Eurosclerosis Is U.S. Diagnosis After Dodging Japan Stagnation

By Rich Miller and Michael McKee

Dec. 14 (Bloomberg) -- The U.S. may have avoided the Japanese disease of prolonged stagnation only to end up with a dose of eurosclerosis: chronically high unemployment in a growing economy.

Economists are starting to extend their forecasts through 2011 and the results don’t look pretty. Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, forecasts that the jobless rate will rise to 10.75 percent by the middle of 2011 from 10 percent now.

Even optimists such as Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York, see unemployment remaining well above the 20-year average of 5.6 percent. Kasman, whose forecast of 3.4 percent growth next year is higher than the 2.6 percent median of 83 economists surveyed by Bloomberg News, projects the unemployment rate will average 9.9 percent in 2010 and 9.3 percent in 2011.

“We had been worried about turning into Japan,” says David Wyss, chief economist at Standard & Poor’s Corp. in New York. “But it may be more likely that we end up with sclerosis.”

Persistent European-style unemployment means that the Federal Reserve, which holds its last policy meeting of the year Tuesday and Wednesday, won’t raise its benchmark interest rate from near zero through 2010, according to Curtis Arledge, co- head of U.S. fixed income in New York at BlackRock Inc., the world’s largest asset manager.

‘Wouldn’t Surprise Me’

“I don’t think they’re even going to be thinking about it until the third or fourth quarter of 2010,” says Arledge, who helps oversee more than $500 billion. “It wouldn’t surprise me if it was into 2011.”

Bond investors should expect large supplies of Treasury securities as the budget deficit stays near last year’s record $1.4 trillion, according to Kasman. Unemployment will help keep the deficit at an historic level by robbing the government of income-tax revenue while forcing it to spend more on jobless benefits.

Because it will help the Fed stay on hold, a high jobless rate also may mean the government can finance that deficit at low cost. The Treasury sold $44 billion of two-year notes on Nov. 23 at a yield of 0.802 percent, the lowest on record.

Stock prices will continue to rise as companies boost profits by concentrating on cutting costs and getting more out of their workers, Sinai says. Employee output per hour rose at an 8.1 percent annual rate in the third quarter, according to the Labor Department, the fastest pace in six years.

Rising Corporate Profits

Sinai sees profits for the companies making up the Standard & Poor’s 500 Index climbing by more than 20 percent next year. Third-quarter corporate profits increased 11 percent, the biggest gain since the first three months of 2004, the Commerce Department reported Nov. 24. The S&P 500 has rallied 64 percent to 1,106.41 from a 12-year low in March.

Annual economic growth in 2011 will be 2.8 percent, according to the median forecast in the Bloomberg News survey -- slower than the average annual rate of 3 percent in the decade before the recession began in December 2007.

The pace is still faster than Japan’s. The country’s central bank lowered its benchmark target interest rate to near zero in February 1999, trying to boost an economy suffering through a “lost decade” of expansion that averaged 1.9 percent a year. Growth since then has averaged 0.7 percent annually as Japan sank into a liquidity trap, where additions to the money supply failed to stimulate the economy.

Big Differences

The median U.S. forecast for this year and next masks big differences among economists about the outlook. Mohamed El- Erian, chief executive officer of Newport Beach, California- based Pacific Investment Management Co., manager of the world’s largest bond fund, argues that the U.S. has entered a “new normal” period with annual growth of 2 percent. He sees growth fading in the second half of next year after an initial burst.

“I’m more bearish than the consensus,” says El-Erian, who sees the dollar experiencing “periods of downward pressure” during the year. “We start the year at 3 percent and then end up at 2.”

Larry Kantor, head of research for Barclays Capital Inc. in New York, is more upbeat.

“What we think is going on right now is that the U.S. economy is growing at a 4 to 5 percent rate,” he says. “When you go down hard, you tend to have a bounce because of pent-up demand, policy stimulus and the like.”

Above Average

No matter what their growth estimates, the economists surveyed by Bloomberg agree that unemployment during the next two years will remain above the 4.9 percent average of the decade before the start of the recession. The jobless rate will average 10 percent next year and 9 percent in 2011, according to the median forecast of those surveyed.

Herbert Giersch, former president of the Kiel Institute for the World Economy in Kiel, Germany, coined the term eurosclerosis in 1985 to describe European economies beset with high unemployment at a time of overall growth. Joblessness that year averaged 9 percent in France, 11.4 percent in Britain and 8.2 percent in what was then West Germany.

Economists say Europe’s malaise, which extended into the mid-1990s, was caused by monetary policy biased toward fighting inflation and maintaining currency stability, generous unemployment and social benefits that encouraged the jobless to stay on the dole, and penalties such as government-imposed employee-severance packages that discouraged companies from hiring.

Zero Bound

Fed Chairman Ben S. Bernanke can’t reduce the federal funds rate -- the rate for overnight loans between banks -- because at Friday’s close of 0.14 percent it is already essentially at what economists call the zero bound. That leaves the U.S. stuck with a higher rate than is appropriate given 10 percent unemployment and the outlook for the economy, says Laurence Ball, professor of economics at Johns Hopkins University in Baltimore.

Bernanke has tried to compensate with a variety of programs aimed at spurring credit more directly, including the purchase of $1.75 trillion in Treasuries, agency bonds and mortgage- backed securities. Fed officials themselves disagree over what impact the measures have had.

Ball says some of the European policy makers in the 1980s and 1990s, including former British Prime Minister Margaret Thatcher, were “anti-inflation zealots” who kept interest rates high even after price pressures had eased. For them, “inflation is like a vampire,” he says. “You can’t just kill it once.”

Stable Currencies

European central banks were also constrained from reducing interest rates by a need to keep their currencies stable within the European Exchange Rate Mechanism, the predecessor of the European Monetary Union and the euro, Ball added.

The high unemployment rates Europe suffered in the 1980s and early 1990s stemmed from limited labor mobility, according to a 2009 paper by economics professors Tito Boeri at Bocconi University in Milan and Pietro Garibaldi at the University of Turin in Italy. They found that mobility increased and joblessness declined starting in the mid-1990s after European countries reduced unemployment benefits and made it easier for companies to fire workers.

Labor mobility in the U.S. dropped last year to its lowest level since records began in 1948, according to the Census Bureau. The so-called national mover rate fell to 11.9 percent of the population in 2008 from 13.2 percent in 2007 as 35.2 million Americans one year or older changed residence.

Pull Up Stakes

One reason is a 27.8 percent decline in housing prices nationwide between the peak in June 2006 and September 2009, the last month for which data are available, according to the S&P/Case-Shiller home-price index. Millions of owners owe more on their mortgages than their homes are worth, making it hard for them to pull up stakes and look for work elsewhere without suffering big losses when they sell.

The number of U.S. homes worth less than the debt owed on them reached almost 10.7 million, or 23 percent of all mortgaged properties, at the end of the third quarter, according to a report from First American CoreLogic, a Santa Ana, California- based real-estate research firm.

An additional 2.3 million mortgages are approaching “negative equity” as loan defaults rise nationwide, the company said Nov. 24.

