U.S. Stocks Fall as Germany Damps Optimism, Wells Fargo Slumps

By Rita Nazareth - Oct 17, 2011 9:49 PM GMT+0700

U.S. stocks fell, after the biggest weekly gain for the Standard & Poor’s 500 Index since 2009, as Wells Fargo & Co. (WFC) slumped and a German government spokesman damped optimism of a quick fix to Europe’s debt crisis.

Gauges of financial and raw material companies had the biggest declines in the S&P 500 among 10 groups, falling at least 2.5 percent. Wells Fargo, the largest U.S. home lender, lost 6.2 percent as third-quarter revenue dropped and margins narrowed. Alcoa Inc. (AA) and 3M Co. (MMM) slumped more than 2.8 percent to pace losses among companies most-tied to the economy. Gannett Co. dropped 8.6 percent as print-advertising revenue slid.

The S&P 500 slipped 1.2 percent to 1,209.40 at 10:48 a.m. New York time. The Dow Jones Industrial Average retreated 145.92 points, or 1.3 percent, to 11,498.57 today.

“It’s optimism punctuated by reality,” Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset Management Inc., which oversees $51.6 billion. “It’s not in the Germans’ interest to offer up a bailout package on the terms that the market would like. The market wants the resolution, but it shouldn’t be forthcoming.”

The S&P 500 rose 6 percent last week amid optimism over corporate earnings and steps by European leaders to support the region’s banks. It has surged 11 percent from Oct. 3, its lowest close in more than a year, through Oct. 14. The rebound brought the gauge close to the top of a price range between 1,074.77 and 1,230.71, where it’s traded for more than two months.

No Complete Fix

Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit. Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of an emerging plan to avoid a Greek default, bolster banks and curb contagion.

German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”

U.S. equity futures fell after the Federal Reserve Bank of New York’s general economic index rose to minus 8.5 from minus 8.8 in September. Economists projected an improvement to minus 4, based on the median of 53 forecasts in a Bloomberg News survey. Separate figures from the Federal Reserve showed that industrial production in the U.S. advanced in September on growing demand for automobiles and computers.

‘A Bit Optimistic’

“There’s not going to be a quick fix to the problems in Europe,” Brian Jacobsen, chief portfolio strategist at San Francisco-based Wells Fargo Funds Management, which oversees $215 billion, said in a telephone interview. “People were getting a bit optimistic. This economic recovery will be uneven in terms of geography and the sectors that are really benefiting from the slow growth.”

The Morgan Stanley (MS) Cyclical Index of companies most-tied to the economy lost 2.4 percent. The Dow Jones Transportation Average, a proxy for the economy, retreated 2.1 percent. The KBW Bank Index decreased 2.8 percent. Alcoa slumped 4 percent to $9.85. 3M fell 2.8 percent to $76.65.

Wells Fargo dropped 6.2 percent to $25.02. Revenue fell to $19.6 billion from $20.4 billion in the second quarter, missing the $20.2 billion estimate of 20 analysts surveyed by Bloomberg.

Citigroup Rallies

Citigroup Inc. (C) rallied 0.6 percent to $28.58. The third- biggest U.S. bank said profit rose 74 percent, beating analysts’ estimates on a $1.9 billion accounting gain and a reduction in losses tied to soured loans.

Gannett slid 8.6 percent, the most in the S&P 500, to $10. The owner of 82 newspapers and 23 television stations reported third-quarter profit decreased 1.6 percent as publishing revenue, including advertising and circulation, declined 5.3 percent.

El Paso Corp. (EP) surged 24 percent to $24.26. The cash and stock offer is valued at $26.87 per El Paso share, or 37 percent more than the Oct. 14 closing price, Houston-based Kinder Morgan said in a statement yesterday. The combined company would have 67,000 miles (107,000 kilometers) of gas lines and eclipse Enterprise Products Partners LP as the biggest U.S. pipeline operator.

Utility, telephone and consumer staples providers, which are least-tied to the economy, outperformed the S&P 500 today.

Stock market bulls and bears agree on at least one thing. The highest valuations for makers of household goods since 2008 signal the best is over after the industry rose more than any other group this year.

Bears vs Bulls

Bears say the easy money has been made in so-called defensive shares should the world slip into a recession. Bulls favor companies with faster earnings growth and cheaper valuations. The last time household-goods producers were this expensive versus the MSCI World (MXWO), stocks were about to begin an advance in which bank, mining and industrial stocks jumped more than 137 percent, while consumer staples rose 76 percent.

“You’ve got too much money that has been bet that we’re going into a recession,” said Jeffrey Saut, who helps oversee $300 billion as chief investment strategist at Raymond James & Associates in St. Petersburg, Florida. “If we don’t go into a recession, you’ll get a whole rotation out of these highly valued defensive stocks into more aggressive stocks.”

Bullish bets in the Traxis Partners LP hedge fund, also known as its net long position, rose to 65 percent, according to founder Barton Biggs.

“I’m inclined to stay where I am, which is moderately, cowardly bullish,” Biggs said in an interview with Betty Liu on Bloomberg Television’s “In the Loop” program. “We’re going to creep higher from here for a while.”

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

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Germany Shoots Down ‘Dreams’ of Swift Crisis Fix

By Tony Czuczka and Rainer Buergin - Oct 17, 2011 9:53 PM GMT+0700

Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging plan to avoid a Greek default, bolster banks and curb contagion. Providing a week to act, they set the Oct. 23 meeting of European leaders in Brussels as the deadline.

On the summit agenda is how any recapitalization of Europe’s banks “might be carried out in a coordinated way” and how to make the European Financial Stability Facility, the EU’s rescue fund for indebted states, as effective as possible, Seibert said. The leaders will also discuss aid for Greece and ways to tighten economic and financial policy, he said.

The euro retreated as much as 1 percent to $1.3739 from a one-month high against the dollar after Seibert’s comments. The currency last week had its biggest gain in more than two years on speculation that policy makers were moving closer to stemming the crisis. German 10-year bonds rallied and the Stoxx Europe 600 Index reversed an advance of as much as 1.5 percent and was down 1.4 percent at 4.45 p.m. in Frankfurt.

‘Disappointment Trade’

Seibert’s statement “moved the disappointment trade to this morning,” Carl Weinberg, founder and chief economist at High Frequency Economics, said today on Bloomberg Television. “We’re looking at a really big disapopintment if we don’t get a funded, operational and agile response to the bank recapitalization problem as soon as possible.”

Two years to the week since Greece triggered the turmoil by revising its budget math, policy makers face increasing calls from the U.S. and other global partners to stamp out the turmoil that has pushed the Greek government to the edge of default and the European economy close to recession.

The outlook for German economic growth has worsened as companies cut their business expectations and foreign orders decline, the Bundesbank, Germany’s central bank, said in its monthly report today.

Greek Strikes

In Greece, Finance Ministry workers began a 10-day strike, complicating the government’s efforts to collect taxes. Renewed walkouts have hit Europe’s most-indebted country as Greek lawmakers face another vote on fiscal measures as soon as this week, a showdown that Prime Minister George Papandreou needs to win to ease the way for more foreign financing.

Obstacles to an EU accord include resistance by bankers to a deeper restructuring of Greek debt and discord among Europe’s capitals over how to multiply the firepower of their bailout fund and recapitalize financial institutions. At stake is confidence in the 17-nation currency union that Merkel says she wants to preserve.

As EU officials move toward an agreement that may include bigger losses on Greek debt holdings and the forced recapitalization of lenders, bankers are pushing back. Options include altering a July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings.

‘Sustainable Solution’

German Finance Minister Wolfgang Schaeuble said yesterday the reduction of Greece’s debt by means of private-investor participation must be bigger than agreed to in July by euro- region leaders to achieve a “sustainable solution” for the country. There will be negotiations with banks about a debt cut for Greece, Schaeuble said on ARD public television, according to a transcript of the interview.

While tensions “may die down if markets are suitably impressed” with the summit outcome, Merkel is seeking to keep pressure on euro-area countries to lock in budget discipline, Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in a phone interview.

“For her, the longer-term reform is at least equally important” because it increases the chances “that the German taxpayer will get back all the money” put on the line in bailouts for Greece, Ireland and Portugal, he said.

Forcing lenders to boost capital would be counterproductive, and getting investors to accept larger losses Greek holdings difficult, Deutsche Bank Chief Executive Officer Josef Ackermann said on Oct. 13. Ackermann, who chairs the Washington-based Institute of International Finance and spearheaded the July accord, travels to Brussels this week for talks with policy makers.

Writedowns

Greek bond losses of as much as 50 percent envisaged in Europe’s emerging plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, people familiar with the discussion said on Oct. 14.

In the works for the summit is a five-point plan foreseeing a solution for Greece, bolstering of the firepower of the 440 billion-euro ($611 billion) EFSF, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty changes to tighten economic management.

