RBA Cuts Growth, Inflation Forecasts on Weaker Jobs

By Michael Heath - May 4, 2012 8:37 AM GMT+0700

The Reserve Bank of Australia cut growth and inflation forecasts as weak labor and housing markets keep price gains in check, underscoring its decision this week to cut interest rates by the most in three years.

“Labor market conditions have continued to be on the soft side to date, with large increases in employment in mining and some service industries roughly offset by declines in the manufacturing, hospitality and retail sectors,” the central bank said today in its quarterly monetary policy statement. “A recovery in housing construction is unlikely in the near term.”

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The central business district is seen illuminated at dawn alongside the Harbor Bridge in Sydney. Growth in Australia, the only major developed economy to avoid a recession over the past 20 years, is weakening as output slows in China, its biggest export market. Photographer: Ian Waldie/Bloomberg

The RBA sees average growth of 3 percent in 2012, down from its February estimate of 3.5 percent. Consumer prices will rise 2.5 percent in the year to December, from a previous prediction of 3 percent; underlying inflation is predicted at 2.25 percent from a previous 2.75 percent, the central bank said. The estimates are based on the overnight cash rate target remaining at 3.75 percent, it said.

The revisions reflect RBA Governor Glenn Stevens’s decision three days ago to slash the benchmark rate by half a percentage point to a two-year low, even as most economists polled forecast a quarter-point reduction. The RBA is trying to buttress a housing market in which prices have fallen for five straight quarters, bolster employment as a high currency hurts non- resource industries and boost confidence that has weakened among consumers who are saving more.

The Australian dollar was at $1.0259 as of 11:32 a.m., little changed from before the RBA statement. It was heading for a 2 percent drop since April 27, which would be the biggest weekly slide this year.

‘Subdued Growth’

“The assumed high level of the exchange rate and a weak short-term outlook for building construction are expected to result in subdued growth outside of the mining sector in the near term,” the RBA said. “Growth in household spending moderated at the end of 2011 and partial indicators suggest that it remained soft in early 2012.”

Australia’s four biggest banks are trying to guard margins against further erosion from elevated wholesale funding costs, by passing through less of the central bank’s rate cuts to mortgage holders. The RBA lowered rates twice late last year by 25 basis points.

The RBA said today that its half percentage-point cut this week was made “in order to deliver the appropriate level” of borrowing rates. “The board judged that it was desirable for financial conditions to be easier than those which had prevailed in December, and that this required a 50 basis point reduction in the cash rate.”

Tradables Inflation

The nation’s unemployment rate has held at about 5.2 percent for the past six months, less than half the level in Europe, even as the currency’s strength hurts manufacturing and tourism.

The central bank, explaining the revision of the inflation outlook, said it expects the decline in the price of international goods to diminish given the exchange rate has been little changed for a year. A weakening in domestically produced inflation will rely on moderate wage growth due to a weaker labor market and improved productivity as companies respond to the heightened competitive pressure caused by the exchange rate, it said.

The central bank described inflation last quarter as “unusually low.”

Budget Cuts

The economy will also have to absorb the biggest fiscal contraction as a proportion of gross domestic product since at least the fiscal year that started in July 1953. The government is seeking to return the budget to surplus in the fiscal year beginning July 1. It will deliver the budget May 8.

The RBA noted the plan, saying “public final demand is also expected to grow at well below-trend rates over the forecast period as both federal and state governments undertake fiscal consolidation.”

Australia’s economy is struggling to accelerate, unexpectedly posting back-to-back trade deficits as coal and metal exports slumped. The RBA said today that “exports have been revised lower, largely reflecting a reassessment of the ability of mining companies to utilize new transport and port capacity fully in the near term, along with weaker manufacturing exports.”

The Australian dollar has risen in six of the past seven quarters. Tourism, manufacturing and retail industries have weakened under the currency’s 41 percent rise in the past three years.

Traders are betting there’s a 74 percent chance Stevens will lower rates by a quarter point to 3.5 percent at the next meeting in June, according to swaps data compiled by Bloomberg.

Resource Bonanza

Even after this week’s rate cut, Australia has the highest borrowing costs among major developed nations as Stevens seeks to manage an economy powered by demand from emerging nations including China and India for iron ore, coal and natural gas. Chevron Corp., Royal Dutch Shell Plc, Woodside Petroleum Ltd. and ConocoPhillips are among energy companies spending $180 billion to explore and develop gas fields in Australia.

The RBA said the outlook for mining investment has been revised higher since its last statement as its liaison suggested some projects previously seen as “only possible now look more likely to go ahead than had been previously assumed, and that work on some other projects is progressing at least as fast as was expected.”

The central bank said the biggest offshore risk to its forecast is that Europe’s sovereign debt crisis could intensify and derail the upswing in the global economy. Global growth is expected to be 3.5 percent this year and 4 percent next year, it said.

“While the likelihood of that occurring has eased somewhat in recent months, partly because of the actions of authorities in Europe, the situation remains fragile,” the central bank said in the statement.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

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

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Gold Standard for All, From Nuts to Paul Krugman

By Amity Shlaes May 3, 2012 6:01 AM GMT+0700

Nut cases. That’s what they are. And if you take an interest in them, you are a nut case, too.

That’s the consensus among credentialed economists who describe advocates of a return to the monetary regime known as the gold standard. In fact, the economic pack will marginalize you as a weirdo faster than you can say “Jacques Rueff,” if you even raise the topic of monetary policy in relation to gold.

About Amity Shlaes

Amity Shlaes is a senior fellow in economic history at the Council on Foreign Relations and the author of the best-sellers "The Forgotten Man: A New History of the Great Depression" and "The Greedy Hand: Why Taxes Drive Americans Crazy."

More about Amity Shlaes

An example of such marginalizing appears in a recent issue of the Atlantic magazine. Author Adam Ozimek lists four rules upon which economists overwhelmingly agree. Right away, that puts readers on guard; they don’t want to be the only one to disagree with eminences.

The first rule Ozimek offers is that free trade benefits economies. So obvious. That makes the penalty for disagreement higher. Then you read down to the final principle: “The gold standard is a terrible idea.” By putting the proposition in such strong terms, the author raises the penalty for disagreeing. If you don’t subscribe to this view, you risk both being classed as the kind of genuine nut case who believes in protectionism, and enduring the disdain of other economists -- “all economists,” as the Atlantic headline writer summarized it.

But “all economists” is not the same as “all economies.” The record of gold’s performance in all economies over the past century is not all “terrible.” Especially not in relation to areas that concern us today: growth, inflation or the frequency of bank crises. The problem here may lie not with the gold bugs but with those who work so hard to isolate them.

Gold’s Real Record

Conveniently enough, the gold record happens to have been assembled recently by a highly credentialed team at the Bank of England. In a December 2011 bank report, the authors Oliver Bush, Katie Farrant and Michelle Wright review three eras: the period of a traditional gold standard (1870-1913); the period of a gold-standard variant, the Bretton Woods gold-exchange standard (1948 to 1972); and a period of flexible exchange rates (1972-2008).

The report then looks at annual real growth per capita worldwide, over many nations. Such growth, they find, was stronger in the recent non-gold-standard modern period, averaging an annual increase of 1.8 percent per capita, than in the classical gold-standard period before 1913, when real per- capita gross domestic product increased 1.3 percent annually. Give a point to the gold disdainers.

But the authors also find that in the gold exchange standard years of 1948 to 1972 the world averaged annual per- capita growth of 2.8 percent, higher than the recent gold-free era. The gold exchange standard is a variant of the gold standard. That outcome doesn’t tell you we must go back to the gold exchange standard yesterday. But it does suggest that figuring out how the standard worked might prove a worthy, or at least not a ridiculous, endeavor.

