Obama Wins Most Demand for Debt of U.S. Presidents Since Before First Bush

By Daniel Kruger - Dec 27, 2011 10:34 AM GMT+0700

The U.S. government received record demand for its bonds in 2011, pushing longer-maturity Treasuries to their best performance since 1995 in a sign that President Barack Obama may have little difficulty financing a fourth consecutive year of $1 trillion budget deficits.

The Treasury Department attracted $3.04 for each dollar of the $2.135 trillion in notes and bonds sold, the most since the government began releasing the data in 1992 during the George H. W. Bush administration. The U.S. drew an all-time high bid-to- cover ratio of $9.07 for $30 billion of four-week bills it auctioned on Dec. 20 even though they pay zero percent interest.

While Standard & Poor’s stripped the U.S. of its AAA credit rating on Aug. 5, Treasuries due in 10 years or more returned 25.6 percent this year. The spreading sovereign debt crisis in Europe and slower global growth are driving investors to the safety of U.S. assets, helping to contain borrowing costs and making it cheaper as a percentage of gross domestic product to finance deficits than when the nation last had budget surpluses.

“If the last two weeks are any indication of how next year will start, there’s near-insatiable demand,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that are required to bid at the auctions, said in a Dec. 21 telephone interview. “We have a significantly shrinking supply of risk-free assets in the world and U.S. Treasuries are one of the few left.”

Beating Commodities, Stocks

The last time longer-maturity Treasuries returned as much as this year was in 1995, when they rallied 30.7 percent.

Treasuries were some of the best assets to own this year, returning 8.9 percent, compared with a decline of 8 percent for the Thomson Reuters/Jefferies CRB Index of raw materials and a 0.6 percent gain in the Standard & Poor’s 500 Index of stocks. Global sovereign debt and mortgage-backed securities rose 5.8 percent, and corporate bonds climbed 4.3 percent, according to Bank of America Merrill Lynch bond indexes.

The dollar is poised to strengthen for a second straight year against its major trading partners, appreciating 1.2 percent as measured by IntercontinentalExchange Inc.’s Dollar Index. The gauge rose 1.5 percent gain in 2010.

“The U.S. is benefiting from a very unstable global environment,” Scott Graham, the head of government bond trading at the Bank of Montreal’s BMO Capital Markets unit in Chicago, a primary dealer, said in a Dec. 21 telephone interview. “At some point you’d think demand would wane if Europe gets settled.”

Falling Yields

While yields on 10-year notes rose 18 basis points, or 0.18 percentage point, last week to 2.02 percent, they are down from 3.3 percent at the end of 2010, Bloomberg Bond Trader prices show. The rates fell one basis point to 2.01 percent at 11:58 a.m. in Tokyo, and the 2 percent security due November 2021 added 1/8, or $1.25 cents per $1,000 face amount, to 99 29/32.

Low yields mean that interest expense accounted for 3 percent of the economy in fiscal 2011 ended Sept. 30, down from 4 percent in 1999. When the U.S. ran budget surpluses between 1998 and 2001 the bid-to-cover ratio was 2.26.

“Some of the trades that appeared obvious have been wrong,” John Fath, a principal at the investment firm BTG Pactual in New York who manages $2.5 billion of bonds, said in a Dec. 21 telephone interview. “Most people thought if the U.S. was downgraded it would lead to higher rates. Most people argued that increasing deficits would be more difficult to finance.”

Caught Off Guard

Among those caught off guard by the strong demand for Treasuries was Bill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co. In February, Gross had a net bet against Treasuries in the firm’s flagship Total Return Fund, which has gained 3.3 percent this year, ranking in the 28th percentile of similar funds, according to data compiled by Bloomberg.

“This no-Treasury thing is simply a demonstration of vigilance on the part of Pimco that says these bonds aren’t worth what others appear to think they’re worth, and we prefer another menu, that’s all,” Gross said in an April 20 telephone interview.

Government and Treasury debt now make up 23 percent of the $241 billion Total Return Fund (PTTRX), according to data posted on Newport Beach, California-based Pimco’s website Dec. 9.

Gross wasn’t the only one surprised by the performance of Treasuries. The median estimate of 70 economists and strategists surveyed by Bloomberg in early January was for 10-year yields to end this year at 3.75 percent. FTN Financial had the lowest estimate, at 2 percent. For the end of 2012, the median forecast is 2.6 percent.

Steady Decline

Ten-year yields, which are a benchmark for everything from corporate bonds to mortgages, have been on a steady decline since 1981, when they exceeded 15 percent.

They were at 6.57 percent in January 1993 at the end of the elder Bush’s presidency, down from 9.54 percent in early 1989 when he took office as the Fed cut its target rate for overnight loans between banks to 3 percent from a high of 9.75 percent in February 1989 as growth slowed. Yields have averaged 4.92 percent since Bill Clinton was sworn in as President in 1993.

The worst financial crisis since the Great Depression boosted the allure of Treasuries, as investors sought a haven amid a plunge in the value of higher risk assets such as stocks and corporate bonds. The Fed has kept its target rate in a range of zero to 0.25 percent since December 2008, and has pledged to keep there until mid-2013.

Bid-to-cover ratios at Treasury auctions averaged $2.99 in 2010, up from $2.50 in 2009 and $2.23 the prior year.

Accelerating Demand

Demand accelerated toward the end of the year, with investors bidding $3.20 per dollar of securities sold in November and December amid concern that the health of the European economy was deteriorating and that Italy may need a bailout.

The Treasury market has benefited from being one of the only refuges left for investors even as the amount of U.S. government borrowing surpassed $15 trillion. The yen is the only major currency to have outperformed the dollar (DXY), rising 4.1 percent.

“You have a lot of risk-free, high-quality assets globally that are no longer risk-free, in terms of the other global sovereigns,” Christopher Bury, co-head of fixed-income rates at Jefferies & Co., a primary dealer, said in a Dec. 16 telephone interview. “You have more people chasing fewer risk-free assets. Everything points right now in the same direction.”

Rolling Returns

U.S. government debt will post its best five-year performance, gaining 39 percent from the start of 2007, since they returned 45 percent from 1998 through 2002, a period that included the failure of Long-Term Capital Management LP, the collapse in internet stocks and the Sept. 11 terror attacks.

That’s even as budget deficits have totaled $4 trillion in the three fiscal years from October 2008 through September 2011. The shortfall may narrow to $1.1 trillion in fiscal 2012 from $1.3 trillion in 2011, according to a survey of bond dealers in the minutes of the Treasury Borrowing Advisory Committee’s Nov. 2 meeting.

About 45 percent of the $7.76 trillion in Treasury notes and bonds will need to be refinanced by the end of 2014, highlighting the importance of continued demand.

“I’m not as concerned” about the ability of the Treasury to attract borrowers “as I am about the economy being self- sustaining,” David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors, said in a Dec. 21 telephone interview.

Economic Outlook

The economy will likely expand 2.1 percent in 2012 and 2.5 percent in 2013, according to median forecasts in a Bloomberg News survey. The Fed’s forecast is for 2.7 percent growth in 2012 and 3.25 percent in 2013.

In addition to keeping its benchmark rate at a record low, policy makers moved on Sept. 21 to contain yields, saying the central bank would buy $400 billion of longer-term government securities and sell $400 billion of short-term debt.

The Fed “still believes that lower rates are good, and it’s going to do all that it can to keep rates down and have them stay there,” Eric Pellicciaro, head of global rates investment at New York-based BlackRock Inc., which manages $1.14 trillion in fixed-income assets, said in a Dec. 16 telephone interview. “They’re not going to settle for trend growth. They want more.”

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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Most Stocks Gain as Dollar Holds Losses on Improved U.S. Economic Outlook

By Shiyin Chen and Bruce Stanley - Dec 27, 2011 5:49 AM GMT+0700

Most stocks (MXAP) climbed, helping the MSCI All Country World Index gain for a fifth day, while the dollar maintained losses against higher-yielding peers amid speculation the U.S. economy will continue to recover. China’s yuan surged to a 17-year high.

MSCI’s global index advanced less than 0.1 percent at 4:51 p.m. in New York as equity gauges in Japan, India, Russia and Mexico rose 0.5 percent or more. About four shares advanced for every three that declined on the global benchmark, helping it extend last week’s 3.1 percent advance.

Financial markets from Hong Kong to the U.K. and the U.S. were closed for holidays. The dollar weakened 0.1 percent to $1.3059 per euro amid reduced demand for haven assets. The yuan touched 6.3160 versus the greenback, the strongest level since 1993, on speculation China’s policy makers will tolerate appreciation to stem capital outflows.

