Funds Make Wrong-Way Bets Before Price Slump: Commodities

By Joe Richter - May 29, 2012 12:13 AM GMT+0700

Speculators raised bullish bets on commodities before signs of Europe’s deepening debt crisis and slowing Chinese growth drove prices lower for a fourth consecutive week, the longest slump since September.

Money managers boosted net-long positions across 18 U.S. futures and options by 9.5 percent to 675,362 contracts in the week ended May 22, government data show. The Standard & Poor’s GSCI Spot Index of 24 raw materials reached a five-month low on May 23. A gauge of net positions for 11 U.S. farm goods surged 21 percent, the most since February, before agriculture prices tracked by S&P posted the biggest weekly loss in eight months.

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a combine combine harvester works on a farm in Princeton, Illinois. Photographer: Daniel Acker/Bloomberg

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May 28 (Bloomberg) -- Binay Chandgothia, a Hong Kong-based portfolio manager at Principal Global Investors, talks about the European sovereign debt crisis and his investment strategy. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Money managers boosted corn wagers by 30 percent to 109,022 futures and options contracts. Photographer: Diego Giudice/Bloomberg

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The euro dropped to the lowest since July 2010 on May 25. Photographer: Valentin Flauraud/Bloomberg

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Wen Jiabao, China's premier, said the nation should put “stabilizing growth in a more important position” and increase lending to support construction. Photographer: Nelson Ching/Bloomberg

The euro dropped to the lowest since July 2010 on May 25 after Catalonia’s president repeated his call for Spain’s central government to help regions access funding and S&P cut the credit ratings for five of the country’s banks. China’s biggest lenders may fall short of loan targets for the first time in at least seven years, three bank officials said, and the nation’s State Council refrained from backing Premier Wen Jiabao’s push to expand credit.

“It’s bit a surprising to see so much on the long side, because the trend is down in commodities,” said Walter ‘Bucky’ Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama. “We’re probably not going to see an extended rally until we get some type of monetary easing. Buying now is an aggressive move. You’re betting on a short-term pop from some sort of resolution in Europe.”

Agriculture Gauge

The S&P GSCI index fell 1.4 percent last week and is down 9.4 percent in May, heading for the biggest monthly loss since September. The S&P agriculture gauge tumbled 4.8 percent last week. The MSCI All-Country World Index of equities rose 0.7 percent, and Treasures slid 0.2 percent, a Bank of America Corp. index shows. The dollar rose 1.4 percent against a basket of six currencies, rallying for a fourth week.

Twenty of the 24 raw materials tracked by S&P dropped last week. Corn tumbled 9 percent, the most in a year, and cocoa slumped 7.2 percent, the biggest loss in 2012. Natural gas fell 3 percent today.

A political impasse in Greece, where voters rejected austerity measures in elections on May 6, has raised concern that country may leave the euro. Spain’s government is analyzing “with all caution” requests from regional governments to help them regain access to capital markets, Deputy Prime Minister Soraya Saenz de Santamaria said May 25. Catalonia is one of 17 semi-autonomous regions in the country.

Europe’s crisis risks deepening, damaging the world economy, the Paris-based Organization for Economic Cooperation and Development said in a report May 22.

‘Aggressive’ Stimulus

China’s Wen, in comments posted on the government’s website May 20, said the nation should put “stabilizing growth in a more important position” and increase lending to support construction. More “aggressive” stimulus measures will spur Chinese economic expansion and boost copper prices in the second half of the year, Morgan Stanley analysts led by New York-based Hussein Allidina said in a report May 21.

Copper inventories monitored by Shanghai’s exchange fell for a seventh straight week to the lowest since January. China is the world’s biggest consumer of industrial metals. Novelis Inc., the top global producer of rolled aluminum, said last week that doubling its output capacity may not be enough to meet rising demand from car makers.

“Where investors struggle at the moment is that they can see in the medium- to long-term it’s still a bull story,” said Jonathan Whitehead, the global head of commodities markets at Societe Generale SA. “Most of the reasons why commodities spent the 2000s going up are still there -- growing demand and increasing supply issues.”

$1.18 Billion

Investors pulled $1.18 billion from commodity funds in the week ended May 23, the fifth consecutive drop and the most this year, according to Brad Durham, a managing director at Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Gold and precious metals outflows totaled $631.7 million, also the biggest exit this year, he said.

Money managers boosted corn wagers by 30 percent to 109,022 futures and options contracts, the Commodity Futures Trading Commission said. That’s the biggest jump since July 2010. Last week’s 9 percent tumble in Chicago prices extended this year’s decline to 11 percent.

Speculators are bullish on wheat for the first time since September. Funds went from a short position, or betting on price declines, of 50,057 futures and options to a long holding of 7,026 in the week ended May 22, the CFTC data show. The gain of 57,083 contracts was larger than for any of the 18 raw materials tracked by Bloomberg. Prices fell 2.2 percent last week.

Export Sales

Slowing growth in China, the world’s biggest pork consumer, is eroding demand for grains used in livestock feed. In the week ended May 17, U.S. corn export-sales for delivery before Aug. 31, 2013, plunged 44 percent from a week earlier, the Department of Agriculture said May 24.

Gold wagers dropped for a third week to 77,318 contracts, extending a slump to the lowest since December 2008. Funds are bearish on copper prices for the first time since January, going to a net-short position of 2,808 contracts as of May 22, from net-long holdings of 4,833 a week earlier.

Nine of 18 analysts surveyed by Bloomberg expect the metal to drop this week and three were neutral. Traders were bearish for a second week, the first consecutive negative outlook since early April.

