Stocks, Euro Advance as Greece Names Premier

By Stephen Kirkland - Nov 10, 2011 9:31 PM GMT+0700

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Nov. 10 (Bloomberg) -- Roger Bootle, managing director of Capital Economics Ltd., talks about Europe's sovereign debt crisis and its implications for the global economy and financial markets. Bootle speaks with Rishaad Salamat, Susan Li, John Dawson and Zeb Eckert on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

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Nov. 10 (Bloomberg) -- Barry Knapp, head of U.S. equity strategy at Barclays Capital, talks about the European sovereign-debt crisis and U.S. stock market. He speaks with Sara Eisen and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Stocks rose, with the Standard & Poor’s 500 Index rebounding from its worst drop since August, as a retreat in Italian bond yields and the naming of a new Greek premier eased concern Europe’s debt crisis will spiral out of control. The euro strengthened and Treasuries fell.

The S&P 500 rose 1 percent at 9:31 a.m. in New York as an unexpected drop in jobless claims also lifted sentiment. The Stoxx Europe 600 Index added 0.5 percent. Italy’s 10-year bond yield dropped 41 basis points to 6.84 percent after the European Central Bank bought the country’s debt and the nation sold all the bills planned at an auction. The euro appreciated 0.6 percent to $1.3619. The S&P GSCI index of 24 commodities climbed 0.8 percent, with oil in New York up 1.8 percent.

Financial shares helped lead gains in equities after Italy sold 5 billion euros ($6.8 billion) of one-year bills and former vice president of the European Central Bank Lucas Papademos was named head of a national unity government in Greece. U.S. initial jobless claims fell by 10,000 to 390,000, the lowest level in seven months.

“Papademos being appointed for the new unity government is constructive,” Mike Ryan, the New York-based chief investment strategist at UBS Wealth Management Americas, said in a telephone interview. His firm oversees $715 billion. “In the U.S., a decline in claims is very positive. The economic data will come back into focus as we shift our vision away from the political fear in the euro zone.”

More than $1 trillion was erased from the value of global equities yesterday, with the S&P 500 sliding 3.7 percent. Cisco Systems Inc. rallied today after earnings topped analyst estimates.

Jobless claims fell by 10,000 to 390,000 in the week ended Nov. 5, the Labor Department said. The median forecast of economists in a Bloomberg News survey called for 400,000 new claims. Another report showed the U.S. trade deficit unexpectedly narrowed in September to the lowest level this year as exports surged to a record high.

The Dollar Index, which tracks the U.S. currency against those of six trading partners, fell 0.5 percent after advancing as much as 0.3 percent.

Three shares rose for every two that fell in the Stoxx 600. European Aeronautic Defence and Space Co. rose 5 percent after reporting higher third-quarter profit. Svenska Cellulosa AB gained 7.7 percent after agreeing to buy Georgia-Pacific LLC’s European tissue operations.

K+S AG retreated 6.3 percent as Europe’s largest producer of potash pared its outlook for sales and profit as economic volatility prompts wholesalers to scale back orders. Vedanta Resources Plc slid 7.4 percent after the largest copper producer in India said fiscal first-half profit dropped 92 percent on foreign-exchange losses.

Italy Bonds

The Italian two-year note yield slid 93 basis points to 6.27 percent, after jumping 82 basis points yesterday. The additional yield investors demand to hold 10-year French, Spanish, Austrian and Belgian bonds instead of benchmark German bunds rose earlier to euro-era records amid concern the region’s debt crisis is spreading.

The ECB bought Italian government bonds, according to three people familiar with the transactions, who declined to be identified because the deals are confidential. The ECB wasn’t immediately available for comment when contacted by telephone by Bloomberg.

The MSCI Asia Pacific Index declined 3.3 percent, the most since Sept. 22. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong tumbled 5.7 percent as China’s export growth slowed. The MSCI Emerging Markets Index slipped 2.1 percent.

New York oil climbed 1.8 percent to $97.44 a barrel, the sixth gain in seven days. Copper fell 1.6 percent. China is the biggest buyer of the metal. Gold for immediate delivery added 0.1 percent to $1,771.55 an ounce, after earlier dropping as much as 0.9 percent.

To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net

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U.S. Stocks Pare Gains as French Yields Jump

By Rita Nazareth - Nov 10, 2011 10:53 PM GMT+0700

U.S. stocks pared gains, following the biggest drop in the Standard & Poor’s 500 Index since August, as Apple Inc. slumped and French bond yields rose amid concern Europe isn’t doing enough to contain its debt crisis.

Apple Inc., the largest technology company, sank 2.7 percent, driving technology shares lower. Bank of America Corp. (BAC) fell 1 percent, reversing an earlier gain of 2.8 percent. Cisco Systems Inc. (CSCO), the largest maker of networking equipment, jumped 5 percent as profit and sales beat estimates.

The S&P 500 added less than 0.1 percent to 1,229.47 as of 10:51 a.m. New York time, paring an earlier gain of 1.3 percent. The benchmark gauge for American equities slumped 3.7 percent yesterday as one out of 500 stocks in the index gained, the fewest since June 2010. The Dow Jones Industrial Average advanced 29.67 points, or 0.3 percent, to 11,810.61.

“We’re all headline watching,” Mike Ryan, the New York- based chief investment strategist at UBS Wealth Management Americas, said in a telephone interview. His firm oversees $715 billion. “While politics and policy are constructive, I’m not so sure this is the end game. There’s still noise that will come out. I don’t view this as a critical turning point for the markets.”

Equities tumbled yesterday on concern that European leaders may be unable to keep the euro zone intact as Italian yields surged to a record. The decline erased the month-to-date gain in the S&P 500. The measure had the biggest monthly gain in 20 years in October on speculation Europe would contain its crisis.

National Unity

Former vice president of the European Central Bank Lucas Papademos will head a national unity government for Greece, according to the country’s presidency. The ECB bought Italian government bonds today, according to three people familiar with the transactions, who declined to be identified. Italy sold 5 billion euros ($6.8 billion) of one-year bills, the maximum for the auction, and demand rose as the Treasury lured investors with the highest yield in 14 years.

Italy should “look at the International Monetary Fund” for help containing its debt crisis, according to Sean Egan, the president and founding principal of Egan-Jones Ratings Co.

“The miner’s canary is the yield on Italian debt,” Egan said today in a radio interview on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene. “It’s gone north and we are fairly concerned.” The sovereign debt rating for Italy “is on review” and that of France is “probably headed south,” Egan said.

Jobless Claims

Stocks rose earlier as data showed the number of Americans filing applications for unemployment benefits fell to the lowest level in seven months, a sign the recovery may be encouraging companies to limit cuts in headcount. The U.S. trade deficit unexpectedly narrowed in September to the lowest level this year as exports surged to a record high, another report showed. as exports surged to a record high, another report showed.

The rally that drove the S&P 500 up 20 percent since October fizzled after it failed to remain above its 200-day average for a second time. Yesterday, the index slid below its average in the past 200 days. The measure closed above the 200- day level on two straight days at the end of October, following the biggest monthly rally since 1991, and again on Nov. 8.

Equities surged worldwide starting in the first week of October on optimism European leaders would solve the crisis, driving the S&P 500 out of a price range where it had been stuck since the start of August. Price indicators such as the stock index’s average price are captivating investors, said Brian Barish of Cambiar Investors LLC.

“The S&P 500 failed to break the 200-day and Italy’s debt yields really blew out, so you have a panicky reaction in the marketplace,” Barish, who helps oversee about $8 billion as Denver-based president of Cambiar, said in a telephone interview yesterday. In early October, “the market was poised to rally on almost anything, and it did,” he said. The 200-day average is “where it ran out of gas.”

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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Hynix Semiconductor Shareholders Get One Bid at Auction, Korea Bank Says

By Jun Yang - Nov 10, 2011 5:43 PM GMT+0700

SK Telecom Co., South Korea’s biggest mobile-phone carrier, submitted a bid to buy 20 percent of Hynix Semiconductor Inc. (000660) amid a criminal investigation into whether the group’s founding family misused funds.

SK Telecom, the lone bidder, made its proposal before 5 p.m. today -- the deadline set by Hynix main shareholders, Irene Kim, a Seoul-based spokeswoman for the carrier, said by telephone. Hynix shareholders received one bid, said Lee Sun Hwan, a spokesman at Korea Exchange Bank. (004940)

A successful offer will give the carrier control of the world’s second-largest semiconductor maker and entry into the $39-billion-a-year market for computer-memory chips dominated by Suwon, South Korea-based Samsung Electronics Co. It’s the fourth attempt in two years by Hynix shareholders to unload the stake, which they gained through a 2001 government-led bailout. The bid comes as chip prices fell to a record low.

