S&P 500 Caps Biggest Weekly Decline in 2012 on Economy

By Rita Nazareth - Apr 14, 2012 3:43 AM GMT+0700

U.S. stocks fell, giving the Standard & Poor’s 500 Index its biggest weekly decline in 2012, as consumer confidence dropped, China’s growth slowed and the cost of insuring against a Spanish default rose to a record.

Financial (S5FINL) shares dropped the most among 10 industries in the S&P 500, following a plunge in European lenders. JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) retreated at least 3.6 percent. Technology shares, which account for 21 percent of the S&P 500, fell 1.6 percent as a group today and had the first weekly slump this year. Google Inc. (GOOG) tumbled 4.1 percent as the world’s largest Internet-search company plans a new stock structure that gives management more leeway in issuing shares.

Enlarge image

A trader on the floor of the New York Stock Exchange on April 9, 2012. Photographer: Spencer Platt/Getty Images

Play Video

April 13 (Bloomberg) -- Bloomberg's Dominic Chu breaks down this week's earnings reports from S&P 500 companies where 71 percent of the 7 companies to report saw their earnings beat analyst estimates. He speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

The S&P 500 slid 1.3 percent to 1,370.26 at 4 p.m. New York time, extending its weekly decline to 2 percent. It fell a second week for the longest losing streak since November. (SPX) The Dow Jones Industrial Average lost 136.99 points, or 1.1 percent, to 12,849.59. About 6.2 billion shares changed hands on U.S. exchanges today, or 9 percent below the three-month average.

“Let’s not get overly concerned, but yes, there are concerns out there that we need to look at,” Brad Sorensen, director of market and sector analysis at San Francisco-based Charles Schwab Corp., which has $1.81 trillion in client assets, said in a telephone interview. “China has been disappointing, U.S. consumer confidence adds to the pressure and Europe is not out of the woods yet.”

Stocks fell as confidence among U.S. consumers cooled in April from a one-year high. China’s growth slowed to the least in almost three years. Credit-default swaps on Spain surged as Prime Minister Mariano Rajoy struggles to prevent the nation from becoming the fourth euro-region member to need a bailout.

Back-to-Back

Today’s decline in stocks follows the biggest two-day rally in 2012. The S&P 500, which had the best first-quarter since 1998, was still up 9 percent this year as investors bought stocks amid better-than-estimated economic data and expectations that Europe would tame its debt crisis.

“The first quarter was a relief that things were not going to be as bad,” said Virginie Maisonneuve, head of global equities at Schroder Investment Management Ltd., which oversees $291 billion, said in a phone interview from London. “Since then, there are question marks of liquidity. We have a lot of liquidity in the world, but what next?”

Concern about the global financial system drove banks lower even after JPMorgan and Wells Fargo & Co. (WFC) reported earnings that beat estimates. The KBW Bank Index (BKX) slumped 3.1 percent as all of its 24 stocks retreated. Bank of America sank 5.3 percent, the most in the Dow, to $8.68. JPMorgan lost 3.6 percent to $43.21. Wells Fargo dropped 3.5 percent to $32.84.

Earnings Season

Quarterly reports scheduled for next week include Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), Bank of America and some of the largest technology companies. International Business Machines Corp., which comprises 12 percent of the Dow; Intel Corp., the world’s biggest chipmaker; and Microsoft Corp. (MSFT), the largest software maker, are due to announce their results. Yum! Brands Inc. (YUM), which surged 2.8 percent to $72.86 today for the biggest gain in the S&P 500, is also scheduled to report.

While S&P 500 per-share profit growth slowed to 1.7 percent during the first three months of the year from 4.9 percent in the fourth quarter, it will accelerate to 8.6 percent during all of 2012, according to analyst estimates compiled by Bloomberg.

Google tumbled 4.1 percent to $624.60 even as earnings beat estimates. The bid to preserve control for founders Larry Page and Sergey Brin raised concern among corporate-governance watchdogs. Google unveiled a plan that lets the company issue new shares without diluting the founders’ voting power.

New Class

The stock change would create a new class of nonvoting shares that will be distributed to existing shareholders in what is effectively a 2-for-1 stock split. For investors, the result is a lack of input on decision making, said Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance.

“Shareholder voting rights are pretty limited in Google,” he said. “And this basically perpetuates that reality.”

Apple Inc. (AAPL) sank 2.8 percent, the most since October, to $605.23. After rising to a record on April 9, the most valuable technology company fell for a fourth day in the longest losing streak since December.

Coinstar Inc. (CSTR) surged 7.3 percent to $65.78. The owner of the Redbox movie-rental kiosks said first-quarter sales and profit exceeded its previous projection and lifted its earnings forecast for 2012 to at least $4.40 a share.

Dow Chemical Co. (DOW) advanced 1.6 percent to $33.20. The largest U.S. chemicals producer increased its quarterly dividend to 32 cents a share from 25 cents.

Leveraged Buyout

Safeway Inc. (SWY) rose 2.5 percent to $21.19. The grocer may be considering options such as a leveraged buyout or Reverse Morris Trust, according to JPMorgan.

Johnson Controls Inc. (JCI) added 2.3 percent to $32.57. The largest U.S. auto supplier was boosted to buy from hold at Deutsche Bank AG.

Concern about the global financial system’s stability has grown so much during the past two weeks that investors ought to take less risk, according to Bank of America’s Merrill Lynch unit.

Forty market-related gauges go into the Bank of America indicator, and 10 of them surged far enough to send a so-called critical stress signal three days ago. The “risk-off” warning was the first since July 12, just before a second-half retreat in stocks got under way.

“We recommend caution,” Benjamin Bowler, head of global derivatives research, and two colleagues wrote in a report two days ago. The MSCI All-Country World Index declined by an average of 3.8 percent in periods when the signal was in place since 2000, the report said.

Stress Index

The stress index’s components reflects the potential worsening of a euro-region debt crisis, according to Bowler, based in San Francisco, and Anders Armelius and Abhinandan Deb, his London-based colleagues.

Credit-default swap rates for government borrowers are showing the most stress, according to their data. A CDS-based based indicator was at 4.1 three days ago. Readings above zero show stress is higher than normal.

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

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

Read more...

China Murder Suspect’s Sisters Ran $126 Million Empire

By Bloomberg News - Apr 14, 2012 8:12 AM GMT+0700

The sisters of Gu Kailai, who is suspected of murdering a U.K. citizen and is the wife of disgraced Chinese official Bo Xilai, controlled a web of businesses from Beijing to Hong Kong to the Caribbean worth at least $126 million, regulatory and corporate filings show.

Gu Kailai, 53, was the youngest of five daughters of a People’s Liberation Army general, according to a Chinese- language website affiliated with the Communist Youth League. She rose from a butcher’s assistant during the 1966-1976 Cultural Revolution to become a lawyer who argued cases in the U.S.

Enlarge image

China's Chongqing Municipality Communist Party Secretary Bo Xilai at the opening ceremony of the National People's Congress (NPC) at the Great Hall of the People on March 5, 2012 in Beijing. Photographer: Feng Li/Getty Images

Now China says she is suspected of murdering businessman Neil Heywood in November, and her husband this week was suspended from the Communist Party’s elite Politburo.

