panic” that sent prices to records in 2008, Samarendu Mohanty, senior economist at the International Rice Research Institute, said Oct. 28.

Loss Estimates

The Philippines, the world’s biggest rice importer, was battered by typhoon Mirinae over the weekend after the government raised its estimate on losses from two recent storms to about 1 million tons, from about 800,000 tons earlier, widening the nation’s shortfall.

Some rice crops in southern Luzon in the Philippines were damaged by Typhoon Mirinae, Frisco Malabanan, national hybrid rice program director, said Oct. 31. The nation’s top rice producing regions were spared by the typhoon, he said.

Corn and wheat fell for a second day as warmer weather in the U.S. improved the production outlook for the largest exporter of the crops and after a stronger dollar damped demand for U.S. supplies.

Above normal temperatures and below-normal rain is expected in major corn and soybean producing regions in the U.S. including Iowa, Illinois, Indiana and Nebraska through Nov. 15, the National Weather Service said in a Nov. 1 forecast.

Corn, Soybeans

“We’ve got an improved outlook across the U.S. for corn and soybean harvest, which incidentally means we’ll also have expectations that planting progress of winter wheat will also pick up,” Mathews said.

Corn for December delivery lost as much as 1.8 percent, to $3.5925 a bushel in after-hours electronic trading on the Chicago Board of Trade, after closing 3.6 percent lower on Oct. 30. The most-active contract was at $3.64 a bushel at 2:14 p.m. Singapore time.

Wheat for December delivery fell as much as 1.3 percent, to $4.8775 a bushel, before trading at $4.9325 a bushel. The contract closed 1.9 percent lower on Oct. 30.

The Dollar Index, which tracks the value of the greenback against the currencies of six major U.S. trading partners, added 0.1 percent to 76.399, before declining to 76.123. The gauge rose 0.5 percent to 76.3 on Oct. 30.

January-delivery soybeans added 0.3 percent to $9.79 a bushel at 2:17 p.m. Singapore time, after declining as much as 1.4 percent earlier.

Eighteen out of 32 traders and analysts surveyed by Bloomberg news from Tokyo to Chicago said soybean prices may rise this week on speculation the USDA may lower its crop estimate next week after rain and freezing weather in October hurt yields.

The USDA on Oct. 9 raised its U.S. soybean production forecast to a record 3.25 billion bushels in the year that began Sept. 1, from its month-earlier estimate of 3.245 billion bushels.

To contact the reporter on this story: Luzi Ann Javier in Singapore at ljavier@bloomberg.net

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Japan’s Stocks Fall the Most in Month on Stronger Yen, Earnings

By Kana Nishizawa and Masaki Kondo

Nov. 2 (Bloomberg) -- Japanese stocks dropped the most in a month as earnings disappointed investors and a stronger yen hurt the outlook for exporters’ earnings.

Daiwa Securities Group Inc. tumbled 4.5 percent as Japan’s No. 2 brokerage reported second-quarter net income that missed analysts’ estimates. Canon Inc., the world’s largest camera maker, dropped 3.1 percent. Mitsubishi Corp., Japan’s largest trading company which generates more than half of its profit from raw materials, declined 3.1 percent on lower commodity prices. Stocks also fell after CIT Group Inc. filed the biggest bankruptcy claim in the U.S. in more than a year.

The Nikkei 225 Stock Average declined 2.3 percent to 9,802.95 at the 3 p.m. close in Tokyo, the biggest drop since Oct. 2. The broader Topix index lost 1.6 percent to 880.54, paring losses of as much 2.2 percent after the yen trimmed gains at midday. The benchmark added 24 percent from this year’s low on March 9, as government spending helped revive growth.

“I can’t expect government stimulus measures to continue to shore up company earnings,” said Hiroshi Morikawa, a senior strategist at MU Investments Co., which manages the equivalent of $14 billion. “Doubt is rapidly growing that corporate profits will continue to improve next year.”

In New York, the Standard & Poor’s 500 Index fell 2.8 percent to 1,039.19 on Oct. 30. Americans cut spending 0.5 percent in September, the first decline in five months, according to the Commerce Department. New-York based CIT filed for bankruptcy on Nov. 1, with $71 billion in assets and $64.9 billion in debt. It was the biggest corporate failure since September 2008.

Daiwa Securities

Daiwa Securities plunged 4.5 percent to 469 yen, the sharpest slide in more than five weeks. Japan’s second-largest brokerage reported second-quarter profit of 1.99 billion yen that missed analysts’ estimates because of lower-than- anticipated trading revenue.

