European Telecoms Oppose EU Network Plan

By Matthew Campbell and Jonathan Browning - Oct 4, 2011 3:52 PM GMT+0700

Telecom Italia SpA (TIT), Telefonica SA (TEF) and Europe’s other former phone monopolies are bridling at a fresh regulatory review of their profits from copper networks, saying the result may crimp proceeds needed to build faster fiber lines.

The extent of EU regulation of telecommunications investment is “simply crazy,” Telecom Italia Chief Executive Officer Franco Bernabe said at a technology conference in Brussels yesterday. The same day, Neelie Kroes, the EU’s commissioner for digital affairs, said the 27-member bloc would review whether companies charge rivals too much for access to copper lines.

European politicians, desperate to boost the use of faster Web services to meet targets, aid economic growth and catch up with Asia, argue that profits from existing networks may make the phone incumbents less willing to invest in new technologies. The former monopolies, faced with falling revenue in their home markets from traditional voice calls, say the reverse is true as they need copper profits to invest in faster fiber networks.

By taking “copper prices down at the same time as they want to stimulate fiber deployment, that is an equation that doesn’t fit at all,” Jon Fredrik Baksaas, CEO of Telenor ASA (TEL), the largest Nordic phone company, said in an interview.

The European Commission yesterday unveiled two consultations to examine prices for regulated wholesale access to copper and fiber networks. The body is also considering how to standardize wholesale pricing rules in EU markets.

High-Speed Targets

Operators weren’t expecting another consultation process before more progress had been made on existing proposals, Vivendi SA CEO Jean-Bernard Levy said.

To catch up to leading countries such as South Korea, the European Commission has called for 50 percent of European households to have Internet connections above 100 megabits per second by 2020, about 10 or 20 times typical current speeds. The body has proposed using some of the EU’s structural funds, which pay for infrastructure in poorer member-states, to finance broadband development in certain areas and called for faster release of unused bands of radio spectrum.

While some former monopolies attacked Kroes’s plans as unwanted regulatory interference, operators that didn’t inherit a network supported her plans and said the European Commission needs to reassess how access prices are calculated.

Network Spat

“Network owners in many countries are making excessive profits over their largely depreciated copper infrastructure,” said Ilsa Godlovitch, director of the European Competitive Telecommunication Association. “This means that consumers are paying very high prices and investments on fiber networks are just not happening.”

The association represents operators such as Vodafone Group Plc (VOD), the world’s biggest mobile-phone company, and Spanish broadband provider Jazztel Plc. (JAZ)

Cesar Alierta, CEO of Telefonica, Spain’s biggest phone operator, said that the network owners should be able to benefit from their investments.

“We will not invest for the benefit of those who do not invest,” Alierta said in Brussels, referring to rival operators. “The time has come to make the market rules work.”

The 21-company Bloomberg Europe Telecommunications Services Index fell 1 percent at 9:46 a.m. in London, led by Telefonica, which slipped 1.6 percent in Madrid. France Telecom SA (FTE) lost 1.3 percent in Paris. Deutsche Telekom AG (DTE) fell 0.4 percent in Frankfurt.

Google Pressure

Access to fast networks is key for operators as the industry develops new business models based on data services and consumers flock to smartphones such as Apple Inc. (AAPL)’s iPhone and handsets based on Google Inc. (GOOG)’s Android system to download music, watch videos online and surf the Web.

One reason for former monopolies’ eagerness to guard profits from copper networks is their failure to develop lucrative new services, said Patrik Karrberg, a researcher at the Information Systems Innovation Group at the London School of Economics.

“They had, and continue to have, the option of going more into services and some have been much better than others,” Karrberg said in an interview. “In the current regulatory environment, data is a commodity, but for a great video service, for example, you can charge much more.”

Most European operators are seeing profits stagnate or decline in their home markets because of competition and mounting investment needs.

Profit Falls

Deutsche Telekom, Europe’s largest phone company, reported a 6.5 percent decline in second-quarter profit before some items. Telefonica saw second-quarter profit slump 27 percent as domestic competition cut earnings. France Telecom, that country’s largest operator, posted a 2.2 percent decline in first-half net income, and is beginning asset sales in Europe to rebalance toward faster-growing markets.

In July, the CEOs of Vivendi, Deutsche Telekom, and equipment supplier Alcatel-Lucent SA presented a joint strategy for ensuring faster deployment of high-speed networks to the EU, including proposals for new investment incentives and limits to some types of regulation. Operators weren’t expecting another consultation process before more progress had been made on existing proposals, said Vivendi’s Levy.

While former monopolies are calling for less state regulation, they’re also complaining about unfair treatment from U.S. technology companies such as Apple and Google, whose bandwidth-hungry video services have supplanted phone companies’ own online offerings.

‘Afraid of You’

Executives including France Telecom’s Stephane Richard last year called for mandatory payments from Internet companies to telecommunications operators to offset network costs. Since then, the two sides may have become more conciliatory.

Google and France Telecom were in talks about working together to reduce network costs, with other operators in similar discussions, according to people familiar with the situation in June. Telenor’s Baksaas said that Google is in talks with operators in an “industry-wide discussion as well as partner discussions.”

“I’ve been speaking to all of them, and they’re afraid of you too,” William Kennard, the U.S. ambassador to the EU, said of Internet companies. “They know that they need access to your customers.”

Operators may also be able to spur profits by charging more for the heaviest users of scarce bandwidth instead of offering all-you-can-eat fixed- and mobile-data plans.

Phone companies “are going to have to go to consumption- based billing,” said Jim Balsillie, CEO of BlackBerry-maker Research in Motion Ltd. (RIMM) “If someone drives a car 100 kilometers, and someone else drives a car 200 kilometers, it has to cost them half as much.”

To contact the reporters on this story: Matthew Campbell in Brussels at mcampbell39@bloomberg.net; Jonathan Browning in Brussels jbrowning9@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.netvroot@bloomberg.net;

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Goldman Cuts Global GDP Estimate; Sees Recessions

By Shamim Adam - Oct 4, 2011 12:49 PM GMT+0700

Goldman Sachs Group Inc. cut its global growth forecast for this year and next, predicting recessions in Germany and France as the European economy stalls and the risk of a contraction in the U.S. grows.

The world economy will probably expand 3.8 percent this year and 3.5 percent in 2012, compared with earlier predictions of 3.9 percent for 2011 and 4.2 percent for next year, Goldman Sachs economists Jan Hatzius and Dominic Wilson wrote in an Oct. 3 report. The company lowered its forecast for earnings growth in Asia excluding Japan in a separate report today.

Europe’s worsening sovereign debt woes and the threat of a U.S. recession have roiled global stock markets, erasing about $13 trillion from equities since May. The debt crisis has infected the European banking system, making financial institutions wary of lending to each other and pushing overnight deposits with the European Central Bank last week to the highest in more than a year.

“The further deterioration in the economic and financial situation in the Euro area has led us to downgrade our global GDP forecast significantly,” the economists said. “Over the next few quarters, we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery.”

Euro Region

Goldman Sachs predicts the Euro region will expand 0.1 percent in 2012, down from an earlier forecast of 1.3 percent. It expects growth of 1.6 percent for this year. Goldman also lowered its end-2011 forecast for the euro to $1.38 per dollar from an earlier projection for it to trade at $1.40.

The ECB has been forced to purchase sovereign bonds to prevent the crisis from spreading to larger euro nations, and is providing banks with unlimited liquidity for up to six months against eligible collateral as governments struggle to restore investor confidence in the 17-member region.

The Frankfurt-based central bank is likely to ease its liquidity policies further this month as a result of an increase in financial risk, Hatzius and Wilson said. The ECB will also probably cut its benchmark interest rate by 50 basis points to 1 percent by December, they said.

“The increase in spillovers from the Euro area, primarily via tighter financial conditions, is the primary reason why we have also downgraded our forecasts for the U.S. further,” the economists said. “We now see the risk of a renewed U.S. recession at around 40 percent.”