Her sisters focused on business rather than politics. Gu Wangjiang, 64, the oldest, is a Hong Kong national who owns $114 million in shares of an eastern China printing company, according to a Shenzhen exchange filing tracked by Bloomberg.

Wangjiang and her sister, Gu Wangning, serve as directors of several other companies, including some that Hong Kong company registry records trace to the British Virgin Islands. They also have made millions selling Hong Kong real estate. Another sister, Gu Zhengxie, 62, was a top official at one of the country’s biggest state-owned companies.

Their wealth -- and the fact they put some assets offshore where ownership is harder to trace -- illustrate how the politically connected thrive in China, a country where Bo himself last month warned of the dangers of a rising wealth gap. While many of the country’s top leaders, including President Hu Jintao and Premier Wen Jiabao, have children who are top executives, the Gu sisters have left a paper trail that details some of their activities.

Old Networks

“Networks have always been of prime importance in China dating back to imperial times,” said Jonathan Fenby, author of the forthcoming book “Tiger Head, Snake Tails: China Today.”

“Economic growth has spawned a web of people connected to the centers of power who have profited, and who often choose to move their wealth to places where they feel it is safer given the risk of political reversals of fortune, as seen in the defenestration of Bo Xilai,” he said in an e-mail.

Gu Wangjiang is chairman of publicly traded Tungkong Security Printing Co. (002117), a Jinan, Shandong-based company, according to data compiled by Bloomberg. It in turn controls a chain of other companies across China linked to her Hong Kong holding company, Hongkong Hitoro Holdings Ltd., according to a September 2010 share prospectus that also says Wangjiang is a Hong Kong national. Hitoro’s Chinese characters mean “lots of happiness coming.”

Tungkong Shares

Hitoro’s 37,827,385 shares in Tungkong, which also counts government bureaus and state-owned companies as customers, were worth 720.2 million yuan ($114.3 million) as of the close of trading in Shenzhen yesterday.

Efforts to reach Wangjiang and Wangning were unsuccessful. A man answering the phone at Tungkong’s Jinan headquarters said Gu Wangjiang wasn’t there. During a visit yesterday to the 37th floor offices of the sisters’ companies in the Hong Kong offices of Hitoro and Hangang Worldwide, a man who declined to be identified said the sisters were not there.

Boris Chan, listed on Hitoro’s corporate filings as an official of the company, declined to comment when reached by telephone. A faxed request for an interview went unanswered.

In 1992, Hitoro purchased a luxury 16th-floor apartment in Parkview Crescent, a Hong Kong complex, for HK$13.3 million ($1.7 million). Gu Wangjiang sold it for HK$88 million early last year, land registry documents show.

Island Postal Boxes

The buyer was Topwell Rich Ltd., a Hong Kong company owned by British Virgin Islands-based Ampere Management Ltd., the land registry records show. Hitoro’s controlling shareholder, Infomatic Resources Ltd., shares the same post office box address in the offshore jurisdiction, according to a Nov. 21 filing with the company registry.

So does the owner of Hangang Worldwide Ltd., a Hong Kong- based company affiliated with a Chinese steelmaker for which Gu Wangning also acts as a director, a Feb. 8 filing shows.

That’s not unusual: P.O. boxes in jurisdictions such as the Cayman Islands and British Virgin Islands can serve as the address for thousands of companies. While the majority of tax haven-based companies are set up for legitimate reasons, offshore jurisdictions have been linked to multiple frauds and corruption cases, including the $1.7 billion scam at Japan’s Olympus Corp. (7733) that was unearthed last year.

Nine Companies?

Gu Wangjiang, known as Kuk Mong Kong in Hong Kong, has held directorships of at least nine companies in the former British territory over the course of more than two decades, also including Panama-registered Sitoro Shipping Enterprises Co. and a venture with Malaysian billionaire Vincent Tan’s Berjaya Group Bhd., Hong Kong registry and bond documents show.

Hitoro also invested in an $85-million industrial park in the eastern China coastal city of Rizhao in a joint venture with Isocab N.V., a subsidiary of German steelmaker ThyssenKrupp AG (TKA). Tungkong’s 2010 prospectus puts the value of its investment at $47.6 million. That investment is part of the underlying assets of Tungkong, the printing company.

Through Hitoro, Wangjiang and Wangning, who retained her Chinese citizenship, owned Beijing Jiahua Investment Consulting Co. An Internet search shows the address in room 1430 of a building southwest of Tiananmen Square. The room numbers on the fourth floor of the budget hotel stop at 1423, a visit shows.

While the extent of the wealth of China’s political elite is unknown, “the few figures available suggest the amounts are often staggering,” said Kenneth Lieberthal, director of the John L. Thornton China Center at the Brookings Institution in Washington. “It comes from the state being involved pervasively in the economy.”

Generated by Families

“The wealth is generally not money they themselves have,” he said of Chinese government leaders. “It is money their families generate. The families of various members of the Politburo have very large assets.”

Gu Zhengxie, the second-oldest sister, became a Communist Party member and rose to become the deputy party secretary of Beijing-based China National Machinery Industry Corp (CNMICZ)., a centrally administered state-owned company with assets of 139.2 billion yuan as of March, 2011, according to its latest bond prospectus. The conglomerate makes everything from power grids to tractors.

The final sister, Gu Dan, is married to Li Xiaoxue, until last year the top discipline official at the China Securities Regulatory Commission, according to a report on the official website of Zuoquan county in Shanxi, the home province of both the Gu and Li families.

Bo Guagua, the son of Gu Kailai and Bo Xilai, was escorted from his home by law enforcement officers in Cambridge, Massachusetts late in the night on April 12, the Telegraph reported, citing a source it didn’t name. Bo Guagua is a student at Harvard University’s John F. Kennedy School of Government.

To contact Bloomberg News staff for this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net; Natasha Khan in Hong Kong at nkhan51@bloomberg.net; Ben Richardson in Hong Kong at brichardson8@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

Read more...

Obamas Paid 20.5 Percent Tax on $789,674 in 2011 Income

By Richard Rubin - Apr 14, 2012 11:01 AM GMT+0700

President Barack Obama and his wife, Michelle, paid 20.5 percent in federal taxes on $789,674 in adjusted gross income for 2011, injecting his personal finances into the political fight over tax policy.

The Obamas reported earning less than half of the $1.7 million they made in 2010 and less than 20 percent of the $5.5 million they made in 2009, according to tax returns released yesterday by the White House. Their tax rate declined from 26.3 percent in 2010 and 32.6 percent in 2009.

Enlarge image

President Barack Obama and first lady Michelle Obama at the White House. Photographer: Mark Wilson/Getty Images

Enlarge image

President Barack Obama, right, and Vice President Joe Biden at the Eisenhower Executive Office Building in Washington. Photographer: Andrew Harrer/Bloomberg

Enlarge image

Copies of the U.S. Department of the Treasury Internal Revenue Service 1040 Individual Income Tax forms for the 2011 tax year belonging to U.S. President Barack Obama, his wife first lady Michelle Obama, and U.S. President Joseph Biden, and his wife Jill Biden, are arranged for a photograph in Tiskilwa, Illinois. Photographer: Daniel Acker/Bloomberg

Obama, whose salary as president is $400,000 a year, received most of the rest of his 2011 income from sales of his books. His gross income from book sales declined to $487,928 for 2011 from more than $1.5 million the previous year.