Sumitomo Electric Industries Ltd. retreated 5.7 percent to 1,061 yen, the level not seen since July 22. The electric-wire maker swung to a first-half net loss of 9.74 billion yen from the previous year’s profit, with a 35 percent drop in sales, as demand from automakers slumped.

Brother Industries Ltd. sank 5 percent to 999 yen after the office equipment maker said first-half net income plunged 58 percent to 4.92 billion yen, with a 22 percent drop in sales, citing the yen’s strengthening and charges related to employees’ retirement program.

Sony Falls

Sony Corp., Japan’s biggest exporter of televisions, tumbled 5.8 percent to 2,625 yen, falling the most since May 18, even after the company narrowed its full-year net loss forecast to 95 billion yen from 120 billion yen.

“The main issue for the 2009 fiscal year in our view, is the delay in introducing LED TVs,” Yoshiharu Izumi, an analyst at JPMorgan Chase & Co., wrote in a report dated today. “Solid progress has thus been made on planned cost cuts, but they have not helped profits improve much because price cuts have hurt, owing to product weaknesses.”

The yen appreciated to a three-week high of 89.20 against the dollar before weakening to 90.039 at the close of stock trading. A stronger yen reduces income when overseas revenue is converted into local currency.

“The yen stopped strengthening, which is supporting Japanese stocks,” said Yumi Nishimura, an equity market analyst at Daiwa Securities SMBC Co.

Exporters Decline

Manufacturing in China expanded at the fastest pace in 18 months, according to a purchasing managers’ index released by HSBC Holdings Plc today and also a government-backed PMI released yesterday. The HSBC index rose to a seasonally adjusted 55.4 from 55 in September, an e-mailed statement showed.

“An improvement in PMI, which boosted expectations for recovery in the Chinese economy, is also lifting investor sentiment” in Japanese stocks, Nishimura said.

Canon declined 3.1 percent to 3,420 yen. Honda Motor Co., Japan’s second-largest carmaker which generated 86 percent of its sales overseas last year, dropped 2.1 percent to 2,820 yen. Mazda Motor Corp., Japan’s second-largest car exporter, retreated 3.3 percent to 204 yen.

Crude oil for December delivery lost 3.6 percent to $77 a barrel on Oct. 30 in New York. The London Metals Index, a measure of six metals including copper and zinc, dropped 2.8 percent.

Mitsubishi fell 3.1 percent to 1,915 yen. Nippon Mining Holdings Inc., Japan’s biggest copper producer, retreated 6 percent to 390 yen, the lowest since March 31. Mitsui & Co., whose profit is the most sensitive among Japan’s five largest trading houses to changes in the price of oil, dropped 3.1 percent to 1,185 yen.

Consumer Lenders

The Nikkei newspaper reported on Nov. 1 that Japan may back away from tightening regulations on credit providers to ease fund-raising strains on the self-employed. The government will ease restrictions that would cap interest charges by lenders including consumer finance companies at 20 percent next June, from 29.2 percent, and a regulation which limits total unsecured borrowing to a third of annual income, the report said.

Consumer lenders jumped 5.8 percent, the biggest gain among the 33 groups on the Topix index. Acom Co., Japan’s largest consumer lender by market value, leapt by its daily limit, rising 17 percent to 1,372 yen, the largest advance in two years. Aiful Corp., the second-largest consumer lender by assets, soared 17 percent to 156 yen. Takefuji Corp. surged by its daily limit, gaining 23 percent to 427 yen.

To contact the reporter for this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net; Masaki Kondo in Tokyo at mkondo3@bloomberg.net

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Asian Stocks Decline on Commodity Prices, U.S. Consumer Report

By Masaki Kondo

Nov. 2 (Bloomberg) -- Asian stocks fell, extending the MSCI Asia Pacific Index’s first monthly decline since February, as weaker commodity prices and a drop in U.S. consumer spending fueled concern corporate earnings growth will falter.

Mitsubishi Corp., a Japanese trading company that gets 39 percent of its sales from commodities, sank 3.1 percent. Sony Corp. slumped 5.8 percent even after narrowing a loss forecast as the yen climbed to a three-week high against the dollar earlier today. Daiwa Securities Group Inc., Japan’s No. 2 brokerage, slid 4.5 percent on lower-than-estimated earnings.

The MSCI Asia Pacific Index slumped 1.1 percent to 115.15 as of 3:50 p.m. in Tokyo. The gauge has surged 63 percent from a more than five-year low on March 9 amid signs lower borrowing costs and spending packages are reviving the global economy. The index lost 1.3 percent in October.