Flagging U.S.

The U.S. economy will expand 1.7 percent this year and 1.4 percent in 2012, Goldman Sachs predicts. It had earlier estimated a 2 percent growth rate for the world’s largest economy next year.

The Federal Reserve announced last month that it would replace $400 billion of short-term debt in its portfolio with longer-term Treasuries, a so-called Operation Twist, in an effort to further reduce borrowing costs and strengthen the flagging U.S. economy.

“We expect additional easing of monetary policy beyond the ‘Operation Twist’ announced recently, although this may not come until sometime in the first half of 2012,” Hatzius and Wilson said. “In addition, the market’s focus on changes in the Fed’s guidance on future policies -- including a greater emphasis on the employment part of the ‘dual mandate’ and/or a temporarily higher inflation target -- is likely to intensify.”

‘Downside Risk’

Asia excluding Japan stocks faces a “downside risk” of 10 percent to 15 percent, Goldman Sachs analysts led by Timothy Moe wrote in a report today.

Earnings per share may grow 10 percent this year and increase 7 percent next year, lower than an earlier prediction of 11 percent growth for both years, according to the analysts. They also cut their 12-month forecast for the MSCI Asia Pacific excluding Japan Index to 480 from 530.

Goldman Sachs analysts also lowered their forecasts for 2011 and 2012 oil prices. Crude prices will end this year at $112.50 a barrel, compared with a previous estimate of $119.50. It will be $122.50 a barrel at the end of 2012, compared with an earlier forecast of $138.50, according to the report.

“The oil market continues to destock as prices anticipate a potential crisis,” the economists said. “If the crisis does not occur, the oil market risks running into pressing supply constraints, requiring sharply higher prices than we currently forecast to force demand in line with supplies.”

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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European Stocks Decline for Third Day on Crisis

By Corinne Gretler - Oct 4, 2011 2:59 PM GMT+0700

European stocks dropped for a third straight day amid waning optimism policy makers will be able to resolve the region’s debt crisis. Asian shares and U.S. index futures retreated.

Dexia SA (DEXB) lost 22 percent after the board asked Belgium’s biggest bank by assets to solve its “structural problems.” Air France-KLM (AF) Group and International Consolidated Airlines Group slid more than 4 percent after the head of the IATA industry association said profit forecasts may be unsustainable.

The benchmark Stoxx Europe 600 Index fell 2.6 percent to 217.89 at 8:57 a.m. in London. The gauge has fallen 24 percent from this year’s peak on Feb. 17 as European and U.S. economic reports trailed forecasts, adding to concern that the global economic recovery is at risk. The decline has left the measure trading at 9.2 times estimated earnings, near the cheapest since March 2009, data compiled by Bloomberg show.

“These concerns over Europe clearly aren’t going away any time soon,” said Cameron Peacock, a market analyst at IG Markets in Melbourne. “As long as markets remain gripped by this fear, the downside pressures are likely to prevail. The lack of consensus we’ve seen so far here really isn’t helping.”

The MSCI Asia Pacific Index dropped 2.3 percent today, while Standard & Poor’s 500 Index futures slid 0.7 percent after the U.S. gauge sank to a one-year low yesterday.

European governments meeting yesterday considered “technical revisions” to a July deal for a second Greek aid package, fueling concern bondholders may have to take bigger losses on the nation’s debt.

July Deal

Finance ministers considered reshaping a July deal that foresaw investors contributing 50 billion euros ($66 billion) to a 159 billion-euro rescue. That private sector involvement, or PSI, includes debt exchanges and rollovers.

“As far as PSI is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a meeting of euro finance chiefs in Luxembourg. “These are technical revisions we are discussing.”

Goldman Sachs Group Inc. cut its global growth forecast for this year and next, predicting recessions in Germany and France as the European economy stalls and the risk of a contraction in the U.S. grows. The world economy will probably expand 3.8 percent this year and 3.5 percent in 2012, compared with earlier predictions of 3.9 percent for 2011 and 4.2 percent for next year, Goldman Sachs economists Jan Hatzius and Dominic Wilson wrote in an Oct. 3 report.

U.S. Economy

In the U.S., a report today may show factory orders were unchanged in August after rising 2.4 percent the previous month, according to the median forecast of 68 economists in a Bloomberg News survey.

Dexia fell 22 percent to 1.01 euro, the biggest drop in three years. The board asked Chief Executive Officer Pierre Mariani to prepare “necessary measures” to fix the company’s “structural problems” after Europe’s government-debt crisis worsened.

Dexia, BNP Paribas (BNP) SA and Societe Generale SA are resisting pressure from regulators to accept more losses on their holdings of Greek government debt amid criticism they haven’t written down the bonds sufficiently.

While most banks have marked their Hellenic debt to market prices, a decline of as much as 51 percent, France’s two biggest lenders and Belgium’s largest cut the value of some holdings by 21 percent. The practice, which doesn’t violate accounting rules, may leave them vulnerable to bigger impairments in the event of a default. The three firms would have about 3 billion euros of additional losses if they took writedowns of 50 percent, according to data compiled by Bloomberg.

BNP, SocGen

BNP Paribas slid 6 percent to 26.93 euros and Societe Generale (GLE) retreated 6.4 percent to 17.76 euros.

Air France declined 5.5 percent to 5.02 euros and IAG declined 4.3 percent to 147.8 pence. Tony Tyler, chief executive officer of the International Air Transport Association since July 1, said profits forecast to total $28 billion in the three years through 2012 may be unsustainable as over-capacity and looming regulatory costs weigh on margins.

Airlines will generate net income equal to 0.8 percent of revenue next year, a margin that may shrink further if economic growth slows to less than 2.4 percent, Tyler said in an interview in London.

American Airlines parent AMR Corp. tumbled 33 percent in New York yesterday, the most since March 2003, amid growing concern the third-largest U.S. carrier may be forced to seek bankruptcy protection.

UBS Declines

UBS AG (UBSN) slipped 2.1 percent to 9.88 Swiss francs after Switzerland’s biggest bank said it expects a “modest” net income in the third quarter and positive net new money in its wealth management units. UBS said last month it may be unprofitable in the quarter after discovering losses from unauthorized trading at its investment bank.

“The news of third-quarter profit is not as positive as it may appear at first glance because the gains UBS booked have nothing to do with normal business,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “It’s rather disappointing.”

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer in London at arummer@bloomberg.net;

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HSBC Said to Consider Selling Regional Non-Life Insurance Units Separately

By Cathy Chan - Oct 4, 2011 10:07 AM GMT+0700

HSBC Holdings Plc (HSBA), the European bank seeking buyers for its non-life insurance assets, will consider selling regional units of the business separately, three people familiar with the matter said.

HSBC may receive offers for its general insurance operations in Asia and Latin America separately, though potential buyers can also submit bids for the global business, said the people. The sale may value HSBC’s non-life insurance assets at $1 billion to $1.5 billion, they said, asking not to be identified because the sale process is private.

Selling the regional operations separately may help HSBC get a higher price for the assets, as some buyers are only interested in acquisitions in Asia and Latin America, the people said. MS&AD Insurance Group Holdings (8725) Inc. and Axa SA are among possible bidders for HSBC’s non-life insurance business, people with knowledge of the matter said.

“Profit margins have been under pressure” in general insurance, said Dominic Chan, an analyst at BNP Paribas SA in Hong Kong. “If HSBC finds this business not profitable in some markets, it’s logical for them to exit those markets.”

Gareth Hewett, a spokesman for HSBC in Hong Kong, declined to comment on the sale process. Spokespeople for MS&AD, Japan’s biggest non-life insurer, and Axa, Europe’s second-largest insurer, also declined to comment.

Tougher Rules

HSBC, Europe’s largest bank, reported $1 billion of “net written insurance premiums” for its non-life business last year, down from $1.1 billion in 2009, according to its annual report. Net premiums in Asia accounted for about a third of the total, while Latin America made up 42 percent, the report showed.