As the April 17 tax-filing deadline nears, Obama has been emphasizing his tax-fairness campaign theme and promoting a proposal to impose a minimum tax on those earning $1 million or more a year. That measure, known as the Buffett Rule, is scheduled for a procedural vote in the Senate on April 16.

The administration put a Buffett Rule calculator on the White House and campaign websites. With a few keystrokes, a taxpayer can determine “how many millionaires pay a lower effective tax rate than you.”

If the Buffett Rule were in effect, the Obamas wouldn’t be subject to its provisions because they earned less than $1 million for 2011. They would be affected by other tax policies the president is proposing.

Paying More Taxes

“Under the president’s own tax proposals, including the expiration of the high-income tax cuts and limitations on the value of tax preferences for high-income households, he would pay more in taxes while ensuring we cut taxes for the middle class and those trying to get in it,” Jay Carney, the White House press secretary, said in a blog post.

The Obamas overpaid taxes during the year and requested that their $24,515 refund be applied to their 2012 tax payment. They donated $172,130 to charitable organizations, or 21.8 percent of their adjusted gross income.

The charitable donation figure is a lower dollar amount and a greater percentage of their income than for 2011, and it’s a big reason why their tax rate is lower than that of many households with incomes in that range.

According to the nonpartisan Tax Policy Center in Washington, households with cash income of between $500,000 and $1 million in 2011 paid an average of 23.7 percent of their adjusted gross incomes in federal income taxes.

Military Charity

The largest recipient of the Obamas’ donations was the Fisher House Foundation, which provides lodging to relatives of hospitalized members of the military and scholarships to children of deceased and disabled soldiers. The Obamas gave $117,130 to the organization in 2011.

In 2011 they donated $5,000 each to the Boys & Girls Club, Habitat for Humanity, the United Negro College Fund and Sidwell Friends School, which their daughters attend.

Unlike last year, the Obamas were subject to the alternative minimum tax, the parallel tax system for high earners. The AMT added $12,491 to their tax bill for 2011.

Steven Bankler, an accountant in San Antonio, Texas, said the president’s returns don’t show smart money management because his investments are in low-yield U.S. government securities and he is most likely paying interest on the mortgage of his Chicago home at a higher rate than he is earning.

“He manages his money pathetically,” Bankler said. “He’s got it backwards. This is a man that’s trying to tell us how to make decisions on managing our money.”

Book Earnings

Bankler also questioned Obama’s decision to report his book earnings as business income subject to self-employment payroll taxes. He wouldn’t have to pay those taxes if he reported the income as royalties.

More than half of Obama’s book sales occurred outside the U.S., according to his foreign tax credit form.

Anthony Nitti, a tax partner at WithumSmith & Brown in Aspen, Colorado, said Obama appears to have taken a relatively conservative approach to his tax return.

“To me, his return looks like it’s been carefully considered for public release,” he said.

Use of the White House doesn’t count as income under a section of the tax code that allows the exclusion for people who are provided meals and lodging for their employer’s convenience. Presidents haven’t reported the personal use of government resources tied to their security, such as Air Force One, as income.

Secretary’s Rate

Obama pays a slightly higher tax rate than his secretary, said Amy Brundage, a White House spokeswoman. Anita J. Breckenridge is paid $95,000 a year, according to the 2011 White House report to Congress on staff salaries. Brundage declined to provide details about Breckenridge’s tax rate or return. The Buffett Rule is named for billionaire investor Warren Buffett, who says he pays a higher tax rate than his secretary does.

Vice President Joseph Biden and his wife, Jill, reported paying $87,900 in federal taxes for 2011 on $379,035 in adjusted gross income for a 23.2 percent rate. The White House released the Bidens’ tax returns yesterday.

Citizens “ought to be able to know that everyone one else is paying their fair share as well,” Biden said April 12 at a campaign event in Exeter, New Hampshire.

“But the truth is you know they’re not,” he said. “The truth is, when you pay those taxes, you know not everyone is paying their fair share.”

The Bidens donated $5,540, or 1.5 percent of their adjusted gross income, to charity in 2011.

Romney Estimate

Republican presidential candidate Mitt Romney, a former Massachusetts governor, released an estimated 2011 tax return earlier this year. Yesterday, Romney requested an extension to delay filing his final 2011 return for six months, spokeswoman Andrea Saul said in an e-mail. She said he will file the return before the Nov. 6 election.

Romney’s 2010 return was signed by his accountant on Oct. 15, 2011, indicating that he had received an extension of the time to file. That’s common for taxpayers who receive income from partnerships that can take months to provide information to the partners.

The Obama campaign has called on Romney, a former private- equity executive, to release more tax returns from prior years.

For 2010, Romney paid a 13.9 percent effective tax rate on more than $21 million in income, largely because he receives most of his income from capital gains and dividends taxed at preferential rates capped at 15 percent.

Obama, by contrast, is subject to ordinary income tax rates of as much as 35 percent on almost all of his income.

“You have two wealthy individuals, both in the top 1 percent, that have as disparate tax returns as humanly possible,” Nitti said.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

Read more...

Traders Walk Out of CME Eurodollar Pit to Protest Trade

By Matthew Leising - Apr 14, 2012 3:01 AM GMT+0700

Local traders in the CME Group Inc. (CME)’s Eurodollar options pit walked off the job today to protest a block trade yesterday.

“These guys that stand in there all day and make prices would have loved to participate in that particular price, but they weren’t able to,” Rocco Chierici, a broker at R.J. O’Brien & Associates on the floor of the Chicago Mercantile Exchange, said in a telephone interview.

Enlarge image

Traders in the Eurodollar pit on the CME Group trading floor in Chicago. Photographer: Scott Olson/Getty Images

Prices for the block trades of options on Eurodollar futures were higher than offers in the pit, which wouldn’t be allowed in open-outcry trading, Chierici said. Local traders buy and sell for their own account and in the process help add liquidity to a market. Block trades are privately negotiated transactions that are conducted outside the normal pit or via computer-based trading systems used by exchanges.

“There are rules that prohibit that in the pit, but you can circumvent the pit” in a block trade, Chierici said. “I believe they wanted to make the point that the system is not fair.”

Six block trades totaling 215,200 options traded at 8:11 a.m. Chicago time yesterday, according to CME Group’s website. The trade was rolling positions from April contracts, which expired today, into June contracts.

‘Longstanding Rules’

“The block trade in question was managed by longstanding rules and processes of our exchanges,” Michael Shore, a CME Group spokesman, said in an e-mail. “It was a legitimate, well- managed trade, which was executed within one tick of the market and in one trade.”

Other traders continued to help buy and sell options on Eurodollars, which are contracts tied to three-month expectations for interest rates, Shore said.

While volume has been down recently, the walk-off cut the number of orders to buy and sell today, Chierici said. “There was a small drop because a lot of the volume is local,” he said.

CME Group has seen demand for Eurodollars, once the largest contract by volume, fall as the Federal Reserve has kept its benchmark interest rate near zero since December 2008. Eurodollar options volume last month averaged 811,000 contracts per day, compared with 1.3 million on average in the same month in 2007, according to CME statements.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

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

Read more...