Reports tomorrow may show home prices in 20 U.S. cities declined at a slower pace and consumer confidence improved to a five-month high. Data last week showed durable goods orders jumped in November by the most in four months, while sales of new homes increased to a seven-month high.

“The U.S. economy is improving more than expected,” said Hideyuki Ishiguro, assistant manager at the investment strategy department at Okasan Securities Co. in Tokyo. “Pessimism is easing among American consumers due to a recovery in the job market and some stability in the stock market.”

Latin American Stocks

Mexico’s IPC advanced 0.5 percent. Brazil’s Bovespa index slid 0.1 percent as economists cut their 2011 forecasts for a fifth straight week.

Japan’s Nikkei 225 Stock Average added 1 percent, the BSE India Sensitive Index jumped 1.5 percent, while Russia’s Micex Index gained 1 percent. Canon Inc. (7751) climbed 1.3 percent after the Nikkei newspaper reported that the camera maker may pay a 120 yen ($1.54) dividend this year.

The Bloomberg GCC 200 Index of Persian Gulf shares rose less than 0.1 percent to 54.89 while Israel’s TA-25 index gained 0.7 percent.

The S&P 500 (SPX) added 0.9 percent on Dec. 23, erasing its losses for this year, after Commerce Department data showed orders for goods meant to last at least three months rose 3.8 percent in November. A separate report showed purchases of single-family properties increased 1.6 percent to a 315,000 annual pace, while consumer spending rose less than forecast in November as wages declined for the first time in three months.

Consumer Confidence

Property values probably dropped 3.2 percent in October from the same month in 2010, the smallest year-over-year decrease since January, according to the median forecast of 20 economists before a report from S&P/Case-Shiller. Consumer confidence may have climbed to a five-month high of 58.6 in December from 56 last month, a separate survey showed before tomorrow’s report from the New York-based Conference Board.

“Excessive pessimism has receded at the end of the year, and what we’re seeing is some unwinding of safe-haven buying of currencies like the dollar and yen,” said Kengo Suzuki, manager of the foreign-bond department in Tokyo at Mizuho Securities Co., a unit of Japan’s third-biggest listed bank by market value. “The U.S. economy is resilient.”

The Dollar Index, which tracks the U.S. currency against those of six trading partners, fell less than 0.1 percent after sliding last week. The Australian dollar rose 0.2 percent to $1.0169 and Turkey’s lira gained 0.5 percent to 1.8926 per dollar.

Yuan Gains

The yuan strengthened 0.3 percent to 6.3198 per dollar as the central bank set the reference rate 0.07 percent higher at 6.3167 per dollar. A depreciation of the yuan may fuel outflows of capital, Yi Xianrong, a researcher at the Institute of Finance and Banking that is affiliated to the Chinese Academy of Social Sciences, wrote in a commentary in the China Daily.

Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said at a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday.

Gold for immediate delivery retreated as much as 0.5 percent to $1,597.75 an ounce before trading at $1,606.90 an ounce. Copper declined 1.2 percent to 55,200 yuan ($8,735) a metric ton in Shanghai, the first retreat in five days. The London Metal Exchange and Comex are closed today.

To contact the reporters on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Bruce Stanley in Dubai at bstanley5@bloomberg.net

To contact the editor responsible for this story: Sheldon Reback at sreback@bloomberg.net

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Japan Set to Unveil India Currency Swap Deal

By Kyoko Shimodoi and Unni Krishnan - Dec 27, 2011 12:33 PM GMT+0700

Japan is poised to unveil a currency-swap line with India in its second international financial agreement with top Asian powers this week.

Finance Minister Jun Azumi told reporters today in Tokyo that Japan is negotiating an agreement with India, the third- largest economy in Asia behind China and Japan. The deal is likely to be unveiled during a trip by Prime Minister Yoshihiko Noda to India that starts today, with the amount of the swap line about $10 billion, a Japanese government official said on condition of anonymity.

Japan agreed with China two days ago to promote direct trading of the yen and yuan without using dollars and start purchases of Chinese bonds for its foreign-exchange reserves. The deal with India would expand the ability to respond to financial shocks as Prime Minister Manmohan Singh’s administration contends with a slump in the rupee that risks stoking inflation.

“It’s like an insurance cover or padding to the foreign- exchange reserves in a crisis,” said Dharmakirti Joshi, a Mumbai-based economist at Crisil Ltd., the local unit of Standard & Poor’s. “It will help in times of dollar shortage.”

The rupee has plunged about 15 percent against the dollar this year, the worst performance in Asia, after foreign investors sold shares worth $561 million as growth slows and Europe’s protracted sovereign-debt crisis roiled global financial markets. A weakening currency adds to the cost of imported goods in a nation that has the fastest inflation among so-called BRIC nations, with the benchmark wholesale-price index rising more than 9 percent in each of the past 12 months.

Previous Arrangement

While India’s foreign-exchange reserves have risen $4.8 billion in the past year to $302 billion, the country’s holdings are smaller than those of China, Japan, Taiwan, South Korea and Hong Kong.

India and Japan have previously supported each other with similar arrangements. In 2007, the two nations agreed to support each other in the event of a run on their currencies in the first such foreign-exchange accord for the South Asian nation. Under the plan, Japan would lend dollars and other currencies should India find its foreign-exchange reserves insufficient to stem a fall in the rupee.

Japan has also deployed some of its reserves, the world’s second biggest behind China’s, for aiding Japanese companies in making overseas acquisitions.

Direct Trading

Earlier this week, the Japanese government said Asia’s two largest economies will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges.

Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing Dec. 25. Encouraging direct yen- yuan settlement should reduce currency risks and trading costs, the two governments said.

China is Japan’s biggest trading partner with 26.5 trillion yen ($340 billion) in two-way transactions last year, from 9.2 trillion yen a decade earlier. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as the two-year-old European debt crisis keeps global financial markets volatile.

To contact the reporters on this story: Kyoko Shimodoi in Tokyo at kshimodoi@bloomberg.net; Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.

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

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Intervention Failing as Yen Poised to Gain

By Masaki Kondo - Dec 27, 2011 11:06 AM GMT+0700

There’s been no better currency in 2011 than the yen and strategists forecast more gains, even as Japan promises to intervene again in foreign-exchange markets and expands the world’s biggest debt burden.

The yen’s advance against every major currency, including a 4.1 percent climb against the dollar, illustrates the anxiety in global markets as Europe’s debt crisis stretched into a second year on the heels of the collapse of Lehman Brothers Holdings Inc. and the U.S. housing market crash. Though bond yields in Japan are the second-lowest in the world and government borrowings are double the size of the economy, foreign ownership of its debt is the highest since 2008.

Japanese officials sold at least 14.3 trillion yen ($183 billion) this year to stem gains that cut profits for exporters from Toyota Motor Corp. to Nintendo Co., and Finance Minister Jun Azumi has pledged more action. Intervention in 2012 may fail again as financial turmoil attracts investors to the world’s third-most traded currency for its low volatility.

“When avoiding losses trumps profits during a period of risk aversion, low-volatility assets are very appealing,” Masashi Murata, a currency strategist in Tokyo at Brown Brothers Harriman & Co., said in an interview on Dec. 19. “When the U.S. and Europe moved in a bad direction and people wanted to avoid risk, the yen stood as the only currency that had enough liquidity to absorb demand.”

Risk-Adjusted Returns

Besides its gains against the dollar, the world’s primary reserve currency, the yen is also the best performer among major peers after filtering out price swings, strengthening 0.5 percent, according to risk-adjusted return data compiled by Bloomberg. Japan’s is the only Group-of-10 currency seen rising versus the greenback next quarter, strengthening to 77 per dollar by March 31, analyst forecasts show.

The U.K. pound and Swiss franc were the second- and third- best performers against the dollar in 2011, finishing unchanged and down by 0.1 percent on a risk-adjusted basis. South Africa’s rand fared the worst, weakening 1 percent after taking into account price swings, followed by the Mexican peso’s 0.7 percent loss.

Gains in Japan’s currency underscore the retreat from risk and losses in carry trades, whereby investors borrow in low- interest regimes to invest in higher-risk, higher-return assets elsewhere. Carry trades involving borrowing yen to invest in the currencies of Australia, South Africa, Mexico and Brazil have lost 9.1 percent this year, according to Bloomberg data, reversing a 1 percent gain in 2010.

Yen Bets

The Japanese currency traded at 77.93 per dollar and 101.86 versus the euro as of 12:55 p.m. today. For the year, the yen advanced 4.1 percent against the greenback and 6.6 percent against the 17-nation currency.

