U.S. Stocks Rally as S&P 500 Jumps in Final Hour After Europe Bank Report

By Rita Nazareth - Oct 5, 2011 3:57 AM GMT+0700

U.S. stocks rallied, driving the Standard & Poor’s 500 Index up 4.1 percent in the final 50 minutes of trading, amid speculation European Union officials are examining how to recapitalize the region’s banks.

Financial stocks in the Standard & Poor’s 500 Index jumped 4.1 percent as a group, reversing a 2.9 percent drop. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) added at least 4.1 percent. DuPont Co. and Hewlett-Packard Co. (HPQ) rallied more than 3.6 percent, pacing in companies most-tied to economic growth. AMR Corp. (AMR) surged 21 percent as analysts said the parent of American Airlines is unlikely to file for bankruptcy.

The S&P 500 rose 2.3 percent to 1,123.95 at 4 p.m. New York time. The index plunged 2.2 percent earlier, to a level that would mark more than a 20 percent drop from an April peak, the threshold of a bear market. The Dow Jones Industrial Average lost 153.41 points, or 1.4 percent, to 10,808.71 today.

“The European crisis has been the market driver,” Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co., said in a phone interview. “If Europe comes out with something to kick the can down the road, it buys them more time. We learned in 2008 how important the financial system is and how a ripple effect can occur.”

Stocks reversed losses in the final hour of trading after a report in the Financial Times quoted Olli Rehn, European commissioner for economic affairs, as saying there is an “increasingly shared view” that the region needs a coordinated approach to halt the sovereign debt crisis. Belgian Prime Minister Yves Leterme said a “bad bank” for troubled assets will be set up for Dexia SA and will have government guarantees.

Due for Rally

Stocks were due for a rally after falling more than 5 percent in the previous two sessions, Paul Zemsky, the New York- based head of asset allocation for ING Investment Management, said. His firm oversees $550 billion. The S&P 500 is trading for 12.2 times earnings in the last 12 months, close to the lowest since March 2009.

“The market doesn’t go on a straight line either up or down,” Zemsky said in a telephone interview. “There’s no sign of recession in the U.S. and yet the market is pricing for one. So you’re going to have days when things pop up and you’re going to have bear market rallies.”

About 7 percent of S&P 500 stocks began the day trading above their average price in the last 200 days, according to data compiled by Bloomberg. That matched the proportion following the Aug. 8 rout for the lowest level in 30 months. The full index began today 14.1 percent below its 200-day moving average, the biggest gap since April 30, 2009.

Bear Markets

Concern governments may be running out of tools to keep the global economic slowdown from worsening has left equities from Brazil to Hong Kong and Frankfurt in bear markets. The declines have confounded bullish investors who speculated the recovery that began in March 2009 would boost stocks for a third year.

Global stocks fell earlier after some officials hinted that bondholders may have to take bigger losses on Greek debt than previously negotiated. Deutsche Bank AG scrapped its profit forecast and announced 500 job cuts and further writedowns of Greek bond holdings amid a “significant and unabated slowdown in client activity” in the wake of Europe’s debt crisis.

Equities briefly rose after Fed Chairman Bernanke said the central bank “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability. Bernanke made his remarks today in testimony to Congress’s Joint Economic Committee in Washington.

Banks Surge

Banks, brokerages and insurers led the rally as the S&P 500 Financials Index (S5FINL) jumped 6.5 percent between 3:18 p.m. and 4 p.m. New York time. The KBW Bank Index jumped 4.5 percent, after slumping 3.2 percent earlier. Bank of America added 4.2 percent to $5.76. JPMorgan rose 6.6 percent, the most in the Dow, to $30.26. Morgan Stanley (MS), owner of the biggest retail brokerage, rose 12 percent, the largest gain in the S&P 500.

The Morgan Stanley Cyclical Index of companies most-tied to the economy rallied 4.3 percent. The Dow Jones Transportation Average, a proxy for the economy, added 4.4 percent. DuPont increased 4.5 percent to $40.23. Hewlett-Packard advanced 3.7 percent to $23.02.

The Bloomberg U.S. Airlines Index of 10 companies added 6.3 percent. AMR gained 21 percent to $2.39, after falling 33 percent yesterday on concern the company may file for bankruptcy. Fort Worth, Texas-based AMR reiterated yesterday that Chapter 11 protection ‘‘is certainly not our goal or our preference’’ as the third-largest U.S. airline seeks more productivity in union agreements.

Apple Slumps

Apple Inc. (AAPL) dropped 3.6 percent to $361.23. The company, in its first product unveiling since Steve Jobs resigned as chief executive officer, introduced an iPhone with a stronger processor to help it vie with Google Inc.’s Android. The update of Apple’s best-selling product marks an early test for Tim Cook, CEO since Aug. 24, who hasn’t yet shown he can match his predecessor’s skills at product design and marketing.

‘‘There is some disappointment that only one new iPhone has been announced,” said Shaw Wu, an analyst at Birmingham, Alabama-based Sterne Agee.

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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Bernanke Talks Stimulus, Cautions Congress

By Scott Lanman - Oct 5, 2011 1:49 AM GMT+0700
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Ben S. Bernanke, chairman of the U.S. Federal Reserve, listens during a Joint Economic Committee hearing in Washington, D.C., on Oct. 4, 2011. Photographer: Andrew Harrer/Bloomberg

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Oct. 4 (Bloomberg) -- U.S. Representative Kevin Brady, a Republican from Texas, talks about Federal Reserve Chairman Ben S. Bernanke's performance and trade policy. He speaks with Peter Cook on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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Oct. 4 (Bloomberg) -- Steven Ricchiuto, chief economist at Mizuho Securities USA Inc., talks about Federal Reserve Chairman Ben S. Bernanke's congressional testimony today, U.S. monetary and fiscal policy, and the outlook for the U.S. economy. Ricchiuto speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

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Federal Reserve Chairman Ben Bernanke testifies before the U.S. Congress Joint Economic Committee in the Dirksen Senate Office Building on Capitol Hill, October 4, 2011. Photographer: Chip Somodevilla/Getty Images

Federal Reserve Chairman Ben S. Bernanke said the central bank can take further steps to sustain a recovery that’s “close to faltering” and cautioned lawmakers against making changes in fiscal policy that harm growth.

