Chinese Firms Tired of Wall Street Shift to H.K.

By Mark Lee - Dec 8, 2011 7:25 AM GMT+0700

Chinese technology companies that raised $7.8 billion from Wall Street investors in initial public offerings during the past 12 years have at least one good reason to delist in New York and take their business to Hong Kong.

Valuations appear to be significantly higher in Hong Kong. Perfect World Co. (PWRD), China’s fourth-biggest online games operator, trades at 3.9 times its estimated earnings in New York, while smaller rival NetDragon Websoft Inc. (777) is valued at 13 times in Hong Kong. Such disparities may push some technology companies to consider moving back east, said Victoria Mio, a senior portfolio manager at Robeco Group in Hong Kong.

More strict oversight by New York regulators and allegations of fraud from short-seller Muddy Waters LLC have suppressed the USX China Index of 174 Chinese stocks trading on Wall Street by 21 percent this year. The gauge trades at 12 times earnings, compared with 20 times for Hong Kong’s Hang Seng Composite Information Technology Index. (HSCIIT)

“I am tired of the U.S.,” Yang Tianfu, chief executive officer of Harbin Electric Inc. (HRBN), said in a phone interview. “We just couldn’t communicate with the investors.”

‘Overtake’ Wall Street

The Harbin, China-based maker of electric motors delisted from the U.S. last month and can “easily” complete a listing in Hong Kong or Shanghai, Yang said.

Companies wanting to leave Wall Street may choose Hong Kong because listing in Shanghai or Shenzhen would require them to restructure into domestic Chinese firms, said Richard Lim, a Palo Alto, California-based partner at GSR Ventures, which invests in technology companies in China.

China Renaissance Partners, a Beijing-based investment bank that advised New York-listed E-Commerce China Dangdang Inc. (DANG) and NetQin Mobile Inc., is working on potential deals that may result in listings in Hong Kong, Chief Executive Officer Bao Fan said. Some involve U.S.-listed companies that may be taken private, he said without naming them.

“Hong Kong, over time, will overtake the U.S. as the preferred place of listing for Chinese technology companies,” Bao said. “In the long term, the core group of holders in these Chinese technology firms will have to be Chinese,” rather than overseas, investors, he said.

18 Delistings

In October, Shanghai-based Internet companies Shanda Interactive Entertainment Ltd. (SNDA) and China Real Estate Information Corp. (CRIC) unveiled plans to delist from the U.S. after their shares underperformed Hong Kong-traded rivals. They join 16 other U.S.- listed Chinese companies that announced delisting plans since 2010, according to data from Roth Capital Partners LLC, a Newport Beach, California-based financial firm.

“Some Chinese companies listed in the U.S. that trade at low valuations may consider delisting and go public in Hong Kong,” said Mio, whose fund managed $188 billion of assets, including the Hong Kong-traded stock of Tencent Holdings Ltd. (700), China’s biggest Internet company by revenue, as of September.

Funtalk China Holdings Ltd. (FTLK), a Beijing-based mobile-phone retailer that delisted from New York in August, “won’t rule out” listing in Hong Kong, said Francis Wan, a senior vice president.

48 IPOs

NetDragon, based in Fuzhou, southeast China, is also more expensive than New York-listed Chinese online game firms Shanda Games Ltd. (GAME), Changyou.com Ltd. and Giant Interactive Group Inc. (GA), according to Bloomberg data.

Teal Willingham, who represents Beijing-based Perfect World at Christensen International, said the company doesn’t comment on its share price.

At least 48 Chinese technology stocks, including Baidu Inc. and Youku.com Inc. (YOKU), completed IPOs in the U.S. since 2000. By comparison, 17 did in Hong Kong.

Hong Kong Exchanges & Clearing Ltd. (388), operator of Asia’s third-biggest stock market, offers “a perfectly good listing platform” for Chinese technology companies, said Mark Dickens, the exchange’s head of listings. There are plans by investment banks to take some Chinese companies currently traded in New York for listings in Hong Kong, he said.

“We heard investment bankers had been exploring the opportunities,” Dickens said in an interview.

Muddy Waters

About 100 companies are seeking the exchange’s approval to list their shares or are planning share sales after having received approval, Dickens said at a Nov. 30 forum in Hong Kong.

Focus Media Holding Ltd. (FMCN), a Shanghai-based outdoor advertising company, plunged 40 percent in New York trading on Nov. 21 after a report by Muddy Waters alleged the Chinese firm had overstated its assets.

Spreadtrum Communications Inc. (SPRD), a Chinese chip designer, declined as much as 34 percent in intraday trading on June 28 after the short seller alleged the company had misstated financial results.

The Securities and Exchange Commission sent letters seeking explanation of corporate structures at U.S.-listed Chinese companies, including Shanda Interactive and Kongzhong Corp., said Paul Boltz, a Hong Kong-based partner at Ropes & Gray.

The SEC in June cautioned investors about buying shares in companies formed by reverse mergers, a maneuver used by more than 400 Chinese businesses to gain stock-market listings in North America while avoiding the scrutiny of a public offering.

JP Morgan

The buyouts of Chinese companies from stock-market investors in New York, and relisting them in markets offering higher valuations, may generate profit for private-equity investors.

“There is a real interest among private-equity funds in these companies,” said Mark Tobin, co-director of research at Roth Capital. Some U.S.-listed Chinese companies are trading at valuations “far below” those of private companies in China, he said.

Shanda Interactive Chairman Chen Tianqiao’s group, which plans to buy out the company, discussed financing with JPMorgan Chase & Co. (JPM), the company said Oct. 17. PAG Asia Capital, a Hong Kong-based alternative investment manager, helped fund the management-led buyout of Funtalk.

Most of the Chinese companies trying to list in the U.S. are relatively small and are subject to an increasingly difficult regulatory environment, Bao said. Hong Kong also has the benefit of having a sophisticated, international capital market, he said.

“Most of the U.S. investors don’t understand China very well,” Bao said.

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

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

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Zynga Gets Publicity Lift From Word Game-Engrossed ‘30 Rock’ Star Baldwin

By Andy Fixmer and Douglas Macmillan - Dec 8, 2011 8:27 AM GMT+0700

Zynga Inc. has Alec Baldwin to thank for giving its “Words With Friends” word game a publicity boost.

Baldwin, star of NBC’s “30 Rock,” was so engrossed in the Scrabble-like game he got ejected from an American Airlines flight for refusing to stop playing. The actor took his phone into the plane’s lavatory, slamming the door hard enough to alarm pilots in the cockpit, American Airlines said today on its page on Facebook Inc.’s social network.

“Flight attendant on American reamed me out 4 playing WORDS W FRIENDS while we sat at the gate, not moving,” Baldwin, 53, said in a post to Twitter Inc.’s microblogging service yesterday after the incident.

After Baldwin refused to turn off his phone and obey signs requiring seat belts, he was removed from the flight, according to the airline’s statement.

“The passenger was extremely rude to the crew, calling them inappropriate names and using offensive language,” American Airlines said.

Baldwin today apologized to other passengers, while criticizing a flight attendant for singling him out, and said others were also using their phones.

“I guess the fact that this woman, who had decided to make some example of me, while everyone else was left undisturbed, did get the better of me,” he wrote in a Huffington Post article.

Good Publicity

Zynga, which plans to sell shares in an initial public offering, is the biggest maker of games on Facebook Inc. Still, it’s less well understood by many of the investors targeted by its IPO marketing effort, currently under way, said Michael Pachter, an analyst at Wedbush Securities. Baldwin’s American Airlines flap may raise Zynga’s profile, he said.

“This is phenomenal for Zynga,” said Pachter, who’s based in Los Angeles. “The problem for Zynga with investors has been that the average portfolio manager doesn’t relate to their games. This definitely helps change their perception.”

Zynga took up Baldwin’s cause with Twitter posts featuring the phrase, “#LetAlecPlay.” “Words With Friends” is Zynga’s sixth most popular game, according to Appdata.com.