Chief Executive Officer Stuart Gulliver is reversing HSBC’s expansion over the past two decades, selling assets and cutting jobs as the euro-area debt crisis saps profit and regulators demand thicker capital buffers.

The bank in July agreed to sell almost half its U.S. branches to First Niagara Financial Group Inc. for about $1 billion. HSBC said last month it will reap a $2.4 billion after- tax gain from the sale its U.S. credit card division to Capital One Financial Corp. (COF) The company has also sold part of its Russian consumer banking unit and said it will shut 10 retail branches in Poland.

European lenders will need to raise an extra 423 billion euros ($611 billion) by 2019 to comply with global capital rules approved by the Basel Committee on Banking Supervision, according to a European Union study. HSBC is cutting jobs and closing offices to reduce costs by as much as $3.5 billion over the next two years as it prepares for the stricter regulations.

The Basel committee said in July that 28 banks would be subject to additional capital requirements to rein in too-big- to-fail lenders.

To contact the reporter on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net

To contact the editor responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net

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Apple May Unveil Voice Technology With New IPhone

By Adam Satariano - Oct 4, 2011 11:01 AM GMT+0700
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A man uses an Apple Inc. iPhone as he waits in line near the company's new store in Hong Kong. Voice technology is emerging as the latest arena for Apple’s rivalry with Google Inc. Photographer: Jerome Favre/Bloomberg

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Oct. 4 (Bloomberg) -- James Gautrey, a technology specialist at Schroder Investment Management, talks about Apple Inc.'s next iPhone, due to be unveiled at an event today. He speaks with Owen Thomas on Bloomberg Television's "Countdown." (Source: Bloomberg)

Apple Inc. (AAPL)’s next iPhone, due to be unveiled at an event today, may be a showcase for improved voice controls, bringing phones closer to the realm of “Star Trek”- style speech recognition.

New voice commands will let users make appointments in their calendars, send text messages or e-mails, and surf the Web, said Gene Munster, an analyst at Piper Jaffray Cos. Apple already has basic voice-control abilities on the iPhone for placing a call or accessing a song. Today’s event is called “Let’s talk iPhone,” hinting at an expansion of the features.

Voice technology is emerging as the latest arena for Apple’s rivalry with Google Inc. (GOOG), which has spent years promoting speech technology. Current Google features transcribe voice messages to text and perform Web searches based on verbal commands. The challenge so far has been getting mainstream users to adopt the technology, said venture capitalist Larry Marcus, who has invested in speech-recognition company SoundHound Inc.

Apple can “make it exciting and make people think about it in different ways,” Marcus said. “Voice controls are a very fundamental way to interact with your device.”

Voice commands won’t be the only features added to the new iPhone. The device may include a better camera and a stronger processor to make programs run faster, people familiar with the matter said earlier this year. Apple showed off some of the new software for the device in June, including new messaging and notification features.

ICloud Approaches

The company also is readying iCloud, a service for storing files such as pictures and music on Apple’s remote servers so they can be accessed through iPhones, iPads and Mac computers.

Natalie Kerris, a spokeswoman for Cupertino, California- based Apple, declined to comment on today’s event.

The fifth-generation iPhone comes at a pivotal time for Apple. Today’s event will be the company’s first major product unveiling since co-founder Steve Jobs resigned as chief executive officer in August, when he turned the job over to longtime deputy Tim Cook.

The new speech technology would build on a service Apple introduced in 2009 called Voice Control, which lets users make a call or play music by speaking into the phone. Those features haven’t taken off, Marcus said.

“They have probably been taking extra time to figure out how to get it right,” he said.

Nuance Software

Speech-recognition technology also is available from companies such as Nuance Communications Inc. (NUAN), which offers voice-to-text transcription software. Automakers are adding speech features as well, letting drivers make a call or choose a song while keeping their hands on the wheel.

Mobile devices represent a growth market for voice-command technology as people try to perform more complex computing tasks on the go. Features will increasingly blend vocal and physical commands, said John Donovan, chief technology officer of AT&T Inc. (T), a carrier for the iPhone.

“Certain things are more naturally spoken, some things are more naturally typed, and some things are more naturally swiped,” he said, referring to the swiping motion that iPhone users make on the device’s touch screen. While declining to talk about Apple specifically, he said a big product event can “accelerate” adoption.

Apple acquired a speech-recognition software company last year called Siri, which lets users make restaurant reservations or search for a flight with voice commands. Apple also is probably working with Nuance to power the voice capabilities of the new iPhone, said Mike Phillips, chief technology officer and co-founder of Vlingo, which also makes voice-recognition technology.

How Far?

The move is good for the whole market, Phillips said. “The question is: How much farther do they go?” he said. “Do they really try to transform the search experience?”

That would mean making voice a main method of searching, rather than a once-in-a-while method, Phillips said.

Apple also is facing mounting competition in touch-screen smartphones -- a market it pioneered. Samsung Electronics Co. and HTC Corp. are relying on Google’s Android software to woo iPhone users. And Google is acquiring its own mobile-phone company, Motorola Mobility Holdings Inc., for $12.5 billion.

The Apple-Google rivalry has expanded to the courtroom, where Apple and Android adherents are suing each other for patent infringements.

Smartphone Showdown

At stake is leadership in the market for smartphones, which is projected to double by 2015, when 1 billion of the handsets will be sold, according to research firm IDC. While Apple is the single biggest smartphone maker, the Android coalition leads the market, accounting for 41.7 percent.

The iPhone is Apple’s top-selling product, generating almost half its sales last quarter. The company hasn’t released a new model since June 2010, so there may be pent-up demand for an update. Apple will sell a record 25 million iPhones during the December quarter, Piper Jaffray’s Munster estimates.

The success of the product has helped Apple’s stock weather market turmoil and the loss of its CEO. Shares of Apple, the world’s most valuable company, have climbed 16 percent this year. The stock fell $6.72 to $374.60 in yesterday’s trading on the Nasdaq Stock Market.

Even so, the long delay between new iPhones has put pressure on Apple to ward off competitors, said Ramon Llamas, an analyst with Framingham, Massachusetts-based IDC.

“It’s critical they have an iPhone coming out every single year,” he said. The 16-month lag “left the door open for some other competitors to jump in.”

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Stocks, Commodities Drop on Europe Concern; Bunds Gain, Dollar Strengthens

By Stephen Kirkland and Shiyin Chen - Oct 4, 2011 4:35 PM GMT+0700

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The euro touched the lowest level in more than a decade against the yen. Photographer: Chris Ratcliffe/Bloomberg

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Oct. 4 (Bloomberg) -- Alex Au, Hong Kong-based managing director of Richland Capital Management Ltd., talks about the outlook for Hong Kong and South Korea stocks. Au speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Stocks dropped and an index of raw materials fell to a 10-month low as European leaders signaled they may renegotiate terms of Greece’s bailout. U.S. index futures declined, while German bonds and the dollar gained.

The MSCI All Country World Index sank 1.3 percent at 10:30 a.m. in London. S&P 500 futures slipped 0.6 percent. The S&P GSCI index of 24 commodities retreated 1.1 percent, led by nickel, copper and oil. The German bund yield decreased nine basis points, its fourth straight decline, while the Dollar Index advanced 0.3 percent.

European finance chiefs meeting yesterday considered “technical revisions” for a second Greek bailout, Luxembourg Prime Minister Jean-Claude Juncker said today, fueling concern bondholders may have to take bigger losses on the nation’s debt. U.S. factory orders probably stalled in August, economists said before a Commerce Department report. Goldman Sachs Group Inc. cut its global growth forecasts and predicted recessions in Germany and France.

“The rot has spread to every corner of the global markets,” said Bill Blain, co-head of strategy at Newedge Group, a London-based brokerage. “The taint of fear is dragging down most assets, with indecision running rife.”

The Stoxx Europe 600 Index retreated 2.2 percent as all 19 industry groups declined. Dexia SA (DEXB), Belgium’s biggest bank by assets, tumbled 22 percent after its board asked the company to solve its “structural problems.” Germany’s DAX Index dropped 3 percent, France’s CAC 40 declined 2.6 percent and the U.K.’s FTSE 100 slipped 2.2 percent. Greece’s ASE plunged 4.1 percent to the lowest since 1993.