“The problems in the eurozone are chronic” and “won’t go away,” said Nouriel Roubini, chairman and co-founder of Roubini Global Economics LLC.Roubini. He said EFSF needs to be more than four times its current size to be effective.

Even so, leaders won’t present a “definitive solution” for the euro region’s debt crisis at the summit in Brussels, Reuters cited Schaeuble as saying at a tax advisers’ conference in Dusseldorf today.

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Rainer Buergin in Berlin at rbuergin1@bloomberg.net

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

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Kindle Challenge to IPad Narrows Amazon Margins

By Danielle Kucera - Oct 17, 2011 11:01 AM GMT+0700

Amazon.com Inc. (AMZN)’s profit margins, already at a five-year low last quarter, are set to narrow next year as the world’s largest online retailer sells its new tablet computer for half the price of the iPad.

The Kindle Fire will go on sale next month for as little as $199, compared with $499 for the cheapest tablet from Apple Inc. (AAPL) The lower price will help Amazon sell 4.5 million Kindle Fires in the fourth quarter, according to Barclays Plc, topping the 3.3 million units Apple reported for iPad’s debut quarter. It also means Seattle-based Amazon loses about $10 on each tablet, according to IHS Inc.

“It is possible that in 2012 you’ll have a quarter with negative operating margins,” said Ben Schachter, an analyst at Macquarie Capital in New York. “That typically is a disaster scenario. It’s phenomenal to have this revenue growth, but at some point you want to see them make money on it.”

Chief Executive Officer Jeff Bezos is counting on sales of music, books, movies and merchandise on the tablet to make up for money lost on the device. The Kindle Fire, available Nov. 15, has a 7-inch display, smaller than the iPad’s 9.7-inch screen, Amazon said at a Sept. 28 event in New York. The device will run on Google Inc.’s Android software, have a dual-core processor and offer Wi-Fi connectivity, the company said.

Apple Challenge

Amazon is trying to parlay its leadership in e-commerce to grab a piece of a market that Cambridge, Massachusetts-based Forrester Research Inc. predicts will grow 51 percent a year through 2015. While tablets from companies such as Hewlett- Packard Co. and Research In Motion Ltd. have failed to erode Apple’s dominance in the market, Amazon may be the first to pose a meaningful sales challenge to the iPad, Brian Blair, an analyst at Wedge Partners Corp. in New York, said the day of the Kindle Fire’s unveiling.

Still, selling the device at a loss means Amazon’s margins could fall below zero percent, weighing on the company’s stock price, Macquarie’s Schachter said. Amazon’s 2 percent operating margin in the second quarter was the lowest since the third quarter of 2006, according to data compiled by Bloomberg. They may have narrowed to 1.3 percent in the third quarter, which ended in September, analysts surveyed by Bloomberg project.

Investors’ focus on Amazon’s revenue growth has so far diverted attention from the decline in profitability, Schachter said.

Sales, Share Gains

Sales rose 51 percent in the second quarter from a year earlier, the biggest jump since at least 2002, and analysts predict revenue will rise 43 percent this year, according to data compiled by Bloomberg.

Amazon shares rose 4.5 percent to close at $246.71 on Oct. 14. The stock has gained 37 percent this year. It is projected to rise 1 percent over the next 12 months, compared with an anticipated 20 percent increase for Apple, according to Bloomberg data.

Mary Osako, an Amazon spokeswoman, didn’t respond to requests for comment.

Amazon spends about $210 to make each Kindle Fire, while the iPad 2 costs Cupertino, California-based Apple about $333, IHS estimates.

Amazon will have to rely on content sales on the Kindle Fire to make the tablet profitable, said Kerry Rice, an analyst at Needham & Co. in San Francisco. He estimates Amazon will sell 2 million to 4 million Kindle Fires this year.

Media, Merchandise

“Amazon is coming at it as, ‘We’re a media company, and we need to put this in the market to drive sales of our media,’” Rice said. “What this device does for Amazon is drive the consumption of media in whatever form possible. They pay once for a movie, and if they sell it a million times, that margin increases.”

A Kindle Fire user would have to spend about $500 on media and merchandise through the device, on purchases of items with 2 percent to 4 percent margins, to make up for Amazon’s loss on the tablet itself, estimates Scot Wingo, chief executive officer of ChannelAdvisor Corp. The Morrisville, North Carolina-based company consults on Web strategies for more than 3,000 businesses, including Amazon third-party sellers.

Wingo expects Amazon to sell about 5 million tablets in the fourth quarter, bringing pressure on margins for the first six months of sales.

Adding Prime Users

Margins may widen in the next few years, a result of Amazon’s switch to a so-called agency model to sell books, which means the company reports 100 percent profit and lower revenue on each purchase, Schachter said. Instead of selling a book for $10 and booking the entire amount as revenue, then paying publishers $7 -- a 30 percent gross margin -- the company only reports the $3 in revenue, he said.

Amazon is offering Kindle Fire buyers a 30-day free trial of Amazon Prime, the company’s $79-a-year membership service that includes streaming video and free two-day shipping, something that may bring in more net income, Wingo said.

While Prime members represent about 8 percent of users, they spend four times as much as other customers, according to ChannelAdvisor. The Kindle Fire could draw 10 million more Prime members, Wingo said.

“You go to Costco or BJ’s, you buy the membership and you want to shop there enough to make up the cost,” he said. “Once you join Prime, it just becomes second nature. You stop going to Target every Wednesday.”

Investors’ Patience

Revenue from digital content on Kindles will surpass hardware sales from the device in 2013, Barclays analyst DiClemente estimates. He projects that the Kindle Fire and content sales through the tablet will account for 5.1 percent of Amazon’s 2012 revenue.

Investors may not continue to overlook the narrower margins if Amazon doesn’t find a way to squeeze more profit from its lower-priced items, Schachter said.

Increases in capital expenditures and marketing must be countered by profit from higher-margin digital offerings such as books, music and movies, he said. Amazon can also leverage its ability to sell consumers items like clothes and cat food, in addition to digital media products, to woo customers from Apple, he said.

“Scale does not necessarily beget margin expansion,” Barclays’s DiClemente said in an interview. “The sentiment from investors is that in the near-term, revenue growth is more important than margins. If and when revenue growth starts to slow down, the narrative on Amazon’s financial story will switch to margins.”

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

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

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Philips to Cut 4,500 Jobs as Profit Sinks to Two-Year Low

By Maaike Noordhuis - Oct 17, 2011 5:55 PM GMT+0700

Royal Philips Electronics NV, the world’s biggest maker of light bulbs, plans to cut 4,500 jobs to revive earnings after quarterly profit fell to the lowest in almost two years and the company predicted no near-term rebound.

The job cuts are part of a plan to save 800 million euros ($1.1 billion), Amsterdam-based Philips said in a statement today. Earnings before interest, taxes and amortization dropped to 368 million euros ($510 million) in the third quarter, from 647 million euros a year earlier. That beat the 341 million-euro average estimate in a Bloomberg survey of analysts. Revenue fell 1.3 percent to 5.39 billion euros, in line with estimates.

“Taking into account that cost-cutting measures will kick in in the fourth quarter and next year, maybe Philips has hit the bottom this quarter,” said Jos Versteeg, an analyst at Theodoor Gilissen Bankiers. Versteeg, who advises that investors buy the stock, said earnings were better than he had expected.

Chief Executive Officer Frans van Houten said the biggest round of job cuts since 2009 are an “inevitable step” to revive Philips and respond to economic challenges. Van Houten spent the quarter traveling to Philips global sites, gathering together workers in meetings to push his bid to accelerate an efficiency drive. The manufacturer aims to pull out of television production by the end of the year, a move it said today is taking longer than anticipated.

Stock Rebound

Philips rose as much as 4.6 percent to 15.49 euros in Amsterdam and was up 1.1 percent as of 12:54 p.m. Before today, the stock had declined 35 percent this year, reducing the market value of the company to 14.9 billion euros. German rival Siemens AG (SIE), which also makes light bulbs and medical equipment, has dropped about 18 percent in 2011.

Philips had “better than expected results, albeit relative to low expectations,” Peter Olofsen, an analyst at Kepler Capital Markets, said in a note to clients. The stock’s price reflects that investors are “discounting overly cautious future margins.”

Philips employed about 120,500 people at the end of the third quarter, excluding the discontinued television operations. Some 1,400 jobs will be eliminated in the Netherlands, Philips said. The focus on administration and services jobs in making cuts is the reason why the Netherlands is bearing the brunt of the reductions, Van Houten said.

Cost cuts will take place at the headquarters, in infrastructure, information technology and real estate, and will have “quite a big impact in 2012 and 2013,” Van Houten said in an interview with Bloomberg Television.