Gold shone in other ways. In a gold-standard regime, money is backed by gold, so it’s impossible, or at least more difficult, for governments to inflate. Naturally the gold standard and Bretton Woods years therefore enjoyed lower rates of inflation compared with the most recent era. The gold standard endures a reputation for causing more banking crises than other monetary regimes. The Bank of England paper suggests gold stabilizes banks: The incidence of banking crises in the non-gold-standard period is higher than the incidence in the two gold periods.

“Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives,” wrote Bush, Farrant and Wright.

Stable Markets

Markets and countries enjoyed relative stability in gold- standard years, and capital in those years flowed to worthy growth-generating projects. The main sacrifice in gold regimes that the authors identify is that governments lose authority to micromanage domestic economies. But given governments’ records, that may not be such a bad thing, either.

It all suggests that contempt for old gold hands such as Congressman Ron Paul of Texas might not be warranted. And that it might be interesting to peruse the numerous gold-related currency plans outside the door of the academic salon. Plenty of people, many former bankers, think it is time to pass laws returning the U.S. to some version, strong or weak, of the gold standard.

Lewis Lehrman, financier and founder of the Gilder-Lehrman Institute, which focuses on history, recently published a plan to take the world back to gold, “The True Gold Standard.” Charles Kadlec, another former Wall Streeter, co-wrote his own proposal, “The 21st Century Gold Standard,” with Ralph Benko. The case for gold as a mandatory metric for the Federal Reserve in setting interest rates is made in new legislation offered by Congressman Kevin Brady, another Republican from Texas. Dozens of state legislatures are introducing their own gold- or silver-related currency legislation.

One reason people slap the nut-case label on others with impunity is that for the past 30 or 40 years most economic education has systematically excluded the gold standard and its exponents from the classroom. It’s easy to call something your professors never respected the work of a nut case. But it’s also worthwhile to ask why the professors white out the gold standard from the books. Perhaps it is because the systems they raved about in their dissertations, systems of flexible exchange rates, subsequently underperformed.

This inconsistency in their own modeling is of course hard to acknowledge. Recently Bloomberg Television drew enormous attention when co-anchor Trish Regan moderated a debate between Ron Paul and Paul Krugman, the Nobel prize-winning New York Times columnist.

Krugman’s Nostalgia

Krugman sought to hold the middle ground, noting that all he sought, through his recommendation that federal debt rise to 130 percent of gross domestic product, was a return to the kind of America in which his parents lived. The professor treated the congressman’s remarks as unscholarly; in a blog post afterward, Krugman wrote “everything Paul said about growth after World War II was wrong.”

But Krugman too has some sorting through to do. The years when his parents lived were gold years, the Bretton Woods gold exchange standard, a time when the federal government, except in world war, would never had considered raising debt to 130 percent of the economy, as Krugman suggested in the debate.

If we are going to speak of consensus, let’s not forget one that is truly universal: Our economic system stands a good chance of breakdown in coming years. The only way to limit damage from such a breakdown is to ready ourselves to choose other models by learning about them now.

Not to do so would be nuts.

(Amity Shlaes is a Bloomberg View columnist and the director of the Four Percent Growth Project at the Bush Institute. The opinions expressed are her own.)

Read more opinion online from Bloomberg View.

Today’s highlights: the View editors on what’s missing from the U.S.-Afghanistan pact and better ways to fix the farm bill; Ezra Klein on how the U.S. isn’t like Greece; Caroline Baum on lack of alternatives to austerity; Ray Ball on pitfalls of mark-to-market accounting; Josh Barro on new arguments for a U.S. value-added tax.

To contact the writer of this article: Amity Shlaes at amityshlaes@hotmail.com.

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net.

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U.S. Stocks Fall on Economic Data Ahead of Jobs Report

By Rita Nazareth - May 4, 2012 3:39 AM GMT+0700

U.S. stocks fell, sending the Standard & Poor’s 500 Index down a second day, amid disappointing service industries data and as investors awaited tomorrow’s jobs report to gauge the pace of growth at the world’s largest economy.

Commodity and technology shares fell the most among 10 S&P 500 groups as Alcoa (AA) Inc. and Hewlett-Packard Co. (HPQ) slid at least 1.5 percent. General Motors Co. (GM) sank 2.4 percent after earnings tumbled 61 percent. Target Corp. (TGT) lost 2.5 percent as April sales missed projections. Green Mountain Coffee Roasters Inc. (GMCR) plunged 48 percent as profit will be less than it expected. Carlyle Group LP advanced 0.2 percent in its first day of trading.

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A trader works on the floor of the New York Stock Exchange. Photographer: Michael Nagle/Bloomberg

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May 3 (Bloomberg) -- Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., talks about the outlook for the U.S. labor market and economy. Feroli speaks with Scarlet Fu on Bloomberg Television's "InBusiness." (Source: Bloomberg)

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May 3 (Bloomberg) -- U.S. jobless claims fell by 27,000 to 365,000, lower than forecast, in the week ended April 28 from a revised 392,000 the prior period, Labor Department figures showed today in Washington. Meanwhile, productivity fell at a 0.5 percent annual rate after a 1.2 percent gain in the prior three months. Michael McKee and Betty Liu report on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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May 3 (Bloomberg) -- Peter Solomon, founder of investment bank Peter J. Solomon Co. and a former vice chairman at Lehman Brothers Holdings Inc., talks about the outlook for corporate merger and acquisition activity and U.S. employment. Solomon speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

The S&P 500 retreated 0.8 percent to 1,391.57 at 4 p.m. New York time, dropping 1 percent in two days. The Dow Jones Industrial Average declined 61.98 points, or 0.5 percent, to 13,206.59. The Russell 2000 Index (RTY) of small companies decreased 1.5 percent to 806.59. About 6.9 billion shares changed hands on U.S. exchanges, or 3.8 percent above the three-month average.

“It’s a bump in the road,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida. His firm oversees more than $300 billion. “The economic data has turned softer. I wouldn’t be surprised to see the jobs report tomorrow disappoint. All that will do is allow the market to work off its overbought condition.”

The two-day drop in stocks, which pulled the Dow down from a four-year high, came as concern about the economy grew. A measure of forecasting accuracy shows economic data have been worse than predicted. The Citigroup Economic Surprise Index is at minus 24.20, the lowest since September.

160,000 Jobs

Equities fell today as service industries grew at a slower pace than projected in April, a sign the largest part of the economy may struggle to accelerate. The report overshadowed data showing that jobless claims fell to 365,000 in the week ended April 28, a one-month low. The Labor Department may say tomorrow that the U.S. added 160,000 jobs in April, compared with a gain of 120,000 the previous month, according to a Bloomberg survey.

“The jobless claims are good,” Philip Orlando, the New York-based chief equity strategist at Federated Investors Inc., which oversees about $370 billion, said in a phone interview. “This gives us the read-through that May’s jobs numbers are likely going to be better. Yet tomorrow’s report will probably still be consistent with this temporary soft patch.”

Concern about growth also intensified after European Central Bank President Mario Draghi said the economic outlook has worsened, adding that policy makers didn’t discuss cutting the benchmark rate below its current record low of 1 percent.

Earnings Season

Today’s decline pared the 2012 rally in the S&P 500 (SPX) to 11 percent. Investors bought stocks this year on better-than- estimated profits. About 71 percent of S&P 500 companies that reported results since the start of the earnings season have beaten projections, according to data compiled by Bloomberg.

Eight out of 10 groups in the S&P 500 retreated today as commodity shares slumped at least 1.1 percent. The Morgan Stanley Cyclical Index of companies most-tied to the economy slid 1.5 percent. Alcoa dropped 1.5 percent to $9.58. Hewlett- Packard decreased 3.1 percent, the most in the Dow average, to $24.48. Bank of America Corp. (BAC) lost 2 percent to $8.