“The weak housing market will contribute to high unemployment,” Nobel Prize-winning economist and Columbia University professor Joseph Stiglitz said in testimony to the Joint Economic Committee of Congress on Dec. 10.

“A distinguishing feature of America’s labor market is its high mobility,” he added. “But if individuals’ mortgages are underwater, or if home equity is significantly eroded, they will be unable to move, reinvest in a new home.” He urged U.S. lawmakers to use “overwhelming force” to reduce joblessness.

Mimic Europe

The U.S. is also starting to mimic Europe by increasing the role of the central government in the economy, says Nobel Prize- winning economist Edward Prescott.

“There’s been a regime change,” he says. Taxes are likely to rise and that will weigh on the U.S. economy by reducing incentives to work, just as is the case in Europe, adds Prescott, who is a senior monetary adviser to the Federal Reserve Bank of Minneapolis and a professor at Arizona State University in Tempe.

The U.S. shares another characteristic of the eurosclerosis era: high levels of long-term unemployment. Some 5.8 million Americans have been looking for work for more than 26 weeks, representing 38 percent of the unemployed, the most since records began in 1948.

The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- stood at 17.2 percent in November.

“There’s reason to think we could suffer a U.S. sclerosis,” Ball says. “That would be horrible. We’d have a big pool of people being left behind.”

To contact the reporters on this story: Rich Miller in Washington rmiller28@bloomberg.netMichael McKee in New York at mmckee@bloomberg.net

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BOE Says Job Market Coped With Recession Better Than Forecast

By Jennifer Ryan and Scott Hamilton

Dec. 14 (Bloomberg) -- The Bank of England said the British job market has come through the recession better than it initially forecast and record low interest rates are helping consumers cope with their debt.

“Employment to date has not fallen by as much as we might have feared given the falls in output,” Chief Economist Spencer Dale said in the bank’s quarterly bulletin, published today. “Despite the severe recession, the proportion of households who reported difficulties keeping up with bills and credit commitments had fallen slightly.”

The report suggests policy makers see the recovery from the longest recession on record is under way. The Bank of England also said asset prices and credit conditions are shaking off the effects of the financial crisis and U.K. stock prices “do not look particularly elevated.”

Consumer spending accounts for more than three fifths of gross domestic product and Britain has lost more than 600,000 jobs since the recession began, taking the unemployment rate to 7.8 percent. Employment rose in October and claims for jobless benefits increased the least in 18 months, the statistics office said Nov. 11.

Higher unemployment has nevertheless eased wage pressures. Compensation agreements have “fallen sharply” this year as the average increase fell below 2 percent while some companies froze pay, the report said. In the third quarter, annual pay growth was 1.2 percent, compared with 3.4 percent in the same period a year earlier, easing inflation pressures in the economy.

“A substantial element of the workforce appears to have been able to protect their jobs by accepting slower wage growth,” Dale said.

Record Low

The central bank held its key interest rate at 0.5 percent last week and kept its bond-purchase program at 200 billion pounds ($325 billion) to ensure the recovery.

Low rates have made borrowing more affordable and helped more U.K. households meet debt payments, the bank said, citing a survey it conducted with NMG Financial Services Consulting from September to October.

Central bank policy has underpinned an improvement in credit markets and has also spurred demand for riskier assets, the bank said. The benchmark FTSE-100 Index has gained about 50 percent from its March low.

Bond purchases are “likely to have boosted asset prices by encouraging portfolio rebalancing toward riskier assets and reducing required risk premia,” the report said. “Despite their rapid rise since March, the level of U.K. equity prices did not look particularly elevated compared with long-run averages of simple valuation metrics.”

‘Fragile’

Still, investor confidence is vulnerable, the report said. Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World, the state company that roiled markets last month when it tried to rescheduled debt payments.

HSBC Holdings Plc has the most at risk in the United Arab Emirates, JPMorgan Chase & Co. said in a Nov. 27 report.

“Sentiment in financial markets remained fragile,” the Bank of England said. The report cited a “renewed period of market volatility linked to worries about the possible wider implications of the potential default of the Dubai World investment company.”

The pound’s 20 percent drop in the past two years against a basket of trade-weighted currencies hasn’t helped lower the price of exports relative to imports, the bank said. Since the middle of 2007, export and import prices have both increased by around 15 percent.

“The recent stability of the U.K. terms of trade reflects the fact that sterling import and export prices have risen by similar amounts and by only a little less than the overall exchange rate depreciation,” the report said. “But if the rise in export prices is persistent, then this will create an incentive for rebalancing within the U.K. economy.”

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net.

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Yen Favored for Carry Trades as Japan Faces Deflation

By Oliver Biggadike and Theresa Barraclough

Dec. 14 (Bloomberg) -- The yen is poised to replace the dollar as the top funding currency for investments in cities from Sydney to Sao Paulo after borrowing from Japan became almost as cheap as U.S. loans for the first time in four months.

Rates on 90-day yen loans between banks have fallen the most in 13 years amid record deflation that prompted the Bank of Japan to start a $113 billion lending program last week. By easing demand for private-sector loans, the move helped shrink the gap between U.S. and Japanese London interbank offered rates by two-thirds over the past three months to 0.024 percentage point, the least since Aug. 26, data compiled by Bloomberg show.

Investors are betting Libor rates in the U.S. will be higher by June as it recovers from the recession quicker than Japan, according to Bloomberg data. The U.S. will expand 2.6 percent in 2010, twice as fast as Japan, median forecasts in Bloomberg surveys of as many as 82 economists show. That may entice traders to shift to yen from dollars to buy assets in higher-interest countries like Australia and Brazil, weakening Japan’s currency and shoring up the dollar, as advocated in public statements by both governments.

“The dollar’s role as a funding currency is fleeting at best,” said Samarjit Shankar, a foreign-exchange group managing director in Boston at BNY Mellon, the world’s largest custodial bank at more than $20 trillion in assets. “When central banks start raising rates, the yen will be left behind as the primary funding currency.”

The yen fell 7.7 percent in the five months after the last time Japanese loans became cheaper, in August 1993. That plunge followed a 45 percent gain in the previous three years, when American rates were mostly lower.

Libor Spread

Japan’s currency also tended to slide as the Libor spread between the two countries widened during the 13 years that U.S. loans cost more, from 1993 until Aug. 24. The yen depreciated 24 percent in five months in 1995 as that spread expanded by 41 basis points, or 0.41 percentage point. It weakened 13 percent in 2005 as Japan’s borrowing costs became almost 2 percentage points cheaper than in the U.S.

This year’s falling U.S. loan costs encouraged investors to sell dollars in carry trades, which seek to profit by using money from low-interest economies to buy assets in higher- yielding countries. Since American rates began dropping in March, the dollar has lost 9.4 percent against the yen, almost twice as much as the U.S. currency had weakened in the prior 10 months.

The three-month yen Libor rate fell to 0.28 percent on Dec. 11, from 1.09 percent on Oct. 8 last year, following its biggest 14-month plunge since 1996. The U.S. rate last week was 0.25 after its largest drop since 2002.