Baldwin was removed from a flight to New York from Los Angeles, the actor said on his Twitter account. American Airlines parent AMR Corp. (AMR) filed for bankruptcy protection from creditors on Nov. 29.

“He loves WWF so much that he was willing to leave a plane for it, but he has already boarded another AA flight,” Matthew Hiltzik, a spokesman for Baldwin, said in a statement.

‘Words With Friends’

Adam Isserlis, a spokesman for San Francisco-based Zynga, declined to comment beyond the company’s posts on Twitter.

“Words With Friends” was created by Newtoy Inc., a McKinney, Texas-based game developer acquired by Zynga in December 2010. A version of the game with advertising is free on Apple Inc. (AAPL)’s AppStore, while a commercial-free version costs $2.99.

Zynga is seeking to raise as much as $1 billion in the biggest IPO by a U.S. Internet company since Google Inc.’s debut. The “Let Alec Play” graphic features a scoreboard saying, “A Baldwin 1, American Air 0.”

To contact the reporters on this story: Andy Fixmer in Los Angeles at afixmer@bloomberg.net; Douglas Macmillan in New York at dmacmillan3@bloomberg.net

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

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LivingSocial Is Said to Get Funding Valuing It at $6 Billion

By Douglas MacMillan - Dec 8, 2011 7:12 AM GMT+0700

LivingSocial.com, the online-coupon provider that competes with Groupon Inc., lined up $400 million in funding that gives it a valuation of about $6 billion, according to a person with direct knowledge of the matter.

The company has already sold $176 million of the total, Washington-based LivingSocial said in a filing with the U.S. Securities and Exchange Commission. The funding will be a mix of equity and debt, said the person, who declined to be identified because the figure hasn’t been disclosed. The investment will come from both existing and new backers, the person said.

LivingSocial, which was in talks with banks earlier this year about raising $1 billion in an initial public offering, shifted plans after other Internet companies faced turbulent debuts in the public markets. Groupon, which has a market capitalization of $13.6 billion, has seen its shares dip as much as 24 percent below its IPO price last month. The stock is now trading at 5.8 percent more than its initial price.

As LivingSocial grows and expands into new cities, it requires funds to hire and train more salespeople, said A.B. Mendez, a social-media analyst at WJB Capital in New York.

“LivingSocial has made the claim that they have a human sales representative on the ground in every city where they have a daily-deal presence,” Mendez said. “In theory, LivingSocial’s model is as human-capital intensive, if not more, than Groupon.”

Fueling Expansion

Executives and backers have discussed a round of funding valuing the company at $6 billion since September. LivingSocial plans to use the new investment to fuel operations and expansion, said the person familiar with the matter.

The company has almost doubled in value since April, when it raised $400 million at a valuation of $3.5 billion, two people with knowledge of the matter said at the time. With the $400 million in funding unveiled today, LivingSocial has received a total of $1.03 billion from investors, including Grotech Ventures, Institutional Venture Partners, T. Rowe Price Group Inc. and e-commerce site Amazon.com Inc. (AMZN)

LivingSocial delivers daily discounts on restaurants, hotels, events, and other goods and services. The daily-deal market may generate $4.17 billion in U.S. sales in 2015, compared with $1.97 billion this year, according to research firm BIA/Kelsey in Chantilly, Virginia.

U.S. consumers will spend $80 million to $100 million on daily-deal gifts between Thanksgiving and Christmas, estimates Yipit, a website that aggregates offers from a range of companies. That amount is up from $15 million to $20 million during the same period a year ago, Yipit said.

Other technology companies are pushing ahead with their IPOs, even if valuations are coming down. Zynga Inc., which earlier expected to be valued at as much as $10 billion in its IPO, now aims to sell shares at a valuation of up to $7 billion.

To contact the reporter on this story: Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

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

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Buffett’s $2 Billion Solar Bet Receives ‘Attractive’ Power Rates

By Christopher Martin - Dec 8, 2011 12:00 PM GMT+0700

Warren Buffett’s Berkshire Hathaway Inc., which is buying a $2 billion solar project in California, may have picked the right time to invest in the industry.

The 550-megawatt Topaz project will qualify for a federal incentive because construction began last month, and it will sell electricity under a long-term contract that was completed before prices for solar panels fell 44 percent in the last year. Berkshire’s MidAmerican Energy Holdings utility unit and First Solar Inc. (FSLR), the project developer, announced the deal yesterday.

Topaz, which will use First Solar panels, may be the last large solar farm to qualify for the U.S. Treasury Department incentive program, which is set to expire this year. It will likely sell power at a higher price than projects that are seeking contracts from utilities now, said Paul Clegg, an analyst at Mizuho Securities USA in New York.

“The smart guys are getting into these early projects because they have very attractive power-purchase agreements,” Clegg said in an interview. “Financing won’t be as easy at the rates being signed for the latest ones.”

First Solar projects that are currently being built will sell power for 14 cents to 16 cents a kilowatt-hour, said Alan Bernheimer, a spokesman for the Tempe, Arizona-based company. By 2014, he expects its solar farms to sell power at 10 cents to 12 cents a kilowatt-hour, he said.

The price of the Topaz deal wasn’t disclosed and Bernheimer wouldn’t give the rates at which it will sell electricity. PG&E Corp. (PCG)’s San Francisco-based utility agreed in August 2008 to buy Topaz’s power for 25 years.

‘Favorable Terms’

“The reason this project made sense is because the power purchase agreement was signed three years ago at very favorable terms,” Sanjay Shrestha, an analyst at Lazard Capital Markets in New York, said in an interview. He has a “buy” rating on First Solar.

Prices for power sold under these long-term contracts are coming down, and the expected expiration of a federal incentive may further erode profit margins for large projects, Shrestha said. The Treasury Department’s 1603 program, which offers cash grants equal to about 30 percent of renewable energy projects’ development costs, is set to end Dec. 31.

First Solar received $3.1 billion in federal loan guarantees for three other solar projects that it later sold. Buffett is chairman and chief executive of Omaha, Nebraska-based Berkshire.

Loan Guarantees

The Topaz plant was offered a conditional guarantee that the company couldn’t complete because it was unable to meet some of the requirements before the U.S. Energy Department loan guarantee program ended Sept. 30. MidAmerican Energy said the purchase shows that solar energy is viable without government backing. Solyndra LLC, a failed solar panel company, received a guarantee under the same program.

“Buffett’s investment shows that solar has come of age,” Shrestha said. The end of the grant program “takes away some of the incentive but there will still be viable large scale solar plants.”

The billionaire’s endorsement may also help First Solar sell other solar farms, even if they have power-purchase deals with lower rates, Clegg said. “I don’t doubt they will find buyers for more of their projects,” he said. “The returns probably won’t be as good as the ones that have already been sold.”

First Solar has sold and begun building projects using its panels to buyers including General Electric Co., NextEra Energy Inc., Exelon Corp. and NRG Energy Inc. Projects that First Solar is developing and for which it still needs buyers total 600 megawatts, according to a company presentation on Oct. 26.

Biggest Acquisition

MidAmerican may not be one of the buyers, said Jeff Matthews, a Berkshire shareholder and author of “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett.”

“I would guess this is specific to MidAmerican and this particular deal,” he said in an e-mail. Though Buffett has voiced support for renewable energy, “I wouldn’t think he’s going to run around and buy solar assets.”

Buying Topaz will provide a “nice set” of cash flow for MidAmerican, Jenny Chase head of solar analysis at Bloomberg New Energy Finance, said in an e-mail. “This is the biggest acquisition of a single photovoltaic project anywhere,” she said.

The Topaz project in San Luis Obispo County is expected to be complete in 2015. It’s the third-largest solar farm announced to date in the U.S., tied with First Solar’s Desert Sunlight plant, also in California, and trailing plants that NRG Energy and Cannon Power Corp. are developing, according to New Energy Finance.