“I struggle to see any logical reason why there are synergies between SK Telecom and Hynix,” said Shaun Cochran, head of Korea research at CLSA. “It’s clear from the unusual timing and nature of this decision that it’s not being driven from shareholders’ perspective.”

Largest Sale

Seoul authorities searched the offices of some SK Group affiliates Nov. 8 while investigating whether funds were misappropriated. Chairman Chey Tae Won will prove his innocence, the group said in an e-mail response to Bloomberg News that day.

Yonhap News reported that prosecutors have been investigating Chey, 50, since May to determine if he used money from SK companies to reduce personal losses from futures investments. Yonhap reported Nov. 8 that Chey and his brother allegedly embezzled more than 100 billion won ($88 million).

The investigation of Chey comes less than four years after South Korea’s highest court reaffirmed a suspended, three-year prison term for fraud. Chey later was pardoned by the government.

Hynix fell 2.5 percent to 21,500 won, the lowest level in three weeks, in Seoul today on speculation the last likely bidder won’t proceed with an offer while entangled in a probe by prosecutors. SK Telecom declined 5.2 percent to 145,000 won, the biggest drop in more than two months.

Cheapest Prices

Hynix had a market capitalization of 12.7 trillion won based on today’s closing price. If the 20 percent stake shareholders want to sell fetches more than 2.6 trillion won, it would rank the share sale as the largest for a Korean technology company since 1999, according to data compiled by Bloomberg.

Interest in the semiconductor maker comes as the benchmark DDR3 2-gigabit DRAM fell to 75 cents, the lowest level on record, according to data compiled by Bloomberg.

Samsung, which earned 23 percent of its revenue last year from semiconductors, was the only manufacturer among the three biggest to post a profit last quarter from the business. Hynix had a net loss of 562.6 billion won in the third quarter.

SK Telecom’s interest in Hynix shows how South Korean business conglomerates known as chaebol are making investments that aren’t in the best interests of shareholders, Cochran said.

The bid makes sense for SK Telecom because it is trying to diversify as growth slows in the telecommunication business, said Kim Hong Sik, a Seoul-based analyst at NH Investment & Securities Co.

Deadline Extended

“For a meaningful reorganization of business, they probably need something as big as Hynix,” Kim said. “Hynix isn’t having massive losses like before, and they’re generating cash rather stably now.”

Supporters of chaebol credit them with pulling the country out of poverty after the 1950-1953 Korean War and transforming South Korea into Asia’s fourth-largest economy. Yet the International Monetary Fund cited the debt-driven chaebol model as one reason for the economic crisis at the end of 1997.

Fitch Ratings said in September that if SK Telecom buys the stake with debt, “the company’s credit strength may be impaired.” That echoed Standard & Poor’s July statement that the purchase would undermine the phone company’s credit rating.

The deadline for bids was extended twice since STX Group, which submitted a preliminary bid along with SK Telecom in July, pulled out in September. STX cited global economic uncertainties and concerns about investments needed to keep the chipmaker competitive as the reasons for the pullout.

$2 Billion Wealth

The shareholders, a group of financial institutions that spent $4.6 billion to bail out the chipmaker in the past decade, first tried to unload their shares in 2009.

Hyosung Corp. (004800), the sole bidder in a sale attempt in 2009, walked away from negotiations in November that year, saying speculation that it received political favors to pursue the takeover made it difficult to negotiate a fair acquisition.

Two subsequent attempts by creditors to sell their Hynix stake failed after no bidders emerged. In 2002, Micron Technology Inc. (MU) scrapped a $3 billion takeover offer after it was rejected by Hynix’s board.

SK Group, which started seven decades ago as a textiles maker, has grown into the nation’s third-largest chaebol with more than 80 units in the energy, financial services and telecommunications sectors. Chey’s wealth is estimated to be about $2 billion, making him South Korea’s seventh-richest man, according to Forbes magazine.

To contact the reporter on this story: Jun Yang in Seoul at jyang180@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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Google Drops Gmail BlackBerry Application as RIM Seeks to Stem Defections

By Hugo Miller - Nov 10, 2011 5:50 AM GMT+0700

Google Inc. (GOOG), the maker of Android software for mobile phones, will stop supporting the Gmail application for rival BlackBerry smartphones made by Research In Motion Ltd. (RIM)

The app for Google’s Web-based e-mail will no longer be available as of Nov. 22 and won’t be supported after that, the Mountain View, California-based company said in a blog posting. Users may continue to use the app if already downloaded, Google said.

RIM is struggling to find ways to stop a decline in smartphone market share as customers increasingly opt for Android devices or Apple Inc. (AAPL)’s iPhone. The Gmail announcement comes one week after Google debuted a similar app for Apple’s iPhone, iPad, and iPod Touch devices, before pulling it after users began receiving error messages.

RIM, based in Waterloo, Ontario, closed down 4.1 percent to $18.05 in New York, its lowest level since Aug. 13, 2004. The stock has dropped 69 percent this year. The Standard & Poor’s 500 Index shed 3.7 percent to 1,229.1, its worst decline in almost three months.

Google’s move is an inconvenience for BlackBerry users with a Gmail account who want to access those messages on the go and also a signal to RIM more than anything else, said analyst Roger Entner.

‘Symbolic Gesture’

“It’s a more symbolic gesture, as if you want it to work you can make it work but the app makes it easier,” said Entner, founder of market research firm Recon Analytics LLC in Dedham, Massachusetts.

BlackBerry users that want to access their Gmail accounts will still be able to do so on their phone’s Web browser, or by synchronizing their Google account with BlackBerry service.

Google said it is stopping development of its app for BlackBerrys to focus on the mobile browser experience, without elaborating further.

RIM said in an e-mailed statement that the BlackBerry operating system supports “native” Gmail so a dedicated app is not needed to access its messages. Native describes the ability to synch e-mail to your BlackBerry. The large majority of BlackBerry Gmail users already rely on that native support, the company said.

RIM’s share of the global smartphone market fell 5 percentage points to 10 percent in the third quarter from a year earlier, according to research firm IDC. Its market share in the U.S. alone dropped to 9 percent from 24 percent, according to another researcher Canalys.

Google, Motorola

While RIM is struggling to shift its entire range of devices onto a new operating system and revive interest in its PlayBook tablet, its base of more than 70 million subscribers remains a threat to competitors. Google is seeking approval for its $12.5 billion purchase of handset maker Motorola Mobility Holdings Inc., which would turn it into a hardware maker as well as software and search engine company.

“Google is sticking it to RIM because RIM has become more and more of a competitor, from an ecosystem perspective and, pending the Motorola acquisition, from a device perspective,” said Entner.

Google closed down 1.9 percent to $600.95.

RIM said in a separate statement that the company is investigating reports that some users in Europe, the Middle East and Africa have experienced delays. There is no system-wide outage, the company said.

The BlackBerry network suffered a three-day outage last month after problems that began in Europe spread to North and South America, disrupting access for millions of BlackBerry users. RIM said the delays were caused by the failure of a backup switch when a core switch failed, resulting in a large backlog of data that spread across the network.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

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

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European Stocks Erase Gains After Italy Auctions Bills at Record Yield

By Peter Levring - Nov 10, 2011 5:30 PM GMT+0700

European stocks erased their gains after Italy sold one-year bills at the highest average yield in 14 years. U.S. index futures rose and Asian shares fell.

European Aeronautic Defence and Space Co. rose 5.9 percent after its third-quarter profits surged and the German government agreed to buy a 7.5 stake in the company from Daimler AG. (DAI) Svenska Cellulosa AB gained 6.2 percent after agreeing to buy Georgia-Pacific LLC’s European tissue operations.

The benchmark Stoxx Europe 600 Index was unchanged at 236.34 at 10:28 a.m. in London, after falling as much as 1.7 percent and rising as much as 0.8 percent. The gauge has rallied 9.9 percent from this year’s low on Sept. 22 as German Chancellor Angela Merkel and French President Nicholas Sarkozy pushed for expanding the European Financial Stability Facility, the bailout fund. Standard & Poor’s 500 Index futures added 1 percent, while MSCI Asia Pacific Index fell 3.3 percent.

“Italy cannot sort this out on its own,” said Henrik Drusebjerg, who helps oversee $230 billion as senior strategist at Nordea Bank AB in Copenhagen. “The only thing that’ll work now is if Merkel and Sarkozy come up with some real money for the EFSF to remove any uncertainties.”

Italy raised 5 billion euros by selling 366-day bills at an average yield of 6.087 percent, the highest since September 1997. That’s also up from 3.570 percent on similar-maturity securities sold last month.