“I can’t expect government stimulus measures to continue to shore up company earnings,” said Hiroshi Morikawa, a senior strategist at MU Investments Co., which manages the equivalent of $14 billion. “Doubt is rapidly growing that corporate profits will continue to improve next year.”

Japan’s Nikkei 225 Stock Average lost 2.3 percent, while Australia’s S&P/ASX 200 Index dropped 2.2 percent. The Hang Seng Index in Hong Kong slumped 0.9 percent.

China’s Shanghai Composite Index rose 2.4 percent. Shanghai Lujiazui Finance & Trade Zone Development Co. climbed 8.1 percent after the South China Morning Post said the government had approved a Walt Disney Co. theme park for the city.

U.S. Futures, Treasuries

Consumer lenders Aiful Corp. and Takefuji Corp. soared at least 17 percent in Tokyo after the Nikkei newspaper said tighter regulations on lenders may be postponed.

Futures on the U.S. Standard & Poor’s 500 Index added 0.6 percent and Treasuries fell as economists said an industry report today will show the country’s manufacturing industry expanded last month. The yield on 10-year Treasuries rose two basis points to 3.41 percent, according to BGCantor Market Data.

The U.S. stock gauge fell 2.8 percent on Oct. 30, the most since July 2, as a Commerce Department report showed spending by American consumers dropped 0.5 percent in September, the first decline in five months. New-York based commercial lender CIT Group Inc. filed for bankruptcy on Nov. 1.

James Hardie Industries NV, the biggest seller of home siding in the U.S., retreated 2.2 percent to A$7.05 in Sydney. Toyota Motor Corp., which gets 31 percent of its revenue from North America, fell 2.5 percent to 3,570 yen and was the single biggest drag on the MSCI Asia Pacific Index.

Sony Forecast

Sony, which generates 24 percent of its sales in the U.S., slid 5.8 percent to 2,625 yen even after narrowing its annual net loss forecast by 21 percent.

The yen appreciated to as much as 89.20 per dollar today, the strongest since Oct. 14, compared with 91.02 against the dollar at the close of stock trading in Tokyo on Oct. 30. It was at 90.03 recently. Against the euro, the yen strengthened to as high as 131.01 from 135.01. The stronger yen reduces income when overseas revenue is converted into local currency.

“Sony’s shares are adversely affected by the strong yen,” said Ryosuke Katsura, an analyst at Mizuho Securities　Co. in Tokyo. “Macroeconomic factors have a larger influence over the stock than the company’s fundamentals.”

The MSCI Asia Pacific Index has fallen 5 percent from this year’s high on Oct. 20 as earnings from PetroChina Co. to National Australia Bank Ltd. missed analyst forecasts and investor concern grew about the end of stimulus policies. Stocks on the MSCI gauge trade at an average 22 times estimated profit, the lowest level since May 18, according to Bloomberg data.

‘End to Recovery’

The measure lost 1.3 percent last month, the first drop since February. Australia on Oct. 6 became the first Group of 20 nation to raise interest rates amid signs of strength in its economy, while the Bank of Japan said last week it will let its programs of buying corporate debt expire at the end of the year.

“The global economy can’t stand on its feet yet without government support,” said MU’s Morikawa. “An end to stimulus is an end to a recovery.”

Mitsubishi, Japan’s biggest trading house, sank 3.1 percent to 1,915 yen, while closest rival Mitsui & Co. slid 3.1 percent to 1,185 yen. BHP Billiton Ltd., the world’s biggest mining company, retreated 2 percent to A$36.71 in Sydney.

Crude oil futures in New York tumbled the most in a month, dropping 3.6 percent to $77 a barrel, on Oct. 30. The London Metals Index, a measure of six metals including copper and zinc, dropped 2.8 percent.

Daiwa fell 4.5 percent to 469 yen after posting second- quarter net income that was 72 percent lower than the average analyst estimate from a Bloomberg survey.

Disney Theme Park

HSBC Holdings Plc lost 1.3 percent to HK$86.05 in Hong Kong. Apple Daily said the bank’s provision for bad debts in the U.S. may stay at a high level for the near future, citing Sandy Flockhart, who heads HSBC’s Asia-Pacific unit.

In Shanghai, Lujiazui rose 8.1 percent to 30.23 yuan, while Shanghai Jielong Industry Corp. jumped by the 10 percent daily limit to 18.57 yuan.

The Disney park project has been approved by China’s top economic planning body, the National Development and Reform Commission, the South China Morning Post reported today, citing an unidentified official with direct knowledge of the matter. An official at the Beijing-based NDRC who wouldn’t give her name declined to comment today.