To contact the reporter on this story: Christopher Martin in New York at cmartin11@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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Trapped by a $50,000 Degree in a Low-Paying Job

By Janet Lorin - Dec 7, 2011 12:00 PM GMT+0700

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Sayer, unsure of what she wanted to do after graduating from college in 2006, figured a master’s degree was “a safe bet.” Source: Laura Sayer via Bloomberg

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Ellis, 28, took about $160,000 in federal loans to attend Fordham Law School. Because his student debt is so high compared to his salary, Ellis said he expects to qualify for a plan that would let him pay 15 percent of his salary for 25 years, and whatever debt is left after that is forgiven. Photographer: Scott Wagner via Bloomberg

Laura Sayer, unsure of what she wanted to do after graduating from college in 2006, figured a master’s degree was “a safe bet.”

With $5,000 in undergraduate loans from her time at the University of Cincinnati, Sayer was set back $50,000 more after completing the Interdisciplinary Master’s Program in Humanities and Social Thought at New York University. The 27-year-old now makes about $45,000 a year as an administrative assistant for a nonprofit group, a job that didn’t require her advanced degree.

More people are losing the same gamble as a 33 percent jump in U.S. graduate school enrollment in the past decade, coupled with an 80 percent surge in tuition and required fees, runs headlong into a weaker job market. Universities are fueling the trend by offering more one- and two-year programs in areas from environmental science to sports management that rarely come with financial aid other than the option for loans.

“Students need to be more skeptical that the income, debt and job-placement statistics that they’re being shown about graduate schools may not reflect individual experiences,” said Mark Kantrowitz, publisher of FinAid.org, a website with educational-lending information. “It’s like the advertisements on TV for weight-loss programs: the results are not typical.”

About one-third of people with master’s degrees make less money on average than a typical bachelor’s degree holder, said Stephen J. Rose, a labor economist with Georgetown University’s Center on Education and the Workforce, citing U.S. Census data.

‘Making Mistakes’

“Some people are making mistakes and other people are just making choices that this is what they want to do,” Rose said. “In this bad environment, many people with master’s degrees are employed but in relatively low-paying positions.”

Students who attend professional schools, such as for law, medicine and business, accumulate even more debt. Medical school graduates have a mean indebtedness of $161,290, up 55 percent since 2002, not adjusted for inflation, according to the Association of American Medical Colleges. Average tuition and fees for private law schools have jumped 73 percent since 1999 to $35,743 in 2009, an American Bar Association survey shows.

The median tuition and fees for an MBA at a private school has gained 66 percent from 2001-2002 to $49,500 for 2010-2011, according to a survey by the Association to Advance Collegiate Schools of Business.

Men with master’s degrees make an average of $14,500 more a year than those without the degrees, and for women it’s about $10,000, according to Rose’s analysis of Census data. Advanced degrees in computers, engineering, business and nursing lead to the highest salaries. Master’s degrees in education, fine arts, teaching and liberal arts fare the worst.

Trapped for Decades

Gerrald Ellis, 28, took about $160,000 in federal loans to attend Fordham Law School, and then spent a year searching for a job. He eventually found work at a four-lawyer firm in White Plains, New York, doing consumer protection work.

Because his student debt is so high compared to his salary, Ellis said he expects to qualify for a plan that would let him pay 15 percent of his salary for 25 years, and whatever debt is left after that is forgiven.

“I’m trapped for at least two decades,” said Ellis, who lives in Harlem with a classmate who also borrowed more than $100,000. “The debt has an impact on everything, where I decide to live, what job I take. I can’t even imagine having kids with this kind of debt burden. Multiply that by a whole generation.”

Change in Law

After a change in federal law in 2006, graduate students became eligible to borrow federally backed loans that covered the full cost to complete their degrees, while undergraduates are limited to $27,000 over four years, according to Kantrowitz.

The number of students enrolled in graduate schools, excluding law and medicine, totaled 1.7 million last year, a 33 percent jump from 2000, according to data from the Council of Graduate Schools, which represents more than 500 universities.

Federal and private student loans outstanding for graduate and undergraduate education is approaching $1 trillion, and surpassed U.S. credit-card debt in June 2010 for the first time, said Kantrowitz, who analyzed federal loan data and modeled private student-loan volumes. Defaults are at their highest since fiscal 1997, according to the Education Department.

Of the $93 billion in total federal and private education loan debt in 2007-2008, the most recent federal data available, about 30 percent was for graduate and professional debt, Kantrowitz said.

Pathway to Success

The predicaments of people like Sayer and Ellis have become a rallying cry for Occupy Wall Street protesters, and students at schools from City University of New York to the University of California system demonstrated last month against tuition increases.

President Barack Obama in October announced rules to lower the burden for some with federal loans and met this week with a dozen heads of public and private universities about ways to curb rising education costs.

Debra Stewart, president of the Washington-based Council of Graduate Schools, said advanced schooling is still the “pathway to success in the modern economy.”

“The more education you have, the more highly regarded you are going to be in the workplace,” she said.

Well before the economic recession and tuition increases made students evaluate whether to invest in graduate school, universities had expanded their master’s degree offerings over the past 15 years.

Expanded Offerings

Robert Manuel, dean of Georgetown’s School of Continuing Studies, said a master’s degree from his program is worth the debt. His school offers six master’s of professional studies degrees, including in sports and real-estate management, and has about 980 students.

“I see the impact and I see the transformation that happens in these students as they go through the program,” Manuel said in an interview. “It’s worth every dollar.”

The cost to complete the degrees is about $40,000, which includes tuition, fees and estimated living expenses, said Stacy Kerr, a spokeswoman for Washington-based Georgetown University. Students take one to five years to finish, depending on their personal situations. About half take loans, with annual average borrowing of about $21,000, she said.

Nearby George Washington University has expanded programs at its Graduate School of Political Management, offering degrees in legislative affairs, political management and strategic public relations. Enrollment has doubled since its founding in 1995 to about 250 full-time students, paying roughly $53,000 for their degree including living expenses, said Dennis Johnson, the acting executive director.

Career Prospects

Evening classes are aimed at students with day jobs and they leave with contacts among the faculty, many of whom work in the field and can help alumni land jobs, he said.

“I’m very much sold that this is a good idea,” Johnson said.

Sayer, the NYU graduate, said while she learned critical- thinking skills, her career prospects won’t allow her to pay off her debt anytime soon.

“Even if I didn’t know what field it would lead me to, I thought it would be worthwhile for my professional career,” said Sayer, who lives in the Crown Heights neighborhood of Brooklyn with two roommates.

Many of the students who enroll in the master’s of “Social Thought” program directly from college do so with an eye toward a Ph.D., said John Beckman, an NYU spokesman.

“The numbers have shown, and will continue to show, over time that an investment in an advanced degree will yield better career prospects and income,” Beckman said.

Game Show Winnings

The decision to go to graduate school was easy for Zach Safford, who finished Williams College in Massachusetts in 2009 with no debt.

The 24-year-old recently completed a master’s in design ethnography at the University of Dundee in Scotland for about $18,000 and found work immediately doing qualitative research for a company in New York.

He said he paid for the degree with $25,000 won on the television game show Jeopardy!

“If I had to borrow, it would have certainly been a much more complicated decision,” he said.

To contact the reporter on this story: Janet Lorin in New York at jlorin@bloomberg.net

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net

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Asia Stocks Fall on Data, Before EU Summit

By Kana Nishizawa and Norie Kuboyama - Dec 8, 2011 10:35 AM GMT+0700

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Dec. 8 (Bloomberg) -- Robert P. Browne, chief investment officer at Northern Trust Corp., talks about the European debt crisis, global stock markets and his investment strategy. Browne speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Dec. 8 (Bloomberg) -- Wilfred Sit, Asia chief investment officer for Baring Asset Management, talks about the outlook for Asian financial markets in 2012 and his investment strategy. Sit speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up" .(Source: Bloomberg)

Asian stocks (MXAPJ) dropped ahead of a European summit on the region’s sovereign debt crisis, and after economic data from Japan and Australia signaled the global economy is slowing.