Cash and Carry

Since U.S. borrowing costs fell below Japan’s in August, buying Australian dollars with U.S. funds has produced a 9.9 percent profit, Bloomberg data show. With Brazilian real, the trade gained 6.9 percent. Using yen as a funding currency would have gained less than half as much against the Aussie and barely broken even versus the real.

“The difference between U.S. dollar and Japanese interest rates in general, including Libor rates, is one of the main drivers of the dollar-yen,” said Masafumi Yamamoto, Tokyo-based chief foreign-exchange strategist at Barclays Capital. Based on British Bankers’ Association surveys, Libor rates are what banks charge each other for loans and serve as benchmarks for $360 trillion worth of financial products globally from home mortgages to corporate bonds.

Weaker Yen

“A higher dollar Libor rate than yen Libor rate means stronger dollar versus yen,” said Yamamoto, who predicts Japan’s currency will fall to 96 by June and to 100 by the end of 2010, an 11 percent drop from its Dec. 11 close, at 89.10. Median estimates from as many as 41 strategists surveyed by Bloomberg see the yen weakening to 93 by mid-year and to 97 six months later.

The dollar traded at 88.86 yen today, after falling 1.6 percent against the yen last week, down 2.5 percent for the year. The greenback bought $1.4624 per euro, after gaining 1.7 percent for the week and down 4.7 percent for the year. The U.S. Dollar Index measuring its performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona added 0.9 percent last week and is down 5.8 percent for the year.

Investors are betting that the Bank of Japan will keep its 0.1 target rate through next year and that the Federal Reserve will abandon its near-zero benchmark.

Future Chances

There’s at least an 88 percent chance the U.S. will raise rates in 2010, up from 78 percent on Nov. 24, futures on the CME Group show. Prices indicate a 46 percent likelihood of an increase by June, up from 30 percent on Nov. 30. By contrast, overnight interest-rate swaps traders see no chance that the BOJ will increase its benchmark next year, Bloomberg data show.

Trading in forward contracts on three-month swaps, used to hedge against Libor fluctuations by agreeing to pay or receive a specified rate starting on a future date, show U.S. borrowing costs rising above Japan’s within six months.

The yen hit a 14-year high of 84.83 per dollar on Nov. 27, less than three weeks after U.S. Treasury Secretary Timothy Geithner said a “strong dollar” is “very important.” Prime Minister Yukio Hatoyama said on Dec. 2 the yen’s rise can’t continue, Nikkei newspaper reported.

There is “no doubt” that accelerating yen gains would hit exporter profits, said Chief Cabinet Secretary Hirofumi Hirano on Nov. 26 in Tokyo. That would be a “huge risk” for auto makers, Nissan Motor Co. Chief Operating Officer Toshiyuki Shiga said on Nov. 19 in Yokohama.

Intervention

Chances are increasing that Japanese policy makers will sell the currency to prevent damage to the economy from further gains, said Sophia Drossos, co-head of global foreign-exchange strategy for Morgan Stanley in New York.

Options traders are the least optimistic on the yen since before the bankruptcy of Lehman Brothers Holdings Inc. pushed up volatility in currency markets and forced investors to buy protection against yen gains. The cost on Dec. 4 of hedging for a month against a gain was the cheapest relative to guarding against a decline since February 2007, so-called risk reversal rates show.

Japan’s struggling economy and signs of a U.S. recovery are shifting the carry-trade funding advantage back toward the yen, where it had been since 1993, when the BOJ cut rates in an unsuccessful attempt to avert a recession that sparked a decade of deflation.

Unemployment

Employers in the U.S. eliminated 11,000 jobs in November, the fewest since the recession began, and unemployment fell to 10 percent from 10.2 percent a month earlier, the Labor Department reported on Dec. 4. The dollar rose that week against the yen by the most since 1999, advancing 4.7 percent.

“The U.S. economy will perform strongly; the Fed will tighten,” said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, the world’s biggest currency trader. “It makes the yen again a much more attractive vehicle for funding carry trades.”

In Japan, the economy has shrunk 7.7 percent since 2008’s first quarter, the steepest decline in at least 29 years. Prime Minister Hatoyama is boosting borrowing to a record 53.5 trillion yen ($607 billion) in the year ending March 2010 to support the economy and slow deflation.

Consumer prices have fallen 2.5 percent in the past year, the sharpest 12-month decline since at least 1970, sparking demand for the nation’s debt and pushing down bond yields as investors bet the securities’ fixed payments will gain purchasing power.

Real Yields

Mitsubishi UFJ Financial Group Inc. and Yasuda Asset Management Co. say they are buying the bonds even though Japan’s 1.23 percent 10-year yield is lower than in the U.S., U.K. and Germany. That’s because deflation has driven so-called real yields up to 3.78 percent, compared to the U.S.’s 3.7 percent.

From 2004 to 2007, carry trade investors who sold borrowed yen to invest in Mexican pesos, South African rand, Brazilian real and New Zealand and Australian dollars earned as much as 84 percent, Bloomberg data show.

The trades benefited from interest rates as low as zero in Japan and three-month bill yields as high as 8.4 percent in New Zealand. The popularity weakened the yen more as it fell as much as 13 percent in that period, further increasing carry profits.

Last year’s financial crisis magnified price swings and caused the trades to lose money. Dollar-yen volatility surged on Oct. 24, 2008 to 42 percent as Japan’s currency rallied 27 percent from 110.66 on Aug. 15, 2008 to 87.13 on Jan. 21, erasing carry trade profits from the previous four years.

‘World’s Weakest’

Now, narrowing interest-rate differences are making the yen the funding currency of choice again. Six-month borrowing costs in yen fell below dollar rates for one day last week after the Bank of Japan announced its 10 trillion yen ($112.7 billion) program on Dec. 1 to offer three-month loans to commercial banks at 0.1 percent interest. The central bank said on Dec. 10 that it had initiated the program with an 800 billion yen injection into the banking system.

Japan’s currency “may become the world’s weakest,” said Keiji Matsumoto, currency strategist at Nikko Cordial Securities Inc. in Tokyo.

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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Citigroup Said to Near Agreement on TARP Repayment

By Bradley Keoun

Dec. 14 (Bloomberg) -- Citigroup Inc. is nearing an accord with the Treasury Department and regulators that would let the bank repay its $20 billion of bailout funds and escape government pay limits, people familiar with the matter said.

Under the plan, which may be announced as soon as today, the U.S. bank would raise about $20 billion of capital, said three people briefed on the plan, who declined to be identified because the talks are private. A partial offering of the Treasury’s 7.7 billion shares may be coordinated with New York- based Citigroup’s effort to raise capital, the people said.

Chief Executive Officer Vikram Pandit is pressing for an exit from the Troubled Asset Relief Program to avoid being the only large bank left on “exceptional assistance,” a Treasury designation reserved for companies including American International Group Inc. and General Motors Co. that are surviving on taxpayer aid. Bank of America Corp. exited last week after paying back $45 billion of bailout funds.

“It is important to get back to normal and if they pay back the TARP money they aren’t so much under the pressure of public opinion,” said Roger Groebli, Singapore-based head of financial market analysis at LGT Capital Management, which oversees about $75 billion.