Cost of Changes

Restructuring costs will amount to 400 million euros through 2014, the company said, with 200 million euros of the total to be incurred in 2012.

Net income dropped to 74 million euros in the quarter from 524 million euros a year earlier, Philips said.

Philips is a remnant of a consumer-electronics industry once led by Europe and now dominated by Asia. Munich-based Siemens exited production of phones and bundled its appliances operation into a joint venture. The company is also working on an initial public offering of its Osram lighting subsidiary.

The planned cuts should help improve efficiency at a time when Philips is battling slowing economic growth and competition from lower-cost manufacturers in Asia. Some 60 percent of the savings are tied to the job cuts, while the remainder will come from “other structural costs,” Philips said.

Margin Improvement

Investors may increasingly favor the stock “in the course of next year as margins start to improve,” Kepler’s Olofsen said.

Van Houten is seeking to drive innovation and new products that can be moved quickly to market and made a commercial success. He is stepping up market penetration and innovation by making additional investments of 200 million euros a year.

The executive, who took over in April, has set a target of increasing earnings before interest, taxes and amortization to 10 percent to 12 percent of revenue by 2013, on sales growth of 4 percent to 6 percent. He reiterated those goals today.

In lighting, where Philips is global market leader, the goal is to lift the margin to 8 to 10 percent. In the third quarter, the measure stood at 5.8 percent, compared with 11.3 percent a year earlier. That marked the third consecutive quarterly drop for the division.

In health care, Philips wants to boost margins to 15 percent to 17 percent by 2013, while in consumer lifestyle subsidiary, it aims for an Ebita margin of 8 to 10 percent. Both divisions were short of those goals in the third quarter.

To contact the reporter on this story: Maaike Noordhuis in Amsterdam at mnoordhuis@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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U.S. Stock Futures, Euro Fall as Germany Damps Crisis Optimism

By Rob Verdonck - Oct 17, 2011 7:53 PM GMT+0700

U.S. equity futures fell, while stocks in Europe and oil trimmed earlier gains and the euro weakened, as a German government spokesman damped expectations for a fast resolution to the sovereign-debt crisis and a report showed New York-area manufacturing shrank more than forecast.

Standard & Poor’s 500 Index futures dropped 0.2 percent at 8:50 a.m. in New York after earlier climbing as much as 0.9 percent. The Stoxx Europe 600 Index was up less than 0.1 percent, erasing most of a 1.5 percent gain. The euro weakened 0.7 percent against the dollar. The yield on 10-year Spanish bonds advanced for a sixth day, adding six basis points to 5.31 percent. Oil was up 0.2 percent at $87 a barrel in New York, reversing most of an earlier 1.6 percent advance.

Equities and the euro headed lower as Steffen Seibert, German Chancellor Angela Merkel’s chief spokesman, said European Union leaders won’t provide the quick ending to the debt crisis that global policy makers are pushing for at an Oct. 23 summit. Optimism that the region was developing a plan to shield banks from losses on sovereign debt helped send global stocks to the biggest weekly gain since July 2009 last week and gave the euro its best rally versus the dollar since March 2009.

“This may prove to be a somewhat monumental instance of buy the rumor and sell the fact,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “The continued promise of a sweeping solution is underpinning a cautious ‘risk-on’ tone.”

U.S. futures signaled the S&P 500 may fall after last week’s 6 percent jump, also the steepest increase since July 2009. Wells Fargo & Co. slipped 3.6 percent after per-share profit met estimates.

Earnings Season

Citigroup Inc. climbed 2 percent in early trading after reporting profit that rose 74 percent, beating analysts’ estimates following a $1.9 billion accounting gain that reduced the impact of falling trading and investment-banking revenue.

El Paso Corp. (EP) surged 28 percent as Kinder Morgan Inc. agreed to buy the company for $21.1 billion in a deal that would create the largest U.S. natural-gas pipeline network.

International Business Machines Corp. will report earnings after the close of trading.

The Federal Reserve Bank of New York’s general economic index rose to minus 8.5 from minus 8.8 in September. Economists projected an improvement to minus 4, based on the median of 53 forecasts in a Bloomberg News survey. Readings less than zero signal companies in the so-called Empire State Index, which covers New York, northern New Jersey, and southern Connecticut, are cutting back.

A Federal Reserve report due at 9:15 a.m. New York time will show that industrial production expanded for a fifth straight month in September, according to the median estimate in a survey of economists.

European Stocks

About three stocks declined for every two that gained in the Stoxx Europe 600 Index, which retreated after gaining for three straight weeks. Automobile companies led losses, with Daimler AG and Bayerische Motoren Werke AG down more than 1.4 percent. BP Plc appreciated 4.6 percent after saying Anadarko Petroleum Corp. will pay $4 billion to settle all claims over last year’s oil spill in the Gulf of Mexico.

The yield on the Portuguese 10-year security rose 15 basis points to 11.80 percent, with seven days of losses in the bond driving the level up from 11.21 percent. The yield on the U.S. 30-year Treasury bond was little changed at 3.24 percent. The euro weakened to $1.3779, and was lower against 13 of its 16 most-traded peers.

Emerging Markets

The MSCI Emerging Markets Index increased 1.2 percent, on course for its ninth straight gain, the longest winning streak in 16 months. The Hang Seng China Enterprises Index of Chinese shares traded in Hong Kong climbed 2.8 percent and the Kospi Index (KOSPI) jumped 1.6 percent in Seoul. Korea’s won climbed 1.4 percent against the dollar.

South Korean Finance Minister Bahk Jae Wan said at the Paris meeting the Asian nation’s economy is performing better than expected, while data tomorrow may show China’s gross domestic product increased 9.3 percent in the third quarter from a year earlier, according to the median estimate of 22 economists surveyed by Bloomberg. That would be the ninth consecutive quarter of expansion above 9 percent.

The pound slipped 0.3 percent to $1.5768 as Ernst & Young LLP’s ITEM Club cut its U.K. growth forecast and said the Bank of England should lower its key interest rate as its new stimulus earlier this month is unlikely to be enough to revive economic growth.

To contact the reporter on this story: Rob Verdonck in London at rverdonck@bloomberg.net

To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net

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European Stocks Fluctuate as Germany Damps Euro-Area Debt Crisis Optimism

By Adria Cimino - Oct 17, 2011 7:40 PM GMT+0700

European stocks fluctuated as a German government spokesman said that euro-area leaders will not provide a quick ending to the debt crisis at their next meeting. Asian stocks rose, while U.S. futures were little changed.

National Bank of Greece SA (ETE), the country’s biggest lender, led bank shares lower. G4S Plc slumped 21 percent after agreeing to acquire ISS Holdings A/S. BP Plc (BP/) surged 4.3 percent after saying that Anadarko Petroleum Corp. will pay $4 billion to settle all claims for last year’s Gulf of Mexico oil spill. Royal Philips Electronics NV gained 1.6 percent after announcing a plan to cut costs.

The Stoxx Europe 600 Index added 0.2 percent to 238.88 at 1:37 p.m. in London, paring an earlier gain of as much as 1.5 percent after Germany’s government said that the European Union’s Oct. 23 summit will not provide a complete fix to the euro area’s sovereign debt crisis. The benchmark measure swung between gains and losses at least eight times today.

“Markets are off their earlier highs on the back of wary comments from Germany suggesting that the upcoming EU summit won’t present a final solution for euro-zone debt crisis,” said Stephane Ekolo, chief European strategist at Market Securities in London. “These comments remind investors how difficult it is to find a solution regarding the euro-zone woes. The problems are still out there and the solution isn’t really coming.”

Futures on the Standard & Poor’s 500 Index expiring in December slipped 0.1 percent, while the MSCI Asia Pacific Index increased 1.9 percent.

Germany Damps Optimism

Stocks pared earlier gains after Steffen Seibert, German Chancellor Angela Merkel’s chief spokesman, told reporters in Berlin that European leaders won’t fulfill “dreams” of a quick end to the debt crisis at the Oct. 23 summit.

The Stoxx 600 advanced 2.8 percent last week. The gauge has still retreated 18 percent from this year’s high on Feb. 17 as concern mounted that Greece will default, pushing borrowing costs higher for other indebted euro-area countries. The gauge traded at 9 times its companies’ estimated earnings on Sept. 22, the cheapest since March 2009, according to data compiled by Bloomberg.

G-20 finance ministers and central bank governors concluded weekend talks in Paris endorsing parts of the emerging plan to avoid a Greek default, bolster banks and curb contagion.

Backstop for Banks

The euro area’s plan, which has yet to be made public, includes writing down Greek bonds by as much as 50 percent, establishing a backstop for banks and magnifying the strength of the 440 billion-euro ($606 billion) temporary rescue fund known as the European Financial Stability Facility, people familiar with the matter said last week.