Tokyo Electric Power Co., the operator of the power plant at the center of the biggest nuclear disaster in 25 years, sank 8 percent after the Mainichi newspaper reported it may be effectively nationalized. Hitachi Construction Machinery Co., a Japanese construction machinery maker, declined 1.6 percent. LG Electronics Inc. (066570), a home appliances maker that gets more than a fifth of its revenue from Europe, fell 3.3 percent in Seoul.

City Developments Ltd. (CIT), Singapore’s second-biggest real- estate company by market value, led declines among the city’s property developers after the government imposed additional taxes on purchases of private residential property.

“As the European meetings get closer investors have turned cautious,” said Masaru Hamasaki, who helps oversee the equivalent of $24 billion as chief strategist at Toyota Asset Management Co. in Tokyo. “There’s been a switch from a feeling that we were going to get some visibility on the situation to a cooler stance, where people are in a wait-and-see mood.”

The MSCI Asia Pacific Index (MXAP) slid 0.9 percent to 117.18 as of 12:21 p.m. in Tokyo. All 10 industry groups on the measure dropped, with more than three stocks falling for each that rose.

Japan’s Nikkei 225 Stock Average (NKY) retreated 1.1 percent after machinery orders fell 6.9 percent in October from September, missing the median forecast of a 0.5 percent gain by 27 economists surveyed by Bloomberg News.

Australia’s S&P/ASX 200 index fell 0.3 percent as the nation’s employers cut 6,300 workers in November from the previous month, missing the 10,000 extra jobs forecast in a Bloomberg survey of 22 economists.

Interest Rates

New Zealand’s NZX 50 Index dropped 0.5 percent after the central bank left interest rates at a record low of 2.5 percent today and cut its economic growth predictions. South Korea’s Kospi Index (KOSPI) declined 0.5 percent as the central bank refrained from raising borrowing costs for a sixth straight month amid a global slowdown. Hong Kong’s Hang Seng Index fell 0.8 percent, while Singapore’s Straits Times Index lost 1.6 percent.

The MSCI Asia Pacific Index declined 14 percent this year through yesterday, compared with a gain of 0.3 percent by the Standard & Poor’s 500 and a 12 percent slump by the Stoxx Europe 600 Index. Stocks in the Asian benchmark are valued at 12.9 times estimated earnings on average, compared with 12.7 times for the S&P 500 and 10.6 times for the Stoxx 600.

Pressure Intensifies

LG Electronics fell 3.3 percent to 72,500 won in Seoul, while Hutchison Whampoa Ltd. (13), an owner of ports in Germany, Italy and Spain, retreated 0.9 percent to HK$67.65 in Hong Kong.

Pressure on Europe’s leaders to halt the spread of the region’s debt crisis at a summit in Brussels this week intensified as the European Union had its AAA long-term rating put on “creditwatch negative” by S&P following a similar action on 15 euro-area governments.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are expected to argue for rewriting European Union treaties to tighten control of national budgets at the meeting of euro zone leaders tonight and tomorrow.

“Investors can’t buy or sell until they see the results of the European meetings,” said Mitsushige Akino, who oversees about $600 million in Tokyo at Ichiyoshi Investment Management Co. “Stocks have been rising on expectations the European Union and the European Central Bank may take some action, but now investors need to see whether the results meet or beat expectations.”

Hitachi Construction declined 1.6 percent to 1,367 yen in Tokyo, while Fanuc Corp. (6954), a maker of industrial robots, slid 0.8 percent to 12,990 yen.

Tepco Action

Tokyo Electric Power, known as Tepco, dropped 8 percent to 253 yen after the Mainichi newspaper said the government’s Nuclear Damage Liability Facilitation Fund may buy preferred shares worth at least 1 trillion yen ($12.9 billion) from the utility by next summer, without saying where the information came from. Most of Tokyo Electric’s management will be replaced, the report said.

City Developments sank 7.1 percent to S$9.31 in Singapore, the second-biggest drop in the MSCI Asia Pacific Index after Tepco. CapitaLand Ltd. (CAPL), an operator in residential and commercial properties, dropped 6.9 percent to S$2.43. Keppel Land Ltd., the real-estate unit of Keppel Corp., retreated 6.8 percent to S$2.45.

Singapore developers declined after the government required foreigners and corporate entities to pay an additional 10 percent stamp duty when they buy homes in the city. Permanent residents purchasing a second home as well as citizens buying their third residential property also need to pay an additional tax of 3 percent, the government said in a statement yesterday.

To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net; Norie Kuboyama in Tokyo at nkuboyama@bloomberg.net

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

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Poll: Investors Predict China Bank Crisis

By David J. Lynch - Dec 8, 2011 12:13 PM GMT+0700
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Residential and commercial properties are illuminated at dusk in the Louhu district of Shenzhen, China. Evidence of slowing growth in China -- including the weakest manufacturing performance in more than two years, falling home sales and ebbing export growth -- has stoked concern that non-performing loans will climb in China. Photographer: Forbes Conrad/Bloomberg

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Dec. 8 (Bloomberg) -- David Roche, president of Independent Strategy and a former Morgan Stanley global strategist, talks about the impact of the European sovereign debt crisis on financial markets and the outlook for the global economy. Roche speaks with John Dawson, Angie Lau, Zeb Eckert and David Ingles on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

Most global investors predict China will face a banking crisis within the next five years, paring their appetite for the nation’s shares and eroding confidence in its leadership, a Bloomberg Global Poll indicated.

Sixty-one percent of respondents said they anticipate a crash in the financial industry by late 2016, and only 10 percent were confident China’s banks will escape trouble, according to the quarterly poll of 1,097 investors, analysts and traders who are Bloomberg subscribers conducted Dec. 5-6.

Evidence of slowing growth in China -- including the weakest manufacturing performance in more than two years, falling home sales and ebbing export growth -- has stoked concern that non-performing loans will climb in the world’s second-largest economy. The risk is a legacy of a record 17.6 trillion-yuan ($2.8 trillion) lending boom unleashed by Premier Wen Jiabao in 2009-2010 amid the global recession.

“The deep-seated misallocation of resources, particularly in the real estate and banking sectors, will lead to a combination of political and economic instability,” says Lance Depew, managing director of UPI Management LLC in Santa Barbara, California, and a participant in the poll. “I expect further macroeconomic weakness and sub-par returns in the stock market for the foreseeable future.”

Stocks Slide

The MSCI China/Financials Index of shares has tumbled 22 percent this year, underperforming the broader MSCI China Index of equities, which is down 17 percent. China Life Insurance Co. (2628) has declined 32 percent and Bank of China Ltd. (3988) 30 percent, contributing the most to the financial index’s losses.

Enthusiasm for Chinese stocks has flagged among Bloomberg users. In the latest poll, 21 percent called China one of the best places to invest over the next year. That was less than half the 44 percent who named China in an October 2009 Bloomberg survey.

Thirty-five percent of respondents said they expect China’s economic growth to slow to less than 5 percent from the 9.1 percent year-on-year pace recorded in the third quarter. Thirty- one percent anticipated “serious political or economic instability that stalls growth.” American investors were the most pessimistic, with 40 percent expecting a Chinese crisis.

A plurality of 46 percent of investors described the Chinese economy as “deteriorating” -- up from 38 percent in September -- compared with 40 percent who said it was “stable.”

Goldman’s Outlook

The skepticism contrasts with the outlook of economists from Goldman Sachs Group Inc. and the International Monetary Fund, who predict China will avoid a growth slump while defusing inflation. Goldman Sachs, in a Dec. 1 report, projected the nation’s gross domestic product will rise 8.6 percent next year and 8.7 percent in 2013.

A relatively low central government debt burden gives Premier Wen Jiabao’s administration the fiscal wherewithal to address a jump in non-performing loans. The IMF estimates the government’s gross debt-to-GDP ratio at 27 percent this year, compared with 100 percent for the U.S. and 233 percent in Japan.