The Fed can give more information about its pledge to keep interest rates low at least through mid-2013, reduce the rate paid on banks’ reserve deposits or buy more securities, Bernanke said today in testimony to Congress’s Joint Economic Committee in Washington, reiterating options he mentioned in July. He signaled that higher inflation this year won’t stop the Fed, saying it hasn’t become “ingrained” in the economy.

Bernanke is struggling to find ways to reduce unemployment stuck at 9 percent and avert a second recession in three years after deploying unconventional stimulus tools in August and September. Europe’s sovereign-debt crisis poses risks to growth already weak from housing and joblessness, the Fed chief said.

“We need to make sure that the recovery continues and doesn’t drop back and that the unemployment rate continues to fall downward,” Bernanke said in response to questions from Senator Bob Casey of Pennsylvania, the panel’s Democratic chairman.

They were Bernanke’s first detailed comments on the economic outlook and monetary policy since his decision Sept. 21 to adopt so-called Operation Twist, replacing $400 billion of Treasuries in the Fed’s portfolio with longer-term securities in a move aimed at further reducing borrowing costs and lowering unemployment.

‘Close to Faltering’

That action from the Fed, while not a “game changer,” is “particularly important now that the economy is, the recovery is close to faltering,” Bernanke said today. The central bank program should reduce long-term interest rates by about 0.2 percentage point, a move “roughly approximate” to a half- percentage-point cut in the benchmark federal funds rate, he said.

The central bank has kept that rate near zero since 2008 and purchased $2.3 trillion of housing and government debt. In August, the Fed pledged to maintain low interest rates through at least mid-2013, amending previous language for a less specific “extended period.”

The Fed “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,” Bernanke said in today’s testimony.

Bernanke, a former Princeton University economist, reiterated his comments from throughout 2011 that lawmakers shouldn’t adopt fiscal policies that harm the economy in the short term while adopting a long-term plan to reduce the federal budget deficit.

‘Substantial Step’

Lawmakers on the separate bipartisan congressional supercommittee charged with seeking $1.5 trillion in deficit reduction by Nov. 23 would take a “substantial step” by accomplishing that goal, Bernanke, 57, said. At the same time, “more will be needed to achieve fiscal sustainability,” he said.

“A second important objective is to avoid fiscal actions that could impede the ongoing economic recovery,” Bernanke said. “Putting in place a credible plan for reducing future deficits over the longer term does not preclude attending to the implications of fiscal choices for the recovery in the near term,” he said, without being more specific.

Stocks pared losses after Bernanke’s comments. The Standard & Poor’s 500 Index fell 0.9 percent to 1,089.15 at 2:29 p.m. in New York after declining as much as 2.2 percent. The yield on the 10-year Treasury note rose three basis points to 1.80 percent. A basis point is 0.01 percentage point.

No Plans

Responding to a question, Bernanke said the central bank has no immediate plans for another round of large-scale asset purchases, known as quantitative easing. At the same time, he said, the Fed doesn’t take “anything off the table.”

The U.S. jobless rate was 9.1 percent in August and has been stuck at 9 percent or higher for five months. Employers added zero jobs to payrolls in August, down from 85,000 in July, according to the Labor Department. Sustained payroll increases of around 150,000 a month are needed to bring unemployment down about half a percentage point over a year, according to Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

“Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” Bernanke said today. He also said that the “pattern of sluggish growth” in the economy “was particularly evident in the first half.”

Economy Expanded

The economy expanded at a 1.3 percent annual pace in the second quarter after a 0.4 percent rate in the first three months of the year, according to the Commerce Department. Analysts surveyed by Bloomberg last month projected a 1.8 percent rate of growth in the third quarter, based on the median estimate.

“The recovery from the crisis has been much less robust than we had hoped,” Bernanke said. Fed officials expect a “somewhat slower pace of economic growth over coming quarters” than they did in June, he said, without giving a specific forecast.

U.S. stocks last week finished their worst quarter since the financial panic of 2008, burdened by concerns over a potential Greek debt default and chances the U.S. will relapse into recession. The Standard & Poor’s 500 Index dropped 14 percent through Sept. 30.

Yields Risen

Yields on 10-year Treasuries have risen from a record 1.67 percent on Sept. 23. Still, the difference between yields on 10- year and 30-year Treasuries has narrowed to less than 1 percentage point for the first time since July 2010.

In response to a question, Bernanke said the U.S. banking system has manageable exposure to European nations buffeted by the continent’s sovereign-debt crisis.

“We have looked very carefully at bank exposures both to foreign sovereigns and to foreign banks,” Bernanke said. “The exposures of U.S. banks to the most troubled sovereigns -- Portugal, Ireland and Greece -- is quite minimal. So the direct exposures there are not large.”

Bernanke said faster inflation this year “does not appear to have become ingrained in the economy” and cited a recent decline in what traders expect for inflation in five to 10 years. The FOMC said inflation “appears to have moderated since earlier in the year” as prices of energy and some commodities have fallen. The Fed’s preferred price index, which excludes food and fuel costs, rose 1.6 percent in August from a year earlier, up from 1 percent in March.