Systemic Importance

The nation’s bonds rose before the auction as the European Central Bank was said to purchase the securities, according to three people familiar with the transactions. The ECB was not immediately available for comment.

At 1.9 trillion euros ($2.6 trillion), Italy’s debt exceeds that of Greece, Spain, Portugal and Ireland combined, though unlike those nations, it has systemic importance as the world’s third-largest bond market and the eighth-biggest economy. Prime Minister Silvio Berlusconi’s offer to quit has still left his nation struggling to produce a government stable enough to deliver austerity measures.

Stocks yesterday dropped as Italian bond yields surged to euro-era records. The cost of insuring against default on the country’s sovereign bonds jumped 38 basis points to a record 562, according to CMA prices.

German Finance Minister Wolfgang Schaeuble told lawmakers Italy may need to consider a request for European Union aid.

Austerity Measures

Italy’s Senate rushed to pass debt-reduction measures that clear the way for establishing a new government in a bid to restore confidence in Europe’s second-biggest debtor.

The Senate will vote tomorrow on a package of measures including asset sales and an increase in the retirement age. The Chamber of Deputies should vote the following day, and Berlusconi will resign “immediately,” Angelino Alfano, the secretary of Berlusconi’s People of Liberty party, said on state-owned RAI television.

In Greece, President Karolos Papoulias called a meeting with political party leaders for today. Squabbling over who will be the next premier pushed unity government aims into disarray and undermined the country’s bid to secure the bailout funds needed to prevent a financial collapse.

Prime Minister George Papandreou met with Papoulias in Athens yesterday as criticism grew over delays in naming a new prime minister.

EADS, Vedanta

EADS advanced 5.9 percent to 21.14 euros after Europe’s biggest defense contractor reported higher profit for the third quarter. The company also said that the Airbus A350 jet will be delayed by a few months.

Net income rose to 312 million euros from 13 million euros a year earlier, EADS said. Analysts surveyed by Bloomberg had estimated a loss of about 30 million euros. Sales dropped 4 percent to 10.75 billion euros.

Vedanta Resources Plc (VED) slid 4.1 percent to 1,199 pence. The largest copper producer in India said fiscal first-half profit dropped 92 percent on foreign-exchange losses. Net income fell to $27.8 million in the six months through Sept. 30 from $337 million a year earlier.

K+S AG retreated 4.3 percent to 42.60 euros as Europe’s largest producer of potash pared its outlook for sales and profit this year and the next as economic volatility prompts wholesalers to scale back orders.

Anglo American Plc rose 3.4 percent to 2,433.5 pence after selling a 24.5 percent stake in its Chilean copper unit to Mitsubishi Corp. for $5.39 billion.

Svenska Cellulosa, Europe’s biggest tissue maker, gained 6.2 percent to 97 kronor after agreeing to buy Georgia-Pacific LLC’s European tissue operations for 1.32 billion euros to strengthen its offering with brands including Lotus.

To contact the reporter on this story: Peter Levring in Copenhagen at Plevring1@bloomberg.net or

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

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Thai Floods Sap Consumer Confidence as Economic Growth Forecast Slashed

By Daniel Ten Kate and Suttinee Yuvejwattana - Nov 10, 2011 2:09 PM GMT+0700

Thai economic forecasters said floods that have swamped factories and displaced millions over the past month may crimp gross domestic product growth this year to as little as 0.5 percent if all of Bangkok is inundated.

Thailand’s consumer confidence dropped for a third straight month in October, slumping to the lowest level in a decade, the University of the Thai Chamber of Commerce said today. The economy may grow between 0.5 percent and 1.5 percent this year if floods reach all of Bangkok’s 50 districts, according to economist Thanavath Phonvichai.

“Confidence may fall further this month as people are still concerned about the wider flooding area,” Thanavath, the university’s economic forecasting director, told reporters today. “The steep fall showed that people are shocked about what has happened. Economic activities are stalled.”

Thai officials are aiming to prevent the floods from further damaging the economy after swamping seven industrial parks with 891 factories north of the capital, disrupting global supply chains. Bangkok officials are trying to prevent floodwaters from cutting off a key road linking the capital with southern resort areas including Hua Hin, where many people have fled to escape the disaster over the past month.

Waters bubbling up through the city’s drainage system are set to reach Rama II road in the southwestern corner of Bangkok today, according to Jate Sopitpongstorn, an adviser to Governor Sukhumbhand Paribatra.

“There is hope the road will be flooded but not cut,” Jate said by phone. “They hope to control the level of water.”

Stocks Fall

Thailand’s benchmark SET Index, which has risen 4.3 percent over the past month, fell 0.5 percent at the midday break. The baht weakened 0.4 percent to 30.83.

The Bank of Thailand last month slashed its 2011 economic growth forecast to 2.6 percent from 4.1 percent. Credit Agricole CIB cut its GDP forecast this year to 2 percent from 4.5 percent, according to a report today by senior strategist Frances Cheung, who predicted the central bank would cut its benchmark interest rate on Nov. 30.

Prime Minister Yingluck Shinawatra yesterday said GDP expansion would miss an earlier target of 3.5 percent to 4 percent this year and may grow between 4.5 percent and 5.5 percent in 2012 with inflation as high as 4 percent. The university forecasted Thai GDP growth next year at 4 percent to 5 percent, Thanavath said.

Confidence “may swing back in December if the government can drain water and start the reconstruction quickly,” he said, adding that most of the nearly 700,000 people temporarily out of jobs would find work again quickly due to a tight labor market.

Rebuilding Budget

Yingluck has proposed spending 130 billion baht ($4.2 billion) to help flood victims and rebuild damaged roads, bridges and buildings. She has also set up committees to develop a long-term water management plan.

Waters continued rising around Bang Chan and Lad Krabang, two industrial estates in eastern Bangkok with 322 factories. Companies including Nestle SA (NESN), Honda Motor Co. and Isuzu Motors Ltd. installed sandbags, plastic tarps and water pumps around their operations to keep floodwaters at bay.

Bang Chan “has good protection, so I still believe we can protect it at a certain level,” Yingluck told reporters today. She plans to attend a regional summit in Bali next week that will include U.S. President Barack Obama.

“People have chosen me to do the job,” said Yingluck, who came to power in August after her party won a majority in national elections the previous month. “I will do the best I can to pay back for all the votes.”

Bangkok officials have announced evacuations in 18 of the city’s 50 districts. The government is using pumps and canals to prevent water in northern Bangkok from draining into the main business areas of Silom and lower Sukhumvit.

To contact the reporters on this story: Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net; Supunnabul Suwannakij in Bangkok at ssuwannakij@bloomberg.net

To contact the editor responsible for this story: John Brinsley at jbrinsley@bloomberg.net

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Euro Rises Versus Dollar as Italy Meets Maximum Target at Bill Auction

By Anchalee Worrachate - Nov 10, 2011 5:32 PM GMT+0700

The euro rose against the dollar, trimming yesterday’s biggest drop in more than a year, after Italy raised the full amount it planned from selling one-year debt, easing concern about the nation’s ability to fund itself.

The 17-nation currency also rose against the yen, reversing an earlier decline. Italy sold 5 billion euros ($6.8 billion) of one-year bills today, with investors bidding for nearly double the amount of securities on offer. The country’s 10-year yields yesterday climbed above the 7 percent level that spurred Greece, Ireland and Portugal to seek bailouts. The ECB bought Italian bonds today before the auction, according to three people familiar with the transactions.

“The whole market is watching the Italian bill auction today, and we expect a choppy trade,” Sebastien Galy, a senior currency strategist at Societe Generale SA in London, said before the auction. “Somehow they will find a way to make it work as they know how crucial this is to market sentiment.”

Europe’s shared currency climbed 0.4 percent to $1.3597 at 10:27 a.m. London time, after reaching $1.3484, its weakest since Oct. 10. It rose 0.2 percent to 105.60 yen after earlier sliding to 104.83, the least since Oct. 26. The yen strengthened 0.2 percent to 77.68 per dollar.

The euro fell 2.1 percent against the dollar yesterday, the biggest decline since Aug. 11, 2010.

The bills were sold to yield 6.087 percent today, compared with 3.57 percent the last time it sold 12-month bills on Oct. 11.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net;

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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Greek Unity Deal Is in Disarray Amid Squabbles

By Eleni Chrepa, Maria Petrakis and Natalie Weeks - Nov 10, 2011 5:34 PM GMT+0700

Greek Prime Minister George Papandreou and other party leaders were holding talks with President Karolos Papoulias after squabbles over a new premier pushed unity government plans into disarray, undermining a bid to secure bailout funds needed to prevent a financial collapse.