The World Bank said last month that while China faces the risk of a “strong” impact from a real-estate correction, it has “ample” scope to cushion its economy. Policy makers have begun responding to the signs of a weakening outlook, with the People’s Bank of China last week lowering banks’ reserve requirements for the first time since 2008 to encourage lending.

Best in Class

“China, simply put, is the best managed major economy on the planet,” said Anthony Stephens, an equity trader with Standard Chartered Bank in Hong Kong and a survey participant.

Most investors in the poll don’t anticipate China’s relative economic performance translating into broader influence that would displace the U.S. as the world’s preeminent superpower.

Forty-one percent of poll respondents said that the U.S. would remain militarily dominant even as the Chinese economy eventually overtakes it in size. An additional 27 percent said China would “never surpass” the U.S. as the top global force. Only 25 percent agreed that China would “inevitably replace” it as the No. 1 superpower.

President Barack Obama’s administration has sought to enhance the U.S.’s stature in Asia this year, an initiative Secretary of State Hillary Clinton has described as a “pivot” toward the region after a decade of American focus on war in the Middle East. As part of the approach, the administration is seeking a free-trade agreement with Pacific nations including Malaysia, Vietnam and Singapore, and last month enhanced its security ties with Australia.

U.S. in Asia

Global investors are skeptical of the U.S. effort, highlighted when Obama hosted the annual 21-nation Asia-Pacific Economic Cooperation summit in Honolulu last month and attended an East Asia Summit in Bali, Indonesia. Fifty-six percent said the campaign “will not enhance U.S. influence and end up antagonizing China,” compared with 30 percent who expect it to serve as an “effective counterweight” to Chinese power.

“China’s rising power and the United States’ traditional role are increasingly coming into conflict in the region,” said Michael Swaine, author of “America’s Challenge: Engaging A Rising China in the 21st Century” and a senior associate at the Carnegie Endowment for International Peace. “These two countries have very different views on what sustains prosperity and stability.”

Leadership Assessment

Investors this year have become less enamored of Chinese President Hu Jintao, with 47 percent saying they were optimistic about his leadership, compared with 38 percent who described themselves as pessimistic. In January, Bloomberg customers favored Hu by a 60 percent to 30 percent margin.

China is in the midst of a planned leadership shift that will culminate late next year with the 18th Communist Party Congress. The conclave, which occurs every five years, is likely to tap Vice President Xi Jinping as China’s next president and Li Keqiang, currently vice premier, as prime minister.

Ahead of that comes an annual conference by top government officials this month that may affirm the shift to stimulus already telegraphed by last week’s bank reserve-ratio cut. Goldman analysts also predict an endorsement of “structural” tax cuts in the wake of rapid gains in fiscal revenue.

Global investors are confident the new team will continue the shift toward private enterprise devised in the late 1970s by Deng Xiaoping. In the poll, 49 percent of Bloomberg customers said the Chinese leadership will move toward free markets, while 37 percent forecast a tightening of state control over the economy. Asian investors were most upbeat, with 55 percent anticipating further opening.

Next Administration

Among the tasks that may face the next government is clearing any wreckage left from a surge in non-performing loans. The IMF, in its first formal evaluation of China’s financial system Nov. 15, called for further moves toward a “market-based financial system,” including upgraded bank risk-management systems and additional skilled personnel for the central bank and regulatory agencies.

“Many government liabilities are hiding in the banking system,” says Yin-Chen Chang, a consulting associate at Waterland Securities in Taipei, Taiwan.

The Bloomberg Global Poll was conducted by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 3.0 percentage points.

To contact the reporter on this story: David J. Lynch in Washington at dlynch27@bloomberg.net

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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Jive IPO Gets Boost From Billion-Dollar Cloud Deals

By Peter Elstrom - Dec 7, 2011 8:59 PM GMT+0700

Jive Software Inc. has every reason to lift its initial public offering price after billion-dollar cloud-computing acquisitions led by SAP AG and Oracle Corp.

Jive, a social-networking software maker, said last week it aims to raise as much as $117 million in an IPO that would value it at up to $573 million. That was before SAP’s (SAP) agreement Dec. 3 to buy SuccessFactors Inc. for $3.4 billion, or 52 percent more than its value before the offer. Six weeks earlier, rival Oracle snagged RightNow Technologies Inc. for $1.5 billion.

SAP is paying 11.7 times SuccessFactors’ sales over the past 12 months. At a similar ratio, Jive would be valued at more than $800 million. Software makers are paying up for targets that charge fees to access applications online, rather than licensing programs for desktops. Jive’s IPO may get a boost as investors try to benefit from a shift to cloud services, a market that Gartner Inc. says may reach $148.8 billion in 2014.

“Everybody is looking around and saying, ‘Where can I play that trend?’” said Jeff Richards, a partner at GGV Capital in Menlo Park, California, which was a venture investor in SuccessFactors. (SFSF) “Jive has achieved some scale and is an up-and- coming area.”

Cloud Shift

Jive’s software lets company employees collaborate on projects and communicate with customers. The company counts NetApp Inc., Avon Products Inc., Yum! Brands Inc. and Nike Inc. among its clients. Revenue has surged in the past three years as workers seek the kind of social-networking features they get from Facebook Inc. and Twitter Inc. for corporate use.

Some of the world’s biggest technology companies, including Microsoft Corp., Hewlett-Packard Co. and International Business Machines Corp., are moving to the so-called cloud, where customers can save money by renting software delivered over the Web and accessing it anywhere, instead of installing it on their own machines. The global market for cloud services was about $68.3 billion in 2010, according to Gartner.

Jive began offering its product on a subscription basis starting in 2007. The company lets customers install software on their own premises or have it hosted offsite. In its prospectus, the company said that its subscription model “provides financial visibility through renewable revenues and cash flows.”

Jive, based in Palo Alto, California, plans to sell 8.33 million shares for $8 to $10 apiece, with stockholders offering an additional 3.37 million shares, according to the Nov. 30 filing. The final pricing is expected on Dec. 13.

If Jive were to seek a valuation of $800 million, it would have to sell shares at about $14 apiece.

Crop of IPOs

At least three other U.S. companies that sell software as a service have registered for IPOs since August. ExactTarget Inc., a provider of e-mail marketing services, filed in November, three months after rival Eloqua Ltd. Bazaarvoice Inc., whose software helps companies communicate with their customers, announced IPO plans in August.

SuccessFactors, which makes software used to manage employee performance, has more than 3,500 customers and 15 million subscribers in 168 countries.

Jive’s sales in the nine months through September climbed 73 percent from the same period a year earlier to $54.8 million.

Still, like SuccessFactors, Jive is losing money as it invests in growth. Sales and marketing costs rose 55 percent in the first three quarters from a year earlier, and the company’s net loss almost doubled to $38.1 million.

Tolerating Losses

Investors will put up with losses as long as Jive and other cloud companies keep expanding and meet analysts’ revenue predictions, said Brenon Daly, an analyst at research firm The 451 Group in San Francisco. Responsys Inc., a provider of marketing software, forecast fourth-quarter sales last month that trailed estimates, pushing the stock down 24 percent the next day.

“The investment community is saying, ‘We will help underwrite your business with the understanding that you’re going to make all your numbers,’” Daly said.

Ana Andreescu, a spokeswoman for Jive, declined to comment, citing the pre-IPO quiet period.

The global market for social customer-relationship management software, where Jive competes with companies such as Salesforce.com Inc. (CRM), will jump to $1 billion in 2012 from $625 million last year, according to Gartner. Other rivals include software giants Microsoft and IBM, as well as Lithium Technologies Inc., a startup based in Emeryville, California.

‘Very Nice Exits’

Sequoia Capital, which profited earlier this year from Linkedin Corp.’s IPO, stands to benefit the most if Jive’s value rises. The Menlo Park-based venture firm paid $57 million for a stake that would be worth about $170 million at the high end of the expected offering. Kleiner Perkins Caufield & Byers paid $40 million for a stake worth about $67 million at that price.