GM sank 2.4 percent to $22.37. Profit at the largest automaker was affected by widening losses in Europe. The results resemble Ford Motor Co. (F)’s profit as North American income was countered by losses in Europe, as well as a higher tax rate.

Green Mountain plunged 48 percent, the biggest decline ever, to $25.87. It’s seeing more competition from private-label capsules that fit into Keurig machines and from Starbucks Corp. (SBUX), which plans to sell its own single-serve brewer later this year. The company has introduced the Vue coffee machine to help combat rivals when the main patents for its K-Cups expire in September.

Retailers Slump

Retailers in the S&P 500 lost 0.9 percent after companies including Target and Macy’s Inc. (M) posted April same-store sales that trailed analysts’ estimates as an earlier Easter holiday pulled sales into March and cooler weather cut mall traffic.

Target, the second-biggest U.S. discount chain, slid 2.5 percent to $56.55. Macy’s, the second-biggest U.S. department- store chain, rose 0.7 percent to $41.55. Gap Inc. (GPS), the largest U.S. apparel chain, slumped 1.6 percent to $28.67.

Prudential Financial Inc. (PRU) tumbled 10 percent, the most in the S&P 500, to $54.81. The second-biggest U.S. life insurer swung to a first-quarter loss as the value of the company’s derivative contracts fell.

Visa Inc. (V) slid 4.7 percent to $116.41. The world’s biggest payments network disclosed a U.S. antitrust probe into its pricing and strategy for debit-card transactions.

Facebook’s IPO

Facebook Inc. (FB), the most popular social-networking site, is seeking as much as $11.8 billion in its initial public offering, the largest on record for an Internet company. About 337.4 million shares are being sold at $28 to $35 each.

Founded in 2004 and led by 27-year-old Chief Executive Officer Mark Zuckerberg, Facebook has amassed more than 900 million users and reported a 24-fold increase in sales over the past four years. The company’s popularity as a tool for staying connected online will spur demand for the stock, even as some investors steer clear of a valuation they deem too high, said Francis Gaskins, president of researcher IPOdesktop.com.

“Some people will buy Facebook stock no matter what -- they’ll just buy it,” said Gaskins, who is based in Marina Del Rey, California. “There’s going to be an initial push of enthusiasm and money, but ultimately, in a year or so, it will come down to valuation metrics. It has to.”

Carlyle Group (CG) rose 0.2 percent to $22.05, trimming a gain of 2.1 percent. It raised $671 million by selling 30.5 million shares at $22 each, according to a statement yesterday. The price for Carlyle, which had offered the shares for $23 to $25, represents a 65 percent discount to rival Blackstone (BX) Group LP.

Hard to Predict

In pricing its IPO, Carlyle sought to avoid the fate of Blackstone, Apollo Global Management LLC and other alternative asset managers, whose stocks have tumbled in public trading. Investors have struggled with how to value private equity firms partly because their earnings are hard to predict, with the bulk coming from buyout funds that sell assets at various times.

“Private equity firms in general struggle with initial public offerings mainly because of the way their business is structured, and Carlyle is no different,” said Tom Murphy, a partner in the law firm of McDermott Will & Emery LLP.

Whole Foods Market Inc. (WFM) jumped 7.6 percent to $90.69. The largest U.S. natural-goods grocer posted profit that topped analysts’ estimates on increased demand for organic foods.

Berkshire Hathaway Inc. (BRK/A) shareholders missed out on better returns from the S&P 500 by sticking with Chairman Warren Buffett after each of his last three annual meetings.

2012 Gathering

Berkshire fell 2.4 percent from the firm’s April 30, 2011, meeting through yesterday, compared with the 2.8 percent advance in the S&P 500. This year’s gathering, planned for May 5 in Omaha, Nebraska, concludes three years in which Berkshire climbed about 32 percent, trailing the S&P 500’s gain of around 60 percent.

Buffett, 81, is seeking to reassure investors that the $200 billion company he built over 42 years as chief executive officer is positioned to thrive after his eventual departure. Growth slowed in the last 15 years as Buffett, a former hedge fund manager, directed Berkshire’s earnings toward takeovers in industries like machine tools, power production and railroads.

“They’re very steady, but they’re not necessarily fast growers,” Cliff Gallant, an analyst at KBW Inc., said about Berkshire operating units. A “lack of clarity” about Buffett’s successor may also be weighing on the stock, Gallant said. He rates Berkshire “outperform.”

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

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

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Zuckerberg Facebook IPO to Make Him Richer Than Ballmer

By Brian Womack and Lee Spears - May 4, 2012 5:07 AM GMT+0700

Facebook Inc. (FB)’s $11.8 billion initial public offering will cement the status of 27-year-old Mark Zuckerberg as one of the world’s richest men and put his social network among the highest-valued companies in the U.S.

Facebook is offering about 337.4 million shares for $28 to $35 each, according to a regulatory filing today. At the upper end of that range, the co-founder’s stake would be $17.6 billion, making him richer than Microsoft Corp.’s Steve Ballmer and Russian steel billionaire Vladimir Lisin, who are both twice his age, according to the Bloomberg Billionaires Index.

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Mark Zuckerberg, chief executive officer and founder of Facebook Inc., at Facebook's F8 developers conference in San Francisco. Photographer: David Paul Morris/Bloomberg

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May 3 (Bloomberg) -- Facebook Inc. Chief Executive Officer Mark Zuckerberg and investors plan to sell as much as $5.5 billion in stock in the social-network company’s initial public offering. Cory Johnson reports on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Zuckerberg, who began the service for Harvard classmates as a 19-year-old in his dorm room, built Facebook into the most popular social-networking site in the world, topping 900 million users last quarter. Now he has to prove he has the leadership skills to deliver enough growth to justify the company’s valuation, said Paul Saffo, managing director at Discern Analytics in San Francisco.

“The whole story about the Silicon Valley is hard-working, entrepreneurial tech geeks getting big payoffs,” said Saffo, whose firm provides analytics to institutional investors. “The challenge he has is: Can Mark grow as quickly as his company has grown? And can Mark grow faster than his company has grown? Because, of course, that’s what a leader must do.”

Passing MySpace

Zuckerberg, who has developed a reputation for introducing new products quickly, helped the company supplant MySpace as the most popular social service while also navigating competitive threats from Google Inc., Twitter Inc. and other social-media sites. The company has expanded its appeal by enabling developers to build applications on top of the platform, offering users music, movies, e-commerce options and other extras.

“They stayed nimble, like a startup of a smaller size,” said Jeremiah Owyang, an analyst at Altimeter Group. “The culture encouraged them to experiment and innovate on a regular basis, even when they had the lead.”

Facebook is offering 180 million of the shares, while existing owners such as Accel Partners and Digital Sky Technologies are offering 157.4 million shares, according to the filing. Zuckerberg is offering 30.2 million of his 533.8 million shares. The majority of his net proceeds will be used to pay taxes associated with exercising a stock option.

Zuckerberg has shown patience in bringing Facebook to the brink of an IPO. After starting the company in 2004, he rolled it out to other college campuses, reaching 1 million users by the end of the year. Zuckerberg also received a key investment from Peter Thiel, who made much of his wealth as a co-founder of online-payments service PayPal, later sold to EBay Inc.

Opening Up

It wasn’t until 2006 that Zuckerberg opened up the service so anyone could join. Facebook accumulated 12 million users by the end of 2006.

Zuckerberg was able to woo other investors along the way to handle the growing user base. That included software company Microsoft (MSFT), Accel and Russian investor Digital Sky.