U.S. Stocks Halt Five-Day Decline After Alcoa’s Results

By Rita Nazareth - Apr 12, 2012 3:40 AM GMT+0700

U.S. stocks advanced, halting a five-day decline for the Standard & Poor’s 500 Index, after Alcoa (AA) Inc. reported an unexpected first-quarter profit.

Alcoa, the first company in the Dow Jones Industrial Average to announce quarterly results, climbed 6.2 percent. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) added at least 2.4 percent to pace gains in financial shares. A measure of 11 homebuilders in S&P indexes jumped 4.8 percent as Wells Fargo & Co. said a survey of sales managers showed 63 percent of the respondents reported better-than-expected orders.

Play Video

April 11 (Bloomberg) -- Jim Bianco, president of Bianco Research LLC, and Michael Gayed, chief investment strategist at Pension Partners LLC, talk about the outlook for the U.S. stock market. They speak with Stephanie Ruhle and Adam Johnson on Bloomberg Television's "Street Smart." Gary Shilling of A. Gary Shilling & Co. also speaks. (Gary Shilling is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Todd Schoenberger, managing principal at BlackBay Group, and Bloomberg's Josh Lipton talk about the impact of the Federal Reserve's Beige Book business survey on the U.S. stock market today and the outlook for equities, corporate earnings and the economy. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Bloomberg’s Stephanie Ruhle, Adam Johnson and Alix Steel report on today’s ten most important stocks including Nike, Apple and Alcoa. (Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Robert Hagstrom, a portfolio manager at Legg Mason Capital Management, talks about the performance of the equity market and investor sentiment. Hagstrom speaks with Betty Liu, Josh Lipton and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Tom Elliott, a global strategist at JPMorgan Asset Management, discusses the outlook for the U.S. economy and asset allocation. He speaks with Maryam Nemazee and Manus Cranny on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Gina Martin Adams, an equity strategist at Wells Fargo Securities LLC, talks about the outlook for the Standard & Poor's 500 Index and drivers for market volatility. She speaks with Erik Schatzker, Sara Eisen and Stephanie Ruhle on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

The S&P 500 increased 0.7 percent to 1,368.71 at 4 p.m. New York time, after dropping 4.3 percent over the past five days. The Dow advanced 89.46 points, or 0.7 percent, to 12,805.39 today. The Russell 2000 Index (RTY) of small companies climbed 1.6 percent to 796.59. About 6.4 billion shares changed hands on U.S. exchanges today, 6.5 percent less than the three-month average and 23 percent below yesterday’s volume.

“Alcoa helped dampen the dark mood in the market,” said Frederic Dickson, who helps oversee $28 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “It’s always nice to see the first company out of the box with an earnings surprise. It’s time to see how this progresses and reassess when to put some money back in.”

Almost $800 billion was erased from U.S. equity values in the five days leading up to the first-quarter earnings season. The S&P 500 yesterday capped the longest drop since November on concern about Europe’s debt crisis and the U.S. jobs market. The decline drove the gauge to about 14 times reported earnings yesterday, below the average since 1954 (SPX) of 16.4.

Earnings Season

Today’s gain extended this year’s rally in the S&P 500 to 8.8 percent as investors bought stocks amid better-than- estimated economic and corporate data. While S&P 500 per-share profit growth slowed to 0.8 percent during the first three months of the year from 4.9 percent in the fourth quarter, it will accelerate to 8.3 percent during all of 2012, according to analyst estimates compiled by Bloomberg.

Analysts’ estimates for S&P 500 earnings growth in the first quarter have declined from 4.1 percent in January, Bloomberg data showed. For Lawrence Creatura at Federated Investors Inc., earnings expectations are still low and profit surprises may drive the market higher.

“This isn’t a phantom bounce,” Creatura, who helps oversee $369.7 billion as a Rochester, New York-based fund manager at Federated, said in a telephone interview. “It seems reasonable to expect positive surprises as we move through the earnings season. Management teams have done a good job of keeping expectations contained.”

Alcoa Rallies

Alcoa climbed 6.2 percent to $9.90. The earnings were “driven by higher-than-expected profitability from every operating segment,” Brian Yu, an analyst at Citigroup Inc. (C) in San Francisco, said in a note. “Good cost control likely played a major role.” The stock dropped 48 percent in the 12 months through yesterday, the biggest decline in the Dow.

A rally in Alcoa shares following its earnings reports has been an indicator of gains for the S&P 500, according to Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati. Since 2005, the gauge has risen an average 4 percent in the three-month period that followed a positive reaction to Alcoa’s earnings, he said.

Financial shares had the biggest gain in the S&P 500 among 10 industries today, rallying 1.6 percent. Bank of America rose 3.8 percent to $8.86. JPMorgan jumped 2.4 percent to $44.01. Investors will get a first look at banks results when JPMorgan and Wells Fargo kick off earnings, about an hour apart, on April 13. Citigroup Inc. is set to announce results April 16, followed by Goldman Sachs Group Inc., Bank of America and Morgan Stanley.

Bank Earnings

The results may disappoint investors who piled into banking stocks on a bet the industry was inexpensive and set to benefit from a strengthening economy. The six largest U.S. lenders may post an 11 percent drop in first-quarter profit, according to a Bloomberg survey of analysts. The KBW Bank Index (BKX) of 24 companies climbed 26 percent in the first three months of the year, led by Bank of America’s 72 percent gain.

“You can’t expect bank stocks to go straight to the moon,” said Peter Kovalski, a money manager at Alpine Woods Capital Investors LLC in Purchase, New York, which manages about $5 billion. “You have to expect fundamentals to catch up, and there are some headwinds facing the industry.”

On top of earnings data, investors also watched the Federal Reserve’s Beige Book business survey today, published two weeks before the Federal Open Market Committee meets to set monetary policy. The Fed said the economy maintained its expansion in all 12 of its regions as manufacturing, hiring and retail sales showed signs of strength in the face of higher fuel prices.

Economic Bellwether

The Morgan Stanley Cyclical Index (CYC) of companies most-tied to the economy added 1.2 percent. FedEx Corp. (FDX), an economic bellwether as it carries everything from mobile devices to pharmaceuticals, rose 1.5 percent to $87.91. Homebuilder PulteGroup Inc. (PHM) advanced 9.1 percent to $8.39.

Apple Inc. (AAPL) reversed a gain of as much as 1.3 percent, falling 0.4 percent to $626.20. The U.S. Department of Justice sued Apple, Macmillan and Pearson Plc’s Penguin in New York today, claiming the publishers colluded to fix e-Book prices. Three other publishers, CBS Corp. (CBS)’s Simon & Schuster, Lagardère SCA’s Hachette Book Group and News Corp. (NWSA)’s HarperCollins, also named in the government’s antitrust lawsuit, settled their cases, according to court filings.

Owens-Illinois Inc. (OI) rose 6.9 percent to $23.52. The glass- bottle maker said first-quarter earnings will rise more than 35 percent from a year earlier on higher prices and lower costs.

‘Too Steep’

Genworth Financial Inc. (GNW) gained 3.2 percent to $7.54. The life insurer and mortgage guarantor was rated buy in new coverage by BTIG LLC, which said the stock is trading at “too steep a discount” to the company’s inherent value.