Antonis Samaras, leader of the opposition New Democracy party, Papandreou and opposition LAOS party leader George Karatzaferis were joined by former European Central Bank Vice President Lucas Papademos in the meeting held on their fourth day of wrangling over a unity government. Papandreou was poised to resign yesterday after he told the nation in a televised address the parties had agreed on a new government that will secure international financing for the country.

“This is the third meeting I’m attending,” Samaras told reporters as he arrived at the presidential palace in Athens today. “I hope it’s the last one.”

Papandreou didn’t name a new prime minister in his speech. Greece’s two biggest political parties agreed to back parliament speaker Filippos Petsalnikos to head the government, To Vima newspaper reported, without saying how it got the information. Earlier media reports suggested that Papademos would become premier.

Agreement Falls Apart

Any agreement that had been reached fell apart shortly after Papandreou’s speech as Karatzaferis, the head of the fourth-biggest party in parliament, walked out of a meeting with Papandreou and Samaras saying he was opposed to Petsalnikos.

The euro gained 0.5 percent to $1.3604 after a 2.1 percent drop yesterday, the most in more than a year versus the dollar. Asian stocks plunged, with the MSCI Asia Pacific Index declining 3.3 percent to 116.05 as of 6:49 p.m. in Tokyo.

European stocks advanced with the benchmark Stoxx Europe 600 Index adding 0.8 percent today at 11:50 a.m. Athens time. Greece’s benchmark general index rose 2.6 percent to 787.21. National Bank of Greece SA (ETE), the country’s largest bank, surged 11 percent to 2.26 euros. EFG Eurobank Ergasias SA (EUROB), the country’s second-largest lender gained 7.7 percent to 84 euro cents while Alpha Bank SA added 11 percent to 1.23 euros.

The yield on the 10-year Greek bond rose 4 basis points to 27.66 percent.

Talks Drag On

Negotiations on a government between Papandreou and Samaras have stumbled as the two sides disagree on a prime minister and the opposition balked at European Union demands for written commitments to secure a bailout package.

The new government must implement budget measures and decisions related to an Oct. 26 European bailout deal that’s worth 130 billion euros ($177 billion), including a debt swap, before holding elections.

Immediately at stake is the fate of an 8 billion-euro loan installment under an earlier aid package, a 110 billion-euro EU- led bailout agreed in May 2010. The tranche must be paid before the middle of December to prevent a collapse of the country’s financial system.

The scale of the task facing any new government was underlined today after the European Commission said the country’s debt will be almost twice the economy’s size in 2012 amid a fifth straight annual contraction.

Greek Debt Rises

Greece’s debt will reach 163 percent of gross domestic product this year and jump to 198 percent in 2012, the EU’s Brussels-based executive arm said in its autumn economic forecast released today. That compares with debt of 173 percent predicted by the Greek government in its 2012 draft budget.

Greece plans to pay lenders 50 cents for each euro the government borrowed under the terms of the bailout plan agreed to at the Oct. 26 summit. Its 4 percent notes due in August 2013 now trade at about 34 cents. Fitch Ratings says the agreement with creditors would amount to a “default event” if implemented, while the International Swaps and Derivatives Association says it won’t trigger credit-default swaps.

“It’s worse than Belgium: There’s the Greek premier who has made a resignation speech but hasn’t resigned; there’s no designated successor prime minister; and main parties are accusing each other of being to blame,” Spyros Economides, senior lecturer at the London School of Economics, said in a telephone interview. “It’s a situation of chaos and denial.”

Papandreou promised his party he would step down on Nov. 4 and put together a new government to bridge differences with EU leaders and officials after his proposal for a referendum on the second Greek financing package roiled markets and Greece.

To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Natalie Weeks in Athens at nweeks2@bloomberg.net; Eleni Chrepa in Athens at echrepa@bloomberg.net.

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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China’s Exports Rise at Slowest Pace in Two Years as Europe Crisis Deepens

By Bloomberg News - Nov 10, 2011 2:24 PM GMT+0700

China’s exports rose at the slowest pace in almost two years in October as Europe’s deepening debt crisis crimped demand, adding pressure on policy makers to support growth in the world’s second-biggest economy.

Overseas shipments rose 15.9 percent from a year earlier, customs bureau data showed today. The trade surplus was $17 billion, lower than all 24 estimates in a Bloomberg News survey. Imports climbed a more-than-forecast 28.7 percent.

Asian stocks slumped after a jump in Italian bond yields fanned concern Europe’s currency union will unravel and cause a recession in China’s largest export market. Chinese data yesterday showing inflation slowed, home sales fell and industrial output cooled have added to the case for the government to ease credit controls and cut taxes.

“The weakness in exports is consistent with the external slowdown and we expect further declines in the growth rate,” said Ken Peng, a senior economist with BNP Paribas SA in Beijing. “Domestic demand growth is weakening so the strength in imports is likely temporary and we may get a sharp downturn next month.”

The MSCI Asia Pacific Index declined 3.1 percent at 3:16 p.m. in Tokyo, poised for its biggest drop since Sept. 22. The benchmark Shanghai Composite Index fell 1 percent to 2,498.33 at 2:07 p.m. local time. The yuan was trading 0.1 percent lower at 6.3451 per dollar in Shanghai.

Asia Slowdown

Overseas sales were $157.5 billion in October, the lowest in five months. That was also the smallest year-on-year increase since gains resumed in December 2009 after the global financial crisis, excluding holiday distortions. The growth rate compared with a median estimate of 16.1 percent in a Bloomberg survey.

Europe’s malaise is taking its toll on other Asian economies. South Korea’s exports rose the least in two years last month and may ease further in the fourth quarter, according to the Ministry of Knowledge Economy. A slowdown in overseas sales contributed to the smallest quarterly growth in Taiwan’s economy in two years, the government said Nov. 1.

Elevated unemployment and faltering expansion in the U.S. and Europe threaten to sap demand for exports that accounted for a quarter of China’s output last year. The export growth slowdown comes as a government campaign to rein in inflation and property prices has led to a credit squeeze among smaller companies and moderating gains in industrial output.

Premier Wen Jiabao said last month the government will fine-tune economic policies as needed to sustain growth although he pledged to maintain curbs on real estate.

Italy Slump

Investors yesterday propelled Italy’s 10-year bond yield to close at a euro-era high of 7.25 percent, escalating the region’s crisis after the promised exit of Prime Minister Silvio Berlusconi failed to convince them that his country can slash Europe’s second-largest debt burden.

China’s export growth to the European Union slowed to 7.5 percent in October from a year earlier. Sales to Italy slumped 18 percent from a year earlier, the second straight decline.

Orders from U.S. buyers at the Canton trade fair held in October and November in Guangdong province dropped 24 percent from a year earlier and those from European buyers fell 19 percent, organizers said last week. Chinese solar-panel maker Trina Solar Ltd. cut its forecast for 2011 shipments on Nov. 3 because customers in Europe have had difficulty financing projects.

Gains in exports will slow to 13.5 percent in the fourth quarter from 20.5 percent in the third quarter and could ease to 10 percent next year, according to estimates from Lu Ting, a Hong Kong-based economist with Bank of America Corp.

Break on Growth

“A weak outlook in advanced economies will continue to feed into China’s trade data, acting as a break on growth and potentially forcing the authorities’ hand in rolling out monetary easing,” Alistair Thornton and Ren Xianfang, Beijing- based economists with IHS Global Insight said in a note today.

Most economists expect China to loosen fiscal or monetary policy without cutting interest rates as inflation stays above the government’s full-year target of 4 percent, a Bloomberg News survey showed this week. HSBC Holdings Plc said yesterday that “targeted easing” may include measures to support smaller businesses and the construction of public housing and infrastructure.

Import growth was higher than every estimate in a Bloomberg survey of 25 economists. China’s purchases from the European Union rose 28.2 percent in October from a year earlier and imports from South Korea gained 21 percent, customs data show.

Inventory Buildup

Iron-ore imports fell to an eight-month low while copper imports rose to the highest level in 17 months, customs data show. Crude oil purchases increased 79 percent in October from a year earlier in value terms and 27 percent in volume terms, according to Societe Generale SA.

“This may reflect inventory building and robust domestic demand, with importers taking advantage of the sharp correction in global commodity prices,” said Chang Jian, a Hong Kong-based economist with Barclays Capital.

October’s trade surplus brings the excess for the year to $124 billion, a 15.4 percent drop on the same period last year, the customs bureau said today.