Aiful, Japan’s No. 2 consumer-finance company by assets, jumped 17 percent to 156 yen, and Takefuji soared 23 percent to 427 yen. A gauge of consumer lenders posted the steepest advance among the Topix index’s 33 industry groups.

The government may freeze the implementation of new regulations that limit lending to a customer to a third of the borrower’s annual income and caps interest charges at 20 percent, the Nikkei newspaper reported, citing a government official it didn’t name.

Lopro Corp., an Osaka-based corporate lender, was suspended from trading after the company filed for bankruptcy today amid swelling interest repayments.

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

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Deutsche Boerse Starts Pan-European Trading, Takes On Rivals

By Nandini Sukumar

Nov. 2 (Bloomberg) -- Deutsche Boerse AG, Europe’s largest exchange by market value, is starting a new venture for pan- European stock and derivatives trading, as it fights off new trading systems and seeks to take business away from other traditional exchanges.

Xetra International Market, which uses the German exchange’s existing electronic system, goes live today. The exchange is offering the 260 existing customers of Xetra, its electronic trading system, the opportunity to trade European stocks and the corresponding equity and index derivatives. XIM will have 10 brokers providing liquidity on its markets at debut, Rainer Riess, managing director of Xetra Market Development, said in an interview last week.

“We want to gain solid market share and that will take some months,” Riess said. “It takes a period of 12 months to build initial market share. Five percent is some kind of threshold for any venue to be successful so that’s the first hurdle to strive for.”

Deutsche Boerse, London Stock Exchange Group Plc and NYSE Euronext have faced a barrage of new pan-European rivals including Turquoise and Chi-X Europe Ltd., which are backed by investment banks, and the European ventures of Bats Global Markets and Nasdaq OMX Group Inc. The new entrants have taken business away, in part by offering cheaper trading of stocks listed on primary markets.

French, Dutch Stocks

XIM starts by offering trading of French, Dutch, and Belgian stocks listed on the Dow Jones Stoxx 50 Index. Two weeks later Finland and Spain will be added, Riess said. The company’s Eurex Clearing unit will provide post-trade services for the system and settlement will be local.

With its new system, Deutsche Boerse is taking a different route to its peers. Nasdaq has a separate London-based MTF, as does NYSE Euronext with NYSE Arca Europe, which trades 400 to 500 stocks that aren’t listed on NYSE Euronext’s four European bourses. LSE has set up a dark pool called Baikal, after the deepest lake in the world, which has its own chief executive officer and will be run separately from the bourse.

To contact the reporter on this story: Nandini Sukumar in London at nsukumar@bloomberg.net;

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German Stocks Erase Gains as Commerzbank, Deutsche Bank Decline

By Christiane Lenzner

Nov. 2 (Bloomberg) -- German stocks erased earlier gains as banks retreated. The benchmark DAX Index dropped 0.6 percent to 5,380.66 as of 9:13 a.m. in Frankfurt, with Commerzbank AG and Deutsche Bank AG falling at least 1.6 percent.

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European, Asian Shares Drop; U.S. Stock-Index Futures Advance

By Adam Haigh

Nov. 2 (Bloomberg) -- European stocks fell, extending their biggest weekly drop since July, as Royal Bank of Scotland Group Plc said talks with the European Union and the Treasury will include some asset sales “not initially contemplated.”

RBS, the biggest bank controlled by the U.K. government, slumped 5.8 percent. Ryanair Holdings Plc slid 6.4 percent after the Europe’s biggest discount carrier said market conditions “continue to be difficult.”

Europe’s Dow Jones Stoxx 600 Index declined 0.2 percent to 236.44 as of 8:27 a.m. in London. The measure has lost 5.2 percent since this year’s high on Oct. 19 amid speculation that an almost eight-month, 50 percent rebound has outpaced the prospects for earnings and economic growth.

“The market is starting to realize gradually that all the problems are not behind us,” said Philippe Gijsels, a senior structured-equity strategist at Fortis Global Markets in Brussels, told Bloomberg Television. “Sentiment is shifting to a more realistic view and this correction will continue. We are still cautioning investors and at these levels there is time to take some more money off the table.”

The MSCI Asia Pacific Index slumped 1.2 percent today. Standard & Poor’s 500 Index futures expiring in December added 0.6 percent before a report forecast to show that U.S. manufacturing expanded at the fastest pace since 2006.