The acquisitions by Oracle (ORCL) and SAP, the largest maker of business-management software, may also help other cloud-based startups fetch higher prices, said Kris Duggan, chief executive officer of business-software startup Badgeville Inc., also based in Menlo Park. Until recently, Salesforce was the only acquirer, he said.

“People thought for a long time Salesforce.com was the only game in town,” Duggan said. “Now it’s everybody. You can create some very nice exits.”

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

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

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OpenTable’s Collapsing Shares Signal Anxiety Over New Competitors: Retail

By Danielle Kucera - Dec 7, 2011 12:01 PM GMT+0700

OpenTable Inc. (OPEN), the restaurant- reservation service that went public during the worst of the recession and saw its market value triple by the end of 2010, is reeling as investors lose their appetite for the stock.

The company’s shares have tumbled 67 percent from a record $115.62 in April amid a continued slow economy, a sluggish effort to enter the European market, and domestic competition from newer, cheaper services such as Livebookings Ltd. Google Inc., which recently purchased restaurant guide Zagat Survey LLC, is also casting a shadow over OpenTable’s shares.

“Expectations have come down materially,” said Clayton Moran, a Delray Beach, Florida-based analyst at Benchmark Co. who has a hold rating on the shares. “Growth has now decelerated, and you’ve had these added competitive concerns.”

Shares of San Francisco-based OpenTable, which went public in May 2009 at $20, trade at 46 times earnings, even after the stock’s recent declines. That’s a higher valuation than 96 percent of companies in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The shares are at an especially “lofty” valuation considering that the company hasn’t yet proved it has a plan to maintain its market leadership, said Justin Patterson, an analyst at Morgan Keegan & Co. in Nashville, Tennessee.

Online Reservation Market

The company dominates the market for reservations in the U.S., with more than 16,000 restaurant subscribers, and may reach 20,000 in 2012, Moran said. Eatery owners pay for OpenTable’s computer system, which lets them manage table inventory and maintain a profile of customers who have dined there, on top of other fees.

Those owners include A.J. Gilbert, who runs San Francisco’s Luna Park, a restaurant serving modern American food that costs about $20 for a dinner entree. He estimates that OpenTable brings in about 60 percent of his restaurant’s reservations. Those bookings come at a price. Gilbert paid $2,351 on his last monthly OpenTable bill.

“The market is ready for some price competition,” he said. “OpenTable has kind of stumbled into this monopoly. They support their product really well. They’re just really expensive.”

Well, not really, according to Matthew Roberts, chief executive officer of OpenTable. For every $1 OpenTable charged in fees for logged reservations, diners spent an average of $43 in North America last year, he said.

Considering Alternatives

That argument is hard to make to restaurants trying to shave costs in challenging economic times. One alternative may be Livebookings, Europe’s largest online restaurant-reservation provider, which started a free service in the U.S. last month that lets restaurants enable online reservations on their own websites and Facebook pages.

OpenTable estimates it has signed up 64 percent of reservation-taking restaurants in San Francisco. The company may be hitting a wall in pushing beyond that level in the city, as well as in its other key markets such as New York, Washington and Chicago, Patterson said.

Roberts disagrees. “We’re not seeing that we’re running into any kind of wall relative to growth,” he said last month on Bloomberg Television. The company estimates it has signed on 37 percent of the 35,000 reservation-taking restaurants it has identified as its potential market in North America.

The Google Question

The question is, what will Google do? Its September takeover (GOOG) of Zagat, the review service known for its burgundy- colored restaurant guides, has already contributed to OpenTable’s share price decline. If Google decides to use Zagat to start a restaurant-booking service, OpenTable would face competition from the world’s largest Internet-search provider.

As it stands now, the company benefits from Google. In August, OpenTable said that 5 percent to 10 percent of traffic on its site comes from Mountain View, California-based Google and other affiliates, including Zagat and Yelp Inc.

“If we were to get any sense that Google was going to remove the uncertainty of it potentially doing reservations directly, it would help the stock,” Moran said.

In the meantime, a sluggish economy isn’t helping OpenTable’s prospects. An unemployment rate hovering around 8.6 percent means people may choose to dine out less, weighing on revenue. Last year, 48 percent of OpenTable’s sales came from fees it charged restaurants for seating each individual diner.

The company increased revenue just 1.7 percent in this year’s second quarter from the prior period, and sales were also little changed sequentially in the third quarter. Revenue will rise 7 percent to $36.7 million in the last three months of this year compared with the third quarter, according to the average analyst estimate compiled by Bloomberg. By comparison, OpenTable sales jumped 25 percent in the fourth quarter of 2010 from the previous period.

New Cities

The company needs to find new business in cities such as Dallas where it hasn’t yet established itself, Patterson said. International expansion has also taken longer than expected, Moran said. The company hasn’t identified what the next growth driver will be if the effort doesn’t turn around, he said.

Livebookings is its largest rival, with about 9,000 restaurant subscribers, mostly in Europe, while OpenTable logged 7,629 in its international markets, including Germany, Japan and the U.K., in the third quarter.

OpenTable bought its way into the European market in 2010 with the acquisition of Toptable.com, a restaurant-reservation service then based in London, for $55 million. The company is making Toptable’s website more user-friendly and expects it to start generating more growth in the U.K. in the second half of 2012, Roberts said.

“There’s nothing that we’ve learned that indicates London should be any different than Manhattan or San Francisco,” Roberts said in an interview.

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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Zynga Gets Pre-IPO Boost From Game-Engrossed ‘30 Rock’ Star Alec Baldwin

By Andy Fixmer and Douglas Macmillan - Dec 7, 2011 12:01 PM GMT+0700

Zynga Inc. has Alec Baldwin to thank for giving its “Words With Friends” word game a publicity boost.

Baldwin, star of NBC’s “30 Rock,” was so engrossed in the Scrabble-like game that he got ejected from an American Airlines flight for refusing to stop playing it on a mobile device.

“Flight attendant on American reamed me out 4 playing WORDS W FRIENDS while we sat at the gate, not moving,” Baldwin, 53, said in a post to Twitter Inc.’s microblogging service yesterday after the incident.

Zynga, which plans to sell shares in an initial public offering, is the biggest maker of games on Facebook Inc. Still, it’s less well understood by many of the investors targeted by its IPO marketing effort, currently under way, said Michael Pachter, an analyst at Wedbush Securities. Baldwin’s American Airlines flap may raise Zynga’s profile, he said.

“This is phenomenal for Zynga,” said Pachter, who’s based in Los Angeles. “The problem for Zynga with investors has been that the average portfolio manager doesn’t relate to their games. This definitely helps change their perception.”

Zynga took up Baldwin’s cause with Twitter posts featuring the phrase, “#LetAlecPlay.” “Words With Friends” is Zynga’s sixth most popular game, according to Appdata.com.

Baldwin was removed from a flight traveling to New York from Los Angeles, the actor said on his Twitter account. The airline said on Twitter that it’s investigating the incident. American Airlines parent AMR Corp. (AMR) filed for bankruptcy protection from creditors on Nov. 29.

‘Baldwin 1, American 0’

“He loves WWF so much that he was willing to leave a plane for it, but he has already boarded another AA flight,” Matthew Hiltzik, a spokesman for Baldwin, said in a statement.

Adam Isserlis, a spokesman for San Francisco-based Zynga, declined to comment beyond the company’s posts on Twitter.

“Words With Friends” was created by Newtoy Inc., a McKinney, Texas-based game developer acquired by Zynga in December 2010. A version of the game with advertising is free on Apple Inc. (AAPL)’s AppStore, while a commercial-free version costs $2.99.

Zynga is seeking to raise as much as $1 billion in the biggest IPO by a U.S. Internet company since Google Inc.’s debut. The “Let Alec Play” graphic features a scoreboard saying, “A Baldwin 1, American Air 0.”