“There’s been a down shift in demand for a lot of commodities with the concerns over growth in China and Europe,” said Jack Ablin, the Chicago-based chief investment officer of BMO Harris Private Bank, which oversees about $60 billion of assets. “There are generally a lot of headwinds. We’re underweight in commodities and may go to zero.”

To contact the reporter on this story: Joe Richter in New York at jrichter1@bloomberg.net

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

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Dollar Scarce as Top-Quality Assets Shrink 42%

By John Detrixhe - May 29, 2012 4:00 AM GMT+0700

The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks.

From last year’s low on July 27, the greenback has risen against all 16 of its major peers. Intercontinental Exchange Inc.’s Dollar Index surged 12 percent, higher now than when the Fed began creating dollars to buy bonds under its extraordinary stimulus measures at the end of 2008.

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The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks. Photographer: Scott Eells/Bloomberg

International investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar-denominated assets. The U.S. is one of only five major economies with credit-default swaps on their debt trading at less than 100 basis points, meaning they are viewed as almost risk free. A year ago, eight Group-of-10 nations fit that category, data compiled by Bloomberg show.

“The pool of high-rated assets has been shrinking, not just in the euro zone but elsewhere as well,” Ian Stannard, Morgan Stanley’s head of Europe currency strategy, said in a May 22 telephone interview. “With the core of Europe shrinking, and the available assets for reserve purposes shrinking, it makes the euro zone less attractive.”

Euro Depreciation

The dollar is gaining mainly at the expense of the euro, which has depreciated almost 5 percent the past six months against a basket of nine major currencies tracked by Bloomberg as nations from Spain to Italy see their credit ratings downgraded amid the region’s sovereign crisis.

Spain, which has about $917.5 billion of debt, has been cut six levels by Moody’s Investors Service to A3 from Aaa in September 2010. Italy, with more than $2 trillion of debt, has been reduced four levels to A3 from Aa2 in October.

“We’re seeing many more periods of dollar buying during these uncertain times,” Ken Dickson, an investment director of currencies at Standard Life Investments in Edinburgh, which manages $257 billion, said May 24 in a telephone interview.

The U.S. currency appreciated 2.06 percent last week to $1.2517 per euro in New York after touching $1.2496, the strongest since July 2010. It gained 0.84 percent to 79.68 yen. The Dollar Index jumped 1.37 percent to 82.402, its fourth- straight weekly rally.

Bigger Share

The five economies with default swaps trading at less than 100 basis points have a combined $14 trillion in debt, with the U.S. accounting for 75 percent, according to CMA data compiled by Bloomberg. A year ago, when there were eight nations, the total was $24 trillion, with America making up 38 percent.

Bank of America Merrill Lynch’s AAA Rated Global Fixed Income Index contained 3,597 securities with the highest ratings as of April 30, down from a high of 5,331 in December 2007, the fewest since November 2005. Dollar assets make up 65 percent of the index, up from 56 percent in 2008.

Hungary’s central bank is among reserve managers diversifying foreign-exchange holdings as the credit quality of European assets declines. The central bank said it will include dollars, yen and British pounds in its reserves, currently invested exclusively in euro-denominated securities.

“The number of euro-denominated assets that meet our quality standards has dropped radically,” Magyar Nemzeti Bank President Andras Simor told reporters on May 14 in Budapest. “More and more securities were dropped from our portfolio as the credit grade of more and more countries fell below the single A category and as more and more securities don’t meet our market quality requirements.”

No ‘Master Plan’

China Investment Corp. President Gao Xiqing said May 10 the nation’s sovereign wealth fund stopped buying government debt in Europe as the region’s turmoil intensifies. With an estimated $440 billion in assets, CIC is the world’s fifth-largest country fund, according to the Sovereign Wealth Fund Institute.

“Ever since the debt crisis broke out, there has never been a master plan for a resolution,” Jin Liqun, chairman of CIC’s supervisory board, said at an event hosted by the Centre for Policy Studies in London on May 22.

Such comments are bolstering the dollar’s status as the world’s primary reserve currency after a decade-long decline.

The greenback’s share of global foreign-exchange reserves climbed in the last three-months of 2011 to 62.1 percent, the highest since June 2010, while holdings of euros fell to the lowest since September 2006 at 25 percent, according to the latest quarterly data from the International Monetary Fund.

Official Holdings

Foreign official holdings of U.S. government debt increased in each of the first three months of 2012, climbing by 3.24 percent to $3.73 trillion in the best start to a year since 2009, according to data from the Treasury Department.

Demand from outside the U.S. helps the administration of President Barack Obama finance a budget deficit forecast to exceed $1 trillion for a fourth year.

A relatively strong dollar may also damp criticism of the Fed if it decides to expand its balance sheet to boost the economy. The Dollar Index tumbled 14 percent during the Fed’s two rounds of asset purchases, known as quantitative easing, or QE, between December 2008 and June 2011.

While the dollar is “somewhere safe to hide,” the euro is poised to rebound before Greek elections next month before resuming its decline against the U.S. currency, said John Taylor, founder of New York-based currency-hedge fund FX Concepts LLC, which oversees $3.9 billion.

‘Way Oversold’

“We are way oversold in the euro,” Taylor said on May 24 in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker and Sara Eisen.

The dollar’s appeal is also getting a boost as nations generally perceived as havens become less welcoming.

The Swiss National Bank introduced a 1.20 franc-per-euro limit in September after its currency rose to a record, hurting exporters and increasing the risk of deflation.

Japan spent 16.4 trillion yen ($206.6 billion) in intervention in 2010 and 2011, according to the Finance Ministry. The franc has lost 1.9 percent against the dollar this year and the yen has depreciated 3.1 percent.