Chinese Manufacturing

Chinese manufacturing data for October showed the nation’s recovery strengthening and export orders climbing, giving policy makers more room to pare stimulus measures in coming months. Manufacturing expanded at the fastest pace in 18 months, according to a purchasing managers’ index released by HSBC Holdings Plc today and also a government-backed PMI released yesterday. The HSBC index rose to a seasonally adjusted 55.4 from 55 in September, an e-mailed statement showed.

CIT Group Inc., the 101-year-old commercial lender that saw its funding dry up in the credit crunch, filed for bankruptcy in an effort to cut $10 billion in borrowings following a failed debt exchange and U.S. taxpayer bailout. CIT’s Chapter 11 bankruptcy may give bondholders new notes at 70 cents on the dollar plus new common stock, and Chief Executive Officer Jeffrey Peek said clients will be able to get funds.

Common stock owners could be mostly wiped out, and the U.S. Treasury Department said it won’t recoup much, if any, of the $2.33 billion of taxpayer money that went into CIT, the largest firm to go bankrupt after getting a federal bailout.

S&P 500 Premium

Wall Street forecasts for the fastest U.S. earnings increase in two decades are failing to convince investors to pay a premium for the S&P 500 index. Companies in the gauge traded for an average of 15.4 times annual profit this year, or 0.6 times equity analysts’ projection for 2010 earnings growth of 25 percent, according to data compiled by Bloomberg. That’s the lowest so-called PEG ratio since 1995 and half the median of 1.3 since 1961.

RBS sank 5.8 percent to 39.49 pence after saying it’s close to agreement with the Treasury on a plan to insure its risky assets. RBS may insure as much as 280 billion pounds ($458 billion) of assets under the Asset Protection Scheme, compared with its initial agreement to insure 325 billion pounds of assets, a person familiar with the situation said last month. The bank will probably have to sell its insurance operation, and shrink its investment banking unit after receiving 20 billion pounds from the government last year, the person said.

Lloyds, BOE

Lloyds Banking Group Plc slipped 2.7 percent to 84.71 pence. The lender is due to unveil two incentives to persuade existing bondholders to exchange their bonds for riskier investments that could convert into equity, as part of its 25 billion-pound fundraising plan, the Financial Times reported, citing people close to the matter.

The Bank of England may choose to risk doing too much rather than too little this week as Britain starts to fall behind the rest of the world economy.

Governor Mervyn King’s nine-member Monetary Policy Committee will expand its bond-purchase plan by 50 billion pounds to 225 billion pounds on Nov. 5, according to the median forecast of 48 economists in a Bloomberg News survey. That would be the third increase since the program started in March.

Ryanair fell 6.4 percent to 2.76 euros after saying conditions in Ireland, the U.K. and Europe “continue to be difficult.” Fiscal second-quarter net income increased to 250.5 million euros from 185.8 million euros a year earlier, the Dublin-based carrier said today.

The Institute for Supply Management’s manufacturing report is due at 10 a.m. New York time. Forecasts range from 52 to 55, after a reading of 52.6 in September. Fifty is the dividing line between expansion and contraction. Another report, due from the National Association of Realtors at 10 a.m., may show pending home sales in September were unchanged, the first time since January they didn’t increase.

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

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Private Equity IPOs Slump as Goldman, Citigroup Can’t Sell AEI

By Cristina Alesci, Jason Kelly and Eric Martin

Nov. 2 (Bloomberg) -- Investors suffering the worst returns on initial public offerings in at least 14 years are shunning companies laden with debt, forcing bankers to pull one sale and cut the price of others.

The postponement of an $800 million offering by AEI, a former Enron Corp. unit with $2.9 billion of net debt, followed reduced sales by RailAmerica Inc. and Select Medical Holdings Corp., both owned by private-equity firms. AEI’s IPO unraveled last week after Ashmore Group Plc, the London-based fund manager that controls the company, withdrew when institutional buyers refused to pay the $16-a-share it sought for the deal.

“Investors are more focused than ever before on buying healthy balance sheets,” said Timothy Monfort, head of U.S. equity capital markets at Jefferies & Co. in New York. “They don’t want to see a stop-gap measure and they want to know that the equity investment offers a complete solution for the company.”

IPOs deteriorated as the Standard & Poor’s 500 Index suffered its first monthly decline since February and the benchmark gauge for U.S. stock-market volatility surged the most in a year. With $4.2 billion of private-equity sales in the pipeline, companies burdened by debt from leveraged buyouts are being forced to lower offering prices, limiting gains that can be passed on to their investors after $3.7 billion was raised through U.S. share sales in the past six months.

‘Bloodletting’

A “bloodletting” for LBOs that will damp the economic recovery may be coming, according to billionaire investor George Soros.