To contact the reporters on this story: Andy Fixmer in Los Angeles at afixmer@bloomberg.net; Douglas Macmillan in New York at dmacmillan3@bloomberg.net

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

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European Stocks Decline After Germany Rejects Combining Euro Bailout Funds

By Adria Cimino - Dec 7, 2011 9:42 PM GMT+0700

European stocks dropped after Germany rejected combining the current and permanent euro-area rescue funds and expressed pessimism over the outcome of a European Union summit this week.

Metro AG (MEO), Germany’s biggest retailer, declined. Airline shares fell after the International Air Transport Association forecast a 49 percent decline in industry profits in 2012. Randgold Resources Ltd. (RRS) led a rally in gold-mining companies. Verbund AG (VER), Austria’s biggest utility, added 3.6 percent after Morgan Stanley raised its recommendation on the stock.

The benchmark Stoxx Europe 600 Index dropped 0.9 percent to 239.65 at 2:40 p.m. in London, after earlier gaining as much as 1.2 percent. The gauge last week posted its biggest rally since November 2008 as central banks lowered the interest rate on dollar funding and China reduced its reserve ratio for banks. The Stoxx 600 slipped 0.3 percent yesterday after Standard & Poor’s put 15 euro-area nations on review for a potential downgrade.

“This once again highlights the difficulties European leaders are having in reaching agreement,” said Benoit Peloille, equity market strategist at Natixis. “Combining the two funds would have allowed them to rapidly attain the sufficient power to fight contagion. The rejection by Germany complicates matters.”

‘No Change in Sequence’

Germany said it opposes any change in the agreed sequence in which the the region’s bailout funds will be used. It stands by the current agreement that the permanent European Stability Mechanism will take over from the European Financial Stability Facility by the middle of next year, a German government official told reporters in Berlin today on condition of anonymity because the negotiations are private.

The statement followed a report in the Financial Times that said officials are negotiating a plan to run the EFSF even after the ESM starts operations. The proposal is part of a bigger rescue effort they will discuss at the EU summit in Brussels tomorrow and Dec. 9. Enhancing International Monetary Fund’s support is another measure being debated.

German Chancellor Angela Merkel and French President Nicolas Sarkozy will push for rewriting EU treaties to tighten control of national budgets. This move won the backing of U.S. Treasury Secretary Timothy F. Geithner, who urged governments to work with central banks to erect a “stronger firewall” to end the debt crisis.

ECB Interest Rate

At its meeting tomorrow, the European Central Bank will cut its benchmark interest rate to 1 percent from 1.25 percent, according to the median estimate of economists surveyed by Bloomberg News.

Germany sold 4.09 billion euros ($5.5 billion) of five-year notes to yield 1.11 percent. The nation got bids for 8.67 billion euros. German bonds advanced after the auction.

Greek Prime Minister Lucas Papademos received parliamentary approval for the 2012 budget, a financial plan that aims to nearly halve the deficit shortfall from a debt writedown and ensure Greece remains a member of the euro area.

Metro slid 2.6 percent to 31.04 euros, extending yesterday’s 14 percent loss. The stock was cut to “sell” from “neutral” at Citigroup Inc. The stock also was downgraded at banks including Deutsche Bank AG (DBK) and JPMorgan Chase & Co. after Metro yesterday forecast declines in sales and earnings this year.

ING Group Slides

ING Groep NV (INGA), the biggest Dutch financial-services company, dropped 7.3 percent to 5.84 euros. The company plans to take a charge of as much as 1.1 billion euros ($1.5 billion) as lower interest rates and stock markets hurt a U.S. annuity business the firm is winding down.

A gauge of European banks was the worst performer of the 19 industry groups in the Stoxx 600. Societe Generale SA, the second-biggest French lender, slipped 3.4 percent to 19.59 euros.

International Consolidated Airlines Group SA, the holding company of British Airways and Spain’s Iberia, declined 2.9 percent to 149.80 pence as pilots at its Iberia unit planned to go on strike later this month, Efe newswire reported.

Separately, IATA said the airline industry’s profits next year will fall 49 percent, more than it had predicted previously. Deutsche Lufthansa AG (LHA), Europe’s second-biggest airline, declined 2.9 percent to 9.21 euros while SAS AB (SAS), the Scandinavian flag carrier, slipped 2.2 percent to 9.05 kronor in Stockholm.

Verbund, ICAP

Verbund climbed 3.6 percent to 19.68 euros. Morgan Stanley raised its shares to “overweight” from “equal weight.”

ICAP Plc (IAP), the biggest broker of transactions among banks, fell 5.1 percent to 348 pence. The stock was cut to “equal weight” from “overweight” at Morgan Stanley.

Carillion Plc (CLLN), a British construction and services company, jumped 6.1 percent to 344 pence. The company said it expects its debt to drop below 100 million pounds ($156 million) by end of the year, beating its earlier target of 125 million pounds. The stock was raised to “buy” from “hold” at Collins Stewart Hawkpoint Plc.

Zodiac Aerospace (ZC), the world’s second-biggest maker of aircraft seats, added 1.4 percent to 62.08 euros. The stock was raised to “outperform” from “neutral” at Exane BNP Paribas. (BNP)

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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Stocks Decline on Dimming EU Summit Hopes

By Nikolaj Gammeltoft - Dec 7, 2011 9:32 PM GMT+0700

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Dec. 7 (Bloomberg) -- Scott Clemons, chief investment strategist at Brown Brothers Harriman & Co., talks about the outlook for the U.S. economy and investment strategy. Clemons speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

U.S. stocks fell, following a two-day advance for the Standard & Poor’s 500 Index, amid growing pessimism that European leaders will reach agreement on measures to ease the debt crisis at a summit this week.

The S&P 500 lost 0.5 percent to 1,252.66 at 9:31 a.m. New York time. The benchmark gauge for American equities rose 1.1 percent over the previous two sessions.

“Markets reflect that it’s pretty high stakes in Europe,” Charles Reinhard, who helps oversee about $1.7 trillion as deputy chief investment officer at Morgan Stanley Smith Barney LLC in New York, said in a telephone interview. “It’s important that Europe is able to integrate fiscal policy, shore up the banks and that monetary policy eases.”

Stock futures pared gains after a German government official said the country rejects proposals to combine the current and permanent euro-area rescue funds. It is already decided that the permanent European Stability Mechanism will take over from the current rescue fund at an appointed time, a German official said on condition of anonymity. Germany will oppose any attempt to change that, the official said.

The ECB may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations. Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans, said the officials, who spoke on condition of anonymity.

Rewriting Treaties

German Chancellor Angela Merkel and French President Nicolas Sarkozy will argue for rewriting European Union treaties to tighten control of national budgets at the meeting in Brussels tomorrow and on Dec. 9.

The S&P 500 has struggled to make any headway this year, rising less than 0.1 percent (SPX), as the euro area’s debt crisis spread to the 17-nation currency’s larger economies. Still, the gauge is the only major developed equity market of 24 tracked by Bloomberg that hasn’t fallen this year.

Never before has the euro influenced U.S. stocks as much as this year, a sign that American equities aren’t going anywhere until Europe’s credit crisis is solved.

The link between the Dow average and swings in the currency reached a record on Dec. 2, according to data compiled by Bloomberg. The so-called correlation coefficient showing how much two markets rise and fall in tandem hit 0.85, the highest level since the euro was founded in 1999, data on 60-day rolling averages show. A reading of 1 means assets are moving in lockstep.

Highest Rating

International investors awarded the U.S. its highest rating in more than two years on optimism that the world’s largest economy will weather the financial crisis in Europe and avoid a recession in 2012, according to a Bloomberg poll.

More than two in five of those surveyed -- 41 percent -- identify the U.S. as among the markets that will perform best over the next year. That’s up from less than one in three who felt that way in September and is the biggest percentage for the U.S. since the survey began in October 2009. It’s also almost double that of the next two top-rated markets, Brazil and China, according to the quarterly Bloomberg Global Poll conducted on Dec. 5-6 of 1,097 investors, analysts and traders who are Bloomberg subscribers.