The difference in the number of wagers by hedge funds and other large speculators on a rise in the yen compared with those on a drop was 24,476 on Dec. 20, data from the Washington-based Commodity Futures Trading Commission show. As recently as April there was a net 52,983 contracts betting on a decline.

Japan’s nominal gross domestic product is about the same as it was in 1992, following the collapse of the nation’s asset and real estate bubble. The Bank of Japan on Oct. 27 lowered its forecast for the country’s economic growth in 2012 to 2.2 percent from the 2.9 percent projected in July, citing effects from the strong yen.

Job Losses

Toyota cut its earnings forecast for this fiscal year and Nintendo predicted its first annual loss in three decades as currency gains eroded the value of their overseas sales.

Japan may lose 600,000 jobs if the yen stays at current levels, pushing carmakers to shift production overseas, according to a Nov. 21 report compiled by Trade and Industry Minister Yukio Edano and posted on the website of the National Policy Unit that reports to Prime Minister Yoshihiko Noda.

“The environment will remain harsh for exporters because they have to make a business plan taking account of the stronger yen,” said Hiroshi Morikawa, a lead economist at the Institute for International Monetary Affairs in Tokyo, which conducts research projects commissioned by the government. “Japan’s economy is still reliant on exports, so the yen’s appreciation has direct impact over employment, too.”

The yen’s surge to a postwar high of 75.35 to the dollar on Oct. 31 prompted Azumi to order the nation’s third intervention of the year that day. He said on Dec. 20 he wants the ability to take “decisive” action in explaining a ministry plan to raise its intervention war chest to more than 65 trillion yen.

More Interventions

A previous yen record of 79.75 reached in April 1995 stood until March of this year, when a magnitude-9.0 earthquake struck Japan’s northeast, stoking speculation companies would repatriate overseas assets to pay for rebuilding. The currency jumped to 76.25 on March 17, prompting coordinated action by Group-of-Seven nations the next day.

Total currency sales in the year through Nov. 28 were seven times bigger than the 2.1 trillion yen sold in one shot in 2010, according to data from the Ministry of Finance. The currency erased most losses in as short as five days after each intervention and stood about 12 percent stronger on Dec. 23 than the three-year average against the dollar.

The Swiss National Bank has had more success controlling its currency by imposing a ceiling on the franc at 1.20 per euro in September. The SNB promised unlimited intervention, and said the overvaluation poses an “acute threat” to the nation’s economy. The franc has since stayed under the ceiling.

‘Limited’ Effect

Unlike Switzerland, Japanese officials would “have to issue unlimited quantities of government bonds if they want to conduct unlimited intervention,” said Junya Tanase, chief currency strategist at JPMorgan Chase & Co. in Tokyo. “There’s likely to be a unilateral intervention if the yen breaks a record, but history has already proven that its effect is limited.”

Lack of alternative havens is causing investors to buy and hold. Three-month historical volatility in the dollar-yen rate was at 9 percent today, the least since July and compared with a three-year average of 12 percent. The 10.18-yen gap between the Japanese currency’s weakest and highest points of 2011 is the narrowest since at least 1973 when it started to trade freely.

“Once investors bought yen they had no problem holding on to it, and that led to low volatility,” said Daisuke Uno, the Tokyo-based chief strategist at Sumitomo Mitsui Banking Corp., which manages $934 billion in customer deposits. “Lots of their purchases appear to be for long-term holdings.”

Ballooning Debt

A worsening fiscal climate hasn’t been a deterrent. The country lost its AAA grade from a domestic ratings company for the first time, as Tokyo-based Ratings & Investment Information Inc. downgraded Japan by one step on Dec. 21. Takahira Ogawa, the Singapore-based director of sovereign ratings at Standard & Poor’s, said on Nov. 24 that the nation’s finances are “getting worse and worse,” bringing it closer to a reduction.

Japan projects its public debt will exceed 1 quadrillion yen in the current fiscal year, more than double the size of its economy and compared with about $10 trillion for the U.S.

Countering debt concerns and supporting demand for the yen is the fact that Japan has a surplus in its current account, the broadest measure of trade. The surplus shields Japan from reliance on foreign capital and is the world’s second largest after China’s, according to International Monetary Fund data.

More than a decade of deflation has encouraged Japanese lenders to buy government bonds rather than make loans, helping to contain yields. Domestic banks are the biggest holders of Japan’s debt, owning 44 percent of the total at June 30, according to a Ministry of Finance report.

Monetary Policy

The BOJ has maintained its benchmark interest rate at or below 0.5 percent since 1995, also helping to prevent bond yields from rising. Rates on Japan’s 10-year debt were at 0.97 percent yesterday in Tokyo, the second lowest after Switzerland among developed nations.

Overseas money managers have boosted holdings of Japan’s government bonds by 17.2 trillion yen this year through October, poised for the biggest annual increase in four years. Non- Japanese residents accounted for 8.2 percent of the total ownership of sovereign debt at the end of September, the most since 2008, central bank data showed this month.

The extra yield investors demand to hold 10-year U.S. debt instead of Japan’s securities narrowed to 73 basis points in October, the smallest gap since 1990. The yield spread between Japan and Germany dropped in September to the narrowest in more than 20 years. Japanese investors have bought 5.4 trillion yen of foreign bonds and stocks this year through November, poised for the smallest net purchase in four years, data from the Ministry of Finance show.

Because of the narrowing yield spreads, “there isn’t much incentive for Japanese money managers to take currency risk and invest in dollar or euro assets,” said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo. “Money isn’t flowing out of the country.”

To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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Dollar Index Holds Decline Before U.S. Confidence, Manufacturing Reports

By Kristine Aquino and Monami Yui - Dec 27, 2011 12:04 PM GMT+0700

The Dollar Index held losses from last week before U.S. data forecast to show consumer confidence rose to the most since July and regional manufacturing gauges increased, reducing demand for haven assets.

Australia’s currency ended a five-day rally as Asian stocks slid. Thailand’s baht weakened versus the greenback as investors reduced holdings of the nation’s assets. Demand for the euro damped before Italy sells bills and bonds this week amid concern Europe’s debt crisis will drive up borrowing costs for the region’s larger economies.

“The U.S. economy is stronger than expected,” said Junichi Ishikawa, a Tokyo-based market analyst at IG Markets Securities Ltd. “That’s giving some support to stocks and risk currencies. The dollar tends to be sold in the risk-on environment.”

The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, slid 0.1 percent to 79.853 as of 1:43 p.m. in Tokyo, having lost 0.2 percent last week. The euro traded at 101.89 yen. The 17-nation currency bought $1.3074 from $1.3061 last week. The dollar was little changed at 77.94 yen.

Australia’s currency fell 0.2 percent to $1.0149. The MSCI Asia Pacific Index (MXAP) declined 0.3 percent.

The dollar has depreciated 1.2 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which tracks 10 developed-nation currencies.

Consumer Confidence

An index of consumer confidence in the U.S. rose to 58.6 this month from 56 in November, according to the median estimate of economists surveyed by Bloomberg News. The New York-based Conference Board reports the figures today.

The Federal Reserve Bank of Richmond may say the overall business activity index for the central-Atlantic region climbed to 5 in December from 0 last month, a separate poll forecast. Manufacturing in Texas increased to 4.5 this month from 3.2 in November, another poll showed. Both Fed reports are due today.

The yen is set to advance versus most of its major peers this month as concern the crisis in Europe will damp global growth boosted demand for the currency as a refuge. The yen has gained against all 16 most-traded peers this year, strengthening 4.1 percent against the dollar and 6.6 percent versus the euro.

A “few” Bank of Japan board members “pointed to the possibility that downside risks to the economy had increased somewhat since the previous meeting” held in October, according to minutes of the Nov. 15-16 gathering published today in Tokyo.

Spain ‘Relapse’

The yen tends to gain during periods of financial stress as Japan’s export-reliant economy doesn’t need foreign capital to balance current accounts -- the broadest measure of trade.

Spain’s Economy and Competition Minister Luis de Guindos said yesterday in Madrid the nation’s economy has suffered a “relapse” and will contract as the People’s Party takes over the nation’s finances from the Socialists. “The next two quarters aren’t going to be easy,” he said.

Germany’s government is revising its forecast for 1 percent economic growth in 2012 and will present a lower figure in mid- January, Focus magazine reported, without citing anyone.

Germany’s economy ministry denied the Focus report, saying no decision has been made. An analysis of potential growth is still ongoing, a spokeswoman said in an e-mailed statement, declining to be identified citing ministry policy.

Thailand’s currency weakened for a third time in four days as overseas investors sold $3.8 million more of Thai stocks than they bought yesterday, bringing this year’s net sales to $200 million, according to exchange data.