Citigroup rose to $4.01 in European trading today, up 1.5 percent from its $3.95 close in New York on Dec. 11. The stock has tumbled 41 percent this year, valuing the lender at about $90 billion.

Treasury, FDIC

Citigroup also plans an early termination of guarantees from the Treasury, Federal Deposit Insurance Corp. and the Federal Reserve on $301 billion of the bank’s riskiest securities, mortgages, auto loans, commercial real estate and other assets, the people said. Citigroup paid $7 billion in advance for the guarantees, which last five to 10 years, depending on the type of underlying assets. The matter remains under discussion, the people said, adding that the terms or timing could still change.

In October, Pandit, said he was “focused on repaying TARP as soon as possible” in cooperation with regulators. Pandit pushed to accelerate the talks after Bank of America’s plan was announced, people familiar with the matter said last week.

Pandit, 52, has indicated he’s seeking to repay the exceptional assistance partly on concern the government-imposed pay limits might make Citigroup vulnerable to employee poaching by unfettered Wall Street rivals, according to people familiar with the matter.

Citigroup spokesman Jon Diat declined to comment. A Treasury spokesman, Andrew Williams, declined to comment. Williams said last week, “We continue to believe that banks and our financial system are better off with private capital instead of government capital.”

Wind Down

Citigroup, which took $45 billion of TARP funds last year, converted about $25 billion in September into common stock, equivalent to a 34 percent stake. Some details of Citigroup’s plan were reported earlier by the Wall Street Journal.

The government is trying to wind down bailout programs extended as financial markets convulsed late last year. Treasury Secretary Timothy Geithner said in a Dec. 4 interview that most taxpayer money injected into banks through TARP will eventually be recovered.

JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, repaid bailout funds in June. San Francisco-based Wells Fargo & Co., with $25 billion of TARP money, isn’t subject to pay limits because it never needed a second helping of bailout funds.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

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Euro Gains After Dubai Gets $10 Billion Bailout From Abu Dhabi

By Bo Nielsen and Yasuhiko Seki

Dec. 14 (Bloomberg) -- The euro rallied after Abu Dhabi pledged to bail out Dubai, easing concern that Europe’s biggest banks will suffer writedowns on loans in the Gulf emirate.

The European currency rose against the dollar, while the pound pared its declines as stocks rebounded after Dubai said it will use some of the funds to pay “trade creditors and contractors as well as meet interest expenses and company working capital.” The yen gained against all 16 most-traded currencies tracked by Bloomberg after the Tankan index of confidence among Japanese manufacturers increased.

“The all-dominating news is Abu Dhabi bailing out Dubai and it has added to the risk-on sentiment for now, sending euro- dollar higher,” Kasper Kirkegaard, a currency analyst with Danske Bank A/S, said in an interview with Bloomberg Television from Copenhagen.

The euro climbed to $1.4663 as of 9:36 a.m. in London, from $1.4615 in New York last week, when it declined to $1.4586, the weakest level since Oct. 5. The 16-nation currency traded at 129.73 yen, from 130.24 yen, after dropping as low as 129.18 yen earlier. The yen was at 88.46 per dollar, from 89.10.

The MSCI World Index of shares advanced 0.4 percent, reversing a 0.1 percent decline, after the Dubai government said Abu Dhabi provided $10 billion to help state-owned Dubai World meet its obligations, including $4.1 billion needed to repay an Islamic bond maturing today for the real-estate unit Nakheel PJSC. Nakheel accumulated debt during a six-year real-estate boom in Dubai, when the sheikhdom borrowed $10 billion and its state-controlled companies a further $70 billion.

Pound Rebounds

Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World, according to JPMorgan Chase & Co. British banks, including RBS and HSBC Holdings Plc arranged about $4.4 billion of Dubai World’s loans, according to a report by Bank of America Merrill Lynch.

The pound pared declines versus the dollar, trading at $1.6237, from $1.6262 last week and as low as $1.6190 earlier.

“It does remove a layer of uncertainty in the market but that doesn’t mean we’re out of the woods yet,” said Geoffrey Yu, a London-based currency strategist at UBS AG.

Gains in the euro were tempered on speculation the credit ratings of European nations will come under pressure.

Spain had the outlook on its AA+ debt rating cut to “negative” from “stable” by Standard & Poor’s last week. Greece’s credit was reduced one step to BBB+ by Fitch Ratings. Portugal’s outlook was also revised to “negative” from “stable” by S&P.

Greece Reforms

Greek Prime Minister George Papandreou will today outline structural reforms aimed at cutting his nation’s budget deficit. European Central Bank Vice President Lucas Papademos said last week Greece’s fiscal situation as “extremely serious.”

“Dollar strengthening may extend somewhat further against the euro as concerns over fiscal solvency in some euro-zone member countries dominate market focus,” Michael Hart, a currency strategist at Citigroup Inc. in New York, wrote in a note today.

Industrial production in the 16 nations using the euro retreated 0.6 percent in October following a revised 0.2 percent increase the previous month, according to the European Union’s statistics office in Luxembourg today. Economists in a Bloomberg survey forecast a reading of negative 0.7 percent.

ZEW Report

The ZEW Center for European Economic Research in Mannheim will say tomorrow its index of investor and analyst expectations, which aims to predict developments six months ahead, fell to 50.0 from 51.1 in November, according to a separate survey.

“The euro is likely to remain captive to downside risk, depending on the outcome of this week’s economic data,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain, so-called net shorts, was 511 on Dec. 8, compared with net longs of 22,151 a week earlier. That’s the first time since April 28 that short bets outnumbered longs.

The dollar has risen against the euro in the past two weeks after a Dec. 4 report showed that U.S. employers cut the fewest jobs in November since the recession began and unemployment unexpectedly fell, prompting traders to bet that the Federal Reserve will bring forward interest-rate increases.

Dollar and Data

“Why is good data suddenly supporting the dollar?” a team of analysts led by Ulrich Leuchtmann at Commerzbank AG in Frankfurt wrote today. “This development makes sense if one relies on good U.S. data eventually leading to an end of the Fed’s zero rate policy. Previously rate rises had moved into the very distant future so that the effect had been ignored. This is obviously changing now.”

The yen advanced most against Taiwan and Australia’s dollar after the Tankan report, rising 1.2 percent and 0.9 percent, respectively. The index of sentiment among big makers of products including cars and electronics climbed nine points to minus 24 in December, the Bank of Japan said in Tokyo today. The median forecast of 19 economists surveyed by Bloomberg News was minus 27. A negative number means pessimists outnumber optimists.

To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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Tokyo Steel to Cut Prices as Construction Declines

By Masumi Suga

Dec. 14 (Bloomberg) -- Tokyo Steel Manufacturing Co., Japan’s largest maker of construction girders, will reduce prices for the second time in three months as manufacturers cut back investment and the government reviews public works spending.

Prices of H-beams will drop 2,000 yen, or 3.1 percent, to 63,000 yen ($711) a metric ton for January contracts, the lowest since February 2004, the Tokyo-based company told reporters. The hot-rolled coil price will drop 3.5 percent to 55,000 yen.