Titan Machinery Inc. (TITN) surged 17 percent to $32.05, the highest since June 2008. The owner of full-service agricultural and equipment stores forecast annual earnings of at least $2.55 a share, beating the average analyst estimate of $2.06.

U.S. shares of Nokia Oyj (NOK) tumbled 16 percent to $4.24. The Espoo, Finland-based mobile phone maker reported an operating loss for its mobile-phone division and forecast earnings won’t recover this quarter as emerging market handsets sales slumped and margins on smartphones shrank.

VMWare Inc. (VMW) slumped 2.5 percent to $107.61. The software maker announced a management shuffle including the departure of Chief Financial Officer Mark Peek. Earnings have more than doubled to $723.94 million since 2008, the first full year after Peek joined. The company is initiating a search to replace him.

Computer Sciences

Computer Sciences Corp. (CSC) fell 2.8 percent to $27.39. The technology contractor for governments and companies said earnings excluding certain costs in the quarter ended March 30 were 19 cents to 21 cents a share. Analysts predicted 97 cents, the average of estimates compiled by Bloomberg.

U.S. stocks will probably see a short-term relief rally before extending their retreat next week, according to the head of technical analysis at Credit Suisse Group AG. The S&P 500 may climb to as much as 1,382, London-based David Sneddon wrote today. The measure will then be poised to drop more than 3 percent next week to the 1,339 low from March 6, he said.

“With a classic bearish momentum and on-balance volume divergence reinforcing the more bearish scenario, we expect further weakness to extend,” Sneddon wrote in a note dated yesterday. So-called on-balance volume shows a security’s momentum by looking at the relationship between price and the number of transactions taking place.

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

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

Read more...

Stocks Rise on Alcoa Results as Spanish Bonds, Euro Gain

By Michael P. Regan and Rita Nazareth - Apr 12, 2012 3:22 AM GMT+0700

U.S. equities halted the longest slump of the year and European stocks rebounded from a two-month low as Alcoa (AA) Inc. opened the earnings season with an unexpected profit. Spanish bonds rose as a European Central Bank official signaled the ECB may revive its bond-purchase program.

The Standard & Poor’s 500 Index added 0.7 percent to close at 1,368.71, snapping a five-day slump. The Dow Jones Industrial Average climbed 89.46 points as Alcoa rallied 6.2 percent. The Stoxx Europe 600 Index (SXXP) rose 0.7 percent. The euro ended a five- day drop against the yen, while yields on Spanish and Italian 10-year debt dropped at least 10 basis points. Oil helped lead commodities higher as U.S. stockpiles of gasoline and distillate fuels declined, while natural gas tumbled below $2 per million British thermal units for first time since January 2002.

Enlarge image

Prime Minister Mariano Rajoy said Spain’s future is at stake in its battle to tame surging bond yields. Photographer: Jock Fistick/Bloomberg

Play Video

April 11 (Bloomberg) -- Jim Bianco, president of Bianco Research LLC, and Michael Gayed, chief investment strategist at Pension Partners LLC, talk about the outlook for the U.S. stock market. They speak with Stephanie Ruhle and Adam Johnson on Bloomberg Television's "Street Smart." Gary Shilling of A. Gary Shilling & Co. also speaks. (Gary Shilling is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Todd Schoenberger, managing principal at BlackBay Group, and Bloomberg's Josh Lipton talk about the impact of the Federal Reserve's Beige Book business survey on the U.S. stock market today and the outlook for equities, corporate earnings and the economy. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Steven Major, global head of fixed-income research at HSBC Holdings Plc, Paul Donovan, deputy head of global economics at UBS AG, and Bill Blain, co-head of the Special Situations Group at Newedge Group Ltd., discuss the outlook for Spanish bonds. This report also contains comments from Spanish Prime Minister Mariano Rajoy and Johannes Jooste, a strategist at Bank of America Corp.'s Merrill Lynch Wealth Management. (Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Timothy Moe, a Hong Kong-based strategist at Goldman Sachs Group Inc., talks about the outlook for Asia stocks Stocks in Asia slipped, with the region’s benchmark index falling for a sixth day, as Spanish bond yields surged closer to levels that prompted Greece, Ireland and Portugal to seek European bailouts. Moe speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Peter Garnry, an equity strategist at Saxo Bank A/S, discusses Alcoa Inc.'s unexpected first-quarter profit reported yesterday, investment strategy for European equities and recommendation of Rolls-Royce Holdings Plc. He speaks from Hellerup, Denmark, with Caroline Hyde on Bloomberg Television's "Countdown." (Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Pelham Smithers, managing director of Pelham Smithers Associates, talks about the outlook for Sony Corp. and Sharp Corp. Sony and Sharp posted losses that together equaled 900 billion-yen ($11 billion) as the first decline in global TV shipments in six years and a stronger yen hurt overseas sales for Japan’s biggest LCD TV makers. Smithers speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Robert Hagstrom, a portfolio manager at Legg Mason Capital Management, talks about the performance of the equity market and investor sentiment. Hagstrom speaks with Betty Liu, Josh Lipton and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Play Video

April 11 (Bloomberg) -- Bloomberg’s Stephanie Ruhle, Adam Johnson and Alix Steel report on today’s ten most important stocks including Nike, Apple and Alcoa. (Source: Bloomberg)

Australian one-dollar coins sit with a collection of bank notes arranged for a photograph, in Sydney, Australia. Photographer: Sergio Dionisio/Bloomberg

Enlarge image

Pedestrians are reflected in an electronic stock board outside a securities firm in Tokyo, Japan. Photographer: Haruyoshi Yamaguchi/Bloomberg

The S&P 500 slid 4.3 percent in the previous five sessions as $2 trillion was erased from global equities amid concern Europe’s debt crisis was worsening and weaker-than-forecast U.S. jobs growth. Today’s rebound came as Alcoa’s results boosted optimism at the start of the first-quarter earnings-reporting season, while ECB board member Benoit Coeure spurred speculation the central bank will help reduce Spain’s borrowing costs after 10-year yields touched 6 percent for the first time this year.

“The environment is still very positive for stocks,” Robert Hagstrom, fund manager at Legg Mason Capital Management Inc., said on Bloomberg Television’s “In the Loop” program. Legg Mason manages about $638 billion. Bull markets “need corrections, need a pullback, in order to be sustainable. We think about that all the time. Until we actually go through it,” he said. Then “it’s the risk-off traders, or Chicken Little, maybe, that the world is coming to an end. But it’s not coming to an end.”

‘Modest to Moderate’

U.S. equities held onto gains after the Federal Reserve said the economy maintained its expansion in all 12 of its regions as manufacturing, hiring and retail sales showed signs of strength in the face of higher fuel prices.

“The economy continued to expand at a modest to moderate pace from mid-February through late March,” the Fed said today in its Beige Book business survey, published two weeks before the Federal Open Market Committee meets to set monetary policy. “Hiring was steady or showed a modest increase across many districts.”

Slump Halted

The S&P 500 ended its longest losing streak since November as financial, consumer-discretionary, telephone and industrial stocks led gains in all 10 of the index’s main industries. Alcoa, Bank of America Corp., JPMorgan and Cisco Systems Inc. rose more than 2 percent to lead the Dow (INDU) higher.