The baht weakened 0.5 percent to 31.43 per dollar.

Italy Auction

Italy is scheduled to sell 9 billion euros ($11.8 billion) of 179-day bills and as much as 2.5 billion euros of zero-coupon 2013 bonds tomorrow. The nation will auction debt due in 2014, 2018, 2021 and 2022 the following day.

Ten-year bond yields in Italy advanced six basis points to 6.98 percent on Dec. 23, approaching the 7 percent level that spurred Greece, Ireland and Portugal to seek bailouts.

“The markets are waiting to see how much demand there’ll be for Italian debt,” said IG Markets’Ishikawa. “If the results deepen doubts about Italy’s funding ability, they will weigh on the euro."

To contact the reporters on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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Lotus Sale Seen 30 Years After Bond Let Go

By Chong Pooi Koon, Siddharth Philip and Steve Rothwell - Dec 27, 2011 6:01 AM GMT+0700

James Bond stopped using Lotus as his vehicle of choice to fight villains 30 years ago. Investors say Malaysia’s Proton Holdings Bhd. (PROH) should follow suit in abandoning the sports-car maker.

Proton, the Malaysian maker of sedans and taxis that bought control of Lotus in 1996, hasn’t made any profit from the British unit for 15 years and probably won’t at least until 2014. Now that Proton itself may be divested by its state-run parent, investors such as Gan Eng Peng say Lotus Group International Ltd. is ripe for a sale.

“It will make sense for them to sell it,” said Gan, who helps oversee about $3.6 billion as head of equities at HwangDBS Investment Management Bhd. in Kuala Lumpur. “Proton and Lotus are not a good fit. They are in different market segments, both in terms of geography and product.”

Lotus, which has struggled to compete against Porsche AG (PAH3) and Ferrari SpA in Europe, has hung on to relevance in the auto industry partly because of its decades-long expertise in designing lightweight frames. Still, the company may need the backing of a carmaker more global than Proton to survive in an industry where carmakers such as Saab Automobile are filing for bankruptcy, according to Gan.

Interest in Lotus

Lotus’s sale has been the subject of speculation before. Shanghai Automotive Industry Corp. this month denied an Edge newspaper report that said China’s largest carmaker is interested in Lotus. Two months ago, Proton denied a report by the Star newspaper that it was selling its Lotus stake to Luxembourg-based Genii Capital.

Lotus Chief Executive Officer Danny Taner Bahar, formerly a Ferrari executive, said he’s confident he can make the company break even by 2014 as long as he has the financial backing.

“The only thing we can do is show the current owners, or the new owners, that we are absolutely in line with the business plan that we have presented,” Bahar, who’s based in Norfolk, U.K., said in an interview last week. “Without the funding support and the guarantees given by the Proton group, we would not survive, end of story.”

Bahar said Lotus, whose cars were featured in the James Bond movies “The Spy Who Loved Me” in 1977 and “For Your Eyes Only” in 1981, will continue to turn to its engineering strengths to stay competitive.

Lightweight Frames

Phil Gott, an IHS Automotive analyst specializing in powertrain research, agrees that Lotus technology is excellent. Expertise in making lightweight frames, a defining area of strength since its founding in 1952 by British inventor Colin Chapman, has allowed Lotus designs to be a popular option for electric cars, Gott said.

Tesla Motors Inc. (TSLA) has relied on Lotus chassis designs since 2008 for its $109,000 Roadster sports car. Then-Chrysler LLC had also planned to contract Lotus to produce electric vehicles before the Auburn Hills, Michigan-based company filed for bankruptcy in 2009, emerging as Chrysler Group LLC.

The Lotus Elise weighs 2,010 pounds (912 kilograms), making it the lightest performance car sold in the U.S., according to Santa Monica, California-based Edmunds.com. The 2012 Porsche Cayman is 2,932 pounds while the Mazda (7261) MX-5 Miata sports convertible is 2,480, according to the website.

“One of Lotus’ key attributes, part of the DNA, is to go the extreme in achieving the most intelligent and clever technological engineering,” Bahar said.

Lotus DNA

Lotus’s DNA may share few similarities with that of its Malaysian owner. While Lotus makes sports cars that are sold for as much as 513,000 ringgit ($163,000) in Malaysia, Proton sells hatchbacks for as low as 34,000 ringgit. Before Proton, Lotus’s owners included the former General Motors Corp. (GM), which later emerged from bankruptcy as General Motors Co., and Romano Artioli’s Bugatti International.

Proton’s stock has gained 44 percent in Kuala Lumpur trading this month as speculation on its sale heated up. State- owned Khazanah Nasional Bhd., which holds a 43 percent stake, has since confirmed it received offers. Khazanah officials have declined to comment on Proton’s sale beyond saying it received proposals of interest. Sime Darby Motors, Naza Group, Hyundai- Berjaya Sdn., DRB-Hicom Bhd. (DRB) and UMW Holdings Bhd. (UMWH) are candidates, the Edge reported Dec. 3. Sime and UMW have said they aren’t interested.

Former Malaysian Prime Minister Mahathir Mohamad, who founded Proton in 1983, said Dec. 13 that billionaire Syed Mokhtar Al-Bukhary’s DRB-Hicom, an auto assembler, is the best candidate to buy the government stake and that Proton shouldn’t be sold to a foreign company. DRB-Hicom Managing Director Mohd Khamil Jamil wasn’t available for comment because he’s on leave, said his secretary.

National Carmaker

For Proton, whose profit tumbled 76 percent in the latest quarter, unloading the U.K. unit may give it room to invest in production facilities as Malaysia’s national carmaker faces mounting domestic competition from Toyota Motor Corp. (7203) and Perusahaan Otomobil Kedua Sdn Bhd.

Lotus needs about 2.4 billion ringgit in order to help it return to profit, according to OSK Holdings Bhd. (OSK) estimates. The brand may be worth about 1 billion ringgit, or about triple its current value, once it’s profitable, according to Ahmad Maghfur Usman, an OSK analyst.

For that to happen, Lotus will have to sell 8,000 vehicles a year, he said. The carmaker sold 1,985 units for the year ended March 31, according to its annual report. That compares with Ferrari, whose chairman said in September will probably post record sales of 7,000 cars this year.

Those numbers may be difficult to reach under current ownership.

“Proton is better off without Lotus,” said Alexander Chia, a Kuala Lumpur-based analyst at RHB Capital. “There are no product synergies.”

To contact the reporters on this story: Chong Pooi Koon in Kuala Lumpur at pchong17@bloomberg.net; Siddharth Philip in Mumbai at sphilip3@bloomberg.net; Steve Rothwell in London at srothwell@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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Asia Stocks Drop, Aussie Falls on BOJ Warning

By Shiyin Chen and Yoshiaki Nohara - Dec 27, 2011 1:10 PM GMT+0700

Asia stocks (MXAP) fell for the first time in three days after the Bank of Japan said risks to the economy have increased and before Italy sells bills and bonds this week. The Australian dollar weakened as copper declined.

Two shares declined for every one that gained on the MSCI Asia Pacific Index, which lost 0.2 percent as of 3:05 p.m. in Tokyo. U.S. financial markets open after the Christmas Day holiday today, while those in Australia, Hong Kong and the U.K. remain shut. The Aussie snapped a five-day rally, the won slid as much as 0.5 percent, while the euro was little changed versus the dollar and yen. Copper futures fell 1.3 percent in New York.

Some Bank of Japan board members cited Europe’s debt crisis and the yen’s appreciation as risks, according to minutes from a November meeting released today, while South Korea’s consumer confidence dropped and Chinese industrial companies’ profit growth cooled. Data today may show home prices in 20 U.S. cities fell at a slower pace and consumer sentiment improved. Italy will sell 9 billion euros ($12 billion) of 179-day bills and as much as 2.5 billion euros of zero-coupon 2013 bonds tomorrow.

“Economic uncertainty is deepening around the world,” said Hitoshi Asaoka, a Tokyo-based senior strategist at Mizuho Trust & Banking Co. “Investors find it hard to move near the year-end.”

Losses today helped extend the MSCI Asia Pacific Index’s decline this year to 18 percent. That will be the first annual retreat since 2008 and compares with a 12 percent drop on the Stoxx Europe 600 Index and a 0.6 percent gain in the Standard & Poor’s 500 Index.

Korea, Japan

The Kospi Index slipped 0.8 percent after the Bank of Korea said an index of sentiment fell to 99 in December from 103 in November. The gauge earlier sank as much as 2.3 percent, triggered by what exchange officials said was possibly an “erroneous” trading order and speculation over North Korea’s new leadership.