‘Depressed’ Housing

The housing market, which the Fed said is “depressed,” is showing little sign of rebounding even with a record-low average 4.01 percent interest rate on the 30-year fixed-rate mortgage. The annual pace of new-home sales in August was 295,000, just above the record-low rate of 278,000 in August 2010. That’s less than one-fourth of the 1.39 million pace in July 2005.

Housing, which had been a “significant driver of recovery from most recessions” in the U.S. since World War II, is now among industries contributing to the “slower-than-expected rate of expansion,” Bernanke said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

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

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Lawmakers Urge BofA Customers to Quit

By Phil Mattingly - Oct 5, 2011 5:20 AM GMT+0700
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Rep. Brad Miller, seen here in 2009, introduced a bill today that would bar banks from imposing fees on customers who close accounts. Photographer: Scott J. Ferrell/Congressional Quarterly/Getty Images

A top Senate Democrat is urging customers to stop doing business with Bank of America Corp. (BAC) to protest new debit-card fees, and a House lawmaker is proposing a measure that could make it easier for them to quit.

Representative Brad Miller, a member of the Financial Services Committee, introduced a bill today that would bar all banks from imposing fees on people who close accounts, calling the proposal a response to the Charlotte, North Carolina-based company’s plan to charge some debit customers an additional $5 a month for using the cards.

“As megabanks flirt with menus of new fees, an increasing number of Americans will want to switch banks,” Miller, a North Carolina Democrat, said in a statement. “That is the way things work in a competitive, free market as unrepentant banks are still trying to rake in vulgar profits.”

Miller’s comments followed more pointed criticism from Senator Richard Durbin, the Illinois Democrat who successfully pushed for legislation restricting the amount banks could collect from retailers for debit transactions and called for. In comments on the Senate floor yesterday, Durbin called on Bank of America customers to “get the heck out of that bank.”

The two lawmakers spoke out after President Barack Obama questioned whether Bank of America has an “inherent right” to charge the new fee, which the company said was aimed at making up revenue lost because of the limits on so-called interchange.

Reduce Revenue

Bank of America, the biggest U.S. lender, is joining rivals including JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and SunTrust Banks Inc. (STI) in rolling out new charges for debit-card users as Dodd-Frank Act rules imposed by the Federal Reserve take effect this month. The limits may reduce annual revenue at the biggest U.S. banks by $8 billion, data compiled by Bloomberg Government show.

The new rules cap the fees at 21 cents, plus 5 basis points of the total and a conditional 1 cent for fraud-prevention, replacing a formula that averaged 1.14 percent of the purchase price, or about 44 cents.

Bank of America is already facing pressure from the European debt crisis and concerns over the legal liability associated with its mortgage business.

“New regulations on debit card interchange fees -- which provide no apparent benefit to consumers -- will further reduce revenue by additional billions of dollars,” Larry DiRita, a spokesman for Bank of America, said in a statement.

The bank yesterday fell below $6 in New York for the first time in more than two years. The shares today rose 23 cents, or 4.2 percent, to $5.76 at 4:15 p.m. in New York Stock Exchange composite trading.

Backs of Customers

“Your decision to charge a new monthly debit fee is an overt attempt to make even more profit off the backs of your customers,” Durbin wrote to Bank of America Chief Executive Officer Brian Moynihan in a letter released yesterday.

Lawmakers and regulators also received a request today from the Consumers Union, an advocacy group based in Yonkers, New York, to investigate whether the fee was needed to maintain business operations or would be used solely to boost profits.

“This fee appears to be unreasonable and unrelated to the actual cost of processing debit card transactions,” Pamela F. Banks, senior policy counsel for the group, wrote in letters that were sent to the members of the Senate Banking Committee and House Financial Services Committee, as well as the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Consumer Financial Protection Bureau.

Closing Fees

Miller’s bill would ban banks from charging closing fees to customers looking to move their account. The measure also would require the bank to close the account within 48 hours of receiving the customer request and limit a lender’s ability to report negative balances from closed accounts to credit reporting firms.

As a member of the House minority, Miller would need support from Republicans who opposed Dodd-Frank to advance his bill. Durbin said in a conference call with reporters today that he has no plans to introduce additional legislation.

In response to a question about Bank of America’s plan yesterday during an interview with the ABC News and Yahoo! Web sites, Obama said it was his “hope that you’re going to see a bunch of the banks say this is not good business practice.”

Richard Hunt, the president of the Consumer Bankers Association, said today that he was “very disappointed” by Obama’s remarks.

“Recent announcements from banks across the country regarding new fees for debit purchases and eliminating free checking are all widely predicted consequences from the government price controls in the Durbin amendment,” Hunt said.

Durbin pushed to include the debit-fee provision in last year’s financial-regulation law to cut down on the fees gas stations, convenience stores and large retailers like Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) face when they accept debit-card transactions. The fees can be the second-highest cost the retailers face after labor.

To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net

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U.S. Stocks Jump; S&P 500 Gains in Final Hour

By Michael P. Regan and Rita Nazareth - Oct 5, 2011 3:43 AM GMT+0700
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Specialist Michael Gagliano, foreground right, calls out prices at his post on the floor of the New York Stock Exchange on Oct. 4, 2011. Photographer: Richard Drew/AP

U.S. stocks rallied, driving the Standard & Poor’s 500 Index up 4.1 percent in the final 50 minutes, amid speculation European Union officials are examining how to recapitalize the region’s banks. Treasuries fell and the euro rallied.