Uncertainty over the economic outlook in the world’s second-largest economy is prompting Japanese companies to reduce capital spending. Construction steel prices are also declining as the new government of Prime Minister Yukio Hatoyama, under pressure to control spending, reviews public works projects, said Tokyo Steel Managing Director Naoto Ohori.

The bottom of domestic steel demand “is not in sight yet,” Ohori said today in Tokyo. “Production levels are too high, given the size of demand,” he said.

Tokyo Steel shares gained 0.6 percent to 1,041 yen at 1:24 p.m. local time on the Tokyo Stock Exchange.

Large enterprises plan to cut capital spending by 13.8 percent this fiscal year, the Bank of Japan’s Tankan index of corporate sentiment showed today. It was the worst reading for a December survey and compares with a 10.8 percent decline three months ago.

Product Prices

Tokyo Steel Manufacturing said it will cut most of its other product prices including plates and deformed steel bars by 2,000 yen, compared with December. The company will maintain the price of wire rods at 61,000 yen per ton.

The increased value of the Japanese currency has raised concern that domestic products are becoming less competitive compared with imported steel, Ohori said. The yen, which last month appreciated to the strongest level since July 1995, traded at 88.85 yen to the dollar at 1:26 p.m. in Tokyo. 　　Tokyo Steel’s price cuts contrast with gains outside Japan. Baosteel Group Corp., China’s largest steelmaker, raised benchmark product prices by 8 percent for January delivery, the first increase since September, on rising raw material costs and improving demand from automakers.

To contact the reporter on this story: Masumi Suga in Tokyo at +81-3-3201-3088 or msuga@bloomberg.net

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Raw, Refined Sugar May Rise in New York, London, Survey Shows

By M. Shankar and Catarina Saraiva

Dec. 14 (Bloomberg) -- Raw-sugar futures and refined-sugar contracts may gain this week as adverse weather hampers harvesting in Brazil and India, the world’s top producers of the sweetener, according to a survey.

Six out of 10 traders, analysts and brokers surveyed last week forecast that raw sugar traded in New York would rise. Three predicted a drop, and one said it would be little changed. Raw sugar gained 6.6 percent to 24 cents a pound last week.

Six of 10 respondents said white sugar traded in London would gain and two said the price would slump. Two forecast it would be little changed. White, or refined, sugar rose 1.3 percent to $626.10 a metric ton last week.

“The wetness in Brazil has lowered the sugar content in the final stages of this crop year,” Craig Ruffolo, a senior vice president at McKeany-Flavell Co. in Oakland, California, said in an e-mail.

Four of 10 said refined sugar’s premium over raw sweetener would widen, four said it would be little changed and two said the gap would narrow.

Bullish on raw sugar: 6       Bearish: 3     Neutral: 1
Bullish on refined sugar: 6   Bearish: 2     Neutral: 2
Widening refined premium: 4   Narrow: 2      Neutral: 4

To contact the reporters on this story: M. Shankar in London at mshankar@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net.

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Asian Stocks Rebound on Dubai Financing; Japan Shares Drop

By Shani Raja

Dec. 14 (Bloomberg) -- Asianstocks rebounded from earlier losses after Dubai secured $10 billion of funding to repay its debt. Japan shares dropped as a measure of business confidence showed companies are scaling back investment plans.

Samsung C&T Corp., builder of the world’s tallest tower in Dubai, climbed 3.3 percent after Abu Dhabi agreed to provide the money for Dubai’s financial support fund. Standard Chartered Plc, which has made loans to the Middle East, climbed 3.9 percent in Hong Kong. Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank by value, sank 2.9 percent after the country’s Tankan confidence survey was released.

The MSCI Asia Pacific Index added 0.5 percent to 120.32 at 4:30 p.m. in Tokyo. It dropped 0.6 percent earlier. The gauge fell by 0.4 percent last week as downgrades to Greece’s credit rating exacerbated credit-market concern sparked by Dubai World’s plan to reschedule payments on its liabilities.

“It’s a positive development if Dubai steps in and says look, we’ll honor these debts,” said Prasad Patkar, who helps manage $1.7 billion at Platypus Asset Management in Sydney. “It has the potential to help along the subdued investor risk appetite that was in place the last couple of weeks.”

Japan’s Topix Index declined 0.4 percent. The Tankan survey of confidence among the country’s largest manufacturers rose the least since the economy emerged from its worst postwar recession.

Qantas, Alumina

China’s Shanghai Composite Index gained 1.7 percent. Hong Kong’s Hang Seng Index added 1 percent, while South Korea’s Kospi Index gained 0.5 percent.

Australia’s S&P/ASX 200 Index rose 0.4 percent. Qantas Airways Ltd. surged 3.5 percent in Sydney on plans to raise its international airfares. Alumina Ltd. jumped 6.4 percent after JPMorgan Chase & Co. boosted the profit outlook for Alcoa Inc., the largest U.S. aluminum producer.

Futures on the Standard & Poor’s 500 Index climbed 0.8 percent, while the MSCI World Index added 0.2 percent. The U.S. futures contracts rebounded from an earlier 0.3 percent drop after Abu Dhabi’s financing for Dubai was announced. The money will help repay obligations including $4.1 billion needed for a Nakheel PJSC Islamic bond maturing today.

State-controlled Dubai World said Dec. 1 it is seeking to restructure $26 billion of debt, less than half the $59 billion of liabilities it had at the end of 2008.

Dubai World

Samsung C&T climbed 3.3 percent to 49,500 won. The stock slumped as much as 14 percent after the Dubai government said on Nov. 25 that Dubai World was seeking a “standstill” accord on its debt. Samsung C&T said on Nov. 27 it stopped work on a $350 million bridge in Dubai after Nakheel halted payments.

Standard Chartered gained 3.9 percent to HK$196.30. The bank has $18 billion of loans to the Middle East and South Asia, of which two-thirds relates to the United Arab Emirates, Finance Director Richard Meddings said on Dec. 9.

HSBC Holdings Plc, Europe’s largest bank, added 1.7 percent to HK$91.70. The London-based banks are among Dubai World’s six main creditors, a banker familiar with the talks last week.

“Markets are likely to take the news positively in the immediate term as concerns are lifted,” said Lee King Fuei, a Singapore-based fund manager at Schroders Plc, which oversees $222 billion worldwide as of September. “Dubai is a symptom of a problem over the past decade of excessively loose credit and liquidity. That requires a long time to work through.”

In Tokyo, Obayashi Corp. lost 1.6 percent to 301 yen, paring an earlier slump of 5.9 percent. General contractors and machinery makers were holding about $7.5 billion of bills owed by the Dubai government and its affiliated companies as of Oct. 31, Nikkei reported, citing the Japanese government.

Growth Optimism

Kajima Corp. rose 1.1 percent to 184 yen, after slumping 5.5 percent. Mitsubishi Heavy Industries Ltd. added 0.3 percent to 322 yen, having earlier lost 1.6 percent. Both companies were also named in the Nikkei report.

The Standard & Poor’s 500 Index added 0.4 percent on Dec. 11 as better-than-estimated retail sales and consumer confidence reports fueled economic growth hopes that have boosted the U.S. index by 64 percent since March 9. The MSCI Asia Pacific Index has climbed 69 percent in that time, while Europe’s Dow Jones Stoxx 600 Index advanced 55 percent.