Hurdles to overcome for the accord include resistance from bankers to a deeper restructuring of Greek debt as well as disagreements between Europe’s capitals over just how to multiply the firepower of their bailout fund and recapitalize financial institutions.

Greece’s ASE Index plunged 3.4 percent for the biggest decline among national indexes. National Bank of Greece sank 7.1 percent to 1.69 euros. Piraeus Bank SA (TPEIR) retreated 9.8 percent to 25.8 euro cents. EFG Eurobank Ergasias tumbled 8.6 percent to 66.7 euro cents.

Industrial Production

A Federal Reserve report due at 9:15 a.m. New York time will show that industrial production, or output from factories, mines and utilities, expanded for a fifth straight month in September, according to the median estimate in a survey of economists.

A separate report showed that manufacturing in the New York area contracted in October more than economists had forecast. The Empire State Index covering New York, northern New Jersey, and southern Connecticut gave a reading of minus 8.5, a larger drop than the average estimate of minus 4 in a Bloomberg News survey of economists.

G4S Plc (GFS) slumped 21 percent to 223.5 pence for the largest drop on the Stoxx 600. The world’s largest security provider agreed to acquire ISS Holdings A/S for about 5.2 billion pounds ($8.2 billion), of which 3.7 billion pounds is assumed debt, to add cleaning and other facilities-management services and accelerate expansion in emerging markets.

BP Plc soared 4.3 percent to 434.3 pence. BP, Europe’s second-largest oil company, said Anadarko will pay to settle all claims over the world’s largest accidental oil spill.

Anadarko, which had a 25 percent stake in the Gulf of Mexico well, will no longer pursue allegations of gross negligence against BP, the London-based company said. BP’s shares made the biggest contribution to the Stoxx 600’s advance.

Philips, Aviva

Philips rose 1.6 percent to 15.04 euros after the world’s biggest maker of light bulbs said it plans to cut 4,500 jobs globally, including 1,400 in the Netherlands, as part of a plan to lower costs by 800 million euros. The company reported third- quarter net income of 74 million euros, exceeding the average analyst estimate of 48.7 million euros.

Aviva Plc (AV/), the U.K.’s second-biggest insurer by market value, climbed 1.5 percent to 344 pence after the stock was raised to “buy” from “neutral” at UBS AG.

SGL Carbon SE (SGL) soared 10 percent to 41.83 euros, its highest price since August 2008. Bayerische Motoren Werke AG (BMW) plans to buy a stake in the German maker of carbon and graphite materials, Spiegel said, citing an unidentified manager at the automaker.

Saint-Gobain Climbs

Cie. de Saint-Gobain advanced 2.6 percent to 34.43 euros. The stock was upgraded to “outperform” from “market perform” at Sanford C. Bernstein & Co., which said the company’s presence in France and other western-European markets and flat or receding energy costs will help it “progress” earnings.

Air France-KLM (AF) Group, Europe’s second-largest airline by sales, surged 4.1 percent to 5.75 euros. The company’s board will meet today to vote on ousting Chief Executive Officer Pierre-Henri Gourgeon and replacing him with Alexandre de Juniac, a former chief of staff to Christine Lagarde, according to two people with knowledge of the proposals.

L’Oreal SA (OR), the world’s biggest cosmetics company, advanced 1.7 percent to 79.86 euros. A French judged ruled that L’Oreal heiress and France’s third-richest person, Liliane Bettencourt, was mentally unfit to manage her own affairs. The court appointed Bettencourt’s daughter to manage her assets.

Tenaris SA (TEN) increased 2.6 percent to 10.87 euros. The world’s largest maker of seamless steel pipes was raised to “outperform” from “neutral” at Mediobanca SpA.

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

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

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Samsung Files to Halt IPhone 4S in Japan, Australia

By Saeromi Shin and Tim Culpan - Oct 17, 2011 1:55 PM GMT+0700

Samsung Electronics Co. sued Apple Inc. (AAPL) in Japan and Australia to stop sales of the iPhone 4S, escalating a legal battle between the world’s two biggest makers of smartphones and tablet computers.

Samsung also sought injunctions against the sale of the iPad 2 and the previous generation iPhone 4 in Japan, the Suwon, South Korea-based company said in a statement today. Samsung claimed Apple’s products infringe its patents covering wireless communications and user-interface technologies.

Legal conflicts between the rivals have spread globally since April when Apple claimed that Samsung’s Galaxy devices “slavishly” copied the iPad and iPhone. An Australian court last week blocked sales of the Galaxy Tab 10.1, while Samsung filed motions in France and Italy seeking to ban sales of Apple’s latest handset.

“The legal battle is lasting longer and is more extensive than originally expected,” James Song, a Seoul-based analyst at Daewoo Securities Co., said by phone today. “This kind of legal saga isn’t good for both companies given their business relationship. The parties will eventually seek to resolve the issue.”

Samsung rose 0.5 percent to close at 890,000 won in Seoul trading, trimming its decline to 6.2 percent this year. Apple’s stock has added 31 percent this year on the Nasdaq Stock Market.

“Apple has continued to violate our patent rights and free ride on our technology,” Samsung said in the statement. “We will no longer stand idly by and will steadfastly protect our intellectual property.”

Paris, Milan

Apple, which is also one of the biggest buyers of chips and displays from Samsung, had 19.1 percent of the global smartphone market in the second quarter, with its South Korean rival closing the gap and taking 16.2 percent, according to Framingham, Massachusetts-based researcher IDC.

“It’s no coincidence that Samsung’s latest products look a lot like the iPhone and iPad, from the shape of the hardware to the user interface and even the packaging,” Steve Park, a Seoul-based spokesman for Apple, said by phone today, responding to the court filing.

Apple is also suing Taoyuan, Taiwan-based HTC Corp. in the U.S., alleging patent infringement. Samsung and HTC both use Google Inc. (GOOG)’s Android platform, which has extended its lead in smartphone operating systems over Apple’s iOS with 43 percent of the market, according to Gartner Inc. Apple’s iOS leads the market for tablet platforms, while Android will close the gap in coming years, Gartner said.

Samsung filed motions in Paris and Milan earlier this month citing two patent infringements on wireless telecommunications technology, aiming to prevent the sale of the iPhone 4S.

The company has filed an appeal against an Oct. 13 Australian court ruling to grant a preliminary injunction against the sale of its Galaxy Tab 10.1, Samsung said in today’s statement.

Samsung filed the latest preliminary injunction motions in Japan’s Tokyo District Court and in the New South Wales Registry, Australia, it said.

To contact the reporters on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net; Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net.

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Bankers Balk at EU Push for Bigger Greek Losses, Higher Capital

By Aaron Kirchfeld - Oct 17, 2011 5:50 PM GMT+0700

Josef Ackermann, the head of Deutsche Bank AG (DBK) and chief lobbyist for the world’s largest financial firms, has pressed European leaders for months to devise a strategy to stamp out the sovereign debt crisis.

Now that European Union officials are moving toward an agreement that may include bigger losses on Greek debt holdings and the forced recapitalization of lenders, the Deutsche Bank chief executive officer and Washington-based Institute of International Finance he chairs are pushing back. He travels to Brussels this week for talks with policy makers.

Forcing lenders to boost capital would be counterproductive, and getting investors to accept larger losses on Greek holdings difficult, Ackermann said on Oct. 13. Opposition from banks may hamper efforts by German Chancellor Angela Merkel and French President Nicolas Sarkozy to present a breakthrough at an Oct. 23 summit of euro leaders in combating the crisis, which has driven Greece toward default, roiled global markets and dented confidence in the survival of the 17- nation currency.

“What’s most depressing about this whole thing is the squabbling between politicians, regulators and banks,” said Christopher Wheeler, a London-based analyst with Mediobanca SpA. “Banks have to take positive action alongside the EU to find a solution, which is a combination of dealing with sovereigns as well as capital concerns.”

Revamped Strategy

Reaching a compromise is in the interest of banks, whose earnings have been battered by financial-market turbulence, Wheeler said. Frankfurt-based Deutsche Bank scrapped its profit forecast on Oct. 4 and announced 500 job cuts and further writedowns of Greek bond holdings amid what the company described as a “significant and unabated slowdown in client activity” brought on by the debt crisis.

European financial companies rose for the first time in three day. The Bloomberg Europe Banks and Financial Services Index of 46 stocks advanced 0.5 percent, led by Royal Bank of Scotland Group Plc and Standard Chartered Plc.

Europe’s revamped strategy to beat its two-year sovereign debt crisis won the backing of global finance chiefs in Paris this past weekend. In the works is a five-point plan foreseeing a solution for Greece, bolstering of the firepower of the 440 billion-euro ($611 billion) European Financial Stability Facility bailout fund, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty amendments to tighten economic management.