Japan’s Nikkei 225 Stock Average declined 0.5 percent. The value of stocks traded on the broader Topix index fell yesterday to 500.8 billion yen ($6.4 billion) yesterday, the lowest full- day turnover since May 2003, according to data compiled by Bloomberg. The Markit iTraxx Japan index of debt-default risk was unchanged at 187 basis points after having gained 85 basis points this year, according to Deutsche Bank AG prices and CMA.

The yen was little changed at 77.93 per dollar and traded at 101.88 against the euro. A “few” Bank of Japan board members “pointed to the possibility that downside risks to the economy had increased somewhat since the previous meeting” held in October, according to minutes of the bank’s Nov. 15-16 gathering published today in Tokyo.

The Aussie slid 0.2 percent to $1.0149, the won weakened 0.3 percent to 1,158.68 per dollar, while the euro was little changed at $1.3074.

Italian Yields

Ten-year Italian bond yields advanced six basis points to 6.98 percent on Dec. 23, approaching the 7 percent level that spurred Greece, Ireland and Portugal to seek bailouts.

The S&P 500 added 0.9 percent on Dec. 23, erasing its losses for this year, after data last week on durable goods, jobless claims and the housing market added to signs the world’s largest economy is recovering.

Property values probably dropped 3.2 percent in October from the same month in 2010, the smallest year-over-year decrease since January, according to the median forecast of 20 economists before a report from S&P/Case-Shiller today. Consumer confidence may have climbed to a five-month high of 58.6 in December from 56 last month, a separate survey showed before the New York-based Conference Board’s report.

Treasury 10-year yields declined two basis points to 2.01 percent. A basis point is 0.01 percentage point.

Copper for March delivery fell as much as 3 percent to $3.365 a pound before trading at $3.4245 on the Comex. Futures gained 4.2 percent last week. Immediate-delivery gold dropped 0.7 percent to $1,596.42 an ounce, while oil slipped 0.3 percent to $99.40 a barrel on the New York Mercantile Exchange, halting last week’s 6.6 percent advance.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

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

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Most Stocks Gain as Dollar Holds Losses

By Shiyin Chen and Bruce Stanley - Dec 27, 2011 5:49 AM GMT+0700

Most stocks (MXAP) climbed, helping the MSCI All Country World Index gain for a fifth day, while the dollar maintained losses against higher-yielding peers amid speculation the U.S. economy will continue to recover. China’s yuan surged to a 17-year high.

MSCI’s global index advanced less than 0.1 percent at 4:51 p.m. in New York as equity gauges in Japan, India, Russia and Mexico rose 0.5 percent or more. About four shares advanced for every three that declined on the global benchmark, helping it extend last week’s 3.1 percent advance.

Financial markets from Hong Kong to the U.K. and the U.S. were closed for holidays. The dollar weakened 0.1 percent to $1.3059 per euro amid reduced demand for haven assets. The yuan touched 6.3160 versus the greenback, the strongest level since 1993, on speculation China’s policy makers will tolerate appreciation to stem capital outflows.

Reports tomorrow may show home prices in 20 U.S. cities declined at a slower pace and consumer confidence improved to a five-month high. Data last week showed durable goods orders jumped in November by the most in four months, while sales of new homes increased to a seven-month high.

“The U.S. economy is improving more than expected,” said Hideyuki Ishiguro, assistant manager at the investment strategy department at Okasan Securities Co. in Tokyo. “Pessimism is easing among American consumers due to a recovery in the job market and some stability in the stock market.”

Latin American Stocks

Mexico’s IPC advanced 0.5 percent. Brazil’s Bovespa index slid 0.1 percent as economists cut their 2011 forecasts for a fifth straight week.

Japan’s Nikkei 225 Stock Average added 1 percent, the BSE India Sensitive Index jumped 1.5 percent, while Russia’s Micex Index gained 1 percent. Canon Inc. (7751) climbed 1.3 percent after the Nikkei newspaper reported that the camera maker may pay a 120 yen ($1.54) dividend this year.

The Bloomberg GCC 200 Index of Persian Gulf shares rose less than 0.1 percent to 54.89 while Israel’s TA-25 index gained 0.7 percent.

The S&P 500 (SPX) added 0.9 percent on Dec. 23, erasing its losses for this year, after Commerce Department data showed orders for goods meant to last at least three months rose 3.8 percent in November. A separate report showed purchases of single-family properties increased 1.6 percent to a 315,000 annual pace, while consumer spending rose less than forecast in November as wages declined for the first time in three months.

Consumer Confidence

Property values probably dropped 3.2 percent in October from the same month in 2010, the smallest year-over-year decrease since January, according to the median forecast of 20 economists before a report from S&P/Case-Shiller. Consumer confidence may have climbed to a five-month high of 58.6 in December from 56 last month, a separate survey showed before tomorrow’s report from the New York-based Conference Board.

“Excessive pessimism has receded at the end of the year, and what we’re seeing is some unwinding of safe-haven buying of currencies like the dollar and yen,” said Kengo Suzuki, manager of the foreign-bond department in Tokyo at Mizuho Securities Co., a unit of Japan’s third-biggest listed bank by market value. “The U.S. economy is resilient.”

The Dollar Index, which tracks the U.S. currency against those of six trading partners, fell less than 0.1 percent after sliding last week. The Australian dollar rose 0.2 percent to $1.0169 and Turkey’s lira gained 0.5 percent to 1.8926 per dollar.

Yuan Gains

The yuan strengthened 0.3 percent to 6.3198 per dollar as the central bank set the reference rate 0.07 percent higher at 6.3167 per dollar. A depreciation of the yuan may fuel outflows of capital, Yi Xianrong, a researcher at the Institute of Finance and Banking that is affiliated to the Chinese Academy of Social Sciences, wrote in a commentary in the China Daily.

Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said at a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday.

Gold for immediate delivery retreated as much as 0.5 percent to $1,597.75 an ounce before trading at $1,606.90 an ounce. Copper declined 1.2 percent to 55,200 yuan ($8,735) a metric ton in Shanghai, the first retreat in five days. The London Metal Exchange and Comex are closed today.

To contact the reporters on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Bruce Stanley in Dubai at bstanley5@bloomberg.net

To contact the editor responsible for this story: Sheldon Reback at sreback@bloomberg.net

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China City Woos Apple Supplier With Workers, Low Wages

By Bloomberg News

The Chinese city of Zhengzhou will help Foxconn Technology Group recruit more than 100,000 workers next year for its local factory, matching the number it helped the maker of Apple Inc. (AAPL) iPhones and iPads hire in 2011.

Zhengzhou has a large workforce, with labor costs that are about two-thirds of those in China’s wealthier coastal cities, Deputy Mayor Xue Yunwei said in an interview. That’s given Zhengzhou, the capital of the mostly rural province of Henan, an advantage luring investment from manufacturers, he said.

“You can’t find entry-level workers in Shanghai offering only 1,500 yuan ($237) of monthly salary,” Xue said in Beijing yesterday. “But we can.”

Efforts to sway companies including Foxconn, Intel Corp. (INTC) and Ford Motor Co. (F) to invest inland instead of moving production to nations such as Vietnam and Bangladesh as wages rise in China’s coastal areas may help sustain economic growth that’s averaged 10 percent in the last three decades. In addition to helping find workers, authorities are offering reduced tax rates and preferential access to land to attract companies.

“In the past 30 years, China created what might be the world’s greatest miracle by attracting global capital to its coastal cities,” Xue said. “The new story for the next few decades will be the inland story.”

Economic Growth

Zhengzhou’s economy may grow 13 percent this year and maintain a double-digit pace of expansion for the “next few years,” Xue said. The national economy may grow 9.2 percent this year and 8.5 percent in 2012, according the median of 15 economists surveyed by Bloomberg.

Foxconn, which began exporting goods from its Zhengzhou factory in August, has been a major factor for the city’s growth, Xue said. Zhengzhou’s exports and imports combined will exceed $15 billion this year, triple what it was in 2010, he said.

Foreign direct investment in the city, with a population of more than 8 million, has grown 43 percent in the first 11 months of the year, Xue said. Nationally, foreign investment gained 13 percent during the same period.

To help Foxconn, Nissan Motor Co.’s local vehicle venture, and other companies to find workers, Xue said, the Zhengzhou government has encouraged some of the more than 21 million people from Henan working in other parts of China to return to the province. The government has also organized students from 40 universities and over 100 technical-training high schools in Henan to do internships at the plants in the city, he said.