The S&P 500 surged 2.3 percent to 1,123.95 at 4 p.m. New York time, sparing the benchmark measure of U.S. equities its first bear market, or 20 percent retreat from a peak, since 2009. Yields on Treasury 10-year notes climbed 6 basis points to 1.82 percent. The euro appreciated 1.1 percent to $1.3322. Futures on Germany’s DAX Index pared their loss to 1 percent from 4.9 percent.

Equities rebounded after the S&P 500 fell below 1,090.89, the closing level required to give the index a 20 percent slump from the three-year high reached on April 29. Stocks rose after the Financial Times quoted Olli Rehn, European commissioner for economic affairs, as saying there is an “increasingly shared view” that the region needs a coordinated approach to halt the sovereign debt crisis. After U.S. markets closed, Belgian Prime Minister Yves Leterme said a “bad bank” to hold Dexia SA (DEXB)’s troubled assets will be set up.

“The European crisis has been the market driver,” Richard Sichel, who oversees $1.6 billion as chief investment officer at Philadelphia Trust Co., said in a phone interview. “If Europe comes out with something to kick the can down the road, it buys them more time. We learned in 2008 how important the financial system is and how a ripple effect can occur.”

Morgan Stanley (MS) Jumps

Banks, brokerages and insurers led the rally as the S&P 500 Financials Index jumped 6.5 percent between 3:18 p.m. and 4 p.m. New York time. Morgan Stanley surged 17 percent and Bank of America Corp. (BAC) soared 10 percent during the same period.

Stocks were due for a rally after the S&P 500 fell 5.3 percent in the previous two sessions, said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management. His firm oversees $550 billion. The S&P 500 is trading for 12.3 times earnings in the last 12 months, close to the cheapest valuation since March 2009.

“The market doesn’t go on a straight line either up or down,” he said in a telephone interview. “There’s no sign of recession in the U.S., and yet the market is pricing for one. So you’re going to have days when things pop up and you’re going to have bear market rallies.”

200-Day Average

About 7 percent of S&P 500 stocks began the day trading above their average price in the last 200 days, according to data compiled by Bloomberg. That matched the proportion following the Aug. 8 rout for the lowest level in 30 months. The full index began today 14.1 percent below its 200-day moving average, the biggest gap since April 30, 2009.

U.S. stocks followed European shares lower earlier as some officials signaled bondholders may have to take bigger losses on Greek debt than previously negotiated. The possible breakup of Belgian bank Dexia and Deutsche Bank AG (DBK)’s abandonment of its profit forecast added to signs that contagion from the debt crisis is spreading. Goldman Sachs Group Inc. cut its global growth forecasts and predicted recessions in Germany and France.

Treasuries extended losses after the Financial Times report. Yields on 30-year bonds rose 9 basis points to 2.81 percent.

“People are looking for optimism anywhere they can get it,” said Christopher Bury, co-head of fixed-income rates at Jefferies & Co., one of the 22 primary dealers that trade with the Federal Reserve. “You have these random stories and the market reacts, but how many times have we been down this road where these are just words?”

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

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

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AMR, JetBlue, McDermott, Molycorp, SodaStream, Yahoo: U.S. Equity Movers

By Kaitlyn Kiernan - Oct 4, 2011 8:42 PM GMT+0700

Shares of the following companies may are having unusual moves in U.S. trading. Stock symbols are in parentheses and prices are as of 9:40 a.m. in New York.

AMR Corp. (AMR) surged 19 percent to $2.36 after losing 33 percent yesterday. The parent of American Airlines advanced after several analysts said an American bankruptcy filing is unlikely. Rodman & Renshaw upgraded the airline to “market outperform” from “market perform.” Capstone Investments Inc. boosted the company to “buy” from “hold.”

JetBlue Airways Corp. (JBLU) rose 7.2 percent to $3.74. United Continental Holdings Inc. (UAL) gained 4 percent to $17.80. US Airways Group Inc. (LCC) increased 2.8 percent to $4.76.

McDermott International Inc. (MDR) fell 3.8 percent to $10.80. The offshore oil and gas contractor was cut from Goldman Sach & Co.’s conviction buy list. Goldman still lists the company as a “buy.”

Molycorp Inc. (MCP) jumped 3.2 percent to $31.10. The owner of the largest rare-earth deposit outside China will announce the discovery of rare earth materials near Mountain Pass, California, the New York Times reported. The mining company may be able to start producing in the area, where the company has had regulatory approval to mine for decades, the Times said, citing Chief Executive Officer Mark Smith.

NRG Energy Inc. (NRG) fell 3.6 percent to $19.22. The Princeton, New Jersey-based power producer cut its forecast for adjusted earnings before interest, taxes, depreciation and amortization in 2011 to no more than $1.85 billion from at least $1.9 billion.

SodaStream International Ltd. (SODA) rose 3.9 percent to $30.24. The producer of soda makers was raised to “buy” from “hold” at Deutsche Bank AG.

Yahoo! Inc. (YHOO US) gained 4.4 percent to $14.12. The private-equity firm Silver Lake, Alibaba Group Holding Ltd. and Russia’s Digital Sky Technologies are discussing a possible joint bid for the most-visited U.S. Web portal, three people with direct knowledge of the matter said.

To contact the reporter on this story: Kaitlyn Kiernan in New York at kkiernan2@bloomberg.net.

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

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Emerging Market Bears Turning Bullish

By Michael Patterson and Weiyi Lim - Oct 4, 2011 5:16 PM GMT+0700
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Komal Sri-Kumar, group managing director and chief global strategist of TCW Group Inc. Photographer: Jonathan Alcorn/Bloomberg

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Tata Motors Ltd., the Mumbai-based maker of the world’s cheapest car, tumbled 22 percent in the three months through September. Photographer: Adeel Halim/Bloomberg

The longest losing streak for developing-market equities in more than a decade is turning investors who shunned the stocks a year ago into buyers after valuations fell to the lowest levels since March 2009.