Bigger Losses

The Greek bond losses now envisaged in the plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, people familiar with the discussion said on Oct. 14.

Options include altering a July accord struck with investors and spearheaded by Ackermann for a 21 percent net- present-value reduction in Greek debt holdings. One variant would take that loss up to 50 percent, the people said.

German Finance Minister Wolfgang Schaeuble said yesterday the reduction of Greece’s debt by means of private-investor participation must be bigger than agreed to in July by euro- region leaders to achieve a “sustainable solution” for the country. There will be negotiations with banks about a debt cut for Greece, Schaeuble said on ARD public television, according to a transcript of the interview.

‘Political Reality’

Policy makers’ priority needs to be convincing investors that Italy, the third-largest issuer of debt after the U.S. and Japan, is a risk-free investment, said Holger Schmieding, a London-based chief economist for Berenberg Bank. Still, increasing private contributions to a Greek rescue would help mollify German voters and injecting capital into banks may ease investors’ concerns about the stability of the financial system, he said.

“Being a realist, I don’t see the chance of avoiding larger private-sector involvement, especially given the German political reality,” said Schmieding. “We also probably need some type of recap after raising market expectations over the last few weeks. But the ultimate thing is impressing on the market that Italy is safe.”

The Institute of International Finance on Oct. 10 rejected pressure for banks to accept larger losses on their holdings of Greek government debt. There are no plans to change the deal, Hung Tran, deputy managing director of the IIF, said in a telephone interview.

No ‘Compelling Case’

“The potential risk and potential costs of revisiting the deal far outweigh any potential benefits,” Tran said. “July 21 represented a balanced approach with significant concessions from private investors. We should remind the public sector that we need to preserve the voluntary nature of the Private Sector Agreement, and therefore honor and implement the deal.”

Charles Dallara, managing director of the IIF, which represents more than 450 financial institutions globally, told the Financial Times on Oct. 14 that he didn’t see a “compelling case” to reopen negotiations.

One risk to changing the agreement is that forcing bigger writedowns could be viewed as a default, triggering insurance bought against such an event, known as credit default swaps, and risking contagion to larger countries such as Italy and Spain, according to analysts.

Rescue Fund

Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS, have about 2.9 trillion euros of government bonds outstanding, according to data compiled by Bloomberg. Italy accounts for more than half, or 1.59 trillion euros, the data show.

About 413 billion euros of GIIPS debt is held by 38 of Europe’s largest lenders, according to an analysis of European stress-test results by Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc (RBS) in London. Those holdings equal almost 40 percent of the banks’ 1.1 trillion euros of equity, according to Gallo.

To combat concern about contagion, officials are considering ways of multiplying the strength of Europe’s temporary rescue fund. The likeliest option is using it to partly insure new bonds issued by distressed governments. EFSF guarantees of new bonds might range from 20 percent to 30 percent, a person familiar with those deliberations said.

There are risks to this plan, Joachim Fels and Sung Woen Kang, analysts at Morgan Stanley, said yesterday in a research note.

More Capital

“Guaranteeing first losses may well turn out less appealing to investors than many hope and a larger private sector involvement could spark another wave of contagion,” the analysts wrote. “Banks would probably choose to shed assets and de-lever rather than raise capital in the market if they are given a longish grace period before having to accept recapitalization through their sovereign and the EFSF.”

All lenders judged by the region’s top banking regulator to be systemically important should be required to hold “temporarily higher” amounts of capital, European Commission President Jose Barroso said on Oct. 12. The European Banking Authority discussed making the banks hold core capital equal to at least 9 percent of their assets, up from a 5 percent core Tier 1 capital requirement imposed in the stress tests carried out by the regulator earlier this year, according to a person familiar with the proposals.

Those new criteria would lead to a 220 billion-euro capital shortfall at 66 of the participating banks, with the biggest gaps at Edinburgh-based RBS, Deutsche Bank and Paris-based BNP Paribas (BNP) SA, according to a note published by Credit Suisse Group AG analysts on Oct. 13.

‘Held Hostage’

The European Banking Federation, in a statement on Oct. 13 titled “High time for coordinated European solution on sovereign debt,” said recapitalization is not “central to the solution” and the region’s lenders have continued to place trust in sovereign debt and made credit available to national governments throughout the crisis.

“European banks feel they are being held hostage by the sovereign debt crisis,” said Guido Ravoet, secretary general of Brussels-based EBF, which represents more than 5,000 banks. The region’s lenders have already “substantially increased” their capital and among about 90 lenders that took part in July’s stress tests, the average core tier 1 capital ratio, a measure of financial strength, was 8.9 percent at the end of 2010, the EBF said.

Bankers including Ackermann have also said that tougher regulation, higher capital requirements and bigger sovereign debt writedowns may force them to restrict lending, which could hurt economic growth.

Ackermann, Merkel

Deutsche Bank, which navigated the financial crisis in 2008 without a government capital injection, will “do everything” not to take money from the state as part of assistance efforts for European banks, Ackermann said in a speech last week, when he criticized the EU’s plans.

His remarks created a stir in Germany. Newsmagazine Spiegel carried the headline “Everyone against Ackermann,” while the country’s biggest tabloid, Bild-Zeitung, wrote: “New Ice Age between Merkel and Ackermann.”

Even if Deutsche Bank didn’t need direct state support in the last financial crisis, “it profited from the fact that the government staved off a collapse of the financial market,” Social Democrat Carsten Schneider told Der Spiegel. “A little bit of humility wouldn’t hurt.”

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U.S. Stock Futures Decline on German Comments

U.S. stock futures declined, as a German government spokesman damped expectations for a swift resolution to Europe’s debt crisis and a report showed New York- area manufacturing shrank more than forecast.

Wells Fargo & Co. (WFC), the largest U.S. home lender, lost 3.8 percent after profit matched analysts’ estimates. Citigroup Inc. (C), the third-biggest U.S. bank, rallied 1.4 percent as profit rose 74 percent, beating projections. El Paso Corp. (EP) surged 29 percent as Kinder Morgan Inc. agreed to buy the company for $21.1 billion in cash and stock.

Standard & Poor’s 500 Index futures expiring in December slipped 0.3 percent to 1,216 at 8:44 a.m. New York time, following the biggest weekly gain for the gauge since 2009. Dow Jones Industrial Average futures dropped 28 points, or 0.2 percent, to 11,538 today.

The S&P 500 rose 6 percent last week amid optimism over corporate earnings and steps by European leaders to support the region’s banks. It has surged 11 percent from Oct. 3, its lowest close in more than a year, through Oct. 14. The rebound brought the gauge close to the top of a price range between 1,074.77 and 1,230.71, where it’s traded for more than two months.

Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit. Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of an emerging plan to avoid a Greek default, bolster banks and curb contagion.

Search for End

German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”

U.S. equity futures fell after the Federal Reserve Bank of New York’s general economic index rose in October to minus 8.5 from minus 8.8 in September. Economists projected an improvement to minus 4, based on a Bloomberg News survey. Readings less than zero signal companies in the so-called Empire State Index, which covers New York, northern New Jersey, and southern Connecticut, are cutting back.

Industrial production in the U.S. probably advanced in September for a fifth consecutive month, a sign manufacturers are contributing to growth, economists said before reports today. Production at factories, mines and utilities increased 0.2 percent, the same as in August, according to the median forecast of 67 economists surveyed by Bloomberg News.

Wells Fargo Slumps

Wells Fargo dropped 3.8 percent to $25.66. Net income climbed to a record $4.06 billion, or 72 cents a diluted share, from $3.34 billion, or 60 cents, in the same period a year earlier, the San Francisco-based company said today in a statement. The average estimate of 30 analysts surveyed by Bloomberg was for earnings per share of 72 cents.

Citigroup rallied 1.4 percent to $28.80. The bank’s credit- valuation adjustment, or CVA, mirrored a similar $1.9 billion gain posted by JPMorgan Chase & Co. (JPM) last week. The benefit helped Citigroup Chief Executive Officer Vikram Pandit, 54, weather a quarter in which its shares tumbled 38 percent amid concern revenue from trading and investment-banking would drop because of Europe’s debt crisis and the U.S. debt-ceiling fight.

El Paso surged 29 percent to $25.28. The cash and stock offer is valued at $26.87 per El Paso share, or 37 percent more than the Oct. 14 closing price, Houston-based Kinder Morgan said in a statement yesterday. The combined company would have 67,000 miles (107,000 kilometers) of gas lines and eclipse Enterprise Products Partners LP as the biggest U.S. pipeline operator.

Best Is Over

Stock market bulls and bears agree on at least one thing. The highest valuations for makers of household goods since 2008 signal the best is over after the industry rose more than any other group this year.