Alcoa marked the unofficial start of an earnings season by reporting a profit of $94 million, or 9 cents a share, after orders rose and the largest U.S. aluminum producer closed higher-cost smelting capacity. Profit excluding restructuring costs and other items was 10 cents a share, compared with the average analyst estimate for a loss of 4 cents.

Analysts project profit growth slowed to 0.8 percent in the first quarter. Google Inc. (GOOG) is scheduled to report results tomorrow after the close of trading, while JPMorgan Chase & Co. and Wells Fargo & Co. will release earnings on April 13.

A rally in Alcoa shares following earnings has foreshadowed gains for the S&P 500 in the past, according to Ryan Detrick at Schaeffer’s Investment Research. Since 2005, the benchmark gauge has risen an average 4 percent in the three-month period that followed a positive reaction to earnings from Alcoa, which is typically the first company in the Dow to report results.

‘Positive Catalyst’

“This earnings season could be a major positive catalyst,” Detrick, senior technical strategist at Schaeffer’s, said in a telephone interview from Cincinnati. “We’ve had a strong selloff ahead of it. Should earnings come in slightly better than expected, that could turn out to be one of those buying opportunities.”

UniCredit SpA (UCG) and Intesa Sanpaolo SpA, Italy’s biggest banks, led a rebound in financial shares, advancing more than 5.4 percent. CGGVeritas SA (GA), the world’s largest seismic surveyor of oil fields, climbed 4.5 percent after saying it boosted vessel production in the first quarter. Givaudan SA, a Swiss maker of flavors and fragrances, gained 3.7 percent as sales increased.

Six countries in Europe sold debt today, with Italy meeting its target and Germany receiving bids for less than its maximum objective.

Germany’s 10-year bund fell, with the yield rising 14 basis points to 1.78 percent. The 10-year Italian bond yield fell 15 basis points to 5.53 percent, while the 10-year Spanish bond yield declined 10 basis points to 5.88 percent. The euro strengthened 0.5 percent to 106.07 yen and gained 0.2 percent to $1.3108.

The yield on the 10-year U.K. gilt increased four basis points to 2.05 percent after its debt agency sold 4.5 billion pounds ($7.2 billion) of September 2017 securities.

Commodities Gain

Lead and aluminum climbed more than 1.6 percent to lead gains in 17 of 24 commodities tracked by the S&P GSCI. Oil increased 1.7 percent to $102.70 a barrel, rebounding from an almost two-month low. Natural gas dropped as low as $1.976 per million British thermal units for the first time in more than 10 years on speculation there won’t be enough weather-driven demand for the fuel in coming weeks to reduce an inventory surplus.

The MSCI Emerging Markets Index (MXEF) slipped 0.1 percent, falling for a sixth straight day and reaching the lowest level since Jan. 30.

The Hang Seng China Enterprises Index (HSCEI) fell 0.9 percent, its third straight decline. The Shanghai Composite Index (SHCOMP) gained 0.1 percent, while benchmark indexes in the Czech Republic and Turkey rallied more than 1 percent.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

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

Read more...

Profit Drop at U.S. Banks Imperils Rally

By Dakin Campbell - Apr 12, 2012 3:36 AM GMT+0700

The six largest U.S. lenders, including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co., may post an 11 percent drop in first-quarter profit, threatening a rally that pushed bank stocks 19 percent higher this year.

The banks will post $15.3 billion in net income when adjusted for one-time items, down from $17.3 billion in last year’s first quarter, according to a Bloomberg survey of analysts. Trading revenue at the biggest lenders is projected to fall 23 percent to $18.3 billion, according to Morgan Stanley analysts, who didn’t include their firm or Wells Fargo.

Enlarge image

A Chase bank branch in New York. Photographer: Mark Lennihan/AP Photo

Enlarge image

Pedestrians walk in front of the Wells Fargo & Co. headquarters in San Francisco. Photographer: David Paul Morris/Bloomberg

Enlarge image

JPMorgan Chase & Co. signage is displayed at a bank branch in New York. Photographer: Robert Caplin/Bloomberg

“You can’t expect bank stocks to go straight to the moon,” said Peter Kovalski, a money manager at Alpine Woods Capital Investors LLC in Purchase, New York, which manages about $5 billion. “You have to expect fundamentals to catch up, and there are some headwinds facing the industry. There is a little too much optimism going into this quarter.”

U.S. lenders, struggling to expand in commercial banking years after the housing collapse, haven’t matched last year’s overall results, even as bond and equity markets strengthened. Making matters worse, loan balances increased less than the economy, bucking a trend in previous recoveries, said Brian Foran, a New York-based analyst at Nomura Holdings Inc.

‘Complete Reversal’

Loans at the top 25 domestically chartered commercial banks rose 0.4 percent in the quarter through March 28, slowing from 1 percent growth in the previous three months, according to the Federal Reserve. Loans fell to $4.04 trillion from a peak of $4.24 trillion in the fourth quarter of 2008, according to the Fed. The U.S. economy expanded 2 percent in the first quarter, according to estimates from 72 economists surveyed by Bloomberg.

“There will be times in this cycle, like this quarter, when GDP growth and loan growth don’t necessarily track each other,” Foran said in an interview. “It’s a complete reversal of the fourth quarter, when capital markets were weak and loan growth was strong.”

The results may disappoint investors who piled into banking stocks on a bet the industry was inexpensive and set to benefit from a strengthening economy, he said.

The KBW Bank Index (BKX) of 24 companies climbed 26 percent in the first quarter, led by Bank of America Corp.’s 72 percent gain and Regions Financial Corp.’s 53 percent. Financial services topped all sectors in the Standard & Poor’s 500 Index. (SPX)

Over the past five trading days ending yesterday, the KBW Index fell 6.4 percent. That may mean fewer investors sell shares if first-quarter results disappoint, Kovalski said.

The gauge rose 2.1 percent today in New York trading, led by Bank of America, up 3.8 percent, and KeyCorp, with a gain of 3.4 percent. JPMorgan rose 2.4 percent.

Book Values

Still, lenders are cheaper than they were last year, as measured by the ratios of their stock prices to earnings estimates over the next 12 months and to book values. The price- to-earnings ratio for the KBW Index was 10.8 as of yesterday, down from 13.7 on April 11, 2011. The ratio of price to tangible book value, a measure of what investors are willing to pay for a company’s equity after removing intangible items such as goodwill, stood at 1.22 compared with 1.53 a year earlier.

Investors will get a first look at results when JPMorgan and Wells Fargo (WFC) kick off earnings, about an hour apart, on April 13. Citigroup Inc. (C) is set to announce results April 16, followed by Goldman Sachs Group Inc. (GS), Bank of America and Morgan Stanley.

JPMorgan, the largest and most profitable U.S. lender, may say net income fell 19 percent, adjusting for one-time items, from the same period a year earlier to $4.53 billion, according to the average estimate of 19 analysts surveyed by Bloomberg. Earnings per share will fall to $1.18, the analysts estimate. Revenue at the New York-based bank is projected to fall 4.1 percent to $24.2 billion.