TCW Group Inc.’s Komal Sri-Kumar, who advised purchasing options as insurance against emerging-market declines in October 2010, now recommends shares of consumer companies after inflation slowed in China and central banks in Brazil and Turkey cut interest rates. HSBC Private Bank’s Arjuna Mahendran is adding Chinese stocks with dividend yields of more than 4 percent. Harris Private Bank’s Jack Ablin said he may boost emerging-nation shares to 10 percent of holdings from 3 percent.

MSCI Inc. (MSCI)’s emerging-market gauge sank 30 percent from its May 2 high and slumped 23 percent in the three months to Sept. 30, trailing the advanced-nation index for four straight quarters for the first time since Russia’s 1998 default, as Europe’s debt crisis and concern the U.S. economy may contract led investors to flee riskier securities. The drop sent shares in the MSCI Emerging Markets Index to 1.5 times net assets, the lowest level versus the MSCI World Index in 30 months.

“It may be time to start getting your toes wet,” Sri- Kumar, who helps oversee about $120 billion as chief global strategist at TCW in Los Angeles, said in a Sept. 27 phone interview. “The emerging markets are not going to have the recession of the kind I anticipate for the U.S. and Europe.”

Fund Outflows

MSCI’s developing-stock gauge trailed the MSCI World index by 6.1 percentage points last quarter, the most since the third quarter of 2008. Brazil’s Bovespa index fell 16 percent, Russia’s Micex Index (INDEXCF) lost 18 percent, the BSE India Sensitive Index slid 13 percent and China’s Shanghai Composite Index retreated 15 percent.

Emerging-market equity funds have posted nine straight weeks of outflows, with investors withdrawing $2.6 billion in the seven days ended Sept. 28, according to data compiled by Cambridge, Massachusetts-based research firm EPFR Global. Industrial companies and raw-materials producers led declines during the past three months on concern falling demand from advanced countries will erode profits.

The drop in energy and food prices that dragged the S&P GSCI Spot Index of commodities down 12 percent last quarter has given central banks room to reverse interest-rate increases that had turned emerging-market stocks into laggards the previous three quarters. Brazil’s central bank cut its benchmark interest rate for the first time in two years in August, while Turkey reduced borrowing costs to a record low. China has kept its lending rate unchanged since July after three increases this year.

Peak Inflation

“Maybe all of this mess is going to help them because it will bring the peak in inflation earlier than it otherwise would have been,” Jim O’Neill, chairman of Goldman Sachs Asset Management in London, said in a Sept. 23 interview on Bloomberg Television. O’Neill coined the term BRIC in 2001 to describe Brazil, Russia, India and China.

Emerging-market stocks began the fourth quarter with losses. The MSCI gauge slid 2 percent to 834.96 at 11:03 a.m. in London, extending yesterday’s 3.2 percent slump. The MSCI World (MXWO) Index has declined 3.8 percent in the past two days.

Barton Biggs, the founder of hedge fund Traxis Partners LP in New York, says it’s too early to invest in emerging markets because government leaders haven’t found solutions for Europe’s sovereign-debt crisis or the faltering U.S. economic recovery.

Global Bears

Seventy-four percent of global investors surveyed by Bloomberg last month said the euro-area economy will fall into recession in the next 12 months. U.S. Federal Reserve Chairman Ben S. Bernanke said on Sept. 29 that the U.S. is facing a “national crisis” with a jobless rate at or above 9 percent since April 2009. German Finance Minister Wolfgang Schaeuble opposed moves yesterday to increase the scale of a euro rescue fund, damping speculation of a breakthrough in talks to quell the debt crisis.

“When there is clarity, when the authorities move and do something, emerging markets will be a fabulous place to invest,” Biggs, the former chairman of Morgan Stanley Asset Management, said in a Sept. 22 interview on Bloomberg Television. “I am not ready to make that bet yet.”

Valuations Fall

Emerging-market stocks trailed advanced-nation shares during times of financial stress that sparked global losses in the past two decades including Latin America’s so-called Tequila Crisis in 1994 after a devaluation of the Mexican peso, Russia’s 1998 default on $40 billion of debt and the 2008 crisis sparked by the bankruptcy of Lehman Brothers Holdings Inc. The peak-to- trough drop in the emerging-market index was 12 percentage points bigger on average during the six retreats, according to data compiled by Bloomberg.

“The likelihood that people continue to take money out of risky asset classes continues to be there,” said Lee King Fuei, a fund manager at London-based Schroders Plc, which oversaw about $330 billion as of June 30. “In the shorter term, I don’t see any particular catalyst that will reverse this.”

A year ago, Harris Private Bank’s Ablin told Bloomberg News that emerging-market shares were “stretched.” Now the Chicago- based chief investment officer says valuations have fallen “back in line with reality” and investors should consider adding to holdings.

Japan Buying

TCW’s Sri-Kumar advises buying in the consumer industries of India and Brazil, where the unemployment rate was 6 percent in August, a record low for the month. Mahendran, who helps oversee about $499 billion as the Singapore-based Asian head of investment strategy at HSBC Private Bank, favors Jiangsu Expressway Co., a Chinese toll-road operator, and China Mobile Ltd. (941), the world’s largest mobile-phone company by users.

Faster growth in emerging markets means investment returns will be higher, said Takahiro Mitani, president of Japan’s Government Pension Investment Fund. The world’s largest public pension fund, which oversees 114 trillion yen ($1.5 trillion), will start investing in emerging-market stocks by the end of the year, Mitani said in a Sept. 27 interview in Tokyo.