“The other countries that often have some kind of a safe- haven attraction to them are slowly but surely saying that we’re not so sure we want our currencies to be stronger,” Standard Life’s Dickson said.

Bank Demand

Demand for dollars is also showing up in financial institutions needing to meet Basel III regulations set by the Bank for International Settlements. The new rules on capital reserves will “increase the price of safety” embedded in assets deemed a reliable store of value, the IMF wrote in an April 18 report.

The cost for banks to convert euro interest payments into dollars through the swaps market for three years has increased to 67.8 basis points below the euro interbank offered rate, or Euribor, from 34.8 basis points below in March 29, according to data compiled by Bloomberg. Negative spreads show a premium for dollar funding.

Dollar assets are also looking attractive on a relative basis, with yields on Treasuries due in 10 years averaging 0.37 percentage point more than German bunds of similar maturity. As recently as November, Treasuries yielded about 0.33 percentage point less than bunds.

“With the chronic problems and challenges in Europe, it’s hard to see how that’s going to overtake the dollar anytime in our lifetime, if the euro even still exists in our lifetime,” Tim Adams, a managing director at the Lindsey Group, a Fairfax, Virginia-based investment consultant and former Treasury undersecretary, said May 1 at the Bloomberg Washington Summit hosted by Bloomberg Link.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

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Euro Declines Most in 2012 on Deepening Turmoil in Spain

By Allison Bennett - May 26, 2012 11:00 AM GMT+0700

The euro had its biggest weekly loss since December against the dollar as Greece’s anti-bailout party gained in the polls and amid a deepening crisis in Spain.

The shared currency fell for a fifth week versus the yen, the longest stretch since October, as German manufacturing shrank and the Bank of Japan (8301) refrained from adding stimulus to the economy. Brazil’s real was the only winner against the dollar as the central bank sold currency-swap contracts. The dollars of Australia and New Zealand declined as reports showed the Chinese economy is stalling. A report June 1 is forecast to show U.S. employers added more jobs in May than the prior month.

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May 25 (Bloomberg) -- Charles Dallara, managing director of the Institute of International Finance, talks about the potential cost of a Greek exit from the euro, its impact on the European Central Bank and the outlook for the region's economies. He speaks with Bloomberg's Andrew Davis in Rome. (Source: Bloomberg)

“Uncertainty is high, growth is poor and a Greek exit is a wild card,” said Aroop Chatterjee, a currency strategist at Barclays Plc’s Barclays Capital unit in New York. “It’s unlikely that the euro finds a bottom for a while even in a good state of the world.”

The euro declined 2.1 percent on the week to $1.2517, touching $1.2496, the weakest since July 2010. The 17-nation currency declined 1.2 percent to 99.75, falling below 100 for the first time since February. The Japanese currency fell 0.8 percent to 79.68 per dollar.

Hedge funds and other large speculators increased wagers the euro will decline versus the dollar to a record high for a second consecutive week. So-called net shorts increased for a third week, totaling 195,361 in the period ended May 22 compares to 173,869 for the week before, according to the Commodity Futures Trading Commission.

Euro Crisis

“Risk appetite itself has traced its undulation to the movements in the euro,” Ravi Bharadwaj, a market analyst in Washington at Western Union Co. (WU)’s Western Union Business Solutions unit, said May 23.

European leaders announced no new measures to stem the bloc’s crisis at a summit in Brussels this week. The gathering took place as Greece prepares to hold new elections on June 17 after an anti-bailout party surged to second place in balloting on May 6. A poll on May 24 had the Syriza party with 27.2 percent support, boosting speculation that the country may exit the currency bloc.

The euro weakened 1.2 percent against nine developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the worst performance along with the Swiss franc. The dollar gained 1.1 percent and the yen rose 0.2 percent.

The shared currency fell below $1.25 for the first time in 22 months after the president of Catalonia, one of 17 semi- autonomous regions in Spain, repeated his call for Spanish central government to help regions access funding, Standard & Poor’s cut the credit ratings of five Spanish banks and the Bankia group said it needed 19 billion euros ($23.8 billion) of government money.

‘Unwelcome Development’

A German index based on a survey of purchasing managers in the manufacturing industry declined to 45 this month from 46.2 in April, Markit Economics said May 24.

“It’s unwelcome development with German manufacturing, because typically that’s where you go looking for a silver lining in the euro,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said May 24. “The second quarter had delivered a shock to growth expectations globally.”

China may have a loan shortfall which would be the first in seven years, according an exclusive Bloomberg News report. Loan demand is drying up as Europe’s debt crisis curbs exports and demand for new homes wanes.

Aussie, Kiwi

Australia’s dollar fell 0.9 percent to 97.58 U.S. cents. The Aussie fell to 96.90 U.S. cents on May 23, a six-month low.

New Zealand’s dollar declined 0.3 percent to 75.40 U.S. cents and touched 74.57 U.S. cents, the weakest since November. The so-called kiwi’s losses were limited as Moody’s cited the government’s deficit and debt trajectories in affirming its AAA rating.

China is Australia’s largest trading partner and is the second-biggest destination for New Zealand exports.

American employers added 150,000 jobs in May, according to the median estimate of economists surveyed by Bloomberg News, after a 115,000 gain in April that missed forecasts. The jobless rate held steady at 8.1 percent, according to another survey.

The Dollar Index (DXY) rose 1.3 percent to 82.393, after touching 82.461, the strongest since September 2010. The gauge’s fourth consecutive weekly gain comes as cumulative net inflows in to U.S. Treasuries yesterday were more than double the daily average over the past year.