Wells, BofA

Profit at San Francisco-based Wells Fargo, the most valuable U.S. bank and biggest home lender, is estimated to climb 7.8 percent to $3.85 billion, analysts estimate. Revenue probably was little changed at about $20.4 billion.

Bank of America, second by assets to JPMorgan and based in Charlotte, North Carolina, may post $1.73 billion in adjusted earnings, about 1 percent less than the year-earlier period, according to the Bloomberg survey. Citigroup may report a 7 percent gain in adjusted profit to $3.21 billion. Goldman Sachs’s net income is projected to fall 29 percent to $1.81 billion. Citigroup and Goldman Sachs are based in New York.

Joe Evangelisti, a spokesman for JPMorgan, declined to comment, as did Wells Fargo’s Mary Eshet, Bank of America’s Jerry Dubrowski, Goldman Sachs’s Michael DuVally and Citigroup’s Shannon Bell.

Trading Revenue

For those banks with the largest capital-markets operations, the bond markets provided one bright spot.

Underwriters sold more than $628 billion in U.S. corporate debt in the first quarter, increasing from less than $561 billion in the prior year’s first three months, according to data compiled by Bloomberg. JPMorgan ranked first, selling $79.7 billion, and Citigroup came in second with $62.2 billion. Wells Fargo was 10th, with $25.5 billion in sales. Wells Fargo, whose 12-month stock performance has outpaced its largest peers, depends the least on capital markets for profit.

While trading probably fell short of last year, analysts estimate it jumped from the fourth quarter. Revenue in the fixed-income, currencies and commodities-trading divisions at Bank of America, Citigroup, JPMorgan and Goldman Sachs probably totaled $14.3 billion in the first quarter, Betsy Graseck, a Morgan Stanley (MS) analyst, estimated in an April 3 report. That would be an 18 percent decline from the $17.5 billion generated a year earlier and more than double the fourth quarter, when it slumped to $6.9 billion, Graseck wrote.

‘More Defensive’

Equity-trading revenue may have fallen 34 percent to $4 billion and fees from underwriting equities may have dropped 18 percent to $1.15 billion over the prior year, according to the estimates. Revenue from mergers and acquisitions advice may have declined 30 percent.

Trading got a lift from rising asset prices with those banks bringing the largest inventories into the quarter likely doing the best, according to Charles Peabody, an analyst at Portales Partners LLC in New York. U.S. investment-grade and high-yield corporate debt rose 3 percent in the first quarter, according to Bank of America Merrill Lynch Index data.

“We’ve gotten more defensive in the last several weeks,” Peabody said in a phone interview. “Fee income will be pretty strong given fixed-income results and asset appreciation. By contrast, we think top-line and the basic banking business will be disappointing.”

Peabody said bank stocks could fall 20 percent to 30 percent from their recent highs.

Net Interest Margins

Central bankers aren’t helping. Fed officials affirmed their projection, first announced in January, that subdued inflation and economic slack probably will warrant low rates through late 2014, according to minutes of the March policy meeting released this month. That cuts into net interest margins, the difference between what banks earn on loans and what they pay for funds. At the four largest U.S. banks by assets, margins dropped to 2.99 percent in the fourth quarter from 3.17 percent a year earlier.

“It will be a while until the industry gets back to its optimal returns,” said Kovalski of Alpine Woods Capital Advisors. “We had a lot of underweighted portfolios quickly increasing their allocation to the sector. Now the question is will they hold it there, or will they get antsy that the group isn’t generating the quick turnaround that was expected?”

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

Read more...

U.S. Files Antitrust Lawsuit Against Apple, Hachette

By Bob Van Voris - Apr 11, 2012 9:27 PM GMT+0700

The U.S. sued Apple Inc. (AAPL), Hachette SA, HarperCollins, Macmillan, Penguin and Simon & Schuster in New York district court, claiming the publishers colluded to fix eBook prices.

CBS Corp. (CBS)’s Simon & Schuster, Lagardère SCA’s Hachette Book Group and News Corp. (NWSA)’s HarperCollins settled their suits today, two people familiar with the cases said.

Enlarge image

Ebook on an iPad in New York on April 11, 2012. Photographer: Scott Eells/Bloomberg

Apple and Macmillan, which have refused to engage in settlement talks with the Justice Department, deny they colluded to raise prices for digital books, according to people familiar with the matter. They will argue that pricing agreements between Apple and publishers enhanced competition in the e-book industry, which was dominated by Amazon.com Inc. (AMZN)

The Justice Department is probing how Cupertino, California-based Apple changed the way publishers charged for e- books on the iPad, a person familiar with the matter said last month. The Justice Department said it would announce an “unspecified” antitrust settlement today.

Pearson Plc (PSON)’s Penguin Group (PNGN) was also preparing to fight the U.S. Justice Department in court if necessary, two people familiar with knowledge of the matter told Bloomberg News April 5.

Gina Talamona, a spokeswoman for the Justice Department’s antitrust division, and representatives of Apple, Simon & Schuster, HarperCollins, Hachette, Penguin and Macmillan, which is a unit of Verlagsgruppe Georg von Holtzbrinck GmbH, declined to comment on prospects for lawsuits or settlements.

Agency Model

Apple, Penguin and Macmillan want to protect the so-called agency model that lets publishers -- not vendors -- set e-book prices, said the people on April 5, who declined to be identified because they weren’t authorized to speak publicly.

The government is seeking a settlement that would let Amazon and other retailers return to a wholesale model, where retailers decide what to charge customers, the people said. A settlement could also void so-called most-favored nation clauses in Apple’s contracts that require book sellers to provide the maker of the iPad with the lowest prices they offer competitors, the people said.

Consumers and competition could be hurt if several companies sign contracts that refer to prices charged to rivals even if those firms aren’t dominant, said Fiona Scott-Morton, a Justice Department economist, in an April 5 speech in Washington, signaling the antitrust division’s thinking on the issue of most-favored-nation clauses.

More Control

Upholding the agency model would give publishers more control over pricing and limit discounting, helping the industry avoid sales losses as more consumers buy books online.

Sales of e-books rose 117 percent in 2011, generating $969.9 million, Publishers Weekly reported Feb. 27, citing estimates from the Association of American Publishers. By eliminating printing and shipping costs, digital versions generate higher profit margins than physical copies.

When Apple came out with the iPad in 2010, it let publishers set their own prices for e-books as long as it got a 30 percent cut and the publishers agreed to offer their lowest prices through Apple. This agency model overtook Amazon’s practice of buying books at a discount from publishers and then setting its own price for e-reader devices.

The results of a settlement or lawsuit wouldn’t necessarily kill the agency model or prevent other publishers from continuing to set their own prices for e-books, one of the people said.

Random House Inc., based in New York, has agreements with Apple and Amazon that lets the book publisher set prices for e- books, the essence of the agency model. The company isn’t a part of the U.S. inquiry.

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

Read more...

Zuckerberg Threatened to Disable Ceglia Site Amid Dispute

By Bob Van Voris - Apr 11, 2012 11:00 AM GMT+0700

Facebook Inc. (FB) cofounder Mark Zuckerberg threatened in 2004 to disable part of the website he was working on for Paul Ceglia, the New York man now suing him for part-ownership of the multibillion-dollar company, according to copies of e-mails filed by Facebook in federal court.