Facebook, while preparing for the IPO, has remained active on other fronts. After being sued by Yahoo! Inc. (YHOO) in March for patent infringement, the company has been looking to buy intellectual property from other owners of it. Facebook plans to spend $550 million on some of the patents Microsoft had earlier said it would purchase from AOL Inc.

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Lee Spears in New York at lspears3@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net

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Payroll Survey Signals U.S. Jobs Slowing as Orders Drop: Economy

By Shobhana Chandra and Timothy R. Homan - May 3, 2012 12:07 AM GMT+0700

Companies in the U.S. added fewer workers last month, according to data from a private survey, pointing to a cooling in the job market, as the Commerce Department also reported a decline in factory orders in March.

Private employment increased by 119,000, the smallest gain in seven months, after rising by 201,000 in March, Roseland, New Jersey-based ADP Employer Services said. Orders to factories fell 1.5 percent following a 1.1 percent gain in February.

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Job seekers wait in line to enter a career fair in New York. Photographer: Michael Nagle/Bloomberg

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May 2 (Bloomberg) -- U.S. Representative James Himes, a Connecticut Democrat, talks about the ADP payroll report for April and the economy. Employment increased by 119,000 following a revised 201,000 gain the prior month, according to figures from Roseland, New Jersey-based ADP Employer Services. Himes, speaking with Betty Liu on Bloomberg Television's "In the Loop," also discusses financial market regulations and the Occupy Wall Street protests. (Source: Bloomberg)

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May 2 (Bloomberg) -- Martin Feldstein, a professor of economics at Harvard University, talks about the impact of Federal Reserve monetary policy on the stock market. Feldstein, speaking with Sara Eisen on Bloomberg Television's "InsideTrack," also discusses the outlook for the U.S. economy. (Source: Bloomberg)

Stocks retreated as the smaller-than-projected advance in payrolls raised concerns government data in two days will show the world’s largest economy isn’t growing fast enough to reduce unemployment. A report yesterday showing manufacturing expanded in April at the fastest pace in almost a year helped send the Dow Jones Industrial Average to the highest level since 2007.

“Some slowing of job growth was expected,” said Gus Faucher, a senior economist at PNC Financial Services Group Inc. in Philadelphia. “As of now, the job market continues to expand, and we’re getting close to a self-sustaining recovery” where job growth supports wage gains, he said.

The Standard & Poor’s 500 Index fell 0.4 percent to 1,400.94 at 12:52 p.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 1.93 percent from 1.94 percent late yesterday.

The median forecast of economists surveyed by Bloomberg News called for a 170,000 increase for ADP. Projections ranged from 100,000 to 200,000, based on estimates of 37 economists.

Uncertain Predictor

Over the previous six reports, ADP has been an uncertain predictor of the Labor Department’s monthly estimate. It was closest in October, when ADP’s first estimate of private payrolls overstated the gain by 6,000, and least accurate in December, when it overestimated employment by 113,000.

The government’s report in two days is projected to show payrolls increased by about 160,000 in April after rising 120,000 a month earlier, according to the Bloomberg survey median. The March data raised concern the job market was cooling, mimicking a slowdown in early 2011 that was precipitated by a jump in fuel costs and disruptions caused by the earthquake and tsunami in Japan.

Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., cut his April payroll estimate after the ADP data. Shepherdson, in an e-mail to clients in which he called the figures “disappointing,” lowered his forecast to 125,000 from 200,000.

Sticks to Forecast

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, stuck to his projected 175,000 gain. In a note to clients, LaVorgna said that ADP uses figures on jobless claims to produce its estimate, meaning the jump in applications surrounding the Easter holiday probably cut into ADP’s estimate. LaVorgna forecast ADP would show a 125,000 increase.

Elsewhere, joblessness in the 17-nation euro area increased to 10.9 percent in March, the highest since April 1997, from 10.8 percent a month earlier. Separate data showed euro-region manufacturing contracted more than initially estimated last month and unemployment in Germany, the area’s biggest economy, unexpectedly climbed.

In China, a manufacturing index rose in April, signaling a rebound in the world’s second-biggest economy may help to offset constraints on global growth from austerity measures in Europe.

The U.S. economy expanded at a 2.2 percent annual rate in the first quarter after a 3 percent pace in the final three months of 2011, Commerce Department figures showed last week. Growth was led by the biggest gain in consumer spending in more than a year.

Expanding in Illinois

Growing demand is generating employment. Volkswagen AG’s U.S. financing arm said it will expand its Illinois office, adding about 150 new jobs through 2018, as the German automaker expands its American business. VW Credit Inc. on April 20 broke ground on a 30,000-square-foot expansion to about double the size of its facility in Libertyville, Illinois.

The Labor Department’s report on May 4 may also show the jobless rate probably held at 8.2 percent, economists in the survey predicted. Unemployment has exceeded 8 percent since February 2009, the longest stretch of such levels of unemployment since monthly records began in 1948.

The ADP report is based on data representing businesses with more than 21 million workers on payrolls. Macroeconomic Advisers LLC in St. Louis produces the data with ADP.

The Commerce Department’s report showed orders to U.S. factories were restrained by a pullback in demand for aircraft that overshadowed gains elsewhere.

Turbines, Appliances

Bookings fell 1.5 percent after a revised 1.1 percent gain in February, according to figures from the Commerce Department. Turbines and household appliances were among areas showing increases as demand for commercial planes dropped by 48 percent.

The report comes a day after purchasing managers said manufacturing expanded in April at the fastest pace since June as orders, production and employment picked up, indicating the slump in bookings may be short-lived. Exports and consumer spending on big-ticket items like automobiles may be making up for a cooling in business investment, which means factories will continue to support the expansion.

Orders “have been on a see-saw pattern over the past four months, largely because of big swings in civilian aircraft,” Steven Wood, president of Insight Economics LLC in Danville, California, said in a note to clients. “Despite this month’s decline, new orders have been on a rising trend,” he said. “The demand for manufactured goods is recovering moderately.”

To contact the reporters on this story: Shobhana Chandra in Washington at Schandra1@bloomberg.net; Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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107 People Charged With $452 Million in Medicare Fraud

By Seth Stern, Laurel Brubaker Calkins and Margaret Cronin Fisk - May 3, 2012 5:52 AM GMT+0700

Federal authorities charged 107 people with Medicare fraud in a multistate operation, alleging schemes involving about $452 million in false billing, officials in Washington announced.

The U.S. charged doctors, nurses and other licensed medical professionals with schemes including submitting bills to Medicare for unnecessary services and providing and paying kickbacks to acquire patient information for fraudulent bills.

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A registered nurse discusses medication with a patient during a house call on March 26, 2012 in Denver. Photographer: John Moore/Getty Images

The indictments were the result of an investigation by the Medicare Fraud Strike Force in seven U.S. cities including Miami, Detroit, Chicago, Houston, Los Angeles, Tampa, Florida, and Baton Rouge, Louisiana, prosecutors said.

“Today’s arrests send a strong message to criminals that the consequences of committing Medicare fraud are serious,” Health and Human Services Secretary Kathleen Sebelius said in a statement. “In addition to these arrests, we used new authority from the health-care law to stop all future payments to 52 health-care providers suspected of fraud.”

Those charged include 59 defendants in Miami, accused of bilking the Medicare program of $137 million in false billings for home health care, mental health and other services.

Seven individuals in Baton Rouge, Louisiana, were accused of submitting $225 million in false claims through two community mental health centers, about half the total alleged fraudulent billings.

Largest Operation

“This coordinated takedown involved the highest amount of false Medicare billings in a single takedown in strike force history,” the Justice Department said in a statement today. The operation was the fourth in a series of such operations in the past two years, Assistant Attorney General Lanny A. Breuer said.