Franc Tumbles

The Swiss franc was the biggest loser against the dollar this week, falling 2.1 percent to 95.95 centimes per dollar. It was the biggest weekly loss since Nov. 4. Switzerland’s currency touched the weakest level in two months versus the euro on May 24 amid speculation the central bank may take action to discourage investment in the nation through taxing deposits.

SNB spokeswoman Silvia Oppliger declined to comment on the Swiss franc exchange rate. Finance Ministry spokesman Roland Meier wouldn’t comment on the tax speculation.

Brazil’s real rose 1.8 percent against the dollar to 1.9874 after the central bank sold currency swaps through auction for four consecutive days to stem the largest year-to-date decline against the greenback. The real is the worst performing major currency this year and has declined 6.1 percent against the dollar. It touched a three-year low on May 18.

The nation also completely removed a tax on currency derivatives for exporters on May 23, said Alexandre Andrade, an official at the tax agency.

The yen had its biggest weekly decline against the dollar since March 16 as Fitch Ratings cut the nation’s credit ranking, saying it isn’t acting quickly enough to tackle its public-debt burden.

Losses were limited as the BOJ kept its asset-purchase fund at 40 trillion yen ($502 billion) at a meeting May 23, after expanding it by 10 trillion yen last month. The central bank also left a credit-lending program at 30 trillion yen, it said in a statement in Tokyo. The policy board kept the key overnight lending rate between zero and 0.1 percent.

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net

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

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Facebook IPO Seen Deepening Investor Distrust of Stocks

By Elizabeth Ody and Margaret Collins - May 26, 2012 11:01 AM GMT+0700

Facebook Inc. (FB)’s initial public offering, plagued by trading errors and a 16 percent drop in the share price, will push more individual investors out of a stock market they already distrust after the financial crisis.

“This is clearly the latest in a long string of events that is eviscerating the confidence investors have in the market,” said Andrew Stoltmann, a Chicago attorney who represents retail investors. “The perception is Wall Street jiggered this IPO so the underwriters made money, Facebook executives made money and the small investor got left holding the bag.”

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Buyers of the stock have sued Facebook, the sale’s underwriters and Nasdaq OMX Group Inc. (NDAQ), the exchange handling the listing. Photographer: Manjunath Kiran/AFP/Getty Images

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May 25 (Bloomberg) -- Paul Kedrosky, author of the Infectious Greed blog and a Bloomberg contributing editor, talks about Facebook Inc.'s initial public offering and co-founder Eduardo Saverin's investment in Jumio Inc. He speaks with Cory Johnson on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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May 25 (Bloomberg) -- Sheila Dharmarajan reports on facebook's IPO and how it is the biggest flop in a decade based on the first 5 days of trading. She speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

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May 25 (Bloomberg) -- Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering. Bloomberg's Peter Cook reports on Bloomberg Television's "Money Moves." (Source: Bloomberg)

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Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering. Photograph: Frank May/DPA/Landov

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The Facebook Inc. logo is displayed on a computer screen in this arranged photograph in San Francisco on May 17, 2012. Photographer: David Paul Morris/Bloomberg

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Individual buyers’ willingness to venture into stocks was undercut by difficulties in executing trades on the first day of trading on May 18, Facebook’s subsequent decline and questions over whether the firm and underwriters selectively disclosed material, nonpublic information.

“If you have a lot of angry people out there, they’re going to express their anger in different ways,” said Steve Sosnick, equity risk manager for Timber Hill LLC, the market- making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc. (IBKR) “One of them may be with their feet.”

The IPO produced the worst five-day return among the largest U.S. deals of the past decade. The 13 percent decline through May 24 exceeded the 10 percent drop by MF Global Holdings Inc. in its first five sessions. Visa Inc. did best among the biggest deals, rising 45 percent.

Lost Decade

Some retail investors still haven’t moved off the sidelines after pulling out of the market during the 2008-09 financial crisis. The Standard & Poor’s 500 Index (SPX) has made no progress in more than a decade, currently trading at levels first seen in 1999 following two bear markets that wiped out about 50 percent from the index. The May 6, 2010, rout known as the flash crash erased $862 billion in less than 20 minutes, undermining confidence in the structure of equity markets.

Investors have withdrawn money from mutual funds that invest in U.S. stocks for five straight years as of December, according to the Investment Company Institute, a Washington- based trade group. U.S. households held about $8.1 trillion in corporate equities at the end of 2011, about 16 percent less than the $9.6 trillion they held in 2007, according to Federal Reserve data released in March.

Increased volatility, high correlation among stocks and the flash crash are among a “whole basket-load of things” that have caused retail investors to be skeptical for several years, said Ron Sloan, who oversees about $11 billion as chief investment officer of the U.S. core equity team for Atlanta- based fund manager Invesco Ltd. (IVZ) “This is just the icing on the cake.”

Lowered Estimates

Patricia Arroyo, 53, a psychologist and executive coach in Boston who manages her own investments, said, “What shakes my investor confidence more than the glitches is to see all the institutional investors, insiders and favored clients get all the advantages in these situations.”

After Facebook said on May 9 that growth in advertising had failed to keep up with user gains, analysts at some banks underwriting the deal cut their earnings estimates, said people familiar with the process. The new estimates were relayed to institutional investors.

Arroyo had avoided Facebook and instead purchased about 50 shares of social-gaming company Zynga Inc. (ZNGA), speculating that a pop in Facebook’s price would benefit the stock of the San Francisco-based company. Trading of Zynga was halted twice because of volatility on the day Facebook started trading. Zynga’s stock has fallen 20 percent in the past week.

Federal Review

Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering. Buyers of the stock have sued Facebook, the sale’s underwriters and Nasdaq OMX Group Inc. (NDAQ), the exchange handling the listing. New York-based Nasdaq was overwhelmed by order cancellations and trade confirmations were delayed on the first day of trading.