Bernanke Testimony

The S&P 500 slumped 2.9 percent yesterday to 1,099.23, the lowest since September 2010 and the exact closing level as on the same day three years ago.

U.S. factory orders were little changed in August, after a 2.4 percent gain the prior month, according to the median of 68 economists’ forecasts in a Bloomberg survey. Federal Reserve Chairman Ben S. Bernanke is scheduled to testify today to a congressional panel about the economic outlook. The 30-year Treasury yield increased two basis points to 2.75 percent.

The yield on the Greek two-year note jumped 87 basis points, with the 10-year yield climbing four basis points. That drove the difference in yield over benchmark bunds 11 basis points higher to 20.92 percentage points.

As far as private sector involvement in a bailout is concerned, “we have to take into account that we have experienced changes since the decision we have taken on July 21,” Juncker told reporters today after chairing a meeting of euro finance chiefs in Luxembourg. “These are technical revisions we are discussing.”

Record Default Risk

Italian 10-year debt yields fell two basis points, with two-year yields dropping four basis points. The European Central Bank bought Italian government securities today, according to three people with knowledge of the transactions. A spokeswoman for the ECB declined to comment.

Credit-default swaps on Germany increased 3.5 basis points to 121.5 basis points, an all-time high, according to CMA. Swaps on banks also soared, with the Markit iTraxx Financial Index jumping 17 basis points to 306, according to JPMorgan Chase & Co. The record is 314 basis points, set on Sept. 12.

The euro traded little changed at $1.3187, after weakening to the lowest level since January. The Dollar Index, which tracks the U.S. currency against those of six trading partners, rose 0.1 percent, its third gain.

Australia Rates

Australia’s dollar slumped against all 16 most-traded peers tracked by Bloomberg, falling to the lowest level in more than a year versus the U.S. currency, after the nation’s central bank signaled it has scope to lower its benchmark interest rate. Governor Glenn Stevens held the overnight cash rate target at 4.75 percent, matching the prediction of all 22 economists surveyed by Bloomberg News.

The GSCI index of 24 commodities fell as much as 1.3 percent to the lowest since Dec. 1. Nickel dropped 2.8 percent, copper declined 2 percent and oil in New York retreated 1.7 percent to $76.33 a barrel. Gold rose 0.4 percent to $1,668 an ounce.

The MSCI Emerging Market Index slid 2.1 percent, extending a decline from its May 2 high to 31 percent. South Korea’s Kospi Index (KOSPI) sank 3.6 percent after the market was closed yesterday for a holiday. The MSCI China Index slumped 3.5 percent. PKN Orlen, Poland’s largest oil refiner, led the WIG20 Index down 2.7 percent after saying it will probably post losses of “several hundred million” zloty in the third quarter from revaluation of foreign-currency debt. Benchmark gauges in Russia, the Czech Republic, Thailand and Indonesia fell more than 2 percent.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Shiyin Chen in Singapore at schen37@bloomberg.net.

To contact the editor responsible for this story: Justin Carrigan at jcarrigan@bloomberg.net

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EU Flags Bigger Losses for Bondholders on Greek Bailout

By James G. Neuger and Jonathan Stearns - Oct 4, 2011 3:51 PM GMT+0700
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Protesters raise a Greek flag decorated with 'For sale' stickers outside the parliament building. Photographer: Kostas Tsironis/Bloomberg

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High school students scuffle with riot police during a protest in central Athens on Oct. 3, 2011. Photographer: Petros Giannakouris/AP

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Greece's finance minister Evangelos Venizelos, right, looks at his mobile phone during the Eurogroup finance minister meeting in the city of Luxembourg, on Monday, Oct. 3, 2011.Photographer: Jock Fistick/Bloomberg

European governments dropped clues that bondholders may be saddled with bigger losses on Greek debt, intensifying market jitters that a second aid package designed to quell the fiscal crisis might unravel.

Finance ministers considered reshaping a July deal that foresaw investors contributing 50 billion euros ($66 billion) to a 159 billion-euro rescue. That private sector involvement, or PSI, includes debt exchanges and rollovers, targeting bondholder losses of 21 percent.

“As far as PSI is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a meeting of euro finance chiefs in Luxembourg. “These are technical revisions we are discussing.”

Together with plans to get more firepower out of the region’s 440 billion-euro rescue fund, the review of Greece’s aid package was a response to growing international frustration with Europe’s inability to get to grips with the crisis after 18 months of incremental steps. Europe’s woes contributed to last quarter’s slump in global stocks, the biggest since the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc.

Stocks Fall

European stocks fell for a third day and investors shunned riskier countries’ bonds amid concern that the crisis is careening out of control. The euro has dropped about 8 percent since the end of August, trading at $1.3169 as of 9:20 a.m. in London.

The European currency plunged to the lowest in more than 10 years against the yen, sharpening Japanese criticism of the crisis management. Speaking to reporters in Tokyo, Finance Minister Jun Azumi urged a “more transparent” rescue strategy “to halt the extreme strength in the yen and weakness in the euro.”

Europe’s financial leaders are fighting on multiple fronts, trying to repair Greece’s recession-struck economy while insulating Italy and Spain and shoring up banks that the International Monetary Fund says face as much as 300 billion euros in credit risks.

No Details

Juncker gave no details about a possible recalibration of the “voluntary” debt exchange, the new element in a package hammered out in July after last year’s 110 billion-euro lifeline failed to stabilize Greece. The Institute of International Finance industry group estimates that the debt swap, still being negotiated, will amount to a writedown of 21 percent.

“No, no,” Spanish Economy Minister Elena Salgado told reporters today when asked about deeper writedowns. “I insist: no.”

European leaders have gone back and forth over the sanctity of bond contracts as the crisis escalated. A November 2010 pledge to rule out writedowns unravelled a month later, only to be reaffirmed in July. The latest about-face came after seven countries including Germany, Europe’s dominant economy, weighed calling for Greek writedowns of as much as 50 percent, two European officials said.

Credibility ‘Dent’

“The reopening is probably going to be quite bad for the markets,” said Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada’s RBC Capital Markets in London. “There is a big dent to European credibility.”

The ministers also pushed back a decision on the release of Greece’s next 8 billion-euro loan installment until after Oct. 13. It was the second postponement of a vote originally slated for yesterday as part of the 110 billion-euro lifeline granted to Greece last year.

“The endgame for Greece has now begun,” Sony Kapoor, managing director of policy group Re-Define Europe, said in an e-mailed note. “It seems that the ground is being laid to revisit the private sector involvement agreement reached in July.”

Scrounging for savings, the Greek cabinet on Oct. 2 announced 6.6 billion euros of cuts, mostly by slashing public payrolls. Greece will “very likely” have to make extra reductions for 2013 and 2014, a two-year phase that will be the focus of the rest of the review by European Union, European Central Bank and IMF officials, EU Economic and Monetary Commissioner Olli Rehn said.

Deficit Goal

Greece’s revised 2011 deficit goal may be 8.5 percent of gross domestic product compared with a previous target of 7.6 percent, Rehn said. He called the new target “plausible” and lauded Greece’s “important steps” toward further savings next year.

While an Oct. 13 meeting to decide on the next payout was canceled, Juncker said he is “nevertheless optimistic when it comes to the issue of the disbursement” by the end of October. The decision now dovetails with an Oct. 17-18 summit of European government leaders to address the crisis. Juncker said Greece can pay its bills in the meantime.

“Greece is not the scapegoat of the euro zone,” Greek Finance Minister Evangelos Venizelos said yesterday. “Greece is a country with structural difficulties.”

Finance ministers held a first discussion over how to further enhance the region’s rescue fund, setting aside a plea by German Finance Minister Wolfgang Schaeuble to postpone that debate until the remaining countries have endorsed the fund’s latest upgrade.