Intel and Ford

Edmund Ding, a spokesman for Hon Hai Precision Industry Co., the Taipei-based flagship of Foxconn, didn’t answer several calls to his mobile phones today.

Intel announced plans in February 2009 to close down its assembly and test operations in Shanghai and move the work to the western city of Chengdu, capital of Sichuan province. In September of this year, Ford Chief Executive Officer Alan Mulally broke ground on an engine transmission plant in the western municipality of Chongqing.

Annual wages of private companies’ urban manufacturing workers in coastal Guangdong province averaged 21,644 yuan last year, compared with 16,391 yuan in Hunan and 15,495 yuan in Henan, according to government data.

“Nobody was available to meet us three to five years ago when we wanted to persuade them to do business here,” Xue said. “But now, all kinds of foreign and domestic companies visit us every week.”

Airport Plans

To make Zhengzhou even more attractive, Xue said the city also wants to spend as much as 30 billion yuan in the next decade to expand its airport to accommodate more cargo transport. The National Development and Reform Commission, China’s top economic planner, and the nation’s aviation regulator have already approved plans to start building a second runway at Zhengzhou’s airport next month, he said.

Local authorities want five runways as part of a 30-year blueprint for developing the city, Xue said.

The local government hasn’t taken on much debt to make these investments, Xue said. Zhengzhou plans to merge about 10 companies the city set up to finance products into three larger entities, each with assets in the tens of billions of yuan, he said. These three companies will focus on investing in selected industries, infrastructure projects and property development, he said, without giving more details.

Xue said the city government wants to make Zhengzhou an industrial base, a transportation hub and a large metropolis. “That’ our vision,” he said.

To contact Bloomberg News staff for this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

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

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Mead Johnson: Enfamil Baby Formula Safe

By Susanne Walker and Stephanie Armour - Dec 27, 2011 3:50 AM GMT+0700

Mead Johnson Nutrition Co. (MJN) said tests it conducted on samples of its Enfamil baby formula tied to a U.S. Food and Drug Administration probe found no presence of bacteria. The company called the product safe.

Two babies tested positive this month for the environmental bacteria Cronobacter, including a newborn in Lebanon, Missouri, who died. The samples tested by Mead Johnson matched those being screened by government regulators and, using their methods, found no Cronobacter, the company said in a statement yesterday.

Retailers including Wal-Mart Stores Inc. (WMT), Kroger Co. (KR) and Walgreen Co. (WAG) last week removed from store shelves a batch of the formula used by the baby who died. The companies didn’t immediately respond to requests for comment today. A Mead Johnson spokesman said the batch that was pulled probably wouldn’t be made available for sale again until the FDA makes a final determination based on its testing.

“It’s still a part of an official investigation so I would suspect that those who did ‘pull and hold’ will hold until the official investigation is completed before they put it back on the shelf,” said Chris Perille, a Mead Johnson spokesman, in a telephone interview today. “There would have to be confirmation from the FDA before they do that.”

Perille yesterday said the company holds samples of every batch it sends to retailers. The company’s negative test for Cronobacter confirmed results the company got before it shipped the batch of Enfamil Premium Newborn powdered formula, he said.

FDA test results are pending, Siobhan Delancey, an agency spokeswoman, said today, declining further comment.

‘May Be Coincidence’

The U.S. Centers for Disease Control and Prevention in Atlanta has been working with state regulations and the FDA in testing in the Missouri cases, said Robert Tauxe, deputy director of the division charged with prevention of foodborne, waterborne, and fungal infection at the agency.

There is no evidence yet the two infections are related or caused by infant formula, Tauxe said in a telephone interview on Dec. 23. “This may just be coincidence,” he said.

Public health officials are gathering information on each infant, checking to see if the bacteria in each infant have the same genetic fingerprint, he said. If they do, that may suggest they got the infection from the same source.

Initial results may be back by the end of this week, Tauxe said. The CDC is testing leftover formula, he said, and the FDA is testing unopened formula.

No other “serious” complaints have been reported related to the batch of Enfamil Premium Newborn that’s being tested, Perille said.

Lead Brand Franchise

The Enfa brands, which include Enfamil, accounted for 79 percent of Mead Johnson’s $3.14 billion in 2010 revenue and were the world’s lead brand franchise in pediatric nutrition based on retail sales, the Glenview, Illinois-based company said in a February filing.

The company said all of its infant formula products undergo more than 2,300 quality tests and checks to ensure they meet standards set by the World Health Organization and FDA.

Mead Johnson shares fell 5.1 percent to $65.29 in New York trading on Dec. 23, after falling 10 percent on Dec. 22 when Wal-Mart pulled its Enfamil Newborn formula from shelves.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Stephanie Armour in Washington at sarmour@bloomberg.net;

To contact the editor responsible for this story: Reg Gale at rgale5@bloomerg.net

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S. Korea Consumer Index Falls After Kim Death

By Eunkyung Seo - Dec 27, 2011 6:41 AM GMT+0700

South Korean consumer confidence fell to a three-month low in December, undermined by concern over the political outlook in the North in the wake of Kim Jong Il’s death and over Europe’s debt crisis.

The sentiment index fell to 99, from 103 in November, the Bank of Korea said in an e-mailed statement today. A reading below 100 indicates pessimists outnumber optimists. The survey was conducted between Dec. 14 and Dec. 21. North Korea announced the death of its leader on Dec. 19, with his son Kim Jong Un, thought to be under 30, to succeed as ruler.

Policy makers in the South pledged to take steps as needed to stabilize markets in the aftermath of the North’s announcement, and an initial slump in equities was recouped within days. While the government said Dec. 21 that South Korea had so far seen little impact to its economy, Asia’s fourth largest, any sign of prolonged impact to consumer spending may spur monetary and fiscal stimulus, economist Kong Dong Rak said.

“We don’t know what will happen in North Korea and this makes people so wary,” said Kong, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul. “Both the central bank and government may have to come up with stimulus if consumers and companies reduce spending in fear of worse things in North Korea or Europe.”

The consumer confidence index is based on survey responses from 2,042 households in 56 cities.

To contact the reporter on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net

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

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Oil Trades Near Two-Week High on Speculation U.S. Recovery to Boost Demand

By Alexander Kwiatkowski - Dec 27, 2011 6:49 AM GMT+0700

Oil traded near the highest settlement in two weeks amid speculation the U.S. economy will continue to recover, bolstering demand for raw materials in the world’s biggest crude consumer.

Futures were little changed after gaining 6.6 percent last week, the most since the five days ending Oct. 28. Reports today may show U.S. consumer confidence improved to a five-month high and home prices in 20 cities declined at a slower pace. Financial markets from from Hong Kong to the U.K. and the U.S. were closed for holidays yesterday.

Crude oil for February delivery was at $99.72 a barrel, up 4 cents from the settlement on Dec. 23 in electronic trading on the New York Mercantile Exchange at 7:19 a.m. in Singapore. Futures have climbed 9.1 percent this year after increasing 15 percent in 2010.

Brent oil for February settlement gained 4.5 percent last week to $107.96 a barrel on the London-based ICE Futures Europe exchange. The European contract’s premium to Nymex crude narrowed to $8.28 a barrel, the smallest differential based on closing prices since March 8.

To contact the reporter on this story: Alexander Kwiatkowski in Singapore at akwiatkowsk2@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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Hedge Funds Cut Bets as Raw Materials Rally Most in 10 Weeks: Commodities

By Elizabeth Campbell - Dec 27, 2011 7:00 AM GMT+0700

Hedge funds reduced bets on higher commodity prices to the lowest level since 2009 just as raw materials headed for their biggest weekly rally in two months.

Money managers cut their combined net-long position across 18 U.S. futures and options by 15 percent to 454,512 contracts in the week ended Dec. 20, the lowest since March 2009, data from the Commodity Futures Trading Commission show. The Standard & Poor’s GSCI gauge of 24 commodities climbed 4.5 percent last week, erasing this year’s declines and pushing the index toward its third consecutive annual advance.

While the S&P GSCI is 15 percent below the 32-month high reached in April, prices gained last week on signs the U.S. economy is proving resilient. Durable-goods orders rose in November by the most in four months, and jobless claims unexpectedly fell to the lowest in more than three years. Concern that shortages will emerge in commodities from copper to crude oil spurred Goldman Sachs Group Inc. to stick with a bullish outlook this month even as funds cut their holdings.

“Commodities are in the process of bottoming,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $340 billion of assets. “You’re going to find out that the U.S. economy is going to continue to grow much faster than people thought. You’re going to see people coming back to commodities.”