Brokerages whose customers had trouble executing Facebook trades, including Boston-based Fidelity Investments and Charles Schwab Corp. (SCHW), said they are trying to resolve complaints.

“Fidelity senior management has been working with regulators, market makers and Nasdaq to represent all of our customers’ trading issues from May 18 and we will continue to do so in order to persuade Nasdaq to mitigate the impact on our customers,” Stephen Austin, a spokesman at Fidelity, said in a phone interview. Schwab also is continuing to address any concerns that remain for its customers, Michael Cianfrocca, a spokesman for the San Francisco-based brokerage, said in an e- mail.

Missed Opportunity

The Facebook fallout has eroded hopes that the debut would revive the appetite for stocks among individuals. Trading in Facebook accounted for about 20 percent to 30 percent of revenue-generating trades at online brokers on May 18, Richard Repetto, an analyst at Sandler O’Neill & Partners LP in New York, said in an e-mailed report on May 23. Retail buying and selling on the day a company debuts is usually 2 percent to 5 percent, he wrote.

The social network accounted for 22 percent of equities volume on May 18 at online brokerage TD Ameritrade Holding Corp. (AMTD), according to Steve Quirk, a senior vice president at the Omaha, Nebraska-based company. The firm had almost 60,000 orders to trade Facebook shares before the stock opened, he said.

“For now, it appears like a missed opportunity to build sustainable retail momentum,” Repetto wrote. The technical glitches and price decline in the stock have “driven retail trading back to earth.”

Knight Capital

Retail investors weren’t the only ones who lost money as Facebook shares declined this week. Knight Capital Group Inc. (KCG) estimated that it lost about $30 million to $35 million trading Facebook because of technical problems at Nasdaq, the firm said in a filing with the U.S. Securities and Exchange Commission on May 23. The brokerage and market maker is based in Jersey City, New Jersey.

Citadel Securities, the Chicago-based broker run by hedge- fund manager Ken Griffin, lost as much as $35 million, according to a person with knowledge of the firm.

Despite trading problems and losses, many investors who have already purchased the stock are continuing to hold on, said John Dominic, vice president of trading for TradeKing, an online broker based in Fort Lauderdale, Florida.

“Most are probably taking a wait-and-see approach,” Dominic said.

‘Slow Motion’ Wreck

IPOs are often risky and expensive for investors, said Zack Shepard, managing director for Mason, Ohio-based Matson Money Inc., which manages about $3.1 billion on behalf of individual investors. He said his firm generally waits about one year before it considers investing in newly public companies.

The Facebook mess and concerns about whether the rules of the game are fair will get resolved, said Invesco’s Sloan. A lasting effect may be that individuals focus more on company fundamentals and invest in equities for the long-term, he said.

“Watching this fiasco was like watching a car wreck in slow motion,” Andrew T. Gardener, president of Tanglewood Legacy Advisors LLC, based in Houston, said in e-mailed comments. “Only a small number of investors were directly involved. The rest of us will soon get out the keys and go for a drive.”

To contact the reporters on this story: Elizabeth Ody in New York at eody@bloomberg.net; Margaret Collins in New York at mcollins45@bloomberg.net

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net

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U.S. Stocks Erase Loss as Europe Offsets China Concern

By Rita Nazareth - May 25, 2012 3:45 AM GMT+0700

U.S. stocks erased losses as Italian Prime Minister Mario Monti said Greece is likely to stay in the euro and a majority of the region’s leaders support issuing a joint bond, offsetting earlier concern about a Chinese slowdown.

A measure of financial shares in the Standard & Poor’s 500 Index gained, while technology and industrial companies retreated. Hewlett-Packard Co. (HPQ) rose 3.3 percent after the largest personal-computer maker announced plans to slice its workforce by 27,000 and reported quarterly sales and earnings that topped estimates. Tiffany & Co. (TIF) tumbled 6.8 percent as the luxury jewelry retailer cut its profit and sales forecasts.

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Traders work at the New York Stock Exchange (NYSE) in New York on May 24, 2012. Photographer: Scott Eells/Bloomberg

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May 24 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks erased losses as Italian Prime Minister Mario Monti said Greece is likely to stay in the euro and a majority of the region’s leaders support issuing a joint bond, offsetting earlier concern about a Chinese slowdown. (Source: Bloomberg)

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May 24 (Bloomberg) -- Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission and a Bloomberg LP board member, talks about Facebook Inc.'s initial public offering and the potential impact on U.S. investor sentiment. Levitt speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

The S&P 500 rose 0.1 percent to 1,320.68 at 4 p.m. New York time, reversing a loss of 0.6 percent. The index gained for a fourth day. The Dow Jones Industrial Average added 33.60 points, or 0.3 percent, to 12,529.75. The Nasdaq Composite Index (CCMP) fell 0.4 percent to 2,839.38. About 6.9 billion shares changed hands on U.S. exchanges, almost in line with the three-month average.

“The market has come down not necessarily because growth has slowed so significantly, but because of a potential disorderly unwind of the euro,” said Dan Veru, who oversees $3.7 billion as chief investment officer of Palisade Capital Management LLC in Fort Lee, New Jersey. “Greece won’t come out of the euro. There’s no mechanism in place to do that.”

Equities reversed losses as Monti said in an interview on Italian television station La7 today that “Europe can have euro bonds soon.” Italy can help push Germany to support the idea of collective debt and to embrace the “common good” of Europe, he said. Stocks dropped earlier as three officials said China’s biggest banks may fall short of loan targets for the first time in at least seven years amid an economic slowdown.