“These fraud schemes were committed by people up and down the chain of health-care providers -- from doctors, nurses and licensed clinical social workers to office managers and patient recruiters,” Breuer said today at a press conference.

The Baton Rouge case is the largest-ever prosecution of a community mental health care-related scheme, the U.S. said.

The Baton Rouge defendants “allegedly recruited elderly, drug-addicted and mentally ill patients from nursing homes and homeless shelters in order to submit false claims on their behalf,” Breuer said.

“They also allegedly falsified patient notes and attendance records, and forged the signatures of medical professionals -- all to make it appear as though their patients were receiving medical services when, in fact, they were not,” he said.

Clinic Owners

Those indicted in Baton Rouge included Hoor Naz Jafri and Roslyn F. Dogan, owners of two community mental-health clinics in that city.

“Jafri and Dogan directed and facilitated a large-scale scheme to bilk Medicare of hundreds of millions of dollars by taking advantage of the most vulnerable,” U.S. Attorney Donald J. Cazayoux Jr. in Baton Rouge said in court papers.

The women admitted the patients without regard to eligibility and continued treating them even after therapists complained it was inappropriate to do so, Cazayouz alleged.

“After the entities through which they operated their fraudulent scheme were placed on suspension by Medicare in September 2011, they reconstituted their fraudulent enterprise by purchasing another company,” Cazayoux said in court papers.

“Finally, Dogan participated in and encouraged the destruction of possibly incriminating files, and she personally even stole evidence from the U.S. Attorney’s Office in order to obstruct the investigation and conceal fraudulent activity,” Cazayoux said in court papers.

Guilty Pleas

The indictment against the seven Baton Rouge defendants was filed under seal the day before four therapists at the centers pleaded guilty to one count each of conspiracy to commit health- care fraud.

The Miami defendants include clinic and pharmacy owners, three nurses, two therapists, four patients and one accountant, U.S. Attorney Wifredo Ferrer said. Federal officials arrested 57 of those indicted and two are fugitives, Ferrer said.

“They each tried to use the Medicare program as their own personal ATMs to steal precious health-care dollars,” Ferrer said today at a press conference.

In Detroit, 22 defendants, including four licensed social workers were charged with cheating Medicare of $58 million in false claims for medically unnecessary services.

Clinic Staffers

In one Detroit indictment, Sanyani Edwards, controller of Funderburg Clinical and Community Services Inc., and Angel Williams, an office manager there, were charged with one count each of conspiracy to commit health-care fraud and five counts of health-care fraud.

Edwards and Williams would bill Medicare using provider numbers for licensed social workers without the workers’ knowledge or authorization “for services that were medically unnecessary and not provided,” the U.S. said in the indictment.

The government charged Raymond Arias, the owner of another Michigan clinic, with six counts of health-care fraud. Medicare paid Arias’s business, Elite Wellness LLC, of Westland, Michigan, about $3.8 million “on false and fraudulent claims,” the U.S. said. About $2.6 million of this was transferred to bank accounts in Mexico and Panama, according to an indictment.

Nine Houston-area residents were charged with participating in schemes involving $16.4 million in false billings for home health-care and ambulance services, the U.S. Attorney’s Office in Houston said.

Among those charged were Nick Patzakis and Jarvis Thomas, a doctor and nurse, respectively, who allegedly submitted $9.7 million in false Medicare billings through two home health agencies, with the help of two other co-conspirators. Four owners of Houston-area ambulance services were also charged in separate indictments with filing $6.7 million in bogus Medicare claims for ambulance rides that were either medically unnecessary or never provided.

The U.S. also charged eight Los Angeles-area residents with allegedly participating in schemes to submit more than $14 million in false bills to Medicare. The charges include an indictment handed down April 24 against two officials with Latay Medical Services, which provides health-care equipment to patients.

Latay owner Bolademi Adetola, of Harbor City, and employee Yuri Martin Lopez, of Lawndale, allegedly obtained fraudulent prescriptions for power wheelchairs, orthotics and hospital beds that were either not provided or weren’t medically necessary, U.S. Attorney Andre Birotte Jr. said today in a statement.

To contact the reporters on this story: Seth Stern in Washington at sstern14@bloomberg.net; Laurel Brubaker Calkins in Houston at of laurel@calkins.us.com; Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net.

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net; Michael Hytha at mhytha@bloomberg.net.

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Chesapeake’s McClendon ‘Deeply Sorry,’ Promises Debt Plan

By Joe Carroll and Jim Polson - May 3, 2012 4:00 AM GMT+0700

Chesapeake Energy Corp. (CHK) Chief Executive Officer Aubrey McClendon told investors he’s “deeply sorry” that his personal finances have come under scrutiny as shares fell the most in more than three years.

“I’m deeply sorry for all of the distractions of the past two weeks,” McClendon, co-founder of Oklahoma City-based Chesapeake, said on a conference call today. McClendon said the company may have to sell more assets than planned to cover a gap between cash flow and revenue if natural-gas prices remain depressed. These sales won’t interfere with debt-reduction targets or plans to boost oil production, he said.

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Aubrey McClendon, co-founder of Chesapeake Energy Corp., is "deeply sorry for all of the distractions of the past two weeks." Photograph: AP Photo

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Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon raised concern among some of his biggest investors, including Southeastern Asset Management, after news reports last month showed that he used his stakes in company wells as collateral to borrow hundreds of millions of dollars. Photographer: F. Carter Smith/Bloomberg

Chesapeake dropped 15 percent to $16.74 at the close in New York, the biggest decline since December 2008. The company reported an unexpected first-quarter loss yesterday, cut cash flow estimates, reduced its drilling budget and said it may run out of money next year under the weight of the lowest gas prices in a decade. Chesapeake needs gas prices of $5 a thousand cubic feet in 2014 to achieve its $7 billion cash flow goal for that year, McClendon said.

The shares have dropped 50 percent in the past year. The impact of falling gas prices has been compounded by media reports that McClendon was using personal stakes in the company’s wells to obtain loans. Chesapeake said yesterday it would strip McClendon of his role as chairman and appoint an independent person to the position he has held since co-founding the company in 1989.

Chesapeake’s board said it will call an early halt to an incentive program that allowed McClendon to amass personal stakes in thousands of company-operated wells.

Biggest Investors

McClendon raised concern among some of his biggest investors, including Southeastern Asset Management, after Reuters reported last month that he used his stakes in the wells as collateral to borrow hundreds of millions of dollars. Southeastern Asset Management, which holds a 13.6 percent stake in the company, today filed to change its status to an activist investor so it can pursue talks with management or third parties to boost the company’s value.

Potential conflicts between his personal and professional duties overshadowed the CEO’s efforts to shave a net debt load that swelled to twice the size of Exxon Mobil Corp. (XOM)’s at the end of 2011.

“The market has been catching up to the debt-laden, smoke- and-mirrors investment model they employ,” said Steve Shafer, chief investment officer for Covenant Global Investors, an Oklahoma City-based hedge fund that manages $320 million. “Chesapeake has a lot of debt and it needs a lot of debt going forward and that sets up a potentially scary situation.”

End the ‘Controversy’

Covenant Global doesn’t own Chesapeake shares.

“We are eager to put the controversy of the past two weeks behind us and focus all of our energies on delivering on our key endeavors,” McClendon said on the conference call today.

Chesapeake reported a first-quarter loss of $71 million, or 11 cents a share, compared with a loss of $205 million, or 32 cents, a year earlier, the company said in a statement yesterday. Excluding one-time gains and losses, per-share earnings were 18 cents, less than the 28-cent average of 34 analysts’ estimates compiled by Bloomberg.