Fourteen of the 17 euro countries have approved the reinforcement, which will empower the European Financial Stability Facility to buy bonds on the primary and secondary markets, offer precautionary credit lines and enable capital infusions for banks.

Credit Lines

Juncker announced “good progress” on the credit lines and bank-recapitalization tools. Avoiding the word “leveraging,” he said work is under way to scale up the fund’s capacity without requiring each country to chip in more.

“We are checking if yes or no we could increase the efficiency of the different instruments,” Juncker said. Asked whether the ECB would be tapped to boost the fund’s clout, he said: “I don’t think that this will be the main avenue of our considerations.”

The ministers also smoothed a snag en route to a second Greek package by settling the terms under which collateral will be offered to AAA rated Finland, home to a euro-skeptic movement that catapulted to third place in April elections by opposing further bailouts.

Finnish Mood

While the party now known as “The Finns” didn’t make it into the ruling coalition, it captured the Finnish mood and hardened the stance of new Prime Minister Jyrki Katainen in the euro-rescue bartering.

Under the accord, Greek bonds will be transferred from Greek banks to a trustee, which will sell them and invest the proceeds in AAA rated bonds with maturities of 15 to 30 years.

In exchange for the special treatment, Finland will speed its payments into a planned permanent rescue fund and forego a share of profits from EFSF emergency loans. In the event of default, it couldn’t cash in on the collateral until Greece’s official loans mature, a wait that might last 30 years.

“It’s a complicated financial structure,” said EFSF Chief Executive Officer Klaus Regling, who brokered the collateral arrangement. He and Juncker said Finland is the only country likely to take advantage of it.

Regling deserves “the Nobel prize for economics or the Nobel peace prize” for engineering the compromise, Rehn said.

To contact the reporters on this story: James G. Neuger in Luxembourg at jneuger@bloomberg.net; Jonathan Stearns in Luxembourg at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Yahoo Strikes News Accord With ABC as Alibaba Weighs Offer for Web Portal

By Douglas MacMillan and Edmund Lee - Oct 4, 2011 1:41 AM GMT+0700

Yahoo! Inc., the most-visited U.S. Web portal, struck a partnership with ABC News as China’s Alibaba Group Holding Ltd. said it may be interested in acquiring Yahoo.

ABC News, part of Walt Disney Co. (DIS), will become the leading provider of news for Yahoo! News and editorial teams from both organizations will collaborate on stories, the companies said in a statement today. Yahoo and ABC News will also combine bureaus in New York, Washington and Los Angeles, they said.

The partnership comes as Yahoo, struggling to compete with Google Inc. (GOOG) and Facebook Inc., may face a possible acquisition bid from Alibaba. The Hangzhou, China-based company, in which Yahoo holds a 40 percent stake, may be interested in Yahoo, Alibaba Chief Executive Officer Jack Ma said at a Stanford University event near Palo Alto, California, on Sept. 30.

“We are very interested in Yahoo,” said Ma. Talks have snagged over “political issues,” rather than financial ones, he said.

Yahoo is reviewing strategy and seeking a new CEO after ousting Carol Bartz, who failed to reverse a growth slowdown or repel competition from Google and Facebook. The process for reviewing strategic options is likely to take “months, not weeks,” according to a memo to employees that was obtained by Bloomberg News.

Silver Lake Interest

As of mid-September, private-equity investor Silver Lake was considering a bid for Yahoo, people involved in the deliberations said at the time. As part of a deal, Silver Lake would sell off Yahoo’s Asian assets and then attempt to turn around the main operations or find a buyer for that business, the people said. Representatives from Silver Lake have approached other companies to gauge interest in purchasing Yahoo’s main business, one person said.

Alibaba, also part-owned by Japan’s Softbank Corp. (9984) and Singapore’s Temasek Holdings Pte, is expanding in search-engine services after dominating China’s e-commerce market. In 2009, Its Hong Kong-listed Alibaba.com Ltd. (1688) unit acquired two U.S. companies to step up international expansion.

“We are very interested in Yahoo because our Alibaba Group is so important to Yahoo, and Yahoo is also very important to us,” Ma said, when asked if he would buy the company. “There are so many people who are interested in that, and we are also talking to them.”

Dana Lengkeek, a spokeswoman for Sunnyvale, California- based Yahoo, declined to comment.

Yahoo rose 28 cents, or 2.1 percent, to $13.45 at 2:30 p.m. New York time on the Nasdaq Stock Market. The stock had dropped 21 percent this year before today.

ABC News Deal

“If the partnership works out and the cultures of the two companies fit, Disney might be interested in buying Yahoo,” said Laura Martin, an analyst at Needham & Co. in Los Angeles. “This could be the first step.”

Under the agreement announced today, ABC News will be used throughout Yahoo News sites and on Yahoo’s front page, the companies said. GoodMorningAmerica.com will launch on Yahoo today with three online-first videos, they said. The companies will continue to control the content on their respective Web pages.

ABC now provides about 20 percent of the video streaming on Yahoo’s site, said Ben Sherwood, president of ABC News. Yahoo receives about 700 million monthly visitors. Combined, the two companies said they will have a news audience of 100 million people in the U.S. each month on personal computers, mobile devices and tablets.

“This relationship will give ABC News an unrivaled ability to reach across the Web, combining Yahoo’s vast distribution and cutting-edge technology with our award-winning journalism,” Sherwood said. “This is an audience the size of the Super Bowl.”

To contact the reporter on this story: Edmund Lee in New York at elee310@bloomberg.net; Douglas Macmillan in New York at dmacmillan3@bloomberg.net;

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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IBM Is Planning Mid-Sized Acquisitions to Fuel Growth in Software Business

By Aaron Ricadela - Oct 4, 2011 7:55 AM GMT+0700

International Business Machines Corp. (IBM) plans more acquisitions to fuel growth in its $22.5 billion software business, senior vice president Steve Mills said in an interview.

IBM, which last week surpassed Microsoft Corp. (MSFT) to become the world’s second-most valuable technology company after Apple Inc. (AAPL), may spend $100 million to $300 million on targets, the Armonk, New York-based company said.

Chief Executive Officer Sam Palmisano has said he’s seeking $20 billion in additional revenue by 2015. The company aims to double or triple the pace of sales growth at companies it acquires and looks for deals that will add to earnings within two or three years, Mills said.

“Everything’s got to fit,” Mills said. “No spurious, off-to-the-side, unrelated things.”

IBM had $99.9 billion in sales last year. Software, which had gross margins of 86.9 percent last year, is key to IBM’s growth plans.

The company has made almost 50 software acquisitions since 2006 in areas including data analysis, e-commerce, supply chain management and computer security, said Mills. More than half of those have been in business-data analysis, where IBM says it has spent $14 billion. The company expects such business analytics products to yield $16 billion in sales by 2015.

“They’ve done a hell of a job,” said Joel Achramowicz, an analyst at Blaylock Robert Van LLC, an investment bank in Oakland, California. IBM is “making the right acquisitions at the right time.”

‘Bored With the Stock’

IBM is unlikely to make large acquisitions, worth $10 billion or more, Achramowicz said. He said he dropped coverage of IBM in April partly because of the company’s unwillingness to take on a very large deal.

“That’s one of the reasons we got kind of bored with the stock,” he said. “There are some big software companies out there, which could augment IBM’s position.”

“IBM’s done about everything it can to maximize their operating model,” he also said.

Shares of IBM fell $1.58 or less than one percent, to $173.29 today on the New York Stock Exchange. The shares have gained 18 percent this year.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Microsoft: Ballmer Got Half of Maximum Bonus

By Dina Bass - Oct 4, 2011 6:07 AM GMT+0700

Microsoft Corp. (MSFT) said Chief Executive Officer Steve Ballmer wasn’t awarded his full bonus for fiscal 2011, citing lower-than-expected sales of phones based on the company’s software and a drop in revenue in its Windows unit.