“In commercial real estate and leveraged buyouts, the bloodletting is yet to come,” Soros said on Oct. 30 during a lecture organized by the Central European University in Budapest, where he was born. “These factors will continue to weigh on the American economy, and the American consumer will no longer be able to serve as the motor for the world economy.”

Stocks are slumping as buyout firms count on IPOs to exit some of the $2.1 trillion in LBOs they made since the start of 2004 and return cash to investors. Distributions to their clients fell by two-thirds to $63 billion in 2008 from the previous year, according to London-based researcher Preqin Ltd.

AEI, an operator of power plants and natural-gas pipelines in emerging markets acquired by Ashmore in 2006, would have been valued at $3.9 billion, or 1.3 times net debt, had its shares sold at the midpoint of its original range, according to data compiled by Bloomberg. Underwriters led by New York-based Goldman Sachs Group Inc., Citigroup Inc.,JPMorgan Chase & Co. and Credit Suisse Group AG in Zurich dropped the sale Oct. 29.

‘Happy to Wait’

The postponement came about seven hours after the deal was cut to less than $300 million from $800 million following the withdrawal of Ashmore, which oversees $31 billion focused on emerging-market stocks, credit, currencies and private equity. Ashmore’s decision was based on investor demand, according to Jerome Booth, the firm’s London-based head of research.

“We’re not in the business of selling at any price or at a bad price,” Booth said in a phone interview on Oct. 30. “If that’s being price-sensitive, then yes, we were sensitive to price in this case. We don’t have to sell, and we like the company. We’re happy to wait for market conditions to improve.”

Underwriters couldn’t find buyers for AEI even after lowering the forecast range of the offering from $14 to $16 to as little as $12, according to government filings. After Ashmore pulled out, George Town, Cayman Islands-based AEI increased the shares it planned to sell to 20 million from 16.7 million, the filings show. Stockholders including Goldman Sachs were going to sell 1 million shares, down from the prior plan of 33.3 million.

‘Any Price’

An investor who declined to be identified said bankers managing the offering called him at least nine times in the week and a half before the pricing, attempting to sell AEI when the low end of the range was still $14 a share.

“The underwriters asked, ‘Is there any price you would be willing to pay, even at $11 or 12?’” said the manager, who asked not to be identified because the negotiations were private. He analyzed the IPO and decided against participating.

JPMorgan spokeswoman Tasha Pelio, Jeanette Volpi, a spokeswoman for Citigroup, Credit Suisse spokesman Duncan King and Goldman Sachs spokeswoman Andrea Rachman declined to comment. AEI spokesman Chuck Dohrenwend cited the company’s Oct. 29 statement, which said the offering was postponed “due to market conditions.”

The IPOs of 18 U.S. companies that went public since September have outperformed the S&P 500 by 0.1 percentage point on average in the first month of trading, the worst performance in Bloomberg data going back 14 years. Offerings by American companies have beaten the S&P 500 by an average 21.3 percentage points since 1995, the data show.

VIX Surges

The S&P 500 slumped 4 percent last week, the steepest retreat since May 15, as declines in consumer confidence, personal spending and home sales, along with the threat of a bankruptcy at New York-based CIT Group Inc., spurred concern over the durability of the economic recovery. CIT filed for Chapter 11 yesterday.

The VIX, the benchmark for U.S. stock options that is known as Wall Street’s “fear gauge,” jumped 24 percent on Oct. 30, the biggest surge since Oct. 22, 2008, as the S&P 500 ended a seven-month streak of gains.

Private-equity firms earn the richest fees from their 20 percent cut of profits on investments, known as carried interest. Pressure is building on some managers to move past their bets of two years ago to what they project will be more profitable transactions, industry executives said.

‘Get Out’

“For certain sponsors, the reality is they’re unlikely to get any carry from these funds, so they want to get out and get on to the next one quickly,” Guy Hands, founder of London-based Terra Firma Capital Partners Ltd., said Oct. 14 at an industry conference in Dubai.

Blackstone Group LP, the world’s largest private-equity company, may take as many as eight of its holdings public, Chief Executive Officer Stephen Schwarzman told investors at the same conference. Knoxville, Tennessee-based Team Health Holdings LLC, a health-care staffing company owned by New York-based Blackstone, filed last month to raise as much as $100 million.

Schwarzman said it’s hard to predict how demand for new stock will hold up.

“No one knows how long a window will be open for IPOs,” he told reporters in Dubai. “It’s been a streaky type of market.”