Stocks in the MSCI benchmark are valued at an average 22 times estimated earnings, higher than 18 times for the S&P 500 and 15 times for the Stoxx 600.

A report last week showed China’s industrial production rose 19.2 percent in November from a year earlier, exceeding the 18 percent estimated by economists, while South Korea’s central bank said gross domestic product will grow next year at a faster pace than previously forecast.

Capital Spending

“There’s always a chance things could get derailed, but we’re seeing an improving environment that bodes well for markets next year,” said Paul Xiradis, who manages $10 billion at Ausbil Dexia Ltd. in Sydney. “There is inaction by a number of market participants at the end of a wild year who are happy just to wait and see what happens next year.”

Mitsubishi UFJ sank 2.9 percent to 442 yen. Shinsei Bank Ltd. lost 1 percent to 104 yen. Large Japanese enterprises plan to cut capital spending by 13.8 percent this fiscal year, the worst reading for a December survey, compared with the 10.8 percent decline the Tankan showed three months ago.

“Weak capital investment shows we can’t expect a robust recovery in the domestic economy in the coming months,” said Hiroshi Morikawa, a senior strategist in Tokyo at MU Investments Co., which manages about $14 billion. “Unless businesses invest, the recovery led by exports won’t spread to the domestic economy.”

Higher Fares

Japan’s gross domestic product grew an annualized 1.3 percent in the three months to September, slower than the 4.8 percent reported last month, government data on Dec. 9 showed.

Qantas, Australia’s biggest airline, surged 3.5 percent to A$2.67. The carrier said it will increase economy-class fares as much as 5 percent on flights to destinations including Japan, North America and Europe.

Japan Airlines Corp. rose 3.2 percent to 98 yen. The U.S. and Japan agreed on a draft “open skies” treaty that will allow airlines in the two countries to act more like a single company for pricing, scheduling and marketing global flights.

Alumina climbed 6.4 percent to A$1.665. Alcoa’s earnings will be $1.45 a share in 2010, compared with an earlier prediction of $1.15, JPMorgan analyst Michael Gambardella wrote in a report. He raised his 2010 Alcoa share price estimate to $25 from $22 in line with metal-price revisions by a JPMorgan strategist.

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

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Euro Stoxx 50 May Climb to 3,200 by Year-End 2010, Nomura Says

By Christiane Lenzner

Dec. 14 (Bloomberg) -- The Euro Stoxx 50 Index may reach 3,200 and the U.K.’s FTSE 100 Index may climb to 6,000 by the end of 2010, according to Nomura Holdings Inc.

“We think stocks will rise further in 2010, but suspect that the rally will have a different complexion to that which drove the market in 2009, a year that was purely a ’macro trade,’” the brokerage wrote in a report to clients dated Dec. 11. “In 2010, we think the emphasis will switch to the micro, with themes within the market becoming more important.”

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German Stocks Climb for Third Day as ThyssenKrupp, Allianz Gain

By Cornelius Rahn

Dec. 14 (Bloomberg) -- German stocks gained for a third day after Abu Dhabi provided $10 billion to keep Dubai’s Nakheel PJSC from defaulting.

The benchmark DAX Index advanced 1.1 percent to 5,819.36 as of 9:50 a.m. in Frankfurt, the highest since Oct. 21 based on closing levels. The measure has rallied 59 percent since this year’s low on March 6 as government spending and recovering exports helped to pulled Germany out of recession. The broader HDAX Index also rose 1.1 percent today.

Abu Dhabi’s pledge will allow Dubai World’s Nakheel real- estate subsidiary to make $4.1 billion of payments on bonds that mature today. Dubai World on Nov. 25 sought a “standstill” agreement on its debt, triggering a slump in equities worldwide.

ThyssenKrupp AG, the country’s largest steelmaker, gained 2 percent to 24.96 euros as metal prices rose in London. Salzgitter AG, the second-biggest, increased 1.8 percent to 65.68 euros, the biggest advance in two weeks.

Deutsche Bank AG, Germany’s largest lender, added 1.6 percent to 48.50 euros, while Allianz SE, the country’s biggest insurer, climbed 1.3 percent to 85.72 euros. Banks and insurers were among the best performers in the pan-European Dow Jones Stoxx 600 index today.

Daimler AG, the world’s second-largest manufacturer of luxury cars, rose 2.3 percent to 35.98 euros. The carmaker expects to outpace growth in China’s overall vehicle market next year. The total market will likely grow as much as 20 percent, Daimler spokesman Trevor Hale said. The company also it will triple production capacity at a Beijing venture on rising sales and anticipated demand for a new Mercedes-Benz E-Class sedan.

Volkswagen, Continental

Volkswagen AG, Europe’s biggest carmaker, climbed 1.7 percent to 83.08 euros. The company said it aims to capture as much as 10 percent of India’s car market in four to six years as it boosts sales in emerging-markets.

Continental AG, Europe’s second-largest auto-parts maker, added 2.3 percent to 37.22 euros, its biggest gain in more than a week. The stock was raised to “outperform” from “neutral” at Exane BNP Paribas.

The following shares rose or fell in German markets. Stock symbols are in parentheses.

Evotec AG (EVT GY) rallied 3.7 percent to 2.27 euros, set for the biggest gain this month. The biotechnology company said it received a milestone payment from Ono Pharmaceutical Co. Ltd. from its research collaboration aimed at identifying novel inhibitors for a protease target.

HeidelbergCement AG (HEI GY) climbed 1.3 percent to 47.62 euros, the second straight gain. Chief Executive Officer Bernd Scheifele said Germany’s biggest cement maker will start considering acquisitions by the end of next year, Euro am Sonntag reported.

Tognum AG (TGM GY) advanced 1.2 percent to 10.97 euros. The diesel-engine maker partly owned by Daimler said it won an order for emergency gensets to be installed in a Russian nuclear power plant. The gensets will be supplied in early 2012 and the order has a value of about 26 million euros, the company said.

Qiagen NV (QIA GY) added 1.9 percent to 15.28 euros, rising for a fifth consecutive day. The Dutch biotechnology company said it closed the purchase of privately held SABiosciences Corp.

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

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U.K. Stocks Advance; Standard Chartered, RBS Lead Gains

By Adria Cimino

Dec. 14 (Bloomberg) -- U.K. stocks climbed, led by financial shares, after Abu Dhabi provided $10 billion to avert a default by Dubai’s Nakheel PJSC.

Standard Chartered Plc, the U.K. bank that gets most of its profit in emerging markets, rallied 5.1 percent. Royal Bank of Scotland Group Plc also rose.

The benchmark FTSE 100 Index rose 55.63, or 1.1 percent, to 5,317.2 at 9:15 a.m. in London, gaining for a third day. The index has rebounded 51 percent since March and is heading for its biggest annual gain since 1997 as central banks cut interest rates to record lows and governments worldwide committed about $12 trillion to revive the economy. The FTSE All-Share Index increased 1 percent today and Ireland’s ISEQ Index added 0.9 percent.