Ballmer, 55, received $1.38 million in pay, according to a filing with the U.S. Securities and Exchange Commission. That included a bonus equal to 100 percent of his base salary, half of the maximum he could have been awarded. Still, the board noted in the filing that it regards Ballmer as “underpaid.”

While directors praised Ballmer for the company’s operating income, progress on the next version of Windows and partnerships with Facebook Inc. and Nokia Oyj, they voiced concerns about lower sales of Windows software and the need to be quicker to adapt the software to work on new devices. Ballmer has come under fire from some investors, including Greenlight Capital Inc. President David Einhorn, who used a May speech to call on Microsoft’s board to replace him.

“He deserves this bonus,” said Kim Caughey Forrest, an analyst at Fort Pitt Capital Group Inc. She said she’s encouraged by the newest version of Windows, unveiled last month. “I see the light at the end of the tunnel, and it’s a pretty big light. They came a huge way for me.”

At the same time, Ballmer didn’t deserve the maximum amount because he and the board aren’t returning enough cash to shareholders, said Caughey Forrest, whose firm manages about $1.1 billion, including Microsoft shares.

Windows Revenue

The popularity of tablets such as Apple Inc.’s iPad contributed to the decline in Windows revenue in fiscal 2011, which ended June 30. Some shareholders may balk at Ballmer’s 100 percent bonus because they think the new Windows isn’t coming fast enough, Caughey Forrest said.

“You could posit Windows 8 and the whole reaction to the phenomenon of tablets and mobile devices is a few years too late,” she said.

Microsoft’s board lauded Ballmer for making progress on the company’s Bing search engine and Azure cloud software; the successful release of the Kinect gaming device; the introduction of the Office 365 Internet-based versions of its productivity software; work toward the acquisition of Skype Technologies SA; and a “strong financial year.”

Ballmer, who owns almost 4 percent of the company’s outstanding shares, doesn’t get stock compensation at his own request, the filing said.

For fiscal 2010, Ballmer also received 100 percent of a maximum 200 percent bonus, with the board citing concerns about new devices and a loss of market share in phone software.

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Stocks Fall in U.S., Sending S&P 500 Index Below Lowest Close of the Year

By Rita Nazareth - Oct 4, 2011 4:02 AM GMT+0700

U.S. stocks tumbled, sending the Standard & Poor’s 500 Index to a one-year low, as concern over Greece’s debt crisis and Bank of America Corp. (BAC)’s slump outweighed a rebound in manufacturing and construction spending.

Financial shares had the biggest drop in the S&P 500 as Bank of America fell 9.6 percent to the lowest level since March 2009. Alcoa Inc. (AA) lost 7 percent amid concern about slower demand for commodities. American Airlines parent AMR Corp. (AMR) slid 33 percent on concern the U.S. is nearing a return to recession and that the carrier may be forced to seek bankruptcy protection.

The S&P 500 lost 2.9 percent to 1,099.23 at 4 p.m. New York time, its lowest close since Sept. 8, 2010. The Dow Jones Industrial Average declined 258.08 points, or 2.4 percent, to 10,655.30, also the lowest level in more than a year.

“The focus will be on Europe until they get their house in order,” Tom Wirth, who helps manage $1.5 billion as senior investment officer for Chemung Canal Trust Co., in Elmira, New York, said in a telephone interview. “There’s a tremendous amount of pessimism built into stocks as the market prices in a recession. In the U.S., we had a good ISM number which shows the economy is growing slowly, but not going into a recession.”

The S&P 500 came within 1 percent of extending its decline from this year’s high to 20 percent, the common definition of a bear market. Losses accelerated in the S&P 500 after the gauge fell below a series of prices considered significant by analysts who base investment decisions on charts. The index slipped below 1,119.46, its previous lowest close of the year, just before 12:50 p.m. and breached 1,114.22, the worst intraday level of September, about 15 minutes later.

‘Accelerated Selling’

“There’s reason to think that the bears will take control,” Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati said in a telephone interview. “We violated that low for the year. It could definitely lead to some accelerated selling here.”

Global stocks slumped as European officials prepared to meet in Luxembourg today to consider how to shield banks from the debt crisis and boost the region’s rescue fund after Greece missed a deficit target for 2012. Euro region finance chiefs will meet again on Oct. 13 to decide whether the austerity push is enough to win a sixth bailout payment.

European governments are close to resolving Finland’s demand for collateral to underpin bailout loans, removing an obstacle to Greece’s second rescue package, three people familiar with the discussion said.

Economic Reports

Earlier today, stocks rose as a report showed that manufacturing in the U.S. unexpectedly accelerated in September as production picked up, easing concern the world’s largest economy is stalling. Separately, the Commerce Department said construction spending in the U.S. rebounded in August, propelled by the biggest jump in state and local government outlays in more than two years.

U.S. stocks fell last week as the sovereign debt crisis in Europe and fears of a global slowdown overshadowed improving economic reports in the U.S. The S&P 500 tumbled 14 percent in the third quarter, the worst drop since the three months ending December 2008. The index declined in nine out 13 weeks during the quarter. For the year, the S&P 500 is down 13 percent.

Bill Gross, the manager of the world’s biggest bond fund, said the global economy risks lapsing into recession with the pace of growth falling below the “new normal” level the firm has predicted since 2009.

‘Overweight Diabetic’

“Sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack,” Gross wrote in a monthly investment outlook posted on Newport Beach, California-based Pacific Investment Management Co.’s website today. “If global policy makers could focus on structural as opposed to cyclical financial solutions, new normal growth as opposed to recession might be possible.”

Financial shares in the S&P 500 fell 4.5 percent as a group. Bank of America declined 9.6 percent to $5.53. Financial shares are under pressure as European regulators struggle to quell concern that their lenders may be hurt by the sovereign debt crisis.

Citigroup Inc. (C) slumped 9.8 percent to $23.11. The bank may be penalized by regulators in Japan for the third time since 2004 after its Japanese retail banking unit possibly breached rules by failing to fully explain product risk to customers, two people familiar with the situation said.

The Morgan Stanley (MS) Cyclical Index of companies most-tied to the economy declined 3.6 percent. The index has dropped 7 percent over the past two sessions. The Dow Jones Transportation Average, also a proxy for the economy, slipped 3.6 percent.

AMR, Alcoa

AMR tumbled 33 percent to $1.98, the most since 2003. A Chapter 11 filing “is certainly not our goal or our preference,” said Andy Backover, an American spokesman. “We know we need to improve our results, and we have a sense of urgency as we work to achieve that.”

The S&P GSCI Index of commodities lost 0.9 percent on investors’ concern about slower demand for energy and raw materials. Alcoa, the largest U.S. aluminum producer, dropped 7 percent to $8.90.

Arch Coal Inc. slipped 9.3 percent to $13.22. The St. Louis-based coal miner cut its forecast for 2011 adjusted earnings to no more than $1.40 a share, from a previous prediction of at least $1.75. Analysts had estimated adjusted profit $2.01 a share, on average.

Yahoo, Alibaba

Yahoo! Inc. rallied 2.7 percent to $13.53, after Alibaba Group Holding Ltd. Chairman Jack Ma said he was “very interested” in buying the Web portal. “Alibaba Group is so important to Yahoo, and Yahoo is also very important to us,” Ma said, when asked if he would buy the company. The executive, whose company is 40 percent owned by Yahoo, spoke at an event at Stanford University near Palo Alto, California, on Sept. 30.

The rout that erased $2.9 trillion from U.S. equities has pushed valuations in the S&P 500 25 percent below the average level from the last nine recessions, even as profit estimates fall.

Companies in the benchmark gauge for American equities started today’s session trading at 10.2 times 2012 forecast earnings, compared with the average in economic contractions since 1957 of 13.7, according to data compiled by Bloomberg. At the same time, analysts have cut projections for profits next year by 2.6 percent to $110.78 a share, the biggest eight-week drop since 2009, the data show.

Bears say analysts have just started paring earnings estimates and that shares will prove expensive when gross domestic product shrinks. Bulls say stock prices have fallen so much that even should earnings fail to increase in 2012, equities are inexpensive.