Commodity Rally

Last week’s gain in the S&P GSCI was the biggest since Oct. 14 and left the gauge up 2.2 percent in 2011. It rose 20 percent in 2010 and 50 percent a year earlier. The MSCI All-Country World Index of equities climbed 3.1 percent last week, paring this year’s decline to 9.3 percent. The U.S. Dollar Index (DXY), a measure against six trading partners, dropped 0.4 percent. The yield on 10-year Treasuries climbed 18 basis points, or 0.18 percentage point, to 2.02 percent, Bloomberg Bond Trader prices show.

Twenty of the 24 raw materials tracked by the S&P GSCI rose last week. Gasoline surged 8 percent to $2.6872 a gallon. Wheat capped six consecutive daily advances, the longest winning streak since January. Oil added 6.6 percent, the biggest weekly gain since October.

Commodities will return 15 percent in the next 12 months, led by industrial metals and energy, because the global economy is likely to avoid another recession, Goldman said in a report Dec. 1. That’s still the bank’s view, Sophie Bullock, a London- based spokeswoman for the bank, said in an e-mail Dec. 15.

Durable Goods

U.S. bookings for equipment meant to last at least three years rose 3.8 percent after no change in the prior month, a period that was previously reported as a contraction, data from the Commerce Department showed on Dec. 23. Sales of new U.S. homes rose in November to a seven-month high, the department said the same day.

The S&P GSCI is still headed for a 1.8 percent monthly decline after Europe’s debt crisis escalated. Funds are net- short, or betting on price declines, in copper, cocoa, soybean meal, wheat, soybean oil and natural gas, CFTC data show. Crude- oil holdings fell 11 percent to the lowest since Oct. 18, and net-long positions in gold dropped 13 percent to the lowest since April 2009.

European Central Bank President Mario Draghi said Dec. 19 that lenders in the euro region will experience “very significant” funding constraints next year and there are “substantial downside risks” to the economy. The Dollar Index rallied 2 percent this quarter as investors sold other assets for the perceived safety of the currency. The gauge declined in six of the past nine years and is 31 percent lower than at the start of that period.

‘Hefty Declines’

“Going into 2012, there’s a very, very high probability that we can see some fairly hefty declines in the commodity markets,” said Stephen Hammers, the Nashville, Tennessee-based chief investment officer at Compass EMP Alternative Strategies Fund, which has about $500 million of assets. “There’s a tremendous amount of uncertainty about what is going to happen around the world in terms of the global economy.”

Pacific Investment Management Co., the world’s largest bond fund, said the U.S. may stagnate next year. Europe may contract and Chinese growth may slow, Saumil H. Parikh, who leads Newport Beach, California-based Pimco’s cyclical economic forums, said in a report posted on its website on Dec. 22.

The economy in China, the biggest consumer of everything from nickel to soybeans, may expand 8.5 percent next year, down from 9.2 percent this year and 10.4 percent in 2010, according to the median of 19 economist estimates compiled by Bloomberg.

$490 Million

Investors pulled $490 million from commodities funds in the week ended Dec. 21, according to data from Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Gold and precious-metals outflows totaled $1.59 billion, and non- precious-metal commodities had net inflows of more than $1 billion, said Cameron Brandt, the director of research.

“Commodities, ex-gold, had one of their better weeks,” Brandt said. “We are seeing some more durable faith in the U.S. recovery at the moment.”

Confidence among U.S. consumers climbed more than forecast in December, to a six-month high, according to the Thomson Reuters/University of Michigan sentiment index. The increase to 69.9 from 55.7 in August is the biggest four-month increase since the period ended June 2009.

Builders broke ground in November on more U.S. houses than at any time in the past 19 months, led by a surge in multifamily units, the Commerce Department said Dec. 20.

China Copper Imports

Refined-copper imports by China climbed to the highest since June 2009 last month, the General Administration of Customs said Dec. 21. Global oil demand will rise 1.4 percent next year, with China accounting for more than a 10th of the total, according to the Paris-based International Energy Agency.

A measure of 11 U.S. farm goods showed speculators cut bullish bets in agricultural commodities by 7.9 percent to 202,544 contracts, the lowest since March 17, 2009. Investors trimmed bullish bets on coffee by 48 percent to 2,954 contracts, the lowest since Aug. 9.

“People are focusing too much on the day to day in Europe,” said Michael Cuggino, who helps manage about $15 billion of assets at Permanent Portfolio Funds in San Francisco. “There’s an overall environment that remains favorably biased towards an increase in commodity prices heading into 2012.”

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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U.S. Should Ease Visa Access for Tourists Wielding Cash: View

By the Editors Dec 27, 2011 7:00 AM GMT+0700

This holiday season, millions of tourists visited the U.S. Given the economic benefits they bring, the U.S. should be working overtime to welcome their friends and families next year.

An estimated 60 million international visitors arrived in the U.S. in 2011, spending about $150 billion, supporting nearly 2 million American jobs and accounting for more than one-quarter of U.S. service exports. From taxi fares to tchotchke purchases, tourists account for a big chunk of economic activity. States from New York (the most popular travel destination) to Colorado and Wyoming (both of which have a high concentration of jobs in tourism) depend on visitors’ dollars.

The good news for Americans is that the U.S. is still the world’s biggest tourist destination by dollar value. (The U.S. ranks second after France as the world’s most popular destination.) After a fall in 2009, tourist arrivals climbed in 2010 and 2011. Still, as groups such as the U.S. Travel Association point out, the U.S. could be doing much better. Although global long-haul travel grew by 40 percent from 2000 to 2010, the U.S.’s share of the market dropped from 17 percent to 12.4 percent. Even taking into account the U.S.’s declining share of the global economy, that’s a steep dip.

One problem is the U.S. visa bureaucracy, which proved unprepared to cope with the growth in demand for tourist and business visas. About 65 million Chinese, for example, are expected to go abroad this year, up 15 percent from 2010, when 800,000 Chinese visitors pumped $5 billion into the U.S. economy. Chinese visa applicants, many of whom travel great distances to get to the U.S. Embassy in Beijing or to one of four U.S. consulates, must sometimes wait weeks for visa interviews. The same bottlenecks bedevil visa operations in other emerging markets, including Brazil and India.

Breaking Logjams

A few sensible reforms could help break the logjams. These include inserting a corps of visa-adjudication officers in high- growth markets, creating video visa-interview centers for applicants who don’t live near a U.S. consulate, and relaxing the requirement for in-person visa interviews. Happily, all three of these proposals were incorporated in the omnibus budget legislation that President Barack Obama signed last week.

Next on the agenda is an expansion of the Visa Waiver Program, which now enables tourists and business travelers from 36 countries to visit the U.S. without a visa. To participate, countries must have a low refusal rate in granting nonimmigrant visas to U.S. citizens, agree to beef up their passport security, and share law-enforcement and security data. When South Korea joined the program in 2008, the U.S. market share of South Korean tourists jumped from 26 percent to 37 percent in 2010. Tourism receipts from South Korean visitors that year rose by $1.6 billion over the average from the previous four years.

No Reliable System

To expand the program, the Department of Homeland Security must be able to verify the departures of almost all foreign visitors who arrive by air. Yet the department has no reliable system to achieve that goal. For countries like Poland and Taiwan, which show the requisite declines in visa refusal rates, that’s not necessarily a big problem. But for less-developed countries like Brazil, India and China, many of whose citizens would like to reside permanently in the U.S., the problem is huge.

Anywhere from one-quarter to one-half of the 11 million illegal immigrants currently in the U.S. overstayed their visas -- without reliable departure data, it’s hard to tell exactly. To reduce that number, the Department of Homeland Security will have to not only match departures to arrivals, but also do a better job of tracking down those who are out of status. It should focus not on draconian enforcement but on finding those people most likely to threaten national security or public safety.

At the Republican debate on Dec. 15 in Sioux City, Iowa, former Ambassador to China Jon Huntsman observed that the U.S.’s share of tourism has declined “because our visa system is so screwed up. ... This is an economic development opportunity, and we are missing it.”

We agree. Which is why during this busy travel week, we hope that Congress and the Obama administration are thinking about how to make next year’s holiday even busier for the tourism industry.

To contact the Bloomberg View editorial board: view@bloomberg.net.

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What ‘Fact Checkers’ Call Lies, I Call Politics: Ramesh Ponnuru

By Ramesh Ponnuru Dec 27, 2011 7:00 AM GMT+0700

Last year, PolitiFact, a widely cited “fact-checking” project of the Tampa Bay Times, awarded its “Lie of the Year” to Republicans who said that the health- care law President Barack Obama had signed amounted to a “government takeover” of the field.