Zuckerberg worked for Ceglia in 2003 and 2004, while he was attending Harvard University and building the website that would become the world’s biggest social network. In an e-mail to Ceglia, Zuckerberg demanded payment for work on Ceglia's website, StreetFax.com, warning that if he didn’t get the money that was coming to him, he would take down part of the site.

Mark Zuckerberg, chief executive officer of Facebook Inc., listens to a question at the Web 2.0 Summit in San Francisco. Photographer: Tony Avelar/Bloomberg

Enlarge image

Facebook Inc. cofounder Mark Zuckerberg threatened in 2004 to disable part of the website he was working on for Paul Ceglia, the New York man now suing him for part-ownership of the multibillion-dollar company, according to copies of e-mails filed by Facebook in federal court. Photographer: Bob Van Voris/Bloomberg

“I must receive $5,000 by next Saturday at midnight, or the scroll search functionality will be removed from the site,” Zuckerberg wrote in a message to Ceglia on Feb. 21, 2004, about two weeks after he put “Thefacebook.com” online. Zuckerberg told Ceglia he owed him $10,500 of the $19,500 he’d been promised, according to the e-mails, filed by Facebook as part of the lawsuit in Buffalo, New York.

Facebook last month asked the judge to throw out the lawsuit. The incident supports Zuckerberg’s defense that the contract on which Ceglia bases his claim to half of the CEO’s Facebook holdings is a fake, defense attorney Orin Snyder of Gibson Dunn & Crutcher LLP said in an e-mail April 9. A different contract Facebook claims is the actual agreement between the men shows Ceglia hired Zuckerberg for the StreetFax work alone, the lawyer said. Zuckerberg never acted on the threat to disable Ceglia’s website, according to Snyder.

‘Cyber-Briber’

Zuckerberg’s 2004 e-mail to Ceglia prompted a lawyer connected to StreetFax at the time to refer to him as the “brat programmer” and “cyber-briber,” according to messages included in Facebook’s court papers. The company said it found the e-mails in Ceglia’s electronic files.

The contract Facebook claims is genuine would have permitted Zuckerberg “to offline the site Streetfax.com and remove his program” for non-payment. The contract Ceglia claims Zuckerberg signed gives him no such right. In its court papers seeking dismissal of the suit, Facebook said Ceglia never paid Zuckerberg the remaining $10,500. The two last communicated in May 2004, according to Facebook.

Facebook has disclosed in court papers 15 of about 300 e-mails the company said it recovered from Zuckerberg’s Harvard e-mail account, consisting of communications with Ceglia and others working for StreetFax at the time.

Frequently Demands Money

In the e-mails, Zuckerberg frequently demands money he claims Ceglia owes him, while Ceglia asks for more time to pay. The 15 messages span almost nine months, from Aug. 15, 2003, to May 7, 2004, shortly before Zuckerberg left Harvard for Palo Alto, California, where he ran Facebook until moving it last year.

Ceglia’s lawyer, Dean Boland, said his client’s computer experts aren’t able to determine whether the Harvard e-mails are genuine or complete because they haven’t had access to the Harvard e-mail server. Facebook, now based in Menlo Park, California, has also had exclusive access to computers Zuckerberg used in 2003 and 2004, and evidence from suits filed against the company by Facebook co-founder Eduardo Saverin, and by Tyler and Cameron Winklevoss and Divya Nirendra, Boland said.

The plaintiffs in the two cases, former Harvard students who claimed a role in founding Facebook, eventually settled.

Ceglia, 38, sued Zuckerberg, 27, and Facebook in 2010, claiming he signed a contract with Zuckerberg in April 2003 that made them partners in exchange for an investment in the project. Zuckerberg said in court papers that the contract he signed related only to his StreetFax work and had nothing to do with Facebook.

Traffic Intersections

StreetFax, which Ceglia started to sell pictures of traffic intersections to insurance companies, is no longer in business. Facebook, which in February filed for an initial public offering to raise $5 billion, is worth an estimated $95.8 billion, according to SharesPost.com, which tracks nonpublic companies.

Facebook said in its request to dismiss Ceglia’s suit that the complaint is a fraud on the court. Facebook claimed Ceglia hopes to use the litigation to “leverage his fraud by disrupting Facebook’s highly publicized initial public offering.”

After Zuckerberg sent the 2004 message threatening to disable the StreetFax site, Ceglia contacted Jim Kole, a lawyer Facebook described in court papers as “an initial member of StreetFax,” for advice on what to do, according to a separate e-mail exchange made public by Facebook in the case.

Written Assurance

In messages dated March 4 and 5, Kole called Zuckerberg “the brat programmer,” suggesting that Ceglia offer to pay him some money, to be held in escrow until Zuckerberg “provides his written assurance that he will not access or disable any portion of the site.” Kole, formerly with Sidley Austin LLP, didn’t return a call and e-mail seeking comment on the case.

“Mabe I am a littel to emotionally charged about this but I think that after him illegally removing functionality from the site that I dont want to pay this kid another dime,” Ceglia wrote in an e-mailed response filed in court papers.

“I think I’ll just make a veiled reference to payments that could be made if he settles the matter as a businessman rather than a cyber-briber,” Kole answered in a handwritten note, according to the Facebook court filings. “PLEASE, PLEASE fax me the contract.”

Facebook’s forensic computer experts, from the firm Stroz Friedberg LLC, said they discovered an image of the Ceglia e-mails, with the handwritten note, in one of Ceglia's e-mail accounts, which they were permitted to access by order of the judge. The e-mail exchange was included in a report by Stroz Friedberg filed by Facebook with the court.

‘Smoking Gun’

Facebook said Ceglia responded to Kole’s fax request by sending him a copy of what the company says is the real StreetFax contract, with no mention of a stake in the social network. The company claims those e-mails and the attached contract provide “smoking gun” proof in its defense.

In a March 8, 2004, e-mail, about two weeks after the threat to disable StreetFax, Zuckerberg told Ceglia “The need for my immediate payment has been resolved for now, and so I guess it is to my advantage to allow you to continue to use the site, as long as you can make monthly payments.”

“I really appreciate you not doing anything rash,” Ceglia answered, according to the e-mails.

Later that month, Ceglia proposed giving Zuckerberg 1 percent of StreetFax as security for the money he owed him.

‘Giving Myself Ulcers’

“I am giving myself ulcers trying to get your money to you before you take aggressive action against the site again,” Ceglia said, according to the e-mail provided by Facebook.

In a hearing last week, U.S. Magistrate Judge Leslie Foschio ruled that Ceglia’s lawyers may question Facebook’s expert-witnesses in computer forensics, documents, paper and ink, who have said Ceglia’s contract and the e-mails he produced in the case are fake.

Foschio barred Ceglia from seeking more evidence from Facebook, including Zuckerberg’s Harvard computers. The judge has yet to rule on Facebook’s motion to dismiss the case.

The case is Ceglia v. Zuckerberg, 1:10-cv-00569, U.S. District Court, Western District of New York (Buffalo).

To contact the reporter on this story: Bob Van Voris in U.S. District Court for the Western District of New York in Buffalo at rvanvoris@bloomberg.net.

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

Read more...