“What you’re seeing is a growth scare,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., said in a telephone interview on Sept. 29. His firm oversaw $643 billion as of Aug. 31. “The question is, how much of that is priced in. I’d say that if we don’t have a double-dip recession, if earnings just stay flat, these valuations are reasonable. The market already expects those downgrades.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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VIX Record Gain Above 40 Signals Stock Market Rebounds Since 1990: Options

By Whitney Kisling and Nikolaj Gammeltoft - Oct 4, 2011 3:30 AM GMT+0700

The biggest quarterly increase ever in the Chicago Board Options Exchange Volatility Index pushed it above 40, a threshold exceeded only three percent of the time in 20 years and a level that has preceded stock rebounds.

The VIX rose 160 percent to 42.96 in the third quarter as the Standard & Poor’s 500 Index fell 14 percent, the biggest retreat since 2008, according to data compiled by Bloomberg. Closes above 40 in the volatility measure have come before the equity gauge gained 3.2 percent in the next three months on average, data compiled by Bloomberg show.

U.S. stocks posted unprecedented swings in the last three months on concern Europe’s debt crisis will spur the second global recession in three years. The VIX, derived from prices paid for options to protect equities from losses, averaged 30.6 during the quarter, the highest since 2009, according to data compiled by Bloomberg.

“A very high VIX level suggests investors have given up, they’re out of the way, and that’s a great entry point,” James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $340 billion, said in a telephone interview. “It’s a contrary sentiment indicator, so when the VIX surges, it says bearish sentiment verging on panic is surging. And the market’s a good buy.”

The VIX closed above 40 a total of 166 times since it began on Jan. 2, 1990, through Sept. 30 this year, data compiled by Bloomberg show. Adjusted to group together periods when it fluctuated around that level over 30 days, the S&P 500 returned 3.2 percent in the next three months and 19 percent over the next year, the data show. The VIX rose 5.8 percent to 45.45 today.

Worsening Plunge

Paulsen and Jeffrey Kleintop, who helps oversee $340.8 billion as the chief market strategist at LPL Financial Corp. in Boston, say the VIX shows that the S&P 500 has fallen too far, too fast. Companies in the benchmark gauge for American equities trade at 10.2 times 2012 forecast earnings, compared with the average in economic contractions since 1957 of 13.7, according to data compiled by Bloomberg.

Mixed signals on the U.S. economy, the American government’s loss of its AAA credit rating, and a sovereign-debt crisis that pushed government bond yields in Spain, Italy and Greece to euro-era records whipsawed equities in the third quarter, when the S&P 500 fell as much as 18 percent from its 2011 high.

Investor Concerns

The rout reflects investor concerns that governments have fewer options left to shore up growth after pumping more than $2 trillion into the global financial system. The delay in solving Europe’s sovereign-debt crisis may mean another economic slump, Deutsche Bank AG Chief Executive Officer Josef Ackermann said in a speech in Zurich on Sept. 30. European policy makers meet again on the debt crisis and averting a Greek default at an Oct. 17-18 summit in Brussels.

The VIX had its biggest three-day increase ever Aug. 4-8, closing at a 29-month high of 48. It has remained above 30 for 41 straight days through Sept. 30, the longest streak since 2009, data compiled by Bloomberg show.

“We see the VIX in the 40s as a sign the emotion in the market is extreme,” Kleintop wrote in an e-mail. “It is usually a good buying indicator when it is in the 40s.”

Basing investment decisions on the VIX’s level has led to losses in the past that were too big to justify using it in isolation, according to Doug Ramsey, the Minneapolis-based director of research at Leuthold Group. The firm oversees about $3.5 billion and recommended buying equities four days before the bull market started.

Staying Above 40

The index climbed above 40 on Oct. 2, 2008, and stayed there for three months. An investor who put $10,000 in the S&P 500 on that date would have had $9,540 in three months and $6,640 by March 3, 2009, according to total-return data compiled by Bloomberg.

“The average return calculation disguises the occasional massive loss that is just too big to stomach,” Ramsey wrote in an e-mail on Sept. 30. “With the market down 15 percent in the last couple of months and day-to-day volatility extremely high, a VIX of 40 percent is appropriate and should be seen as neutral.”

The end of September may be enough to slow losses, according to Tim Hayes, the chief investment strategist for Ned Davis Research Inc. The S&P 500 has gained a median 4.9 percent between October and December after third-quarter losses exceeding 8 percent since 1924, he wrote in a note to clients on Sept. 30.

Returns Like 1998

Volatility, data on manufacturing, and the relative performance of U.S. stocks versus global equities suggest the S&P 500 will post returns more like 1998, when it fell 19 percent between July 17 and Aug. 31, than 2008, Hayes wrote. The index gained 27 percent for the year in 1998 compared with a loss of 38 percent in 2008.

“In 1998 and so far in 2011, the respective crises in Asia and Europe did not wreak havoc comparable to 2008, when the U.S. was ground zero,” he wrote. “Today, as in 1998, the global risk is lessened by a U.S. economic outlook that appears less vulnerable than that of the crisis region, in this case Europe. And that has been reflected by the relative market performance.”

The VIX crossed over 40 for the first time ever on Aug. 31, 1998, when it reached 44.28. The S&P 500 gained 22 percent in the next three months, which also marked the beginning of a bull market in which the index added 60 percent in about a year and a half, according to data compiled by Bloomberg and Westport, Connecticut-based Birinyi Associates Inc.

VIX in 2001

When the volatility gauge rose to 41.76 on Sept. 17, 2001, the S&P 500 posted its worst daily decline in more than a year following the World Trade Center terrorist attacks and was down 21 percent for the year. In the next three months, equities rallied 9.2 percent. A year later, the benchmark gauge for U.S. stocks was down more than 20 percent for the year through September, and once the VIX reached 40.65, equities advanced 4.3 percent through the end of December.

“The VIX tells us that risk assets are oversold,” Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus & Co., which oversees more than $115 billion in client assets, said in a telephone interview on Sept. 30. “Investors should start layering on risk within their portfolios as this uncertainty hits a crescendo. Any type of improvement with regard to the euro zone’s debt issues would drastically lower the VIX, which would scotch the fear trade.”

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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EU Signals Bigger Losses on Greek Bailout

By James G. Neuger and Jonathan Stearns - Oct 4, 2011 7:43 AM GMT+0700

European governments dropped clues that bondholders may have to take bigger losses on Greek debt in a second aid package, as Greece’s deteriorating economic outlook forces bolder steps to quell the fiscal crisis.

Finance ministers considered reshaping a July deal that foresaw investors contributing 50 billion euros ($66 billion) to a 159 billion-euro rescue. That “private sector involvement” includes debt exchanges and rollovers.

“As far as PSI is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a meeting of euro finance chiefs in Luxembourg. “These are technical revisions we are discussing.”

Together with plans to get more firepower out of the 440 billion-euro rescue fund, the review of Greece’s aid package was a response to growing international frustration with Europe’s inability to get to grips with the crisis after 18 months of incremental steps.

Juncker gave no details about a possible recalibration of the debt exchange. The talks came after seven countries including Germany, Europe’s dominant economy, weighed calling for Greek bond writedowns of as much as 50 percent, two European officials said.

Decision Postponed

The ministers also pushed back a decision on the release of Greece’s next 8 billion-euro loan installment until after Oct. 13. It was the second postponement of a vote originally slated for yesterday as part of the 110 billion-euro lifeline granted to Greece last year.

“The endgame for Greece has now begun,” Sony Kapoor, managing director of policy group Re-Define Europe, said in an e-mailed note. “It seems that the ground is being laid to revisit the private sector involvement agreement reached in July.”

European stocks and the euro fell yesterday and investors shunned riskier countries’ bonds amid concern that the crisis is careening out of control. Europe’s financial leaders are fighting on multiple fronts, trying to repair Greece’s economy while insulating Italy and Spain and shoring up banks that the International Monetary Fund says face as much as 300 billion euros in credit risks.