Cutting Estimates

The gas producer slashed its full-year 2012 and 2013 operating cash flow estimates by as much as 48 percent and increased the amount of assets it plans to sell. Chesapeake said it may run short of cash next year after completing more than $20 billion in asset sales to close a funding gap and pay down debt.

The asset sales won’t impede Chesapeake’s plan to increase oil output to 250,000 barrels a day in 2015, Chief Financial Officer Domenic Dell’Osso said during the call.

The cost to protect against losses on Chesapeake’s debt jumped to the highest since September 2009. Credit-default swaps on the company jumped 3.5 percentage points to 7.6 percent upfront as of about 3:30 p.m. in New York, according to CMA, which is owned by CME Group Inc.

McClendon agreed to a board request to terminate the so- called Founder Well Participation Program in June 2014, 18 months early, without additional compensation, Chesapeake said in a separate release yesterday. He’ll retain the CEO position and won’t relinquish any of the well stakes he acquired during the past 23 years, said Michael Kehs, a Chesapeake spokesman.

“They need to keep this guy on a short leash and this is the right way to do it,” said Mark Hanson, an analyst at Morningstar Inc. (MORN) in Chicago, said in a telephone interview yesterday.

Owning Well Stakes

As of Dec. 31, McClendon, 52, had $846 million in loans financing his participation in the well-ownership program. The program, which allowed him to own as much as 2.5 percent of almost every well the company drilled, required that he pay development costs proportionate to his stake.

As Chesapeake has grown during the past two decades, McClendon’s need for cash to cover his well costs expanded along with the company’s. McClendon’s personal cash crunch was exacerbated by a plunge in gas prices that delayed the point when wells drilled in recent years began to turn a profit, Hanson said.

McClendon had $573 million in losses on his well stakes during the past three calendar years as lease and drilling expenses overwhelmed gas and oil revenue, the company said in a regulatory filing. During the first quarter, he piled on another $88 million in losses.

The Internal Revenue Service has been reviewing the well- investment program since March 2010 as part of audits of the company’s 2008 and 2009 tax returns, Kehs said yesterday.

To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Jim Polson in New York at jpolson@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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RIM Bets on BlackBerry Without Keyboard to Challenge Apple

By Hugo Miller - May 3, 2012 4:10 AM GMT+0700

When Research In Motion Ltd. (RIMM) Chief Executive Officer Thorsten Heins unveiled a prototype of the new BlackBerry 10 phone yesterday, it lacked a feature that has kept legions of users loyal to the platform: a physical keyboard.

At the BlackBerry World expo in Orlando, Florida, he showed off a sleek touch-screen device that more closely resembled an iPhone or Android smartphone than the keypad-equipped BlackBerrys of old. While RIM still plans to produce models with keyboards, the demonstration was the biggest signal yet that the company was shifting to a touch-screen world.

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Thorsten Heins, president and chief executive officer of Research In Motion Ltd. Photographer: Julie Fletcher/Bloomberg

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A prototype of Research in Motion Ltd.'s new BlackBerry 10 device. Source: Research in Motion Ltd. via Bloomberg

RIM, which is counting on its redesigned BlackBerry 10 lineup to reverse a sales slump, faces a quandary. Smartphone users have embraced virtual keyboards, evidenced by Apple Inc. (AAPL) and Google Inc. (GOOG) accounting for more than 80 percent of the market. Even so, taking away RIM’s physical keypad removes a feature that distinguishes it from the competition.

“Some will lament it, but others will embrace it,” said Nigel Hughes, a vice president in charge of sales at Ashburn, Virginia-based SteelCloud Inc., which builds BlackBerry- compatible security software and hardware for customers such as the Department of Defense. “It’s a recognition that the future is without a keyboard.”

Shares Fall

Investors didn’t have a warm response. RIM shares declined 5 percent to $12.80 today, following a 5.7 percent drop yesterday. The stock has lost almost three-quarters of its value over the past year.

Heins said that RIM faces real challenges, especially in the U.S., where the company is being squeezed by Apple and Android. Everyone at RIM “gets it that we have an uphill battle in the U.S.,” he told reporters. Heins said he’s confident that BlackBerry will regain market share in the country.

RIM’s marketing has to improve, and the company is very close to picking a new chief marketing officer, a position that has been vacant for more than a year, Heins said. The German- born CEO, who took over from RIM co-founders Mike Lazaridis and Jim Balsillie in January, said he’s also close to choosing a chief operating officer.

The company’s expansion from 6,000 employees when he joined RIM from Siemens AG in 2007 to about 20,000 at its peak caused it to lose some of its focus, Heins said.

‘Fat on the Hips’

“We have had a little fat on the hips,” he said. RIM has to become a “lean, mean hunting machine” focused on BlackBerry 10, Heins said.

Sales at the Waterloo, Ontario-based company tumbled 25 percent last quarter, with U.S. revenue plummeting more than 50 percent. And RIM’s share of the smartphone subscribers shrank to 12 percent in the period, making it a distant third in the industry, according to ComScore Inc. Google’s Android operating system accounted for 51 percent of the market, while Apple’s iPhone had 31 percent.

Before Heins took over as CEO in January, the company had talked with private-equity firm Silver Lake about going private, according to a person familiar with the matter. The discussions were preliminary and the two sides weren’t able to agree on a potential valuation, said the person, who asked to remain anonymous because the talks were private.

The iPhone’s debut in 2007, followed by Android devices a year later, showed that users were willing to embrace phones without a keyboard. While RIM made a foray into the touch-screen market in 2008 with the BlackBerry Storm, most of its lineup kept the keypads. The Storm was criticized for buggy software and was outsold by the BlackBerry Curve and Bold models, which both feature keyboards.

‘Risky’ Endeavor

For Mousser Jerbi, a longtime BlackBerry fan, the new prototype’s lack of a keyboard is a deal killer.

Jerbi plans to keep his current BlackBerry Bold rather than upgrade to the touch-screen phone. The keyboard makes it easy to tap out e-mails -- something that sets the old BlackBerry apart from a sea of iPhones and Android devices.

Jerbi, who runs corporate sales for Groupe Tunisie Telecom, Tunisia’s biggest wireless carrier, is skeptical the new model will catch on with loyalists. Even the name “BlackBerry” evokes the device’s black keys, which resemble seeds.

“Getting rid of the keyboard is risky,” said Jerbi, who once tried switching to an iPhone, only to switch back. “Especially for the e-mail user, the BlackBerry experience is very good.”

Easing the Transition

RIM began releasing the prototype to developers yesterday, saying it would be representative of the device’s hardware -- even if the final design is different. Features, such as word prediction, will make it easy for BlackBerry fans to adjust to a touch screen, Heins said.

Scrapping the physical keyboard from the initial BlackBerry 10 device will put it in closer competition with the iPhone and Android models, such as the Samsung Galaxy S. That could be tough for RIM, said Stephen Beck, a managing partner at the technology consulting firm CG42 LLC in Wilton, Connecticut.

“If you’re forcing a migration to non-keyboard, you’re going to get people asking, ‘What’s the best of breed of those devices?’” Beck said. “Given the momentum of iPhone and Android, that’s going to be a tough argument for RIM to win.”

Michael Clewley, director of handheld software product management at RIM, reassured BlackBerry World attendees that the company will eventually offer something for everyone with the BlackBerry 10 operating system. That may include slide-out keyboards, as well as traditional keypads.

“RIM has always had a wide range of devices,” he said yesterday. “We’re dedicated to having a form factor that fits your needs.”

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

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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Dow Average Retreats From Four-Year High on Jobs Data

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

U.S. stocks fell, dragging the Dow Jones Industrial Average down from the highest level since 2007, as data showed companies added fewer jobs than economists projected and euro-region unemployment rose to a 15-year high.