Emerging economies may expand 6.4 percent in 2011, four times quicker than the 1.6 percent rate for developed nations, the Washington-based International Monetary Fund forecast in September.

Developing-nation government debt will probably amount to 35 percent of emerging-market gross domestic product this year and budget deficits will be 2.7 percent, compared with levels of 102 percent and 6.8 percent in advanced nations, according to the fund’s Fiscal Monitor in June.

Hypermarcas, Tata Motors

The MSCI emerging-market index’s price-to-book ratio is 25 percent lower than its average of 2 during the past five years, according to data compiled by Bloomberg. The gauge trades at a 2.5 percent discount to the MSCI World Index, compared with a 17 percent premium a year ago.

Profits at companies in the emerging gauge jumped 23 percent on average in the second quarter, about three times faster than the 7.8 percent growth in MSCI World index earnings, the data show.

The MSCI Brazil Consumer Staples Index trades at 2.5 times book value, or assets minus liabilities, 19 percent less than its five-year average. Hypermarcas SA (HYPE3), the Sao Paulo-based maker of consumer products and medicines, tumbled 40 percent last quarter to the lowest level since April 2009.

The benchmark gauge for Indian makers of discretionary consumer products has retreated to 3.8 times book value from 6.4 times a year ago, data compiled by Bloomberg show. Tata Motors Ltd. (TTMT), the Mumbai-based maker of the world’s cheapest car, tumbled 22 percent in the three months through September.

Rising Yields

Brazil’s central bank cut its benchmark Selic interest rate by 0.5 percentage point to 12 percent on Aug. 31 after raising borrowing costs eight times since April 2010. While the Reserve Bank of India increased interest rates on Sept. 16, traders of interest-rate swaps are pricing in the possibility of cuts in the next year.

One-year interest-rate swaps in India, which reflect the cost of receiving the overnight money-market rate, traded at 7.91 percent yesterday, below the 8.25 percent repurchase rate, according to data compiled by Bloomberg.

Nanjing-based Jiangsu Expressway’s rising dividend yield lured HSBC’s Mahendran, who accurately predicted emerging markets would “take a breather” in the first half. The company has payouts equivalent to 7.8 percent of its share price, more than double the 3 percent yield on the MSCI World index, according to data compiled by Bloomberg.

‘Far Better’

The stock, which fell 17 percent last quarter, may rally 54 percent in the next 12 months, according to the average of 13 analyst estimates compiled by Bloomberg.

China Mobile’s dividend yield has climbed to 4.2 percent from an average 2.6 percent since 2003, data compiled by Bloomberg show. The Hong Kong-based company has about $50 billion of cash available to invest or return to shareholders, more than Apple Inc. (AAPL), the world’s biggest technology company by market value, according to data compiled by Bloomberg.

“The fundamentals of the emerging-market economies are pretty strong,” said Kelvin Tay, the Singapore-based chief investment strategist at UBS Wealth Management. “On a medium-to longer-term basis, the emerging-market space looks far better than advanced nations.”

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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European Stocks Drop for Third Day on Debt; Dexia Sinks, Air France Tumble

By Corinne Gretler - Oct 4, 2011 7:09 PM GMT+0700

European stocks dropped for a third day as policy makers signaled they may renegotiate terms of Greece’s bailout. Asian shares and U.S. index futures fell.

Dexia SA (DEXB) tumbled the most in 2 1/2 years as the board asked Belgium’s biggest bank by assets to solve its “structural problems.” Deutsche Bank AG (DBK) slumped 6.2 percent after abandoning its 2011 earnings forecast. Air France-KLM (AF) Group slid to a 20-year low after the head of the IATA industry association said profit projections may be unsustainable.

The benchmark Stoxx Europe 600 Index fell 3.4 percent to 216.08 at 1:08 p.m. in London, the lowest level in a week. European finance chiefs meeting yesterday considered “technical revisions” to the second Greek bailout, Luxembourg Prime Minister Jean-Claude Juncker said today, fueling concern bondholders may have to take bigger losses on the nation’s debt.

“Any uncertainty or delay is unwelcome, as fear breeds fear and market trends are not easily reverted,” said Emmanuel Hauptmann, senior equity fund manager and partner at Reyl Asset Management SA in Geneva. Ministers considering a higher contribution by private investors to the Greek rescue “creates uncertainty as to how high the bill for European banks in particular may be, explaining the ever-increasing volatility of the sector.”

Economic Reports

The Stoxx 600 has fallen 26 percent from this year’s peak on Feb. 17 as European and U.S. economic reports trailed forecasts, adding to concern that the global economic recovery is at risk. The decline has left the measure trading at 9.1 times estimated earnings, near the cheapest since March 2009, data compiled by Bloomberg show.

The MSCI Asia Pacific Index dropped 2.3 percent today, while Standard & Poor’s 500 Index futures fell 1.2 percent after the U.S. gauge retreated to a one-year low yesterday.

Finance ministers meeting yesterday considered reshaping a July rescue deal for Greece that foresaw investors contributing 50 billion euros ($66 billion) to a 159 billion-euro bailout. That private sector involvement, or PSI, includes debt exchanges and rollovers.

“As far as PSI is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21,” Juncker told reporters early today after chairing a meeting of euro finance chiefs in Luxembourg. “These are technical revisions we are discussing.”

‘Knock-On Effects’

“The worse things get in Greece, the more pressure there is to further ‘bail in’ private creditors and the greater the perceived knock-on effects of a Greek default across the rest of the euro zone’s periphery and throughout Europe’s banking system,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, wrote in an e-mail. “Sentiment is bearish, euro zone-driven and hyper-sensitive to developments in Greece.”