Economic Data

In the U.S., data showed companies placed fewer orders for computers, machinery and other capital equipment in April for a second month. Manufacturing in the U.S. expanded in May at the slowest pace in three months, indicating the industry that’s spurred the expansion is cooling.

Concern about a slowdown in global growth and a worsening of Europe’s debt crisis drove the S&P 500 down 5.5 percent so far this month. Financial, energy and technology shares have tumbled at least 7.7 percent in May.

Hewlett-Packard rose 3.3 percent to $21.77. The 8 percent workforce reduction, taking place through firings and early retirement offers, will generate annual savings of as much as $3.5 billion starting in 2014.

Facebook Inc. (FB) added 3.2 percent to $33.03, gaining for a second day. The social networking company is still trading below its initial public offering price of $38.

Airlines Rally

The Bloomberg U.S. Airlines Index (BUSAIRL) climbed 4.9 percent after JPMorgan Chase & Co. raised industry estimates, citing lower jet-fuel prices. Southwest Airlines Co. (LUV) jumped 4.6 percent, the biggest gain in the S&P 500, to $8.74. US Airways Group Inc. (LCC) surged 11 percent to $12.16.

Dow Chemical Co. (DOW) rallied 3.4 percent to $31.55. The chemical maker said an arbitration panel ruled that Kuwait must pay $2.16 billion in damages after it canceled a 2008 agreement to buy a stake in the company’s plastics business.

Pandora Media Inc. (P) surged 12 percent to $11.60. The Internet radio pioneer rose the most since its first day of trading in June 2011 after first-quarter results exceeded analysts’ estimates on higher mobile advertising sales.

Technology had the biggest decline among 10 groups in the S&P 500, dropping 0.9 percent. Apple Inc. (AAPL), the most valuable company, lost 0.9 percent to $565.32.

NetApp Tumbles

NetApp Inc. (NTAP) plunged 12 percent, the most in the S&P 500, to $28.82. The seller of hardware and software for storing data forecast first-quarter earnings trailing analysts’ estimates amid a weak economic outlook.

Tiffany tumbled 6.8 percent to $57.59. Chief Executive Officer Michael Kowalski said sales in the Americas region “underperformed, continuing a soft trend that began in the last quarter of 2011.” Sales in the first quarter rose 3 percent to $386 million in the Americas and declined 4 percent in the New York flagship store.

MEMC Electronic Materials Inc. (WFR) lost 6 percent to $1.58. The second-largest U.S. maker of polysilicon dropped after S&P cut its corporate credit rating two levels to B+ from BB.

The slump in the S&P 500 may be nearing an end after the measure dropped below its 150-day average, which may lure buyers into the market, said Oppenheimer & Co. The gauge slipped 8.7 percent between April 2 and May 18, falling below its average price from the prior 150 days on May 17 for the first time since Dec. 19, according to data compiled by Bloomberg.

150-Day Average

Oppenheimer’s Carter Worth wrote in a May 21 report that declines to the 150-day average may prompt pessimists to stop selling and persuade investors who missed out on the market’s rally through April to buy.

The S&P 500 is “down to a level where rebound potential is high and that the right thing to do now is to put some money to work on the long side,” Worth, the New York-based chief market technician at Oppenheimer, wrote in the May 21 report. The stock index rose 1.8 percent this week through yesterday.

Worth highlighted 90 stocks to buy that are down to levels where “selling pressure is judged likely to abate.” The list included Berkshire Hathaway Inc. (BRK/B), Intel Corp. (INTC), Microsoft Corp. (MSFT) and Starbucks Corp. (SBUX)

“If and as these names stop going down (read: stabilize) and actually start to rebound, one can make inferences about the current market correction being at an end,” Worth wrote in the report.

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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Buffett Says Free News Unsustainable, May Add More Papers

By Zachary Tracer - May 25, 2012 3:23 AM GMT+0700

Warren Buffett, whose Berkshire Hathaway Inc. (BRK/A) struck a deal this month to acquire 63 newspapers, said he may buy more publications as the industry rethinks whether to offer free content on the Internet.

“This is an unsustainable model and certain of our papers are already making progress in moving to something that makes more sense,” Buffett wrote in a letter to editors and publishers of Berkshire’s daily newspapers. “We want your best thinking as we work out the blend of digital and print that will attract both the audience and the revenue we need.”

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Warren Buffett, Chairman and CEO of Berkshire Hathaway, in Omaha, Neb., on Nov. 14, 2011. Photographer: Nati Harnik/AP Photo

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Buffett is adding to Berkshire’s newspaper holdings with the $142 million deal announced May 17 for Media General Inc. (MEG) publications including the Richmond Times-Dispatch of Virginia. The billionaire, who bought the Buffalo News in 1977 and said in 2009 that newspapers have the potential for unending losses, is now betting that papers with a community focus can profit as they change their models.

While circulation may slip, papers only fail when there are dailies competing in the same town, a publication forfeits its position as the primary source of locally important information or the market doesn’t have a sense of identity, he said.

“We don’t face those problems,” Buffett, 81, wrote in the letter dated yesterday and posted on the website of Berkshire’s Omaha World-Herald, which is in the Nebraska town where Buffett’s company is based. “Berkshire will probably purchase more papers in the next few years. We will favor towns and cities with a strong sense of community.”

Media General

Berkshire is the largest shareholder of Washington Post Co. (WPO) and purchased the World-Herald last year. Buffett said the company’s newspapers won’t “move the needle in terms of Berkshire’s economic value” in yesterday’s letter.

In the Media General deal, Berkshire also gave the Richmond-based company a $400 million term loan with an interest rate of 10.5 percent and received warrants for about 4.6 million Class A shares. Media General retained its television stations and said it’s selling the Tampa, Florida, group separately.