Energy and financial shares dropped the most among 10 groups in the Standard & Poor’s 500 Index. Chesapeake Energy Corp. (CHK) tumbled 15 percent after reporting an unexpected loss and saying it may run out of money next year under the weight of the lowest natural-gas prices in a decade. Bank of America Corp. retreated 1.8 percent. Stocks pared their slump as a gauge of homebuilders in S&P indexes advanced to the highest since 2008.

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May 2 (Bloomberg) -- U.S. stock-index futures were little changed, indicating the Dow Jones Industrial Average will remain near a four-year high, as investors awaited a private report on payrolls in the world’s largest economy. (Source: Bloomberg)

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May 2 (Bloomberg) -- Martin Feldstein, a professor of economics at Harvard University, talks about the impact of Federal Reserve monetary policy on the stock market. Feldstein, speaking with Sara Eisen on Bloomberg Television's "InsideTrack," also discusses the outlook for the U.S. economy. (Source: Bloomberg)

The S&P 500 slid 0.3 percent to 1,402.31 at 4 p.m. New York time, after falling 0.9 percent earlier today. The Dow dropped 10.75 points, or 0.1 percent, to 13,268.57. The Nasdaq Composite Index increased 0.3 percent to 3,059.85 as Apple Inc. (AAPL) shares rebounded. About 6.6 billion shares changed hands on U.S. exchanges, or 1.4 percent below the three-month average.

“The labor market is weak at best,” said Keith Wirtz, who oversees $15 billion as chief investment officer for Fifth Third Asset Management in Cincinnati. “While we thought that we were gaining some momentum, more recent data suggest that things are sluggish. If we start to see a cascade of negative news, the market is going to be vulnerable.”

Equities fell as American companies added 119,000 workers in April, the fewest in seven months, according to a private report. Concern about Europe’s economy also helped drive stocks lower today. The jobless rate in the euro area rose to 10.9 percent in March, manufacturing contracted last month and unemployment in Germany unexpectedly increased.

Economic Surprises

The decline in stocks came after the S&P 500 rose to the highest level in almost a month yesterday. Today’s payroll survey intensified concern that Labor Department data in two days may show the U.S. isn’t growing fast enough to reduce unemployment. An index of forecasting accuracy shows data have been worse than economists predicted. The Citigroup Economic Surprise Index is at minus 20.40, the lowest since October.

“I’ve got a feeling that we might see a downside surprise on the monthly jobs report,” Randy Frederick, managing director of active trading and derivatives at Charles Schwab Corp., said from Austin, Texas. His firm has $1.83 trillion in client assets. “Given how high the market is right now and this softening in economic data, it’s very likely to see a pullback in the range of 5 percent to 10 percent.”

Investors bought stocks this year on better-than-estimated earnings, sending the S&P 500 up 12 percent. About 73 percent of S&P 500 companies that reported results since April 10 have beaten projections, according to data compiled by Bloomberg.

Energy Stocks

Six out of 10 groups in the S&P 500 retreated as energy shares slumped 1.6 percent. Oil dropped from a five-week high after the U.S. Energy Department said stockpiles rose to the highest level in 21 years. Byron Wien, the 79 year-old chairman of Blackstone Group LP’s advisory services unit, is forecasting an annual drop in oil prices for the first time in his career as swelling production pushes global inventories higher.

Chesapeake tumbled 15 percent, the most since 2008, to $16.74. The company slashed its full-year 2012 and 2013 operating cash flow estimates by as much as 48 percent, and increased the amount of assets it plans to sell. This year’s cash flow estimate was lowered to $2.7 billion to $3 billion, from a February forecast of $4.5 billion to $5.2 billion.

The shares surged 6.3 percent yesterday amid plans to strip Chief Executive Officer Aubrey McClendon of the chairman’s job and end an executive perk that allowed him to buy personal stakes in every well the company drilled.

‘Deeply Sorry’

“I’m deeply sorry for all of the distractions of the past two weeks,” McClendon, co-founder of Oklahoma City-based Chesapeake, said on a conference call to discuss first-quarter results today. McClendon said the company may have to sell more assets than planned to cover a gap between cash flow and revenue if natural-gas prices remain depressed.

The KBW Bank Index dropped 0.9 percent as 18 of its 24 stocks retreated. Bank of America declined 1.8 percent to $8.16. Citigroup Inc. (C) slipped 2.7 percent to $32.70.

Bankrate Inc. (RATE) plunged 15 percent, the most since it went public in June, to $20.19. The online publisher of personal finance information reported first-quarter earnings and revenue that fell short of estimates.

OpenTable Inc. (OPEN) sank 15 percent, the biggest decline since going public in 2009, to $37.13. The online restaurant- reservation service forecast revenue in 2012 of no more than $164 million, compared with the average analyst estimate of $168.5 million.

Homebuilders Rally

Stocks pared losses as a gauge of homebuilders in S&P indexes rose 2.5 percent. Lennar Corp. (LEN) gained 2.7 percent to $29.02. D.R. Horton Inc. added 3.4 percent to $17.22.

An International Strategy & Investment survey released yesterday showed sales by homebuilders climbed to a six-year high. The Los Angeles Times reported that the Federal Housing Finance Agency is under pressure to allow Fannie Mae and Freddie Mac to reduce loan principal amounts for struggling borrowers.

A rebound in Apple, the world’s most valuable company, also helped trim some of the earlier slump in equities. Apple rose 0.7 percent to $585.98, after dropping for four straight days.

CVS Caremark Corp. (CVS) rose 2.7 percent to $45.92. The largest provider of prescription drugs in the U.S. reported first- quarter profit that exceeded analysts’ estimates after grabbing customers from Walgreen Co.

Con-way Inc. (CNW) advanced 13 percent to $37. The U.S. trucking company said it earned 45 cents a share excluding some items in the first quarter. Analysts, on average, estimated 34 cents, according to a Bloomberg survey.

Nike at Record

Nike Inc. (NKE), the world’s largest sporting-goods company, surged to an all-time high today. The shares added 2.7 percent to $114.28, extending this year’s rally to 19 percent.

TripAdvisor Inc. (TRIP) surged 17 percent to $42.63 for the biggest gain in the S&P 500. The online travel-recommendation service spun off from Expedia Inc. reported first-quarter profit and sales that topped some analysts’ estimates.

Financial shares are sending a signal that stock investors may be better off without a “sell in May” strategy this year, said Ari H. Wald, a Brown Brothers Harriman & Co. analyst.

The S&P 500’s financial stocks are beating the benchmark this year after lagging behind in 2011. (SPX) The group’s weakness last year preceded five straight months of declines, from May through September, for the S&P 500.

Banks, insurers and other financial companies posted the year’s biggest gain among the S&P 500’s 10 main industry groups through yesterday. Their industry index rose 20 percent, just beating a 19 percent advance in a gauge of technology stocks.

Economic Swings

Another favorable sign is that computer-related companies and other groups sensitive to economic swings are market leaders this year, Wald wrote yesterday in a report. Industries less affected by the economy’s performance were top performers through the first four months of last year.

There are indicators of weakness as well, he wrote. The number of 52-week highs in U.S. stocks after subtracting lows is shrinking, investor concern about a market slump has faded, yields on Treasury debt are low by historical standards, and commodity prices have fallen in the past two months.

The slump in these and other market barometers “has not progressed to the point that they support a bearish outlook as they did in May 2011,” Wald wrote. Instead, they point toward a “lack of full confirmation in either direction,” according to the New York-based analyst.

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

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

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Romney’s Conflicting Tax Goals Make Burden Shift Likely

By Richard Rubin - May 2, 2012 9:01 PM GMT+0700

Chip Somodevilla/Getty Images

Mitt Romney proposes reducing all individual income tax rates, dropping the top rate to 28 percent from 35 percent and the bottom rate to 8 percent from 10 percent.