“Trade’s contribution to growth may be negative in the fourth quarter, which will increase the odds of policy easing,” said Dariusz Kowalczyk, a senior strategist at Credit Agricole CIB in Hong Kong. “With inflation and the trade surplus declining, there is less need for yuan appreciation and currency gains should slow.”

China may slow the pace of yuan gains against the U.S. dollar to 3 percent to 4 percent until the end of 2012 from an annualized pace of 5 percent this year, London-based Capital Economics Ltd. said in a Nov. 3 report.

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Olympus’s Possible Delisting Means ‘Japan Way’ No Longer Acceptable Excuse

By Tomoko Yamazaki, Shingo Kawamoto and Komaki Ito - Nov 10, 2011 3:26 PM GMT+0700

Olympus Corp. (7733)’s admission that it hid losses by overpaying advisers may lead to its delisting by the Tokyo Stock Exchange and is sparking criticism of corporate- governance standards in the world’s third-largest stock market.

The world’s biggest maker of endoscopes said earlier this week it concealed losses by paying $687 million to advisers on a 2008 acquisition. Olympus said today it likely will miss the Nov. 14 deadline for filing first-half earnings, prompting the TSE to place the Tokyo-based company on a watch list for a review for possible delisting.

Olympus has lost more than 500 billion yen ($6.44 billion) of market capitalization since mid-October, when the company ousted President Michael C. Woodford and he went public with accusations of fraud. The scandal may prompt Japan’s publicly traded companies to improve self-regulation and responsiveness to investors, according to fund managers and strategists.

“This is a case where Japan’s outmoded practice of corporate governance remained and reared its ugly head,” said Shuhei Abe, president of Tokyo-based Sparx Group Co. “With Olympus’s case, it will no longer be justifiable for Japan Inc. to continue practicing under the excuse of the ‘Japan way of doing things.’”

Olympus’s troubles compound the woes of Japan’s stock market, which reeled in the aftermath of the March 11 earthquake and tsunami that led to the worst nuclear crisis since Chernobyl in 1986. The benchmark Nikkei 225 Stock Average has lost 14 percent this year, and the value of shares listed in Japan now trails the U.S. and China.

‘Get Acts Together’

Shares of Olympus plunged by the daily exchange-imposed limit of 100 yen to 484 yen today in Tokyo trading.

Foreign funds, including Olympus investor Southeastern Asset Management Inc., came to Japan to hold corporate directors responsible and seek higher returns. A government panel asked the TSE to bolster corporate-governance rules, and the Asian Corporate Governance Association said in 2008 that failure by Japanese corporate leaders to meet global standards would discourage investment in the country.

“The Japanese market is already looking unattractive to foreign investors,” said Hideaki Tsukuda, managing partner at Egon Zehnder International’s Tokyo office. “Japanese companies really have to get their acts together, taking this opportunity to strengthen their corporate-governance practices.”

Missing Deadline

Olympus today said it’s likely to miss Monday’s deadline for releasing its first-half earnings and instead will aim to give the figures by Dec. 14 as it waits for a report by an independent committee.

The Tokyo bourse subsequently said it placed Olympus on a watch list to alert investors to the possibility that it may be delisted. Should the company fail to disclose the necessary statements by Dec. 14, it faces the risk of being delisted, the exchange said in the statement.

Under Tokyo exchange rules, a company found to have falsified earnings statements is first placed under the “watch list” post, where it is kept for a month. During that period, the exchange will review the magnitude of the wrongdoings, including whether the falsification was done in an organized manner.

Should the falsification be considered malicious, the exchange may decide to delist the company. Once that decision is made, a monthlong waiting period commences before the stock is formally delisted.

‘Disappointed’

“We will be waiting for the findings by the third-party committee, consider the adequacy of information disclosure and potential impact based on exchange’s rules,” said Kazuhiko Yoshimatsu, the head of corporate communication at the Tokyo Stock Exchange.

The companies previously delisted for fabricating earnings statements include Livedoor Co., Seibu Railway Co. and Kanebo Ltd., according to the bourse’s website.

Tadashi Kageyama, the Hong Kong-based head of Asia-Pacific investigations at risk consultant Kroll Inc., said he has investigated more than 150 corporate governance cases in the region during the past decade. Kageyama said he is “not really surprised to see a case like this.”

“Many times I have been disappointed when working with Japanese companies by them not giving full access,” he said. “The government needs tougher penalties on white-collar crime.”

U.S. Investigation

Olympus President Shuichi Takayama this week reversed earlier denials of wrongdoing and said the company was looking into the role played by special-purpose funds in hiding the losses, which date to the 1990s. At least eight Cayman Islands entities have been linked to Olympus acquisitions that are suspected of playing a role in the accounting scandal.

Five of those no longer exist, according to a search of the Caymans registry, which doesn’t give details on the individuals behind the companies.

The mechanism for hiding the losses is still under investigation, Takayama said. Japanese and U.S. regulators are probing allegations by Woodford that more than $1.5 billion was siphoned through offshore funds.

Olympus shareholder Baillie Gifford & Co., a U.K. asset manager, yesterday joined Southeastern Asset in calling for Woodford’s return, saying he is “the best man for the job.”

Selling Holdings

Olympus is included both in the Nikkei 225 (NKY) and the broader Topix index. Company shares have lost more than 80 percent of their value this year.

A possible delisting may prompt investors to sell their holdings to cut losses, while those managing index-tracking funds may have to sell once the delisting is decided to avoid tracking errors.

Meiji Yasuda Asset Management Co. said this week that eight funds it manages sold all their shares in Olympus. The investment arm of Japan’s third-largest life insurer sold the shares due to uncertainties over Olympus’s future profitability, the company said in a statement.

Terumo Corp., the biggest corporate shareholder in Olympus, said it did not rule out an option to sell stakes in the company. Terumo, Asia’s largest medical devices company, owned 6.81 million Olympus shares, or 2.51 percent of the total shares outstanding, as of March 31, making the company the 10th-largest shareholder, according to data compiled by Bloomberg.

“I had been saying Japan has great value and corporate governance is strong,” said Nicholas Smith, a Japan strategist at CLSA Asia-Pacific Markets Ltd. “Then Olympus blew and clients are asking if Japanese corporate governance is really OK.”

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Shingo Kawamoto in Tokyo at skawamoto2@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net.

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U.S. Stock Futures Advance as ECB Buys Italian Bonds; Cisco Shares Rally

By Sarah Jones - Nov 10, 2011 5:18 PM GMT+0700

U.S. stock futures rose, signaling the Standard & Poor’s 500 Index will rebound from its biggest selloff since August, as the European Central Bank bought Italian bonds.

Bank of America Corp. (BAC), the second-largest U.S. lender, climbed in early New York trading. Cisco Systems Inc. (CSCO) rallied 3.6 percent in Germany after earnings topped analyst estimates.

S&P 500 futures expiring in December advanced 1.1 percent to 1,239.2 at 10:16 a.m. in London after the benchmark gauge sank 3.7 percent yesterday. Dow Jones Industrial Average futures expiring the same month gained 96 points, or 0.8 percent, to 11,828 today.

“There is a sense that most of the activity this morning has been short covering as opposed to real buying,” said Ioan Smith, a director at Knight Capital Europe Ltd. in London. “Rallies are likely to be shallow though as events have shifted rapidly in the euro zone, which threatens to pull core member states into the mix.”

Futures and European stocks rebounded as the ECB bought Italian government bonds, according to three people familiar with the transactions. Italian government bonds rose, driving the yields lower on two-year notes and 10-year securities.

U.S. stocks extended a global selloff yesterday, erasing the S&P 500’s month-to-date gain, after a surge in Italian bond yields to euro-era records, intensified concern that Europe’s sovereign-debt crisis is worsening. Italy’s 10-year bond yield yesterday closed at 7.25 percent, near levels that prompted Greece, Ireland and Portugal to seek bailouts.

Italy’s Debt

At 1.9 trillion euros ($2.6 trillion), Italy’s debt exceeds that of Greece, Spain, Portugal and Ireland combined. Unlike those nations, Italy has systemic importance as the world’s the eighth-biggest economy.

Italy sold 5 billion euros of 1-year Treasury bills as borrowing costs rose. The average yield on the bills was 6.087 percent, the Rome-based Treasury said today.

Bank of America climbed 1.6 percent to $6.26 in early New York trading. Morgan Stanley (MS) gained 0.6 percent to $15.86 in German trading.

Cisco Systems jumped 3.6 percent to $18.25 in Germany after the world’s biggest maker of networking equipment reported fiscal first-quarter profit and sales that exceeded analysts’ estimates, bolstered by a turnaround effort and demand for data centers.