Supermarket operators, food producers and soapmakers in the MSCI World (MXWO) Index gained 3.1 percent in 2011 through Oct. 14 as the gauge for developed-market stocks lost 7.3 percent on concern the global economy is slowing. Japan Tobacco Inc., the seller of Mild Seven cigarettes, trades 12 percent above its price-earnings multiple from the past five years. Hershey Co. (HSY)’s 27 percent rally pushed the chocolate maker to the biggest premium to profits since 2008, data compiled by Bloomberg show.

Bears say the easy money has been made in so-called defensive shares should the world slip into a recession. Bulls favor companies with faster earnings growth and cheaper valuations. The last time household-goods producers were this expensive versus the MSCI World, stocks were about to begin an advance in which bank, mining and industrial stocks jumped more than 137 percent, while consumer staples rose 76 percent.

“You’ve got too much money that has been bet that we’re going into a recession,” said Jeffrey Saut, who helps oversee $300 billion as chief investment strategist at Raymond James & Associates in St. Petersburg, Florida. “If we don’t go into a recession, you’ll get a whole rotation out of these highly valued defensive stocks into more aggressive stocks.”

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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EU Given a Week to Fix Crisis as G-20 Warns of Global Threat

By Simon Kennedy, Theophilos Argitis and James G. Neuger - Oct 17, 2011 3:20 PM GMT+0700

European leaders have one week to settle differences and flesh out a strategy to terminate their sovereign debt crisis as global finance chiefs warn failure to do so would endanger the world economy.

Group of 20 finance ministers and central banks concluded weekend talks in Paris endorsing parts of the emerging plan to avoid a Greek default, bolster banks and curb contagion. They set an Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

“The risk of a recession would be increased dramatically were the Europeans to fail to accomplish goals that they’ve set for themselves,” Canadian Finance Minister Jim Flaherty said after the G-20 meeting, which ended Oct. 15.

Two years to the week since Greece triggered the turmoil by revising its budget math, the inability of policy makers to stamp it out has pushed the Greek government to the edge of default and the European economy close to recession. Stocks and the euro extended last week’s gains after the meeting.

The Stoxx Europe 600 Index added 1.3 percent to 241.59 at 9:15 a.m. in London. The euro rose 0.2 percent to $1.3904, following a 3.8 percent weekly advance, the biggest since March 2009.

Greece’s Vote

Hurdles to overcome for an accord include resistance from bankers to a deeper restructuring of Greek debt as well as disagreements between Europe’s capitals over just how to multiply the firepower of their bailout fund and recapitalize financial institutions. Greece’s parliament faces another tight vote on new fiscal measures as soon as this week, a showdown that Prime Minister George Papandreou needs to win to ease the way for more foreign financing.

The Brussels meeting “has the potential to turn into a positive historic moment,” Joachim Fels, London-based chief economist at Morgan Stanley, wrote in a note to clients yesterday. “But it could also easily turn into a negative catalyst.”

Europe’s plan, which has still to be made public, includes writing down Greek bonds by as much as 50 percent, establishing a backstop for banks and magnifying the strength of the 440 billion-euro ($611 billion) temporary rescue fund known as the European Financial Stability Facility, people familiar with the matter said last week.

“The plan has the right elements,” U.S. Treasury Secretary Timothy F. Geithner said in Paris. “They clearly have more work to do on the strategy and the details.”

Cannes Summit

The G-20 officials -- who met to prepare for a Nov. 3-4 gathering of leaders in Cannes, France -- said in a statement that the world economy faces “heightened tensions and significant downside risks.” European authorities must “decisively address the current challenges through a comprehensive plan,” they said.

The policy makers held out the possibility of rewarding European action with more aid from the International Monetary Fund, while splitting over whether the Washington-based lender’s $390 billion war chest needs topping up.

Europe’s latest strategy hinges on putting Greece, whose government forecasts its debt to reach 172 percent of gross domestic product in 2012, on a sustainable path. Austerity has plunged the country deeper into recession and provoked civil unrest that threatens political stability.

Wage Cuts

Papandreou faces the latest test of his party’s unity as soon as this week when he asks Parliament to approve steps including bigger pension and wage cuts as well as plans that may lead to the dismissal of 30,000 state workers. One ruling party lawmaker, Thomas Robopoulos, said he may quit his seat ahead of the vote, exposing the tensions in Papandreou’s socialist party. It has 154 seats in the 300-member chamber.

Failure to limit the risk of a default to Greece led to Portugal and Ireland requiring bailouts, and markets are now targeting larger debt-strapped nations such as Italy. Investors are concerned that if the crisis keeps festering, the world economy could face a repeat of the chaos that followed the 2008 collapse of Lehman Brothers Holdings Inc. (LEHMQ) The euro area is already set to suffer a renewed recession, say economists at JPMorgan Chase & Co. and Goldman Sachs Group Inc.

“We’re aware of our responsibility,” German Finance Minister Wolfgang Schaeuble said in Paris. “We’ll solve the problems in the euro zone.”

Crisis Plan

In the works is a five-point plan foreseeing a fix for Greece, boosting of the rescue fund, fresh capital for banks, a new push to increase competitiveness and consideration of European treaty amendments to tighten economic management.

Proposals include revising a voluntary July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings. One variant would take that reduction up to 50 percent, and a more aggressive suggestion is for investors to exchange Greek bonds for new debt at a lower face value collateralized by the euro area’s AAA-rated rescue fund, the people said. The ultimate choice is a restructuring involving writedowns without collateral.

Highlighting potential opposition from bankers this week, Charles Dallara, managing director of the Institute of International Finance, told the Financial Times in an article published Oct. 15 that he doesn’t “see a compelling case” to reopen the July deal. The imposition of greater losses on investors may prompt them to sell other European bonds, he said. The European Central Bank has also signaled it doesn’t favor a rewrite of the three-month old accord.

Bank Liabilities

The bank-aid model under discussion is to set up a European-level backstop capitalized by the EFSF, the people said. It would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities. Such ideas are controversial in Germany, which has called for recapitalization on a country-by-country basis.

European Union Economic and Monetary Affairs Commissioner Olli Rehn told Bloomberg Television on Oct. 15 that euro-area authorities are “close” to a pact. Banks may be required to maintain a 9 percent capital buffer to absorb sovereign risks, up from the 5 percent core capital level used in July’s stress tests, a person with knowledge of discussions said last week.

How to magnify the strength of the EFSF may also sow discord this week. Options include enabling it to borrow from the ECB or using it to partly insure new bonds issued by distressed governments. The ECB has all but ruled out the first method, making bond guarantees more likely, the people said.

Bond Guarantees

The guarantees of new bonds sold by distressed euro-area governments might range from 20 percent to 30 percent, a person familiar with those deliberations said.

Recourse to bond insurance suggests the central bank will need to maintain its secondary-market purchases for an unspecified “interim” period, the people said. ECB President Jean-Claude Trichet, who attended his last G-20 meeting before he retires Oct. 31, reiterated the central bank hopes to stop purchasing government bonds once the EFSF is able to take over.

A consensus is nevertheless emerging to accelerate the birth of a permanent aid fund by a year to July 2012. This week’s discussions will also look at easing unanimity rules that permit solitary countries to block bailouts.

Morgan Stanley’s Fels said the steps could backfire because investors may fail to be lured by the guarantees, harsher writedowns could spark contagion and banks would likely prefer to sell assets and reduce leverage than raise capital. What’s really required is leaders to take a “big step” toward fiscal integration, he said.

The coming weekend “is the moment people are expecting something quite impressive,” U.K. Chancellor of the Exchequer George Osborne said in Paris.

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net; Theophilos Argitis in Paris at targitis@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; James Hertling at jhertling@bloomberg.net

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Germany Shoots Down ‘Dreams’of Swift Euro Crisis Solution

By Tony Czuczka and Rainer Buergin - Oct 17, 2011 8:11 PM GMT+0700

Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging plan to avoid a Greek default, bolster banks and curb contagion. Providing a week to act, they set the Oct. 23 meeting of European leaders in Brussels as the deadline.

On the summit agenda is how any recapitalization of Europe’s banks “might be carried out in a coordinated way” and how to make the European Financial Stability Facility, the EU’s rescue fund for indebted states, as effective as possible, Seibert said. The leaders will also discuss aid for Greece and ways to tighten economic and financial policy, he said.

The euro retreated from a one-month high against the dollar after Seibert’s comments. The currency last week had its biggest gain in more than two years on speculation that policy makers were moving closer to stemming the crisis. German 10-year bonds rallied and the Stoxx Europe 600 Index reversed an advance of as much as 1.5 percent and was down 0.3 percent at 3:10 p.m. in Frankfurt.

Impressing Markets

While tensions “may die down if markets are suitably impressed” with the summit outcome, Merkel is seeking to keep pressure on euro-area countries to lock in budget discipline, Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in a phone interview.