Abu Dhabi provided $10 billion to help Dubai World, the state-owned holding company, meet its obligations, including $4.1 billion needed to repay an Islamic bond maturing today for the real-estate unit Nakheel PJSC.

Dubai will use the rest of the money to pay Dubai World’s contractors, suppliers, interest and operating costs until the company reaches a standstill agreement with its creditors, Dubai’s government said in an e-mailed statement today.

“The fact that they are offering $10 billion made some fears dissipate,” said Bill Ismail, a senior sales trader at City Index Ltd. in London. “Many people hope the rally will continue into the end of the year.”

Standard Chartered jumped 5.1 percent to 1,587 pence. The stock was raised to “outperform” from “neutral” at Credit Suisse Group AG.

RBS, the U.K. lender 70 percent-owned by the government, advanced 3.5 percent to 31.64 pence.

The following shares rose or fell in London. Stock symbols are in parentheses.

Mouchel Group Plc (MCHL LN) surged 27 percent to 241.5 pence, a record gain. The British road-maintenance company said it received two unsolicited approaches from VT Group Plc and rejected the bids as “wholly inadequate.”

PartyGaming Plc (PRTY LN) gained 2.1 percent to 262 pence, advancing for a third day. The owner of the PartyPoker.com online-gambling brand is in intermittent merger talks with Austria’s Bwin Interactive Gaming AG, the Sunday Times said, citing an unidentified person familiar with the matter.

Shanks Group Plc (SKS LN) added 3.9 percent to 135.1 pence. Covanta Holding Corp., a U.S. developer of waste-to-energy plants, may be considering a bid for Shanks Group following an approach by leveraged-buyout firm Carlyle Group, the Observer said, citing unidentified people.

Spice Plc (SPI LN) sank 13 percent to 62 pence, the biggest decline since February. The U.K.’s biggest reader of water meters posted a first-half loss after taking an impairment charge on its gas social housing unit.

Whitbread Plc (WTB LN) advanced 3.1 percent to 1,371 pence. The operator of the Premier Inn budget-hotel chain said it expects 2009/2010 results to exceed market estimates.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

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S&P 500 Rallying 11% Is Forecast of Top Strategists

By Lynn Thomasson

Dec. 14 (Bloomberg) -- The Wall Street strategists who correctly predicted U.S. stocks would rebound from the steepest plunge since the Great Depression now say the Standard & Poor’s 500 Index will rally 11 percent next year.

Thomas Lee, the chief U.S. equity strategist at JPMorgan Chase & Co., and Goldman Sachs Group Inc.’s David Kostin, this year’s most-accurate forecasters, say Federal Reserve interest rates near zero and profit growth of more than 26 percent will drive the S&P 500 to 1,300 and 1,250, respectively, in 2010. The combination of higher earnings and an increase in mergers and acquisitions will boost the index to 1,250, according to Thomas Doerflinger, a senior strategist at UBS AG in New York.

While analysts failed to foresee 2008’s crash, when credit markets froze and the S&P 500 fell the most since 1937, investors who followed their advice this year were rewarded with 22 percent gains. The index will end 2010 at 1,223, according to the average of 10 projections in a Bloomberg News survey. Their optimism clashes with Pacific Investment Management Co.’s Mohamed El-Erian and economist Nouriel Roubini, who predict smaller returns or losses.

“It’s hard to imagine that the optimistic scenario is baked into stocks,” Lee said. “Everyone is going to fight the recovery. It’s the error of deep pessimism.”

The S&P 500 rebounded 64 percent from a 12-year low in March after manufacturing and consumer spending increased and the U.S. government lent, spent or guaranteed more than $11 trillion to end the recession. The index rose less than 0.1 percent last week and ended at 1,106.41. Futures on the gauge rose 0.8 percent to 1,111.10 as of 2:55 a.m. in New York.

Sticking to Forecasts

It didn’t look like strategists would be right as 2009 began and the S&P 500 sank to 676.53 on March 9, falling 25 percent in its worst start on record. They stuck to their forecasts, predicting a 43 percent surge to 966 through Dec. 31, which would amount to a full-year 2009 gain of 6.9 percent.

“We were perceived by many of our clients in March and April as literally lunatics,” Tobias Levkovich, New York-based Citigroup Inc.’s top U.S. equity strategist, said in a Dec. 11 interview. His prediction for 1,000 on the S&P 500 has proved too conservative.

“Last week, I had dinner with a guy who had called me a lunatic, who didn’t really buy,” Levkovich said. “And he said, ‘I should have listened.’”

Combined earnings for S&P 500 companies will jump 23 percent to $73.69 a share next year from $59.82 in 2009, according to the average of strategist estimates compiled by Bloomberg News. Economists say U.S. gross domestic product will rise 2.6 percent in 2010 after shrinking 2.5 percent this year, according to the median forecasts.

Fastest Growth

JPMorgan’s Lee, who projects that S&P 500 profits will reach $80 a share next year, says investors should buy shares of companies that can increase earnings the fastest, such as technology and material stocks. Lee, in New York, sees the S&P 500 rising 17 percent to 1,300 through Dec. 31, 2010.

Goldman Sachs, the most profitable investment bank, says the Fed’s target rate for overnight loans between banks won’t rise until at least 2012, according to a Dec. 7 note. Fed funds futures give 60 percent odds that the central bank will raise interest rates by August, compared with 46 percent in June, Bloomberg data show.

New York-based Kostin, who wasn’t available for an interview, has a year-end 2010 forecast of 1,250.

Cheap Bank Shares

Binky Chadha, Deutsche Bank AG’s chief U.S. equity strategist in New York, predicts the index will climb 14 percent to 1,260 and is most bullish on financial companies because the economy is improving and the shares are inexpensive. A measure of banks, brokerages and insurance companies in the S&P 500 trades for 1.1 times book value, or just above the net cost of assets. That’s 48 percent less than the average in Bloomberg data going back to 1993.

“Equities remain very cheap,” Chadha said in a Dec. 11 interview. “The market isn’t discounting the recovery yet. It’s going to be gradual, but a recovery nonetheless and that will give you earnings growth.”

Even if the S&P 500 meets the average strategist forecast, it will still need to advance another 28 percent to reach the October 2007 record of 1,565.15. The index plunged 57 percent following that peak through March amid subprime mortgage-related losses at banks that now total $1.71 trillion and the credit crisis that followed the September 2008 collapse of New York- based Lehman Brothers Holdings Inc.

9.1% Advance

Strategists are estimating smaller gains after the nine- month rally that was the steepest since the 1930s. The median annual increase by the index since 1927 is 9.1 percent, according to data compiled by Bloomberg.

“They’ve sobered up,” said John Lynch, chief market analyst at Evergreen Investments, which managed $155.5 billion as of Sept. 30 in Charlotte, North Carolina. “The market can still go higher than where we are today, but we have to be prepared to slip and slide.”

To El-Erian, Pimco’s chief executive officer, and Roubini, the New York University professor who predicted the global financial crisis, the strategists are too optimistic.

Pimco says investors should expect returns that trail the historical average because of heightened government regulation, lower consumption and a smaller role for the U.S. in the global economy. Stocks will fall 10 percent or more next year as economic growth remains weak, El-Erian said in a Dec. 10 interview with Bloomberg News.