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

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

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Euro Gains, Italy Bonds Rise After Auction

By Stephen Kirkland - Nov 10, 2011 5:32 PM GMT+0700

Play Video

Nov. 10 (Bloomberg) -- Marino Valensise, chief investment officer at Baring Asset Management Ltd., discusses Europe's debt crisis, global equity markets and investment allocation. Valensise speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Play Video

Nov. 10 (Bloomberg) -- Scott Wren, senior equity strategist with Wells Fargo Advisors, talks about Europe's debt crisis, its implications for global financial markets and his investment strategy. U.S. stocks sank as a surge in Italian bond yields intensified the credit crisis and concern grew that European leaders may be unable to keep the euro zone intact. Wren speaks with Susan Li on Bloomberg Television's "First Up."(Source: Bloomberg)

The euro strengthened and Italy’s bonds rallied as the European Central Bank bought the country’s debt and the government sold 5 billion euros ($6.8 billion) of bills. U.S. stock-index futures and oil rose.

The euro appreciated 0.4 percent to $1.3589 at 10:30 a.m. in London, after falling as much as 0.4 percent. The yield on Italy’s 10-year bond dropped 26 basis points. The benchmark Stoxx Europe 600 Index added less than 0.1 percent, while Standard & Poor’s 500 Index futures advanced 0.9 percent. The S&P GSCI index of 24 commodities climbed 0.4 percent, with oil in New York up 0.9 percent.

Italy sold one-year bills at an average yield of 6.087 percent after yields yesterday on 10-year notes surged past the 7 percent level at which Greece, Ireland and Portugal sought international bailouts. German Chancellor Angela Merkel’s Christian Democratic Union may adopt a motion at a party congress next week to allow euro members to exit the currency area, a senior CDU lawmaker said. More than $1 trillion was erased from the value of global equities yesterday.

“Uncertainties still linger as to the political situation going forward and the capacity of bailout mechanisms to restore a more robust equilibrium,” Sean Maloney, a strategist at Nomura International in London, wrote in a note. “The wildcard in the process remains the ECB and the scope for greater utilization of its balance sheet and the implications of a change in stance here could, in the short term at least, be significant.”

Italy Bonds

The Italian two-year note yield slid 57 basis points, after jumping 82 basis points yesterday. The additional yield investors demand to hold 10-year French, Spanish, Austrian and Belgian bonds instead of benchmark German bunds rose earlier to euro-era records amid concern the region’s debt crisis is spreading.

The ECB bought Italian government bonds, according to three people familiar with the transactions, who declined to be identified because the deals are confidential. The ECB was not immediately available for comment when contacted by telephone by Bloomberg.

The MSCI Asia Pacific Index declined 3.3 percent, the most since Sept. 22. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong tumbled 5.7 percent as China’s export growth slowed.

The Dollar Index, which tracks the U.S. currency against those of six trading partners, fell 0.3 percent after advancing as much as 0.3 percent.

To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net

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Hackers Hijack Millions of Computers in ‘Massive’ Fraud Case

By Patricia Hurtado and Michael Riley - Nov 10, 2011 6:13 AM GMT+0700

The U.S. charged seven people with a “massive” computer intrusion scheme that used malicious software to manipulate online advertising, diverted users to rogue servers and infected more than 4 million computers in more than 100 countries.

One Russian and six Estonians were charged with wire fraud and conspiracy in a 27-count indictment unsealed today by Manhattan U.S. Attorney Preet Bharara. The cyber-hijacking victims included at least a half million individuals, businesses in the U.S. and government agencies, including the National Aeronautics and Space Administration, Bharara said.

Over at least four years, an information technology company based in Estonia made millions of dollars by manipulating the Internet searches of infected computers, redirecting users to sites they never intended to visit or swapping out advertisements on web pages, according to the indictment.

“We believe this criminal case is the first of its kind and arises from a cyber infrastructure of the first order,” Bharara said. “The defendants were cyber-bandits who hijacked those computers at will, controlling and masquerading as legitimate Internet websites.”

The criminal investigation started about two years ago after NASA discovered a virus on more than 100 of its computers, said Paul Martin, NASA’s inspector general. Bharara said the government “pulled the plug” yesterday at 3 a.m. on rogue data servers the hackers used in New York, Chicago and other U.S. cities. The government is seeking forfeiture of at least $14 million allegedly generated by the scheme.

‘Click Hijacking’

Malicious software, also known as malware, was typically placed on computers after Internet users visited certain websites or downloaded software to view videos online, authorities said.

Users of infected computers were surreptitiously directed from legitimate websites to rogue computer servers, called “click hijacking,” thereby generating revenue for the defendants’ multibillion dollar Internet advertising business, the U.S. said.

For example, a user with an infected computer might perform a Google search for “iTunes” and click on the resulting link to Apple Inc. (AAPL)’s iTunes, only to be sent to another site, the U.S. said. The malware also “hijacked” people looking for the Netflix Inc. (NFLX) and Internal Revenue Service sites, according to the indictment.

Another Scheme

In another scheme that used what prosecutors called rogue domain name server malware, the hackers allegedly replaced legitimate Internet ads with substitutes that triggered millions of dollars of advertising payments for themselves. They made money after a user was diverted to another ad and clicked on it, authorities said.

The indictment cited as an example an American Express ad for the Plum Card on the Wall Street Journal’s home page that was instantly replaced, when users clicked on it, by an ad for “Fashion Girl LA.”

The malware was designed to thwart detection and prevent the installation of anti-virus software updates, prosecutors said. This left the victims’ infected computers vulnerable to further intrusions and to theft of personal and financial information stored there.

Martin, the NASA inspector general, said that the agency hasn’t found any evidence that the malware affected operations or compromised its scientific research.

NASA worked with Bharara’s office and agents with the Federal Bureau of Investigation in New York, which has made computer fraud a priority, said Janice Fedarcyk, supervisor of the bureau’s New York office.

‘Truly Flat’

“In his 2005 book, ‘The World is Flat,’ Tom Friedman was writing primarily about the globalization of the legitimate economy in the 21st Century,” Fedarcyk said today. “By identifying subjects in Estonia who caused a server in Manhattan to direct a user in Germany to a website in California, the FBI has proved the world is truly flat.”

The defendants include a Russian national residing in his home country, while the others charged today are residents of Estonia, Bharara said. He said the U.S. will seek extradition of the six people arrested in Estonia by authorities there. The Russian national, Andrey Taame, 31, remains at large, he said.

Search Warrants

FBI officials said that they participated in the arrests and execution of search warrants in Estonia at that government’s request. Estonia has agreed to extradition of cyber criminals to the U.S. on two previous occasions, the FBI said.

The most serious charges in the indictment, wire fraud and money laundering, carry a maximum penalty of 30 years in prison, according to the statement.

The Estonian company behind the scheme is called Rove Digital, a seemingly legitimate information technology firm based in Tartu, Estonia, according to the Tokyo-based cyber security firm Trend Micro Inc., which aided in the U.S. investigation.

Federal authorities raided two data centers in New York City and Chicago, shutting down more than 100 servers used to manage the operation, according to a Trend Micro blog post published today.

Despite Rove Digital’s alleged heavy involvement in cybercrime, it operated openly for years out of a office building in Tartu, Trend Micro said. Among its subsidiaries is a company called Esthost, a webhosting services reseller, as well as Estdomains, Cernel, UkrTelegroup and others, according to the Trend Micro report.

‘Bad’ Servers

At the government’s request, U.S. District Judge William Pauley in New York appointed an independent receiver to replace the defendant’s “unplugged ‘bad’ servers with clean, good servers so that Internet life can go back to normal for the affected users,” he said. As a result, infected computer users’ Internet service was re-routed through “clean” servers without any interruption, authorities said.

Fedarcyk advised those concerned that their computer had been infected to visit the FBI’s website: fbi.gov/scams- safety/computer_protect.

FBI officials said they are now in the process of working with 32,000 Internet service providers worldwide, who in turn may notify individual victims.

The case is U.S. v. Tsastsin, 11-cr-878, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Patricia Hurtado in Manhattan federal court at pathurtado@bloomberg.net Michael Riley in Washington at michaelriley@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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Cisco Profit Tops Estimates on Cloud Growth

By Danielle Kucera - Nov 10, 2011 5:19 AM GMT+0700

Cisco Systems Inc. (CSCO), the world’s biggest maker of networking equipment, reported profit and sales that exceeded analysts’ estimates, bolstered by a turnaround effort and demand for data centers.

Excluding some costs, earnings were 43 cents a share in the fiscal first quarter, which ended Oct. 29, the company said today in a statement. Analysts on average had predicted 39 cents, according to Bloomberg data. Cisco also topped projections with its second-quarter forecast.