Greek Review

Scrounging for savings, the Greek cabinet on Oct. 2 announced 6.6 billion euros of cuts, mostly by slashing public payrolls. Greece will “very likely” have to make extra reductions for 2013 and 2014, a two-year phase that will be the focus of the rest of the review by European Union, European Central Bank and IMF officials, EU Economic and Monetary Commissioner Olli Rehn said.

Greece’s revised 2011 deficit goal may be 8.5 percent of gross domestic product compared with a previous target of 7.6 percent, Rehn said. He called the new target “plausible” and lauded Greece’s “important steps” toward further savings next year.

While an Oct. 13 meeting to decide on the next payout was canceled, Juncker said he is “nevertheless optimistic when it comes to the issue of the disbursement.” The decision now dovetails with an Oct. 17-18 summit of European government leaders to address the crisis.

“Greece is not the scapegoat of the euro zone,” Greek Finance Minister Evangelos Venizelos said. “Greece is a country with structural difficulties.”

Fund Firepower

Finance ministers held a first discussion over how to further beef up the rescue fund, setting aside a plea by German Finance Minister Wolfgang Schaeuble to postpone that debate until the remaining countries have endorsed the fund’s latest upgrade.

Fourteen of the 17 euro countries have approved the reinforcement, which will empower the European Financial Stability Facility to buy bonds on the primary and secondary markets, offer precautionary credit lines and enable capital infusions for banks.

Juncker announced “good progress” on the credit lines and bank-recapitalization tools. Avoiding the word “leveraging,” he said work is under way to scale up the fund’s capacity without requiring each country to chip in more.

“We are checking if yes or no we could increase the efficiency of the different instruments,” Juncker said. Asked whether the ECB would be tapped to boost the fund’s clout, he said: “I don’t think that this will be the main avenue of our considerations.”

Finnish Deal

The ministers also smoothed a snag en route to a second Greek package by settling the terms under which collateral will be offered to AAA-rated Finland, home to a euro-skeptic movement that catapulted to third place in April elections by opposing further bailouts.

While the party now known as “The Finns” didn’t make it into the ruling coalition, it captured the Finnish mood and hardened the stance of new Prime Minister Jyrki Katainen in the euro-rescue bartering.

Under the accord, Greek bonds will be transferred from Greek banks to a trustee, which will sell them and invest the proceeds in AAA rated bonds with maturities of 15 to 30 years.

In exchange for the special treatment, Finland will speed its payments into a planned permanent rescue fund and forego a share of profits from EFSF emergency loans. In the event of default, it couldn’t cash in on the collateral until Greece’s official loans mature, possibly as long as 30 years.

“It’s a complicated financial structure,” said EFSF Chief Executive Officer Klaus Regling, who brokered the collateral arrangement. He and Juncker said Finland is the only country likely to take advantage of it.

Regling deserves “the Nobel prize for economics or the Nobel peace prize” for engineering the compromise, Rehn said.

To contact the reporters on this story: James G. Neuger in Luxembourg at jneuger@bloomberg.net; Jonathan Stearns in Luxembourg at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Morgan Stanley, Goldman Credit Risk Soars

By Mary Childs and Shannon D. Harrington - Oct 4, 2011 4:22 AM GMT+0700
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A construction worker climbs down a ladder in front of Morgan Stanley headquarters in New Yorkon July 21, 2011. Photographer: Scott Eells/Bloomberg

The cost to protect the debt of Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) surged to the highest levels since the weeks after Lehman Brothers Holdings Inc.’s bankruptcy as concern intensified that Europe’s debt crisis will infect the global banking system.

Contracts on Morgan Stanley, the New York-based owner of the world’s largest retail brokerage, soared 92 basis points to a mid-price of 583 basis points as of 4:30 p.m. in New York, the highest since October 2008, according to London-based data provider CMA. Those on Goldman Sachs increased 65 basis points to a mid-price of 395.

Traders pushed the cost of protecting banks and U.S. companies higher after German Finance Minister Wolfgang Schaeuble opposed moves to increase the scale of the euro rescue fund, complicating efforts to prevent a Greek default. Swaps on Bank of America Corp. (BAC) jumped to a record and a measure of U.S. corporate credit risk rose to the most since May 2009.

“It’s such a difficult situation for the markets here,” Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ in New York, said in a telephone interview. “People are primed for bad news. They’re quick to believe the worst.”

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or speculate on creditworthiness, climbed to the highest since May 2009, adding 6.7 basis points to a mid-price of 150.9 basis points as of 5:10 p.m. in New York, according to index administrator Markit Group Ltd.

The index, which typically rises as investor confidence deteriorates and falls as it improves, has increased from 136.2 on Sept. 27 as concerns mount that Europe’s fiscal imbalances are worsening.

Mitsubishi Commitment

Five-year credit-default swaps tied to Charlotte, North Carolina-based Bank of America’s senior debt climbed 33 basis points 457, according to CMA, a unit of CME Group Inc. that compiles prices quoted by dealers in the privately negotiated market.

Contracts on American International Group Inc. (AIG) surged 76 to 545, the highest since May 2010, CMA prices show.

The cost to protect Morgan Stanley’s debt has risen from 305 basis points on Sept. 15 and is at the highest level since October 13 2008, four weeks after Lehman Brothers Holdings Inc. filed for bankruptcy. It reached as high as the equivalent of 1,300 basis points on Oct. 10 of that year, CMA prices show. It now costs $583,000 annually for five years for every $10 million of debt insured.

‘Dirty Word’

“Investment banks are largely black-box businesses, so in a world where risk is a dirty word, they are going to be punished in the capital markets,” Joel Levington, a managing director of corporate credit at Brookfield Investment Management Inc. in New York, said in an e-mail.

Mitsubishi UFJ Financial Group Inc. said today it’s “firmly committed” to its long-term strategic alliance with New York-based Morgan Stanley. The Tokyo-based bank said it was reiterating its commitment to the firm “in response to recent market volatility.”

“The special relationship we have formed remains core to our global business strategy,” Mitsubishi UFJ said in the statement.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporters on this story: Mary Childs in New York at mchilds5@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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Sprint Tumbles After Report of $20B IPhone Deal

By Scott Moritz - Oct 4, 2011 3:36 AM GMT+0700
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A customer is shown at a Sprint store in Boston. Photographer: JB Reed/Bloomberg

Sprint Nextel Corp. (S), the third- largest U.S. wireless operator, tumbled after a report the company had committed to buy at least 30.5 million iPhones over four years, which would cost $20 billion at current rates.

Sprint fell 31 cents, or 10 percent, to $2.73 at 4:15 p.m. in New York Stock Exchange trading. To win the right to carry the device, Sprint had to commit to buying the phones from Apple Inc. (AAPL) whether Sprint could find buyers for them or not, the Wall Street Journal reported.

Sprint is struggling to compete against Verizon Wireless and AT&T Inc. (T), the two largest U.S. wireless operators, which are both able to offer the Apple device. In July, the Overland Park, Kansas-based company reported its 15th consecutive quarterly loss and lost more contract customers than some analysts had estimated.

Since Apple’s iPhone helps draw high-spending contract customers, wireless operators are willing to agree to long-term supply contracts, Mike Abramsky, an analyst with RBC Capital Markets in Toronto.

“The commitment makes sense,” said Abramsky, who has an “overweight” rating on Apple and doesn’t cover Sprint.

The wireless operator will likely lose money on the deal with Apple until 2014, the Wall Street Journal said, citing people familiar with the matter. Wireless operators including Sprint subsidize the costs of phones for consumers and make up the money through service revenue.

Sprint plans to offer the iPhone with unlimited data service to distinguish itself from its larger rivals, people familiar with the matter said last month. That approach may help the company draw customers concerned about extra charges for using applications such as Netflix Inc. (NFLX)’s movie service or Pandora Media Inc.’s streaming music.

Bill White, a spokesman for Sprint, declined to comment. The company’s stock has dropped 35 percent this year.

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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