Media General has declined more than 90 percent since the end of 2003. The company fell 3.8 percent to $3.51 at 4:04 p.m. in New York. Berkshire slipped 0.2 percent.

The newspaper industry, suffering drops in print advertising, has recently embraced digital subscription plans. The New York Times (NYT) Media Group began charging readers to access its news stories online last year, attracting about 454,000 paying subscribers as of March. The so-called paywall is estimated to bring in $125 million next year for Times Co., according to Douglas Arthur, an analyst at Evercore Partners Inc. (EVR)

Newspaper Paywalls

Gannett Co. (GCI), owner of 82 daily newspapers, said this year it would begin charging readers to access news content online, except for flagship USA Today.

Press+, a startup that sells online subscription technology, is used by more than 300 publications, including some owned by MediaNews Group Inc., Tribune Co., GateHouse Media Inc. (GHSE), McClatchy Co. (MNI) and Lee Enterprises Inc. Press+, based in New York, was founded by former Wall Street Journal publisher L. Gordon Crovitz, along with Steven Brill and Leo Hindery in 2010.

The World-Herald and 17 of the Media General papers Berkshire is buying also use Press+, Crovitz said in an e-mail.

Buffett, a supporter of President Barack Obama and an advocate of higher taxes on the wealthy, said the newspapers would remain independent in their coverage of public policy.

‘Strong Political Views’

“I have some strong political views, but Berkshire owns the paper -- I don’t,” Buffett wrote in the letter. “And Berkshire will always be non-political.”

The billionaire investor said that editors should focus on making the papers “indispensable” to local communities.

“Our future depends on remaining the primary source of information in certain subjects of great importance to our readers,” Buffett wrote. “Technological change has caused us to lose primacy in various key areas, including national news, national sports, stock quotations and employment opportunities. So be it. Our job is to reign supreme in matters of local importance.”

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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Facebook Investor Spending Month’s Salary Exposes Hype

By Danielle Kucera and Douglas MacMillan - May 25, 2012 3:32 AM GMT+0700

Ryan Cefalu, who lives with his wife and two kids in Baton Rouge, Louisiana, saw in Facebook Inc. (FB)’s much-anticipated initial public offering a chance to buffer his retirement fund. His expectations fizzled along with the stock within the first minutes of trading.

“It’s disheartening to know that things get over-hyped,” Cefalu, a 34-year-old data-systems manager who spent about $4,000 on the stock, said in an interview. “That’s about a 12th of my annual income -- so a month’s salary. I’m trying to do an on-my-own retirement kind of thing.”

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Pedestrians walk past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York on May 21, 2012. Photographer: Scott Eells/Bloomberg

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May 24 (Bloomberg) -- Mike Abramsky, a principal at Red Team Global, talks about his suggestion that Facebook Inc. purchase Research In Motion Ltd. and the potential benefits for the social networking company. Abramsky speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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May 24 (Bloomberg) -- Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission and a Bloomberg LP board member, talks about Facebook Inc.'s initial public offering and the potential impact on U.S. investor sentiment. Levitt speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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May 24 (Bloomberg) -- Facebook Inc.’s initial public offering has triggered allegations the social network and banks led by Morgan Stanley selectively disclosed crucial information to investors. Bloomberg's Jon Erlichman reports on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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May 24 (Bloomberg) -- Steven Spencer, a partner at SMB Capital, talks about the performance of Facebook Inc. stock and short-selling strategy. Spencer speaks with Stephanie Ruhle, Erik Schatzker, Scarlet Fu and Dominic Chu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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May 23 (Bloomberg) -- Robert Prongay, an attorney at Glancy Binkow & Goldberg, talks about the lawsuit the firm has filed with a California court over Facebook Inc.'s initial public offering. He speaks with Cory Johnson on Bloomberg Television's "Bloomberg West." Bloomberg's Emily Chang also speaks. (Source: Bloomberg)

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The Facebook Inc. logo is displayed at the Nasdaq MarketSite in New York on May 18, 2012. Photographer: Scott Eells/Bloomberg

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Members of the media stand under Facebook Inc. signage projected on a screen at the Nasdaq MarketSite in New York on May 18, 2012. Photographer: Peter Foley/Bloomberg

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A television technician checks monitors displaying Mark Zuckerberg, chief executive officer of Facebook Inc., inside a satellite truck in the parking lot at the company's headquarters in Menlo Park, California on May 18, 2012. Photographer: David Paul Morris/Bloomberg

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Onlookers peer through the window during the Facebook Inc. initial public offering (IPO) at the Nasdaq MarketSite in New York on May 18, 2012. Photographer: Scott Eells/Bloomberg

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Members of the media broadcast live from Facebook Inc. headquarters in Menlo Park, California on May 18, 2012. Photographer: David Paul Morris/Bloomberg

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News of the Facebook Inc. initial public offer is displayed on a news ticker in New York on May 17, 2012. Photographer: Michael Nagle/Bloomberg

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The Facebook Inc. logo is displayed on a computer screen in this arranged photograph in San Francisco on May 17, 2012. Photographer: David Paul Morris/Bloomberg

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The Facebook Inc. logo is reflected in water droplets in this arranged photograph in San Francisco on May 17, 2012. Photographer: David Paul Morris/Bloomberg

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A pedestrian walks past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York on May 21, 2012. Photographer: Scott Eells/Bloomberg

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Facebook, a site used by 901 million people, allocated more than 25 percent of shares to retail investors, said two people familiar with the offering who asked not to be identified because the process was confidential. That means the value of stock bought by that group for $38 in the IPO has dropped by at least $630 million in total, based on the closing price of $32 yesterday and assuming investors held the stock.