Goldman Sachs Group Inc. cut its global growth forecast for this year and next, predicting recessions in Germany and France as the European economy stalls and the risk of a contraction in the U.S. grows. The world economy will probably expand 3.8 percent this year and 3.5 percent in 2012, compared with earlier predictions of 3.9 percent for 2011 and 4.2 percent for next year, Goldman Sachs economists Jan Hatzius and Dominic Wilson wrote in an Oct. 3 report.

In the U.S., a release today at 10 a.m. New York time may show factory orders were unchanged in August after rising 2.4 percent the previous month, according to the median forecast of 68 economists in a Bloomberg News survey.

Dexia Drops

Dexia plunged 14 percent to 1.12 euros after its board asked Chief Executive Officer Pierre Mariani to prepare “necessary measures” to fix the company’s “structural problems” after Europe’s government-debt crisis worsened.

The shares rebounded from a 38 percent drop as the French and Belgian governments pledged to support the bank.

France and Belgium will take “all necessary measures” to protect clients and will guarantee all Dexia’s loans, French Finance Minister Francois Baroin and Belgian Finance Minister Didier Reynders said. Belgium’s cabinet will meet in Brussels tonight to review the options for the lender. Both governments have stakes in the bank following its bailout in 2008.

BNP Paribas (BNP) SA, France’s biggest bank, declined 4.9 percent to 27.27 euros and Societe Generale (GLE) SA retreated 5 percent to 18.02 euros.

Dexia, BNP Paribas and Societe Generale are resisting pressure from regulators to accept more losses on their holdings of Greek government debt amid criticism they haven’t written down the bonds sufficiently.

Hellenic Debt

While most banks have marked their Hellenic debt to market prices, a decline of as much as 51 percent, Dexia, BNP and Societe Generale cut the value of some holdings by 21 percent. The practice, which doesn’t violate accounting rules, may leave them vulnerable to bigger impairments in the event of a default.

Deutsche Bank slumped 6.2 percent to 24.15 euros. Germany’s largest lender dropped its 2011 profit forecast and announced plans to cut 500 jobs as market volatility and unexpected costs on an indirect tax position weighed on third-quarter earnings.

Greece’s Alpha Bank SA and Piraeus Bank SA (TPEIR) fell 9 percent to 1.11 euros and 6.8 percent to 41 euro cents, respectively.

Air France sank 9.5 percent to 4.81 euros, its lowest price since at least December 1991. International Consolidated Airlines Group, the parent of British Airways, declined 5.6 percent to 145.90 pence while European Aeronautic, Defence and Space Co., the maker of Airbus SAS aircraft, slid 6.6 percent to 19.54 euros.

Airline Earnings

Tony Tyler, chief executive officer of the International Air Transport Association since July 1, said profits forecast to total $28 billion in the three years through 2012 may be unsustainable as over-capacity and looming regulatory costs weigh on margins.

Airlines will generate net income equal to 0.8 percent of revenue next year, a margin that may shrink further if economic growth slows to less than 2.4 percent, Tyler said in an interview in London.

American Airlines parent AMR Corp. (AMR) tumbled 33 percent in New York yesterday, the most since March 2003, amid growing concern the third-largest U.S. carrier may be forced to seek bankruptcy protection.

Volkswagen AG (VOW), Europe’s largest carmaker, lost 6.5 percent to 89.08 euros, leading a gauge of auto-industry shares in the Stoxx 600 to the lowest since May 2010. Renault SA (RNO), France’s second-largest automaker, sank 6.9 percent to 22.66 euros.

Cement Makers Slide

Lafarge SA (LG), the world’s biggest cement maker, dropped 10 percent to 23.56 euros, the most since January 2009, as a gauge European construction companies was the second-worst performer of the 19 industry groups in the Stoxx 600. HeidelbergCement AG (HEI) retreated 8.8 percent to 24.61 euros while Vinci SA (DG) slipped 5.3 percent to 30.11 euros.

Infineon Technologies AG (IFX) dropped 5.7 percent to 5.09 euros. The company may delay investment projects if economic conditions worsen, Frankfurter Allgemeine Zeitung reported, citing an interview with Chief Executive Officer Peter Bauer. The German maker of semiconductors “will not touch” strategic investments, the CEO said, without providing figures.

Arkema SA (AKE) fell 9.1 percent to 38 euros, its lowest price in a year, as the chemical maker was cut to “neutral” from “overweight” at HSBC Holdings Plc.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer in London at arummer@bloomberg.net;

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EU Flags Bigger Losses for Greece Bondholders

By James G. Neuger and Jonathan Stearns - Oct 4, 2011 8:11 PM GMT+0700
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Protesters raise a Greek flag decorated with 'For sale' stickers outside the parliament building. Photographer: Kostas Tsironis/Bloomberg

European governments hinted that bondholders may be saddled with bigger losses on Greek debt, intensifying market jitters that a second aid package designed to quell the fiscal crisis might unravel.

Finance ministers in Luxembourg considered recrafting a July deal that foresaw investors contributing 50 billion euros ($66 billion) to a 159 billion-euro rescue. The debt exchanges and rollovers targeted bondholder losses of 21 percent.

“We have to recalculate what that will actually cost and how to deal with it, but that is not being discussed now because we haven’t had the report from Greece yet,” Austrian Finance Minister Maria Fekter told reporters today at a meeting of European officials.

Together with plans to get more firepower out of the region’s 440 billion-euro rescue fund, the review of Greece’s aid package was a response to growing international frustration with Europe’s inability to get to grips with the crisis after 18 months of incremental steps marked by clashes between Germany, France and the European Central Bank.

European stocks fell for a third day and investors shunned riskier countries’ bonds amid concern that the crisis is careening out of control. The euro has dropped about 8 percent since the end of August, trading at $1.3182 as of 1:30 p.m. in London.