Investors are rewarding some companies with healthier balance sheets.

Vitamin Shoppe, RailAmerica

Vitamin Shoppe Inc., the North Bergen, New Jersey-based retailer of nutritional supplements that has a debt-to capitalization ratio of 0.35 and is backed by New York-based Irving Place Capital, sold its shares for $17 last week. That was above the planned range of $14 to $16. The stock gained 9.8 percent in the first two days of trading.

Vitamin Shoppe outperformed RailAmerica, the railroad operator owned by Fortress Investment Group LLC that has debt exceeding more than half of its capitalization. The Jacksonville, Florida-based company reduced the amount of its IPO and has lost 22 percent since going public.

RailAmerica cut its offering price to $15 a share from a range of $16 to $18 before it began trading Oct. 13. The company sold 10.5 million shares, while New York-based Fortress increased its sale to 11.5 million shares from 10.5 million.

Moody’s Investor Services said in a statement Sept. 30 that the transaction wouldn’t boost the company’s credit rating.

‘Primary Driver’

“Going forward, long-term ratings are more likely to be affected by developments in volume and pricing in the rail- freight sector, which is the primary driver to RailAmerica’s growth and profitability,” Moody’s said.

Select Medical, owned by buyout firms Welsh Carson Anderson & Stowe in New York and Chicago-based Thoma Cressey Bravo LLC, cut its IPO price to $10 from a range of $11 to $13 on Sept. 24. The Mechanicsburg, Pennsylvania-based hospital operator extended the maturity of $384.5 million of term loans by two and a half years to August 2014 on Aug. 5.

Moody’s still left Select Medical’s main credit rating at B2, five levels below investment grade, even as the company said it would use most of the IPO proceeds to pay down debt.

The ability of private-equity managers to cash out of their investments has also been limited by the two-year slowdown in mergers and acquisitions since the onset of the credit crisis.

M&A Slowdown

Announced M&A deals worldwide have dropped 42 percent to $1.3 trillion through last week from the same period in 2008, and 63 percent from two years ago, according to data compiled by Bloomberg.

Private-equity firms have struggled to find buyers to sell their holdings to since the collapse of subprime mortgages locked up credit markets, spurring losses and writedowns at the world’s biggest financial firms that reached $1.6 trillion.

“All options for exiting investments are impaired right now,” said Bill Atwood, Chicago-based executive director of the Illinois State Board of Investment. “The equities market right now is stronger than the strategic sale option.”

Buyout firms are putting their best companies into the markets first, according to Steven Kaplan, a finance professor at the University of Chicago’s Booth School of Business. A weak economic recovery would mean that some less-attractive companies will go bankrupt, he said.

‘Struggling With Them’

“There are a variety of deals which are at or near default,” said Victor Khosla, founder of Strategic Value Partners, a Greenwich, Connecticut-based private-equity and hedge-fund firm that invests in distressed assets. “The industry is going to be struggling with them for years.”

Private equity-owned companies have $455 billion in outstanding leveraged loans with maturities through 2014, even after reducing debt by $72 billion this year through Aug. 7, according to data compiled by S&P in New York.

“Even if things are getting better, we might need another bubble to digest the debt,” said Antoine Drean, chief executive officer of Triago, a Paris-based firm that raises money for private-equity funds and sells existing interests in buyout pools. “The debt will still be a big issue and it’s difficult to take care of today.”

To contact the reporters on this story: Cristina Alesci in New York at Calesci2@bloomberg.net; Jason Kelly in New York at jkelly14@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net.

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Stock Analysts Right on Earnings as Investors Refuse to Agree

By Lynn Thomasson and Mary Childs

Nov. 2 (Bloomberg) -- Wall Street forecasts for the fastest U.S. earnings increase in two decades are failing to convince investors to pay a premium for the Standard & Poor’s 500 Index.

Companies in the gauge traded for an average of 15.4 times annual profit this year, or 0.6 times equity analysts’ projection for 2010 earnings growth of 25 percent, according to data compiled by Bloomberg. That’s the lowest so-called PEG ratio since 1995 and half the median of 1.3 since 1961.

The smaller valuations relative to income growth show investors don’t believe earnings forecasts, which are 10 times higher than economists’ prediction for U.S. gross domestic product, says Charles Stamey, who helps oversee $24 billion at Manning & Napier Advisors Inc. Bulls say analysts got it right during the steepest rally since the 1930s and that stocks are cheap when measured by the PEG ratio, a favored tool of Fidelity Investments fund manager Peter Lynch.