While asset managers and hedge funds got to buy the stock in private trading years before the IPO and investment banks made money in the offering, smaller investors had to wait until last week’s IPO for a piece of the action. The outcome: After Facebook and its underwriters misjudged demand in pricing the IPO and glitches on the Nasdaq hampered trading on the first day, the world’s largest social-network website lost 18 percent in three days. The shares are still about 13 percent under their $38 IPO price after paring some losses.

The stock rose 3.2 percent to $33.03 at 4 p.m. in New York today.

‘Should I Bail?’

Facebook, the biggest technology IPO in history, turned into a quagmire of blame. Buyers of the stock sued the company, Nasdaq OMX Group Inc. and the underwriters, claiming they were misled. The U.S. Securities and Exchange Commission and the brokerage industry’s watchdog both said they may review the offering, and the scrutiny prompted Morgan Stanley (MS), the lead underwriter, to defend its handling of the IPO in a statement.

“I thought it would be fun to get in on the initial frenzy,” said Linda Lantz, an online marketer in Granite Bay, California, who bought 100 shares. “Now it makes me think ‘Oh god, should I bail or is it going to come back?’”

For Cefalu, whose children are age 12 and 1, the first-day glitches meant more than a bad day of trading: they made him buy twice as many shares as he intended after an order he canceled went through hours later, he said. With shares of Zynga Inc. (ZNGA) slumping along with Facebook, he estimates he lost a combined $2,250 as a result of the Facebook debut debacle.

Technical Problems

Michael McClafferty, a freshman finance major at Michigan State University, saw his “first big investment” turn into a $3,000 loss when he sold the shares at $35.

“I didn’t want to lose more,” McClafferty said. “I didn’t know what to do.”

The 19 year-old student estimates he spent $8,000 more than he wanted to while repeating orders that wouldn’t go through on the first day, and failing to cancel them because of the technical problems.

“I didn’t know what happened,” he said. “Then I was like, ‘they should be able to do something about it.’ They messed up pretty big from what I see, and it hurt more people than just me.”

Retail Investors

On its debut, the Menlo Park, California-based website jumped to $45 at the start of trading, which was delayed 30 minutes, before ending the day up 0.6 percent at $38.23. It paled in contrast with Google Inc.’s 18 percent jump in its 2004 initial public offering, Visa Inc.’s 28 percent gain in 2008 and LinkedIn Corp.’s 109 percent surge last May.

“The reaction of the retail investor is ‘Wow, what a flop,’” Jay Pestrichelli, co-founder of the Omaha, Nebraska- based investment adviser Zega Financial, said in an interview.

Frustrations of individual investors were exacerbated by a snafu at the Nasdaq, where trade confirmations were delayed and some orders may have been mishandled. Nasdaq’s woes were felt across the brokerage industry, according to Fidelity Investments, the second-largest mutual fund company.

Some customers who purchased Facebook stock “may have experienced delays in status updates,” Fidelity said in a statement. “This is an industry-wide issue that affected many different broker-dealers and other market participants.”

Fidelity Customer ‘Concerns’

Boston-based Fidelity said it’s working with other brokerage firms to “get Nasdaq to come to a resolution that addresses the concerns of our customers.”

Joseph Christinat, a spokesman for Nasdaq, declined to comment. Larry Yu, a spokesman for Facebook, declined to comment.

Facebook increased the number of shares sold and the price range days before the IPO, raising $16 billion and valuing the company at $104.2 billion.

Pat Brogan, a Yahoo! Inc. manager who trades on sites run by E*Trade Financial Corp. (ETFC) and Fidelity Brokerage in her spare time, called the experience of buying Facebook stock the “biggest fiasco” in her 30 years of day trading.

“They flooded the market with so many shares,” Brogan said. “I’m actually going to dump them if they get back to $38.”

Demand from retail buyers was higher than normal for Facebook, with personal investment website Sigfig.com seeing 10 times more orders than it had for other recent technology IPOs, said Terry Banet, chief investment officer for the site.

“Facebook wanted to get more retail involvement and they succeeded,” Banet said.

‘Obvious Gamble’

Some investors managed to take advantage of the initial gain. James DiMaggio, a 29-year-old product line sales manager at Ametek Inc. in Morton, Pennsylvania, said he bought 200 shares at $38, sold half for $40.98 and made about $280.

“The other half is now tanking,” said DiMaggio, who estimates his losses so far at $320. “It was really exciting in the beginning. I don’t gamble, and this is obviously a gamble.”

In the wake of the stock’s losses this week, small-time investors took to the Web to express their agitation on sites including Twitter Inc. and online investing community StockTwits Inc.

“There’s a lot of questioning about the IPO process in general and a sentiment that the real investor is getting taken by the larger Wall Street,” said Phil Pearlman, executive editor of StockTwits.

Some investors still see potential in the long term. At Sigfig, 7 percent of users who bought Facebook on May 18 sold it the same day, below the 15 percent to 31 percent first-day flipping of stock that has been more typical of recent technology IPOs, according to Banet.

Long-Term Potential

“Short term fluctuations don’t bother me,” said Charles Landry of Sacramento, California, who bought 1,000 shares on May 18. “Facebook has the potential to be, in the long term, one of the iconic companies in Silicon Valley, a la Google, a la Apple.”

Renee Morrison, who runs accounting at Empyrion Wealth Management in Roseville, California, had never bought a stock in her life before investing in Facebook last week. She too plans to wait it out, she said.

“I have been very well educated and prepared that it’s kind of like gambling, there’s no guarantee,” Morrison said.

To contact the reporters on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net; Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

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

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