Republican presidential candidate Mitt Romney’s tax plan rests on a set of principles that, taken together, are difficult to reconcile.

Romney wants to reduce individual income tax rates by 20 percent, keep preferential rates for capital gains and dividends, broaden the tax base to limit revenue loss, and retain the tax-burden distribution across income groups.

Those goals are in conflict and will require that Romney consider limiting or eliminating the tax breaks for charitable deductions and home mortgage interest, said Martin Sullivan, contributing editor at Tax Analysts in Falls Church, Virginia.

“As soon as he gets in, he’s going to have to start backpedaling big-time on all of his promises,” Sullivan said. “It’s just not doable under any conceivable, realistic scenario.”

Romney hasn’t provided many details about his tax plan, such as which tax breaks he would curtail or end. He has suggested that tax benefits might be available to middle-income families though not upper-income families, without defining those income levels.

“We’re not going to shift the burden from middle-income people to higher-income people,” Romney said in an April 16 interview with ABC News. At the same time, he said, “I’m not looking for tax cuts for the rich.”

28 Percent Rate

Romney proposes reducing all individual income tax rates, dropping the top rate to 28 percent from 35 percent and the bottom rate to 8 percent from 10 percent. He would end taxation of investment income for households making less than $200,000 a year and keep the 15 percent rate for capital gains and dividends for taxpayers above those levels. He also would eliminate the estate tax and the alternative minimum tax.

Keeping the tax code’s progressive distribution among income brackets may be difficult without compromising some of these objectives. The lower rate on investment income rate is the most significant tax break for the very wealthiest taxpayers, and promising to protect that means that Romney has limited ways to offset the rate cuts for that group.

“The top 5 percent, the top 10 percent, the top 25 percent, we’ll look across the code at the various categories of taxpayers and see if they’re continuing to pay the approximately the same share that they have in the past,” Romney said on CNBC March 7.

All Taxes Considered

Romney will consider all federal taxes, including income, payroll, estate and corporate taxes, economic adviser Glenn Hubbard said in an April 30 interview. Hubbard noted that economists differ on which income groups bear the burden of some of those taxes.

Because almost half of all households don’t pay income taxes, Romney’s proposed rate cuts won’t benefit them and their other taxes would be largely unchanged. Instead, his plan would shift the burden within the upper-income half: those who get more tax benefits now would pay more taxes and those who get fewer would pay less.

Romney, who made $21.6 million in adjusted gross income in 2010, paid a 13.9 percent tax rate, according to tax returns he released, because most of his income came from investments. With a fortune estimated at as much as $250 million, he would benefit from eliminating the estate tax, now 35 percent with a $5.1 million exemption per person.

“He’s the first president who would massively cut his own taxes,” Sullivan said.

Obama’s Proposal

In contrast, President Barack Obama has proposed that high- income taxpayers pay higher tax rates on wages, capital gains and dividends. He would limit their deductions and prevent tax increases for married couples making less than $250,000 a year and individuals making less than $200,000.

Under Obama’s most recent budget, taxpayers in the top 1 percent would have an average tax increase of $93,707 in 2013, according to the nonpartisan Tax Policy Center in Washington. The middle 20 percent of taxpayers would receive an average tax cut of $40.

As evidence that Romney’s plan is feasible, Hubbard pointed to a report by the co-chairmen of the 2010 bipartisan fiscal commission, Erskine Bowles and Alan Simpson, which also set a top 28 percent tax rate.

“You have a clear road map in Bowles-Simpson,” Hubbard said.

Deficit Commission Plan

Unlike Romney’s plan, the deficit commission’s proposal called for eliminating corporate tax breaks alongside rate reduction and ending the break for investment income. It suggested limiting tax breaks for charitable contributions, mortgage interest, retirement savings and health insurance.

The highest earners -- including Romney -- would benefit most from several of his proposals that differ from the Bowles- Simpson approach. Those include repealing the estate tax, cutting the corporate tax rate to 25 percent from 35 percent, and keeping the 15 percent tax rate on capital gains and dividends.

The Tax Policy Center estimated how Romney’s policies would affect different income groups, without the reductions in tax breaks he has yet to spell out.

Under Romney’s plan as announced, the top 20 percent of taxpayers would receive an average tax cut of $16,134, compared with what they are paying now. The top 0.1 percent -- those with incomes exceeding $2.9 million in 2015 -- would get an average tax cut of $725,716.

Middle-Class Burden

An estimate being released this week by the Brookings Institution’s Hamilton Project shows how hard it is to cut the top income tax rate without losing revenue or causing the middle class to pay a larger share.

To reduce the top rate to 23 percent -- below Romney’s 28 percent target -- and generate today’s revenue would require eliminating almost every tax break, including those for employer-sponsored health insurance, retirement savings and municipal bonds, capital gains and dividends.

A 27 percent top rate would allow some benefits for mortgage interest and health insurance to remain.

“You can only get rates down so far before you start losing revenues or really changing the progressivity of the tax schedule,” said Adam Looney, the Hamilton Project policy director, who helped develop the analysis. He was an economist at the Federal Reserve Board and the White House Council of Economic Advisers under Obama.

Larger Share

The current income tax system requires higher-income people to pay a larger share of taxes. In 2009, the top 10 percent of taxpayers received 43.2 percent of adjusted gross income and paid 70.5 percent of income taxes. Their percentage of taxes paid is lower if the calculation includes payroll taxes, which pay for Social Security and Medicare.

Ending the tax preference for investment income would reduce the after-tax income of the top 0.1 percent by 7.5 percent, compared with 0.9 percent for all Americans, according to the Tax Policy Center.

A Romney-style plan “theoretically could be progressive between the upper-middle class and the affluent, compared to the middle class,” said Edward Kleinbard, former chief of staff at the congressional Joint Committee on Taxation. “But it will not address the progressivity of the super-affluent with a 15 percent tax rate.”

Retaining the current progressive tax burden without changing capital gains rates is difficult, if not impossible, said Eric Toder, co-director of the Tax Policy Center.

“What you’d have to do is tax gains and dividends as ordinary income, because that’s where the very big preferences are,” he said. “That’s just the math.”

‘Aggressive’ on Deductions

For the group between the top 1 percent and the bottom 50 percent, the outlines of Romney’s plan are more achievable.

“There’s a huge amount of money that can be thrown back into the pot if you’re willing to be very aggressive about personal itemized deductions,” said Kleinbard, now a law professor at the University of Southern California in Los Angeles.

Repealing all itemized deductions would reduce after-tax income by 1.7 percent, by 2.7 percent for the top 20 percent, and by 3 percent for the top 1 percent of taxpayers, according to the Tax Policy Center. That means those breaks are less tilted toward the highest-income taxpayers than the preference for investment income.

Romney made his clearest comments about broadening the tax base at an April 15 fundraiser, when reporters overheard him talking about eliminating the state and local tax deduction and the mortgage interest deduction for top earners’ second homes.

‘Up Their Sleeve’

Those changes wouldn’t be nearly enough to make up the revenue loss from his proposed tax cuts.

“I just don’t see where the numbers add up,” Toder said. “Maybe they’ve got something up their sleeve I haven’t seen.”

The focus on maintaining the current distribution of the tax burden is misguided because of income mobility, said Scott Hodge, president of the Tax Foundation, a Washington group that favors a simpler tax code with lower rates. He said more than 70 percent of people on the Internal Revenue Service’s list of the 400 highest incomes between 1992 and 2008 made the list only once.

“Trying to tax any particular group is really trying to tax a snapshot of people as they move through it,” Hodge 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

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