Chief Executive Officer John Chambers is eliminating jobs, scaling back operating expenses and revamping a management structure that slowed decision making. The company also is refocusing on its main products: network switches and routers. The moves are aimed at shoring up gross margin, a yardstick of profitability, which narrowed to 61.4 percent in fiscal 2011 from 65.8 percent five years ago.

“It’s a far cry from the growth rates for prior years, but this is right in line with the new Cisco,” said Colin Gillis, an analyst at BGC Partners LP in New York. “They’re controlling their expenses.”

Cisco rose 64 cents to $18.25 in late trading after the report. The stock had fallen 70 cents, or 3.8 percent, to $17.61 at the close today in New York. Shares of the San Jose, California-based company have dropped 13 percent this year.

Revenue Forecast

Sales will grow 7 percent to 8 percent in the current quarter, the company said on a conference call. That equates to $11.14 billion to $11.24 billion, beating the $11.13 billion predicted by analysts. Earnings will be 42 cents to 44 cents a share, excluding some costs. The average estimate was 42 cents.

First-quarter net income fell to $1.78 billion, or 33 cents a share, from $1.93 billion, or 34 cents, a year earlier. Sales rose 4.7 percent to $11.3 billion in the period, compared with an estimate of $11 billion. While Cisco’s gross margin narrowed to 62.4 percent last quarter, excluding some costs, that beat the average estimate of 61.3 percent.

The company also is benefiting from demand for so-called cloud services. That’s fueling growth in its data-center switching segment, where Cisco has 80 percent market share, said Brian Modoff, an analyst at Deutsche Bank Securities Inc. in San Francisco. Data centers provide access to software and computing power remotely over the Internet, rather than through companies’ local systems.

Cisco is backtracking on some of its consumer efforts as well. The company announced in April that it would close the Flip video-camera business, eliminating 550 jobs. In July, Cisco unveiled a plan to cut about 6,500 employees worldwide and transfer an additional 5,000.

Cisco has “cut back on some bureaucracies and made the company run better,” said Matthew Robison, an analyst at Memphis, Tennessee-based Wunderlich Securities Inc. “That’s a benefit. It’s not just cutting heads, but changing the way the organization operates that I think is compelling.”

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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HTC’s Anti-Apple Strategy Wins U.S. Market

By Sarah Frier and Tim Culpan - Nov 10, 2011 12:01 PM GMT+0700

HTC Corp. (2498) Chief Executive Officer Peter Chou got the call when Sprint Nextel Corp. (S) wanted to develop the first smartphone for a higher-speed wireless network last year.

Sprint needed the phone fast, with a design that would stand out in the market. No problem, Chou told the executives. HTC’s engineers spent about seven months building the device with Sprint and launched the Evo last June. The debut gave Sprint bragging rights for the first fourth-generation phone in the U.S., and won Taiwanese manufacturer HTC strong support at a major carrier.

“Peter personally makes a commitment and gets the team to rally around it,” Steve Elfman, Sprint’s president of network operations, said in an interview. “They were able to design with us. Peter himself would be there describing products at a technical level.”

HTC has become the top seller of smartphones in the U.S. with a strategy that’s precisely the opposite of Apple Inc. (AAPL)’s. Where Apple is secretive, HTC is open. Where Apple is exclusive, HTC works with all carriers. Where Apple is proprietary, HTC is collaborative. Where Apple customizes for no one, HTC customizes for everyone. It’s the anti-Apple and, so far, it has worked.

“HTC will make products for you,” said Elfman. “We certainly don’t do design work on Apple products.”

The question is whether HTC can stay on top. Chou has benefited as people trade in traditional phones, used primarily for voice calls and texting, for smartphones, which can download apps and surf the Web. Carriers scrambling to keep up with demand such as Verizon Wireless and Sprint turned to HTC for smartphones that use Google Inc. (GOOG)’s Android software during the almost four years AT&T had exclusive U.S. rights to the iPhone.

Brand Weakness

Yet as the market matures, HTC may be vulnerable. All three of the top U.S. carriers can now offer the iPhone, and HTC lacks the brand cache of Apple and rivals that use Android, such as Samsung Electronics Co. and Sony Corp. (6758) It also has to compete with new Microsoft Corp.-powered phones from Nokia and a revamped lineup from Research In Motion Ltd. (RIMM)

The result is that, after claiming the top position in the third quarter for the first time, according to researcher Canalys, HTC will likely lose ground in the U.S., said Matt Thornton, an analyst for Avian Securities LLC.

“HTC will never be No. 1 again,” said Thornton, who is based in Boston and rates HTC’s stock “neutral.” “Now they’re butting heads against others who so far have been immovable.”

HTC Founding

Chou said he understands the challenges. Still, he said HTC will stick with the strategy that has helped it forge strong ties to carriers in the U.S. and globally, helping the company almost double revenue last year and post five consecutive quarters of record profit.

“Developing a good brand is really hard,” Chou said in an interview in New York. “We come from a company with no experience, no resources for developing a global brand. We have to be friendly. We have great relationships.”

HTC was founded in 1997 by Chou, Cher Wang and HT Cho. Wang, chairwoman of HTC, is Taiwan’s richest woman and daughter of Formosa Plastics Corp. founder Wang Yung-ching, who was Taiwan’s richest man before he died in 2008.

The company began as a contract manufacturer, one of many Asian companies that made gadgets for Western technology companies at low margins without a trace of their own brand. It manufactured notebook computers and personal digital assistants for Compaq Computer Corp.

In 2002, Chou won a contract with Microsoft to make Windows-based phones and quickly became their top producer globally. HTC also made the first Android phone in 2008, and now makes both kinds of phones.

‘Lives on Planes’

By quickly incorporating the latest technologies and customizing phones for customers, Chou has forged ties to more than 100 wireless operators on six continents. The company has climbed to the No. 4 position in smartphones globally, behind Samsung, Apple and Nokia.

“He lives on planes,” said Anurag Gupta, president of Europe, the Middle East and Asia for Brightpoint Inc., which distributes mobile phones and other products. “He’s a huge force behind HTC and he has a great team.”

HTC has benefited from the rising popularity of Android, which is catching on faster than Apple devices. Android grabbed 44 percent of the market in the quarter ended in August, compared with 38 percent three months earlier, according to ComScore. Apple kept its 27 percent share.

‘Long History’

“Their long history with operators has helped them build a market, dating back to when phone companies spent lots of money on 3G networks and wanted to promote their own brands and services,” said Lu Chia-lin, a Hong Kong-based analyst at Samsung Securities Asia Ltd, who rates the stock “buy.” “HTC realized that this model couldn’t last forever, so they made the move into branding and innovation to build customer awareness.”

Chou, an engineer by training, worked at Digital Equipment Corp. before starting HTC. Harvard Business School’s Advanced Management Program instilled in Chou the importance of presentation and style, helping transform him from engineering geek to chic CEO. To build an international mindset, Chou set the company’s working language to English, with memos and meetings conducted in that language rather than Chinese.

The company operates “almost like a startup,” quickly and intimately, said Elfman, who is meeting this week with Chou in Taiwan -- a trip he makes annually.

Chou is pushing beyond simply making hardware. HTC acquired five software and content-related companies in the past two years to add features. The company is betting that content, software and services will set it apart, Chou said.

Lady Gaga Party

A $300 million controlling stake in Beats Electronics LLC, the headphones maker backed by rapper Dr. Dre, was part of a strategy to lure music enthusiasts with a marketing plan that included bringing singer Lady Gaga to an Oct. 6 audio party in London to release the HTC Sensation XL, its first handset featuring Beats audio technology and headphones.

Chou said he cares more about making unique products than making good profit margins. He listens and acts quickly. Often, when Beats co-founder and music producer Jimmy Iovine calls with an idea, Chou will have sent off an e-mail about it before the conversation is over, Iovine said. Chou said he tests the music himself.

“We are investing in an emotional and cultural experience,” he said.

Steep Climb

The investments may not be enough to keep HTC ahead in the U.S. With Apple’s iPhone now being sold by Verizon Wireless and Sprint, demand for other handsets may slow. Sales associates in wireless retail stores unanimously recommended the iPhone for the average smartphone buyer, according to a Wells Fargo & Co. survey in 20 U.S. cities last month.

Samsung, the world’s largest smartphone maker, unveiled the Galaxy Nexus in October to become the only vendor globally with Google’s latest operating system, called Ice Cream Sandwich, on its phones. HTC said in a Facebook post Nov. 7 that eight of its handsets will be upgradable to the operating system in early 2012 -- not in time for holiday shopping.