‘Completely Overwhelmed’

“Liquidity had completely overwhelmed the fundamentals,” he said in an interview from Newport Beach, California. “Now we’re starting to see some breaks. We’re starting to see some discrimination.”

Surging global equities and commodities mark the beginning of a bubble in financial markets, according to Roubini, who is based in New York. The “vulnerabilities and imbalances” that created the credit crisis have yet to be resolved, he wrote in a Dec. 2 post on his Web site. Roubini didn’t return requests for comment.

The most newsletter writers in 17 years are predicting a correction in U.S. stocks -- generally considered a 10 percent decline -- data from Investors Intelligence showed last week. Advisers expecting a correction increased to 35.1 percent from 33.3 percent, the survey of about 140 newsletters by the New Rochelle, New York-based research firm showed. The last time the level was that high, the S&P 500 slid 3.1 percent in the following month.

Options Insurance

Equity derivatives also indicate concern stocks will slip. S&P 500 options to protect against losses in 2010 are 33 percent more expensive than one-month contracts, among the highest premiums in the past five years, according to data compiled by Bloomberg.

Strategist estimates have missed the S&P 500’s swing each year by a median 8.5 percentage points in the decade Bloomberg has tracked the data. The prediction for a 3 percent advance in 2005 was the most accurate on record as the S&P 500 matched the gain, Bloomberg data show.

Investors who followed Wall Street’s advice in 2008 lost money as the first global recession since World War II erased as much as $37 trillion from global equity markets. The S&P 500 was forecast to end last year at 1,632, according to the average projection. It sank to 903.25 through Dec. 31, or 45 percent below the estimate.

The least accurate 2009 projection was from Barry Knapp at London-based Barclays Plc, who said in January that the S&P 500 would end the year at 874, or 21 percent below its current level. The New York-based forecaster said he failed to anticipate the extent of the Fed’s programs to reduce borrowing costs and ease the financial crisis.

‘So Aggressive’

“We underestimated the magnitude of the rebound,” Knapp said in a Dec. 10 interview. “The Fed was just so aggressive this year. I think that’s the main reason we were off.”

Knapp projects the S&P 500 will fall to 990, an 11 percent drop, during the first half of 2010 as the Fed withdraws stimulus from the economy, before rebounding to end the year at 1,120. The central bank began testing a tool for draining money this month while stressing that the trials themselves don’t represent a change in policy.

Levkovich at Citigroup, which the U.S. government bailed out last year, is the least bullish of the strategists after Barclays’s Knapp and Andrew Garthwaite of Zurich-based Credit Suisse Group AG, with an S&P 500 forecast of 1,150 for next year. That’s 3.9 percent above the index’s last close.

He says the rally may stall next year as companies struggle to meet forecasts for earnings growth. Companies in the S&P 500 are estimated to increase profits by 52 percent to $95.49 a share by 2011, based on projections from company analysts tracked by Bloomberg.

‘Ratchet Up’

“As earnings beat expectations early in the year, analysts will ratchet up the numbers and create a higher hurdle rate that companies can’t quite get over,” Levkovich said in a Dec. 11 interview from New York.

UBS’s Doerflinger is less pessimistic, in part because of the prospect for takeovers. Companies outside the financial industry in the S&P 500 are holding 9.7 percent of cash as a percentage of assets, a record, according to data from Goldman Sachs.

The value of announced mergers fell 46 percent in the U.S. from last year’s total to $456.2 billion in 2009, which would be the lowest full-year amount since 2003, Bloomberg data show.

“We are in a stage in the recovery where growth has to come in and deliver,” said Jeffrey Palma, the head of global equity strategy for Zurich-based UBS. “We’re expecting the economic recovery to continue in 2010 and with it strong earnings growth, creating a supportive environment for equity markets on a global basis.”

     The following table presents estimates from strategists at
brokerages for where the S&P 500 will finish 2010 and the
implied percentage change from last week’s close of 1,106.41.

Firm               Strategist              Estimate    %Change
Bank of America    David Bianco            1,275         15
Barclays           Barry Knapp             1,120          1
Citigroup          Tobias Levkovich        1,150          4
Credit Suisse      Andrew Garthwaite       1,125          2
Deutsche Bank      Binky Chadha            1,260         14
Goldman Sachs      David Kostin            1,250         13
JPMorgan           Thomas Lee              1,300         17
Oppenheimer        Brian Belski            1,300         17
RBC                Myles Zyblock           1,200          8
UBS                Thomas Doerflinger      1,250         13
AVERAGE                                    1,223         11

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

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U.S. Stock-Index Futures Rally as Abu Dhabi Bails Out Dubai

By Adam Haigh

Dec. 14 (Bloomberg) -- U.S. stock-index futures rose, indicating the Standard & Poor’s 500 Index is poised for a fourth day of gains, after Abu Dhabi provided $10 billion to Dubai to help with debt repayments.

JPMorgan Chase & Co. and Bank of America Corp. both gained more than 1 percent after Abu Dhabi agreed to provide funds to Dubai’s Nakheel PJSC. Exxon Mobil Corp. climbed 1.1 percent after Societe Generale SA advised buying the shares.

Futures on the Standard & Poor’s 500 Index expiring in March rose 0.5 percent to 1,109.2 at 9:38 a.m. in London. Dow Jones Industrial Average futures gained 0.5 percent to 10,472. Nasdaq-100 Index futures added 0.6 percent to 1,802.75.

“The prospect of a default has diminished as a result,” said Stephen Pope, chief global equity strategist at Cantor Fitzgerald in London. “I am sure Abu Dhabi realized that to stand aside could lead to a starvation of foreign direct investment into the Gulf region.”

Abu Dhabi’s pledge will allow Dubai World’s Nakheel real- estate unit to make $4.1 billion of payments on bonds that mature today. Markets tumbled last month as Dubai said it was starting talks with its lenders to restructure debt accumulated during the emirate’s six-year real-estate boom.

The S&P 500 has rebounded 64 percent from a 12-year low in March after manufacturing and consumer spending increased and the U.S. government lent, spent or guaranteed more than $11 trillion to end the recession. The Wall Street strategists who correctly predicted U.S. equities would rebound from the steepest plunge since the Great Depression now say the S&P 500 will rally 11 percent next year.

S&P 500 in 2010

Thomas Lee, the chief U.S. equity strategist at JPMorgan Chase & Co., and Goldman Sachs Group Inc.’s David Kostin, this year’s most-accurate forecasters, say Federal Reserve interest rates near zero and profit growth of more than 26 percent will drive the S&P 500 to 1,300 and 1,250, respectively, in 2010. The combination of higher earnings and an increase in mergers and acquisitions will boost the index to 1,250, according to Thomas Doerflinger, a senior strategist at UBS AG in New York.

JPMorgan added 1.3 percent to $41.51 and Bank of America climbed 1.7 percent to $15.90 in Germany.

Exxon Mobil, the largest U.S. oil company, gained 1.1 percent to $73.63. Societe Generale raised its recommendation on the shares to “buy” from “hold,” saying the company may post the “strongest” production growth of the oil majors in 2010.

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

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