“We are hopeful that increasingly loose monetary policy across the globe can result in a reacceleration of growth for export-driven companies in the U.S. by the second half” of next year,’’ said Scott Migliori, the San Francisco-based chief investment officer for the U.S. at RCM, which has about $128.2 billion in assets under management. “Any resolution of global growth concerns and/or clarity on post-election policy in the U.S. could result in a significant re-rating of U.S. equities towards the year end, even in the face of decelerating profit growth.”

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net

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Stocks Checked by Euro Crisis, As Earnings Beat Expectations

By Whitney Kisling, Nikolaj Gammeltoft and Inyoung Hwang - Dec 7, 2011 9:47 PM GMT+0700

Never before has the euro influenced U.S. stocks as much as this year, a sign that American equities aren’t going anywhere until Europe’s credit crisis is solved.

The link between the Dow Jones Industrial Average and swings in the currency reached a record on Dec. 2, according to data compiled by Bloomberg. The so-called correlation coefficient showing how much two markets rise and fall in tandem hit 0.85, the highest level since the euro was founded in 1999, data on 60-day rolling averages show. A reading of 1 means assets are moving in lockstep.

Speculation about whether Greece, Ireland and Portugal will avoid default is drowning out results from companies such as Akron, Ohio-based Goodyear Tire & Rubber Co. and Target Corp. in Minneapolis. While record earnings (SPX) and an improving economy should be pushing the Dow toward its October 2007 record of 14,164.53, they’re not because Europe is overshadowing the good news, said Kevin Rendino, a money manager at New York-based BlackRock Inc.

“What’s getting in the way is a bunch of politicians and a bunch of budget deficits,” Rendino, whose firm oversees $3.3 trillion, said in a telephone interview yesterday. “It’s all we think about. It’s all we talk about. It’s incredibly frustrating because in the U.S., we have a bunch of highly profitable businesses, an OK economy, companies sitting on a bunch of cash and earning as much as they ever have,” he said.

“And everyone is sitting on their hands because they’re waiting to see what happens in Europe.”

Biggest Rally

Signs of cooperation among governments pushed the Dow average (INDU) to its biggest daily gain since March 2009 last week. The announcement on Nov. 30 that the Federal Reserve would join five central banks in a program to make it easier for lenders to obtain dollars helped the Dow rally 7 percent in the five days ending Dec. 2, following the largest drop for a Thanksgiving week since 1932. The euro increased 1.2 percent against the dollar during the period, data compiled by Bloomberg show.

The Dow declined 76.10 points, or 0.6 percent, to 12,074.03 at 9:46 a.m. in New York today. The euro slipped 0.3 percent to $1.3363.

Recession Concern

Concern Europe’s debt crisis would trigger a global recession sent investors to the relative safety of the U.S. currency and Treasuries in the third quarter, dragging equity markets in 37 of the 45 countries in the MSCI All-Country World Index into bear markets, or declines of 20 percent from a peak. The Standard & Poor’s 500 Index dropped 19 percent between April 29 and Oct. 3 before paring the decrease to 7.7 percent. It’s up 0.1 percent for 2011.

“Money managers are getting whipped around,” Donald Selkin, the New York-based chief market strategist at National Securities Corp., said in a telephone interview. Selkin, a 35- year Wall Street veteran, helps manage about $3 billion. “We’re not going to set new stock highs even with these strong corporate profits, so obviously something is holding us back and that’s the crisis in Europe.”

Correlation between U.S. stocks and Europe’s currency has increased along with concern about the bailout championed by German Chancellor Angela Merkel and French President Nicolas Sarkozy. The Dow and euro have moved in the same direction 72 percent of the time in 2011, compared with 49 percent for the 11 previous years, data compiled by Bloomberg show.

Investor Toll

The swings have taken a toll on professional investors. Less than 24 percent of 542 categories of funds tracked by Morningstar Inc. have topped (GT) their benchmark indexes this year, the fewest since at least 1999. A Hedge Fund Research Inc. index of industrywide performance has fallen 3.4 percent in 2011. It’s only the third annual loss since 1990 and the biggest decline since 2008, when it plunged 19 percent, according to data from the Chicago-based firm.

Improving economic reports from the U.S. government haven’t always translated into higher stocks. October industrial production rose 0.7 percent, beating the median estimate of 0.4 percent in a survey of economists by Bloomberg, the Fed said on Nov. 16. The S&P 500 dropped 3.3 percent in the two days before a Nov. 18 confidence vote on Italian Prime Minister Mario Monti.

‘Schizoid’ Markets

“The last four months, it’s just schizoid,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees more than $39 billion, said in a telephone interview. “How do you position your portfolios in this thing? For a lot of stock pickers, they throw up their hands because they say, ‘I’m trying to find good stocks within the market and the key driver is, is the euro-zone going to hang together or fall apart?’”

Corporate profits that topped analyst estimates for a record 11th straight quarter have done little to quell investor fears about Europe. While quarterly earnings for S&P 500 companies from Goodyear to Target (TGT) and Motorola Mobility Holdings Inc. have been 4.6 percent higher than analysts projected, shares tumbled on days when European headlines dominated.

Goodyear said Oct. 28 that third-quarter income topped analysts’ estimates as higher prices helped sales rise the most of any quarter. While the largest U.S. tiremaker advanced 4.9 percent that day, it lost 8.4 percent over the next two after then-Greek Prime Minister George Papandreou said he would put a European Union agreement on financing for Greece to a referendum. The S&P 500 lost 5.2 percent during the stretch.

Target Profit

Target, the second-largest U.S. discount retailer, climbed as much as 3.4 percent on Nov. 16 after posting third-quarter profit that topped analysts’ estimates. It ended that day down 0.5 percent. The S&P 500 slumped 1.7 percent after Fitch Ratings said that further turmoil in Italy, Portugal and Spain poses a “serious risk.”

“Picking stocks is very tricky now,” Ned Gray, chief investment officer for global and international value equity at Delaware Investments, said in a Dec. 6 telephone interview. His firm manages more than $160 billion in assets. “The policy- making in the euro-zone is leading everything,” he said. “The macro risk-on, risk-off decision is the only one that seems to matter.”

Unprecedented Swings

Equity markets have seen unprecedented swings this year, exacerbated by global economic concerns. The S&P 500 has moved an average 1.7 percent each day since July 2011, compared with 0.8 percent daily in the nine years before September 2008, when Lehman Brothers Holdings Inc. collapsed, according to data compiled by Bloomberg. The Dow alternated between gains and losses of more than 400 points on four days in August this year, the longest streak ever.

Because heightened volatility leads to correlated markets, investors should focus on finding stocks that have smaller swings and improving fundamental criteria, according to Birinyi Associates Inc. While Europe’s debt crisis is overshadowing profit reports today, those stocks will be more likely to outperform their benchmarks, according to Birinyi.

“Correlation is a function of volatility, significant volatility,” Laszlo Birinyi, president of the stock market research and money management firm, said in a Dec. 6 phone interview. “Ultimately it’s another handicap that you have to overcome, so investors will have to do what they always do but do more of it. You have to recognize that the market’s not at your back, so to outperform, you want to pick a stock that’s not as much a function of the market as other stocks are.”

Default Speculation

Eight of the Dow’s 10 biggest daily drops this year were driven by speculation about Greece defaulting or Europe’s debt crisis leading to another global recession, according to Bloomberg closing market stories.

“Whether it’s risk on or risk off today, correlations today to things that wouldn’t have even been on our radar screen five years ago are much higher,” John Canally, who helps oversee about $340 billion as an economist and investment strategist at LPL Financial Corp. in Boston, said in a telephone interview. “That’s something that the individual investor’s got to keep in mind,” he said. “It’s all a proxy for risk in Europe, which in turn is a proxy for whether or not we’re going to have another Lehman.”

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net

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

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