“We’re in as bad a time as we’ve ever seen to be projecting future earnings,” said Stamey, who is based in St. Petersburg, Florida. “In this environment, earnings estimates should be significantly questioned, and that’s your starting point in a PEG ratio.”

Concern the U.S. economy won’t grow enough to justify the S&P 500’s 60 percent advance since March sent the benchmark measure for U.S. equities down 4 percent last week. The index has retreated 2 percent since New York-based Alcoa Inc., the biggest U.S. aluminum producer, became the first Dow Jones Industrial Average company to report third-quarter results on Oct. 7.

Record Surprises

The drop came as a record number of companies beat third- quarter estimates and analysts raised forecasts for next year. The average projection for combined earnings among S&P 500 companies in 2010 climbed 2.5 percent last month to $77.36 a share, according to Bloomberg data.

The decline in stocks after releasing results suggests investors are questioning the earnings outlooks. Companies that reported in October fell 0.7 percent on average in the next trading session, the most in data going back to 2001, according to data released by Harrison, New York-based research firm Bespoke Investment Group LLC on Oct. 28.

Inflated estimates can push down the PEG, or the price- earnings ratio divided by income growth. Fidelity’s Lynch, who produced average annual returns of 29 percent managing the Magellan Fund from 1977 to 1990, said the ratio showed stocks offering “growth at a reasonable price.”

Lynch, 65, is vice chairman of Fidelity Management & Research.

Rise, Fall

Since the PEG shrinks as the outlook for profits climbs, a smaller ratio may show investors are speculating companies will fail to meet estimates, said Paul Baiocchi, who helps manage more than $1 billion at Delta Global Advisors in Huntington Beach, California.

“That’s the reason the market appears as cheap as it does, when in reality the market may feel that this is a rich valuation,” said Baiocchi, who recommended the Market Vectors Gold Miners ETF in January before a 24 percent rally. “The expectation for growth is not necessarily the same in the market.”

State Street Corp., the largest money manager for institutions, tumbled 20 percent since reporting profit that topped estimates by 4.7 percent on Oct. 20. The decline occurred even as the PEG ratio for the Boston-based firm stood at just over 1, or about 13 percent cheaper than the five-decade average for S&P 500 companies.

Beating Estimates

The price-to-earnings ratio for Southwest Airlines Co. has jumped more than fourfold since a low in March as the Dallas- based carrier rallied 68 percent and analysts lifted third- quarter forecasts from a loss of 5 cents a share to 1 cent a share in profit. The stock is down 16 percent since Oct. 14, the day before it reported profit of 3 cents a share for the period. Southwest, whose PEG reached 6.7 in January, now trades at 0.2.

Earnings estimates compiled by Bloomberg show companies in the S&P 500 will report combined profit in 2011 that is 54 percent higher than this year, the steepest growth in two decades. The projected increase for next year is 10 times faster than the gain in GDP foreseen by economists surveyed last month, near the highest ratio on record, based on data compiled by Bloomberg going back 60 years.

The U.S. economy expanded at a 3.5 percent annual rate in the three months that ended in September, according to Commerce Department data released Oct. 29. The pace is projected to slow to 2.4 percent in the current period and average 2.4 percent in 2010, economists’ estimates compiled by Bloomberg show.

Buy Signal

A low PEG ratio has historically been a bullish signal for equities. The S&P 500 rallied 16 percent on average the year after its PEG sank below the current level of 0.6, based on eight occurrences since 1961.

Shares are cheap because executives who overestimated the recession are being too conservative forecasting profits, according to Timothy Ghriskey, who manages $2 billion as chief investment officer at Solaris Asset Management LLC in Bedford Hills, New York. More than 80 percent of S&P 500 companies that have reported third-quarter profit beat analysts’ predictions, data compiled by Bloomberg show.

“There are always a large number of skeptics saying it’s going to be different this time, that future growth is not going to be as strong, that earnings aren’t going to be as strong,” Ghriskey said. “This is a very typical reaction, and it’s what prolongs a market rally coming out of recession.”

The S&P 500 posted the biggest drop since July on Oct. 30 as declining consumer confidence and spending and the threat of a CIT Group Inc. bankruptcy raised concern over the durability of the recovery. New York-based CIT filed for Chapter 11 yesterday with financing from investor Carl Icahn after the credit crunch dried up its funding.

“The market’s going to be wary of paying too high a multiple for earnings growth,” said Leo Grohowski, who oversees $151 billion as the New York-based chief investment officer at BNY Mellon Wealth Management. “The market’s in a show-me mode.”

To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net; Mary Childs in New York at mchilds4@bloomberg.net.

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