The competition is expected to weigh on sales in what is typically a busy quarter. HTC expects handset shipments to be 12 million to 13 million this quarter. The company may post its slowest profit and sales growth in almost two years, according to analysts’ estimates.

Chou said maintaining the leading position in the U.S. is not his top priority. He’s focused on creating cutting-edge products and making sure HTC continues to grow globally.

“If you have a great product, business will come,” he said.

To contact the reporters on this story: Sarah Frier in New York at sfrier1@bloomberg.net; Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net.

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Italy Bond Attack Breaches Euro Defenses

By Simon Kennedy - Nov 10, 2011 4:24 PM GMT+0700

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Nov. 10 (Bloomberg) -- Alessandro Leipold, former acting director of the International Monetary Fund's European department and now chief economist at the Lisbon Council, talks about Europe's sovereign debt crisis. Yields on 10-year Italian notes surged to 7.25 percent yesterday, a euro-era record. That’s higher than the 7 percent level at which Greece, Ireland and Portugal sought international bailouts. Leipold speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

The euro region’s defenses are being breached.

Investors yesterday propelled Italy’s 10-year bond yield to close at a euro-era high of 7.25 percent after the promised exit of Prime Minister Silvio Berlusconi failed to convince them that his country can slash Europe’s second-largest debt burden.

The biggest signal yet that the single currency’s third- largest economy is falling prey to its two-year debt crisis forces German Chancellor Angela Merkel, European Central Bank President Mario Draghi and their peers to decide just how far they’re willing to go to defend the euro.

“The market is testing the commitment of the euro zone’s stewards,” said Eric Chaney, Paris-based chief economist at insurer AXA SA and a former official in the French Finance Ministry. “Italy is the real crisis battleground.”

The euro strengthened against the dollar today, after earlier reaching a one month low, and traded at $1.3565 as of 9:22 a.m. in London.

Italian 10-year bonds rebounded from declines as the ECB bought the country’s debt, according to three people familiar with the transactions, who declined to be identified because the deals are confidential. The 10-year yield slipped to 7.1 percent, still at a level which previously drove Greece, Ireland and Portugal to seek bailouts.

Debt Level

At 1.9 trillion euros ($2.6 trillion), Italy’s debt exceeds that of Greece, Spain, Portugal and Ireland combined, though unlike those nations, it has systemic importance as the world’s third-largest bond market and eighth-biggest economy.

Berlusconi’s offer to quit has still left his nation struggling to produce a government stable enough to deliver austerity after LCH Clearnet SA raised the deposit it demands for trading Italian securities. Investor sentiment will be tested today as Italy sells 5 billion euros ($6.8 billion) of one-year bills.

“While Italy is considered too big to fail, she may be too big to save unless there is a major change of attitude towards resolving the crisis,” said John Higgins, an economist at Capital Economics Ltd. in London. “Things could be about to turn very ugly.”

Pressure Builds

Investors want “a signal that Italy has taken control of its accounts and is increasing the competitiveness of the system,” Marco Tronchetti Provera, Chairman of Pirelli & C. SpA, Europe’s third-biggest maker of tires, told reporters in London yesterday. “Parliament has to take action soon.”

Global pressure on Rome is building days after Group of 20 leaders decried the inability of European counterparts to defeat a crisis now in its third year and threatening global growth.

Deputy finance ministers meeting at the Asia-Pacific Economic Cooperation forum in Honolulu today expressed concern over the danger Europe poses to the world economy. U.S. Treasury Undersecretary for International Affairs Lael Brainard said yesterday that European officials must speed up construction of a “firewall” to protect countries that have sound policies.

International Monetary Fund fiscal monitors are due to visit the Italian capital, and European Union Economic and Monetary Affairs Commissioner Olli Rehn says he wants answers to “very specific questions” on economic pledges by the weekend. U.K. Prime Minister David Cameron yesterday said Italian interest rates are “getting to a totally unsustainable level.”

“This is a form of meltdown,” said Marc Ostwald, a fixed- income strategist at Monument Securities Ltd. in London. “I would imagine the telephones between international finance ministries and central banks are in danger of running so hot they’ll melt down themselves.”

Italian Vote

Spooked by the investor selloff, Italy’s Senate rushed to set up a vote tomorrow on a package of debt-reduction measures which should pave the way for a Nov. 12 vote in the Chamber of Deputies and then Berlusconi’s departure. The premier is still seeking elections which may delay further reforms.

Failure to restore order may leave Italy joining Greece, Portugal and Ireland in seeking outside help. The first port of call would likely be the 440-billion euro European Financial Stability Facility. A country can now tap a precautionary promise of support of up to 10 percent of its gross domestic product -- about 160 billion euros in Italy’s case.

German Finance Minister Wolfgang Schaeuble yesterday told lawmakers that Italy should request aid from the EFSF if it needs it, two people present at the Berlin meeting said.

EFSF Backstop

Higgins at Capital Economics said Italy needs about 650 billion euros to keep out of markets for the next three years, rising to 700 billion euros with support for its banks. Another alternative is the EFSF buys Italian bonds in markets, he said.

A problem is that the rescue fund has about 270 billion euros left after subtracting commitments to Greece, Portugal and Ireland. Governments also have yet to flesh out last month’s promise to boost its spending power to 1 trillion euros. With Italy facing bond maturities of about 475 billion euros in the next three years, Citigroup Inc. and Royal Bank of Scotland Group Plc are among those saying the fund needs at least double that amount to insulate Italy and Spain.

“It’s hard to see that Europe would have the resources to take a country the size of Italy into the bailout program,” Finnish Prime Minister Jyrki Katainen said this week.

Such dilemmas could push Italy into the arms of the IMF, days after Berlusconi said he turned down a credit line with the Washington-based lender. With G-20 leaders debating whether and how to boost the IMF’s $391 billion war chest to assist Europe’s crisis-fighting, Managing Director Christine Lagarde yesterday warned of a potential “lost decade” for the world economy.

‘Bazooka’ Approach

“The bazooka approach would be an IMF-led solution backed by the U.S., China and others,” said Fredrik Erixon, head of the European Centre for International Political Economy in Brussels.

There is mounting pressure on the Frankfurt-based ECB --now helmed by the Italian Draghi -- to bolster a bond-buying program which it deployed as recently as yesterday to ease Italy’s strains. Another proposal is for the central bank to provide an unlimited guarantee of Italy’s debt in the hope that would remind investors it’s struggling with liquidity not insolvency and to buy it time to pass debt-reducing policies.

“The house is on fire,” said Dante Roscini, a lecturer at Harvard Business School and former chief executive officer of Morgan Stanley in Italy. “The ECB needs to print money and buy Italian bonds, it’s the only way to put the fire out.”

The time may still not have come for the ECB to power-up, given central bankers would first want Italy to earn support by showing how it will eventually deliver budget discipline, said Ken Wattret, chief euro-zone market economist at BNP Paribas SA.

‘Limited’ Intervention

“The ECB will only intervene in a limited way when there’s a clearer path towards a more fundamental overhaul of the economy,” he said.

Internal politics and ideology may stay the ECB’s hand permanently despite its prior willingness to rewrite its rulebook. Since May 2010 the ECB has limited its bond buying to 183 billion, and Bundesbank President Jens Weidmann this week said the central bank cannot bail governments out, citing Germany’s experience of hyperinflation after World War I.

“The only thing that would be a real game changer would be if the ECB were to take up this idea of being a lender of last resort to governments, but printing money is against the ECB’s religion,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam.

If the central bankers do eventually turn to the printing press it may be part of a broader strategic effort to finally conquer the turmoil which includes Greece being ejected from the euro area, said Eoin Fahy, chief economist at Kleinwort Benson Investors in Dublin. Merkel and French President Nicolas Sarkozy said last week for the first time that a country could leave the euro area if it fails to live by its rules.

Pressing ‘Print’

“Eventually they’ll get to that point where they have to press ‘print,’” Fahy said. “The question is, do they throw Greece to the wolves first?”

Italy may still not need saving. IHS Global Insight economist Raj Badiani says the government can survive “several quarters of expensive debt auctions” thanks to positive cash flow and relatively low levels of private debt. BlackRock Inc., the world’s biggest money manager, said yesterday it’s “comfortable” holding intermediate Italian bonds.

Andrew Bosomworth, a senior portfolio manager at Pacific Investment Management Co. in Munich, senses a “watershed moment.” With Italy all but locked out of markets, European officials may have to jettison their short-term firefighting and pick between a smaller, stronger euro zone or a federalist structure with greater cross-border support.

“What is happening is what they’ve been trying to stop,” said Bosomworth, a former ECB economist.

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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