This year, the uncoveted prize has gone to Democrats who said that Republicans had voted to “end Medicare” by voting for Representative Paul Ryan’s budget.

PolitiFact doubtless regards its having criticized both Republicans and Democrats as evidence of its evenhandedness and concern for truth. And I am sure that they are indeed calling things as they see them without regard to party. But PolitiFact often seems unaware that the same facts can be interpreted in different ways, with neither interpretation qualifying as a lie. Here is a different interpretation of its evenhandedness: PolitiFact was wrong last year and this year -- in each case injecting a little poison into the political system in the name of cleaning it up.

Start with this year’s winning lie. Liberals insist that the Ryan plan is fairly characterized as ending Medicare because it replaces the existing program with a very different (and, they believe, inferior) one. Under Medicare as it is today, the federal government pays set fees for most medical services that senior citizens receive. Under the Ryan plan passed by the House of Representatives, senior citizens would instead pick among coverage plans offered by companies, with the federal government paying part or all of the premium. Nobody, pro or con, thinks this plan would be a minor tweak to Medicare.

Misleading to Seniors

On the other hand, saying Republicans want to “end Medicare” can be misleading. People who hear the phrase might think that under the Ryan plan senior citizens would have to get medical care on their own, with no help from the federal government. That is a misimpression, and it is one that Democrats have an interest in spreading.

Similarly, Democrats have accurately said that the Republican plan would involve cutting health-care spending for the elderly -- which yields the misleading impression that they would cut spending on today’s elderly when only the elderly of a decade from now would actually be affected.

Republicans should tell the parts of the story the Democratic catchphrases omit, and so should media organizations such as PolitiFact. But that’s not the same thing as calling the Democrats liars for employing a characterization that many of them sincerely believe is fair, and that isn’t so much false as arguable.

Last year it was the Republicans who were smeared. PolitiFact insists it’s “simply not true” that the Democratic health-care law is a government takeover of health care because “it is, at its heart, a system that relies on private companies and the free market.” The government “will not seize control of hospitals or nationalize doctors.”

Let us stipulate that any government health-care policy falls on a continuum with laissez faire at one end and single- payer close to the other end (which would be “nationalized doctors,” whatever that would mean). Surely the point at which you have moved from a mostly free-market system (S5MANH) to a mostly government-controlled one is a subjective matter that depends largely on one’s political philosophy.

Obamacare is a federal law that converts health insurance into a product that nobody would voluntarily buy and then forces everyone to buy it; that forces a change in the basic business model of every private insurance company; and that seeks to impose sweeping changes on the practice of American medicine by, for example, promoting “accountable care organizations.”

Different Interpretations

This policy may be good or bad. It is certainly possible for a conservative or libertarian to consider it, in good faith, a government takeover behind a private-sector facade. (I have never, incidentally, read or seen an advocate of Obamacare even attempt to explain why this arrangement, in which insurance companies are treated essentially as public utilities, is superior to a single-payer system with no such facade.)

One of the worst features of contemporary politics is the tendency -- found on the right, on the left and in between -- to label our opponents liars, often without a shred of evidence that the person we’re attacking is saying something he knows to be false. PolitiFact makes that problem worse, not better, by giving a supposedly authoritative imprimatur to such loose accusations.

The reason we have politics at all is that we disagree, sometimes deeply, about how to promote the common good, and we need a peaceful and productive way to resolve or at least manage these disagreements. We disagree about how to improve U.S. health care, and we disagree about how each other’s proposals to change it should be characterized. The pretense of PolitiFact, and other media “fact checkers,” is that many of our political disputes have obvious correct answers on which all reasonable people looking fairly at the evidence can agree -- and any other answer is “simply not true.”

This pretense really is false, and like dishonesty, it is corrosive.

(Ramesh Ponnuru is a Bloomberg View columnist and a senior editor at National Review. The opinions expressed are his own.)

To contact the writer of this article: Ramesh Ponnuru at rponnuru@bloomberg.net.

To contact the editor responsible for this article: Timothy Lavin at tlavin1@bloomberg.net.

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Ivy Grads Choose Teaching Over Wall Street: William D. Cohan

By William D. Cohan Dec 27, 2011 7:00 AM GMT+0700

We are witnessing the decline and fall of the investment-banking profession as we have known it for the past 40 years.

The evidence is everywhere. The increasing regulations on Wall Street -- as required by the Dodd-Frank law and still being written by the Federal Reserve, the Securities and Exchange Commission, the Commodities Futures Trading Commission and others agencies in the U.S. and Europe -- will require the remaining companies to increase their capital, curb their risk- taking and reduce their principal investing.

Aside from the fact that investing principal and proprietary risk-taking per se had nothing to do with the recent financial crisis -- and that the ability of Goldman Sachs Group Inc. (GS) to make a huge proprietary bet against the mortgage market probably helped saved the firm -- these new rules will greatly curb Wall Street’s revenue and profitability at a time when the business itself is suffering a severe slowdown. (What sunk Wall Street in 2008 was the seemingly more conventional business of being a middleman for the manufacture, packaging and sale of increasingly risky mortgage-backed and other debt securities.)

Not being able to make those big proprietary bets when you see them developing -- in effect, the closing of the casino that Wall Street has become over the past few decades -- will severely limit bankers’ money-making opportunities. It will also protect the rest of us when those big bets go wrong or are perceived to be too risky. (For every Goldman Sachs acting brilliantly, there is an MF Global Holdings Ltd. acting foolishly).

Signs of Withdrawal

There is little debate anymore that Wall Street had become highly dependent on its trading operations. Something like 90 percent of Bear Stearns’s profits in the years leading up to its March 2008 demise came from its trading and debt-origination activities. The percentages are not that much different at Goldman Sachs, where in 2010 its traditional investment-banking operations generated only $1.3 billion of $12.9 billion in pretax earnings, about 10 percent. All but $1 billion or so of the rest of Goldman’s pretax earnings came from its trading, lending and investing businesses.

The slowdown in business, combined with the looming trading curbs, has resulted in job losses across Wall Street. Morgan Stanley (MS) recently announced it was firing 1,600 employees. Goldman Sachs has done its usual turn of eliminating the bottom 10 percent of its workforce and a group of its long-serving partners. Bank of America Corp. (BAS) announced that about 30,000 employees would be chopped by the end of 2012, although a number of the firm’s investment bankers lost their jobs in the past month.

Yet those suffering the most are the foreign firms that were trying to break into Wall Street’s business. Nomura Holdings Inc. (8604) has pretty much scuttled its most recent Wall Street experiment (it bought Lehman Brothers Holding Inc.’s European and Asian banking operations) and firms such as Societe Generale SA (GLE), UBS AG (UBSN), Credit Suisse Group AG (CSGN) and Royal Bank of Scotland Group Plc (RBS) are all cutting Wall Street bodies.

In November, Bloomberg News estimated that more than 200,000 people who work in finance had already lost or would lose their jobs this year.

Not only will the head-count reduction on Wall Street continue for the foreseeable future, but the vast sums overpaid to bankers and traders will inevitably continue to fall as well -- as many of them are finding out this bonus week. There is simply no easier and quicker way for Wall Street firms to keep up a modicum of profitability than by cutting pay for the people who still work there. Needless to say, the inevitable decline in Wall Street’s compensation will mean less tax revenue for New York City and New York State and fewer government services for the rest of us (absent higher taxes).

Ivy League Doubts

The most reliable leading indicator of Wall Street’s future prospects is the way recent graduates of Harvard, Princeton and Yale -- supposedly our best and brightest -- choose to spend their time after graduating. For years, hordes of graduates from those schools beat a fast path to Wall Street. Now the road is far more difficult to travel. For those who choose to make the journey, there is the prospect of incurring the wrath and scorn of fellow students who make up the various Occupy Wall Street movements -- a fact not likely to deter many -- and then there are dimmer prospects for a job on Wall Street generally, what with the slowdown in business.

According to a Dec. 21 article in New York Times, whereas in 2006 some 46 percent of Princeton graduates who had jobs lined up after graduation went to Wall Street, four years later that number had fallen to 36 percent. At Harvard, in 2006, a quarter of the class got jobs in finance; by 2011, that number had fallen to 17 percent. At Yale, in 2006, 24 percent of the graduates had jobs in finance and on Wall Street, while in 2010, the number of graduates going to Wall Street had fallen to 14 percent.

The word around Goldman Sachs, I’m told, is that even those offered a still highly coveted entry-level job at the firm are having second thoughts about taking it. More and more, banks are losing talent to Teach for America, a fact that may turn out to be one of the most heartening consequences of the financial crisis.

(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this article: William D. Cohan at wdcohan@yahoo.com.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.

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