“For her, the longer-term reform is at least equally important” because it increases the chances “that the German taxpayer will get back all the money” put on the line in bailouts for Greece, Ireland and Portugal, he said.

Two years to the week since Greece triggered the turmoil by revising its budget math, policy makers face increasing calls from the U.S. and other global partners to stamp out the turmoil that has pushed the Greek government to the edge of default and the European economy close to recession.

The outlook for German economic growth has worsened as companies cut their business expectations and foreign orders decline, the Bundesbank, Germany’s central bank, said in its monthly report today.

Greek Strikes

In Greece, Finance Ministry workers began a 10-day strike, complicating the government’s efforts to collect taxes. Renewed walkouts have hit Europe’s most-indebted country as Greek lawmakers face another vote on fiscal measures as soon as this week, a showdown that Prime Minister George Papandreou needs to win to ease the way for more foreign financing.

Obstacles to an EU accord include resistance by bankers to a deeper restructuring of Greek debt and discord among Europe’s capitals over how to multiply the firepower of their bailout fund and recapitalize financial institutions. At stake is confidence in the 17-nation currency union that Merkel says she wants to preserve.

As EU officials move toward an agreement that may include bigger losses on Greek debt holdings and the forced recapitalization of lenders, bankers are pushing back. Options include altering a July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings.

‘Sustainable Solution’

German Finance Minister Wolfgang Schaeuble said yesterday the reduction of Greece’s debt by means of private-investor participation must be bigger than agreed to in July by euro- region leaders to achieve a “sustainable solution” for the country. There will be negotiations with banks about a debt cut for Greece, Schaeuble said on ARD public television, according to a transcript of the interview.

Forcing lenders to boost capital would be counterproductive, and getting investors to accept larger losses Greek holdings difficult, Deutsche Bank Chief Executive Officer Josef Ackermann said on Oct. 13. Ackermann, who chairs the Washington-based Institute of International Finance and spearheaded the July accord, travels to Brussels this week for talks with policy makers.

Greek bond losses of as much as 50 percent envisaged in Europe’s emerging plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, people familiar with the discussion said on Oct. 14.

Five-Point Plan

In the works for the summit is a five-point plan foreseeing a solution for Greece, bolstering of the firepower of the 440 billion-euro ($611 billion) EFSF, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty changes to tighten economic management.

“The problems in the eurozone are chronic” and “won’t go away,” said Nouriel Roubini, chairman and co-founder of Roubini Global Economics LLC.Roubini. He said EFSF needs to be more than four times its current size to be effective.

Even so, leaders won’t present a “definitive solution” for the euro region’s debt crisis at the summit in Brussels, Reuters cited Schaeuble as saying at a tax advisers’ conference in Dusseldorf today.

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Rainer Buergin in Berlin at rbuergin1@bloomberg.net

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

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Amazon in IPad Challenge Narrows Margins

By Danielle Kucera - Oct 17, 2011 11:01 AM GMT+0700

Amazon.com Inc. (AMZN)’s profit margins, already at a five-year low last quarter, are set to narrow next year as the world’s largest online retailer sells its new tablet computer for half the price of the iPad.

The Kindle Fire will go on sale next month for as little as $199, compared with $499 for the cheapest tablet from Apple Inc. (AAPL) The lower price will help Amazon sell 4.5 million Kindle Fires in the fourth quarter, according to Barclays Plc, topping the 3.3 million units Apple reported for iPad’s debut quarter. It also means Seattle-based Amazon loses about $10 on each tablet, according to IHS Inc.

“It is possible that in 2012 you’ll have a quarter with negative operating margins,” said Ben Schachter, an analyst at Macquarie Capital in New York. “That typically is a disaster scenario. It’s phenomenal to have this revenue growth, but at some point you want to see them make money on it.”

Chief Executive Officer Jeff Bezos is counting on sales of music, books, movies and merchandise on the tablet to make up for money lost on the device. The Kindle Fire, available Nov. 15, has a 7-inch display, smaller than the iPad’s 9.7-inch screen, Amazon said at a Sept. 28 event in New York. The device will run on Google Inc.’s Android software, have a dual-core processor and offer Wi-Fi connectivity, the company said.

Apple Challenge

Amazon is trying to parlay its leadership in e-commerce to grab a piece of a market that Cambridge, Massachusetts-based Forrester Research Inc. predicts will grow 51 percent a year through 2015. While tablets from companies such as Hewlett- Packard Co. and Research In Motion Ltd. have failed to erode Apple’s dominance in the market, Amazon may be the first to pose a meaningful sales challenge to the iPad, Brian Blair, an analyst at Wedge Partners Corp. in New York, said the day of the Kindle Fire’s unveiling.

Still, selling the device at a loss means Amazon’s margins could fall below zero percent, weighing on the company’s stock price, Macquarie’s Schachter said. Amazon’s 2 percent operating margin in the second quarter was the lowest since the third quarter of 2006, according to data compiled by Bloomberg. They may have narrowed to 1.3 percent in the third quarter, which ended in September, analysts surveyed by Bloomberg project.

Investors’ focus on Amazon’s revenue growth has so far diverted attention from the decline in profitability, Schachter said.

Sales, Share Gains

Sales rose 51 percent in the second quarter from a year earlier, the biggest jump since at least 2002, and analysts predict revenue will rise 43 percent this year, according to data compiled by Bloomberg.

Amazon shares rose 4.5 percent to close at $246.71 on Oct. 14. The stock has gained 37 percent this year. It is projected to rise 1 percent over the next 12 months, compared with an anticipated 20 percent increase for Apple, according to Bloomberg data.

Mary Osako, an Amazon spokeswoman, didn’t respond to requests for comment.

Amazon spends about $210 to make each Kindle Fire, while the iPad 2 costs Cupertino, California-based Apple about $333, IHS estimates.

Amazon will have to rely on content sales on the Kindle Fire to make the tablet profitable, said Kerry Rice, an analyst at Needham & Co. in San Francisco. He estimates Amazon will sell 2 million to 4 million Kindle Fires this year.

Media, Merchandise

“Amazon is coming at it as, ‘We’re a media company, and we need to put this in the market to drive sales of our media,’” Rice said. “What this device does for Amazon is drive the consumption of media in whatever form possible. They pay once for a movie, and if they sell it a million times, that margin increases.”

A Kindle Fire user would have to spend about $500 on media and merchandise through the device, on purchases of items with 2 percent to 4 percent margins, to make up for Amazon’s loss on the tablet itself, estimates Scot Wingo, chief executive officer of ChannelAdvisor Corp. The Morrisville, North Carolina-based company consults on Web strategies for more than 3,000 businesses, including Amazon third-party sellers.

Wingo expects Amazon to sell about 5 million tablets in the fourth quarter, bringing pressure on margins for the first six months of sales.

Adding Prime Users

Margins may widen in the next few years, a result of Amazon’s switch to a so-called agency model to sell books, which means the company reports 100 percent profit and lower revenue on each purchase, Schachter said. Instead of selling a book for $10 and booking the entire amount as revenue, then paying publishers $7 -- a 30 percent gross margin -- the company only reports the $3 in revenue, he said.

Amazon is offering Kindle Fire buyers a 30-day free trial of Amazon Prime, the company’s $79-a-year membership service that includes streaming video and free two-day shipping, something that may bring in more net income, Wingo said.

While Prime members represent about 8 percent of users, they spend four times as much as other customers, according to ChannelAdvisor. The Kindle Fire could draw 10 million more Prime members, Wingo said.

“You go to Costco or BJ’s, you buy the membership and you want to shop there enough to make up the cost,” he said. “Once you join Prime, it just becomes second nature. You stop going to Target every Wednesday.”

Investors’ Patience

Revenue from digital content on Kindles will surpass hardware sales from the device in 2013, Barclays analyst DiClemente estimates. He projects that the Kindle Fire and content sales through the tablet will account for 5.1 percent of Amazon’s 2012 revenue.

Investors may not continue to overlook the narrower margins if Amazon doesn’t find a way to squeeze more profit from its lower-priced items, Schachter said.

Increases in capital expenditures and marketing must be countered by profit from higher-margin digital offerings such as books, music and movies, he said. Amazon can also leverage its ability to sell consumers items like clothes and cat food, in addition to digital media products, to woo customers from Apple, he said.

“Scale does not necessarily beget margin expansion,” Barclays’s DiClemente said in an interview. “The sentiment from investors is that in the near-term, revenue growth is more important than margins. If and when revenue growth starts to slow down, the narrative on Amazon’s financial story will switch to margins.”

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

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

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Samsung Files to Halt IPhone 4S in Asia

By Saeromi Shin and Tim Culpan - Oct 17, 2011 1:55 PM GMT+0700

Samsung Electronics Co. sued Apple Inc. (AAPL) in Japan and Australia to stop sales of the iPhone 4S, escalating a legal battle between the world’s two biggest makers of smartphones and tablet computers.

Samsung also sought injunctions against the sale of the iPad 2 and the previous generation iPhone 4 in Japan, the Suwon, South Korea-based company said in a statement today. Samsung claimed Apple’s products infringe its patents covering wireless communications and user-interface technologies.

Legal conflicts between the rivals have spread globally since April when Apple claimed that Samsung’s Galaxy devices “slavishly” copied the iPad and iPhone. An Australian court last week blocked sales of the Galaxy Tab 10.1, while Samsung filed motions in France and Italy seeking to ban sales of Apple’s latest handset.

“The legal battle is lasting longer and is more extensive than originally expected,” James Song, a Seoul-based analyst at Daewoo Securities Co., said by phone today. “This kind of legal saga isn’t good for both companies given their business relationship. The parties will eventually seek to resolve the issue.”

Samsung rose 0.5 percent to close at 890,000 won in Seoul trading, trimming its decline to 6.2 percent this year. Apple’s stock has added 31 percent this year on the Nasdaq Stock Market.

“Apple has continued to violate our patent rights and free ride on our technology,” Samsung said in the statement. “We will no longer stand idly by and will steadfastly protect our intellectual property.”

Paris, Milan

Apple, which is also one of the biggest buyers of chips and displays from Samsung, had 19.1 percent of the global smartphone market in the second quarter, with its South Korean rival closing the gap and taking 16.2 percent, according to Framingham, Massachusetts-based researcher IDC.

“It’s no coincidence that Samsung’s latest products look a lot like the iPhone and iPad, from the shape of the hardware to the user interface and even the packaging,” Steve Park, a Seoul-based spokesman for Apple, said by phone today, responding to the court filing.

Apple is also suing Taoyuan, Taiwan-based HTC Corp. in the U.S., alleging patent infringement. Samsung and HTC both use Google Inc. (GOOG)’s Android platform, which has extended its lead in smartphone operating systems over Apple’s iOS with 43 percent of the market, according to Gartner Inc. Apple’s iOS leads the market for tablet platforms, while Android will close the gap in coming years, Gartner said.

Samsung filed motions in Paris and Milan earlier this month citing two patent infringements on wireless telecommunications technology, aiming to prevent the sale of the iPhone 4S.

The company has filed an appeal against an Oct. 13 Australian court ruling to grant a preliminary injunction against the sale of its Galaxy Tab 10.1, Samsung said in today’s statement.

Samsung filed the latest preliminary injunction motions in Japan’s Tokyo District Court and in the New South Wales Registry, Australia, it said.

To contact the reporters on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net; Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net.

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Asian Stocks Rise, Extend Biggest Weekly Gain Since March; Olympus Plunges

By Shani Raja - Oct 17, 2011 11:42 AM GMT+0700

Asian stocks rose, extending the biggest weekly gain since March on the region’s benchmark index, after Group of 20 finance chiefs meeting in Paris endorsed parts of a plan to contain Europe’s debt crisis.

BHP Billiton Ltd. (BHP), the world’s No. 1 mining company, advanced 2.3 percent in Sydney. National Australia Bank Ltd., the nation’s biggest business lender, climbed 2.3 percent. Esprit Holdings Ltd. (330), a clothier that gets 83 percent of its revenue in Europe, surged 7.8 percent in Hong Kong. Sony Corp. rose 4.4 percent after profit at its Sony Ericsson Mobile Communications AB venture beat analyst estimates. Olympus Corp. tumbled 23 percent after at least six brokerages cut their ratings on the optical-equipment maker after the sacking of its.

The MSCI Asia Pacific Index advanced 1.6 percent to 118.68 as of 1:21 p.m. in Tokyo. More than five stocks rose for each that fell. The gauge climbed 3.4 percent last week after German Chancellor Angela Merkel and French President Nicolas Sarkozy pledged to deliver a plan to recapitalize Europe’s banks and address Greece’s debt crisis.

“An important precondition for resolving the European credit crisis is unity of vision and commitment to find a solution,” said Angus Gluskie, who manages more than $300 million at White Funds Management in Sydney. “The comments over the weekend show some elements of both. A credible and well- executed solution is the next element, and we are yet to see this.”

Japan’s Nikkei 225 Stock Average climbed 1.4 percent and Australia’s S&P/ASX 200 Index gained 1.7 percent. South Korea’s Kospi Index increased 1.2 percent. Hong Kong’s Hang Seng Index advanced 1.5 percent while Shanghai’s Composite Index added 0.2 percent.

Futures on the Standard & Poor’s 500 Index added 0.6 percent today. The gauge rose 1.7 percent in New York on Oct. 14 after a report showed retail sales rose more than economists estimated. The S&P 500 had its biggest weekly gain since July 2009 amid rising confidence that European policy makers are moving toward taming the region’s sovereign-debt crisis.

Retail Sales

Retail sales in the U.S. rose more than forecast in September, easing concern that slumping confidence and scant hiring will derail the biggest part of the economy.

Separately, G-20 finance ministers and central bankers concluded weekend talks in Paris, endorsing parts of an emerging plan to avoid a Greek default, bolster banks and curb contagion. They set an Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

Hurdles to overcome for an accord include resistance from bankers to a deeper restructuring of Greek debt as well as disagreements between Europe’s capitals over just how to multiply the firepower of their bailout fund and recapitalize financial institutions.

‘Risk Appetite’

“We could see that G-20 countries would cooperate with European countries, which helped concern over the debt crisis recede,” said Kenichi Hirano, general manager and strategist at Tachibana Securities Co. in Tokyo. “Investors are recovering their risk appetite.”

Commodity and consumer stocks paced advances among the Asian benchmark’s 10 industry groups. BHP Billiton rallied 2.3 percent to A$37.70 in Sydney, while rival Rio Tinto Group added 2.9 percent to A$70.27. S-Oil Corp., South Korea’s third-largest crude refiner, surged 7.9 percent to 109,500 won in Seoul, and Korea Zinc Co., which also produces gold and silver, advanced 1.6 percent to 320,000 won.

Mitsubishi Corp., a Japanese commodities trading company, surged 3.5 percent to 1,614 yen. Cnooc Ltd. rose 3.2 percent to HK$13.70 in Hong Kong after the state-run Xinhua News Agency said the company finished cleaning up an oil spill in China’s Bohai Bay, prompting the government to lift its emergency response to earlier leakages.

Copper, Oil

New York-traded copper futures rose 3.1 percent on Oct. 14, while the London Metal Exchange Index of prices for six metals including copper and aluminum advanced 2.1 percent. Crude oil futures in New York gained 3.1 percent.

Esprit surged 7.8 percent to HK$12.50 in Hong Kong, leading Asia’s exporters higher. Sony rose 4.4 percent to 1,599 yen after Sony Ericsson Mobile Communications AB posted third- quarter sales and pretax profit that exceeded analysts’ estimates as sales climbed in Asia.

Nissan Motor Co., a carmaker that gets about 80 percent of its sales overseas, gained 1.8 percent to 726 yen. Rival Honda Motor Co. added 2.8 percent to 2,311 yen. James Hardie Industries SE (JHX), a building-materials supplier that gets more than 70 percent of its sales from the U.S, climbed 0.9 percent to A$5.64 in Sydney.

Asian financial shares also climbed. National Australia Bank gained 2.4 percent to A$24.86 and Commonwealth Bank of Australia, the nation’s largest by market value, climbed 1.9 percent to A$48.38 in Sydney. HSBC Holdings Plc (5), Europe’s biggest lender, rose 1.3 percent to HK$64.55 in Hong Kong, while in Tokyo, Nomura Holdings Inc., Japan’s largest brokerage, jumped 4.1 percent to 303 yen.

Mitsubishi UFJ Financial Group Inc. advanced 1.8 percent to 341 yen after its Mitsubishi UFJ Morgan Stanley Co. joint venture said it plans to quadruple job cuts in Japan after the number of staff who accepted early retirement offers exceeded the brokerage’s initial estimate.

Estimated Earnings

The MSCI Asia Pacific Index dropped 15 percent this year through Oct. 14, compared with a 2.6 percent loss by the S&P 500 and a 14 percent decline by the Stoxx Europe 600 Index. Stocks in the Asian benchmark are valued at 11.9 times estimated earnings on average, compared with 12.3 times for the S&P 500 and 10.2 times for the Stoxx 600.

Among stocks that fell today, Olympus plunged 23 percent to 1,566 yen in Tokyo. The Japanese imaging-equipment maker was set to fall by a record for the second straight day after brokerages cut their ratings after President Michael C. Woodford was dismissed.

Woodford commissioned an external auditor’s report, which said that Olympus should investigate payments made to advisers in connection with an acquisition, according to a copy of the report obtained by Bloomberg News.

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

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

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