Insulating Italy

Europe’s financial leaders are fighting on multiple fronts, trying to repair Greece’s recession-struck economy while insulating Italy and Spain and shoring up banks that the International Monetary Fund says face as much as 300 billion euros in credit risks.

The stress on banks in Europe’s better-off economies was in the spotlight today with shares in Dexia SA, a French-Belgian lender, plunging on concern it will require a second bailout. The French and Belgian governments vowed “all necessary measures” to protect clients and will guarantee all Dexia’s loans.

A seven-hour meeting of euro-area finance chiefs yesterday yielded an agreement to pursue “technical revisions” to the July accord on private sector burden-sharing, Luxembourg Prime Minister Jean-Claude Juncker told reporters early today. He spoke of “changes” to the Greek outlook that spurred the reassessment.

Debt Swap

Juncker gave no details about a possible recalibration of the “voluntary” debt exchange, the new element in the follow- up package hammered out after last year’s 110 billion-euro lifeline failed to stabilize Greece. The Institute of International Finance industry group estimates that the debt swap, still being negotiated, will amount to a writedown of 21 percent.

“No, no,” Spanish Economy Minister Elena Salgado told reporters today when asked about deeper writedowns. “I insist: no.”

European leaders have gone back and forth over the sanctity of bond contracts as the crisis escalated. A November 2010 pledge to rule out writedowns unravelled a month later, only to be reaffirmed in July. The latest about-face came after seven countries including Germany, Europe’s dominant economy, weighed calling for Greek writedowns of as much as 50 percent, two European officials said.

Credibility ‘Dent’

“The reopening is probably going to be quite bad for the markets,” said Peter Schaffrik, head of European interest-rate strategy at Royal Bank of Canada’s RBC Capital Markets in London. “There is a big dent to European credibility.”

The ministers also pushed back a decision on the release of Greece’s next 8 billion-euro loan installment until after Oct. 13. It was the second postponement of a vote originally slated for yesterday as part of the 110 billion-euro lifeline granted to Greece last year.

Scrounging for savings, the Greek cabinet on Oct. 2 announced 6.6 billion euros of cuts, mostly by slashing public payrolls. Greece will “very likely” have to make extra reductions for 2013 and 2014, a two-year phase that will be the focus of the rest of the review by European Union, European Central Bank and IMF officials, EU Economic and Monetary Commissioner Olli Rehn said.

Deficit Goal

Greece’s revised 2011 deficit goal may be 8.5 percent of gross domestic product compared with a previous target of 7.6 percent, Rehn said. He called the new target “plausible” and lauded Greece’s “important steps” toward further savings next year.

While an Oct. 13 meeting to decide on the next payout was canceled, Juncker said he is “nevertheless optimistic when it comes to the issue of the disbursement” by the end of October. The decision now dovetails with an Oct. 17-18 summit of European government leaders to address the crisis. Juncker said Greece can pay its bills in the meantime.

“Greece is not the scapegoat of the euro zone,” Greek Finance Minister Evangelos Venizelos said yesterday. “Greece is a country with structural difficulties.”

Finance ministers held a first discussion over how to further enhance the region’s rescue fund, setting aside a plea by German Finance Minister Wolfgang Schaeuble to postpone that debate until the remaining countries have endorsed the fund’s latest upgrade.

Fourteen of the 17 euro countries have approved the reinforcement, which will empower the European Financial Stability Facility to buy bonds on the primary and secondary markets, offer precautionary credit lines and enable capital infusions for banks.

Credit Lines

Juncker announced “good progress” on the credit lines and bank-recapitalization tools. Avoiding the word “leveraging,” he said work is under way to scale up the fund’s capacity without requiring each country to chip in more.

“We are checking if yes or no we could increase the efficiency of the different instruments,” Juncker said. Asked whether the ECB would be tapped to boost the fund’s clout, he said: “I don’t think that this will be the main avenue of our considerations.”

The ministers also smoothed a snag en route to a second Greek package by settling the terms under which collateral will be offered to AAA rated Finland, home to a euro-skeptic movement that catapulted to third place in April elections by opposing further bailouts.

Finnish Mood

While the party now known as “The Finns” didn’t make it into the ruling coalition, it captured the Finnish mood and hardened the stance of new Prime Minister Jyrki Katainen in the euro-rescue bartering.

Under the accord, Greek bonds will be transferred from Greek banks to a trustee, which will sell them and invest the proceeds in AAA rated bonds with maturities of 15 to 30 years.

In exchange for the special treatment, Finland will speed its payments into a planned permanent rescue fund and forego a share of profits from EFSF emergency loans. Collateral wouldn’t cover its entire Greek exposure. In the event of default, it couldn’t cash in on the collateral until Greece’s official loans mature, a wait that might last 30 years.

“It’s a complicated financial structure,” said EFSF Chief Executive Officer Klaus Regling, who brokered the collateral arrangement. He and Juncker said Finland is the only country likely to take advantage of it.

Regling deserves “the Nobel prize for economics or the Nobel peace prize” for engineering the compromise, Rehn said.

To contact the reporters on this story: James G. Neuger in Luxembourg at jneuger@bloomberg.net; Jonathan Stearns in Luxembourg at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Billionaire Mordashov Adds Steel Mills as Mittal Retrenches: Commodities

By Ilya Khrennikov - Oct 4, 2011 3:50 PM GMT+0700
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A steelworker controls the pour from a steel mill ladle at an OAO Severstal steel mill in Cherepovets, Russia. Photographer: Alexei Boitsov/ Bloomberg

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Alexey Mordashov, chief executive officer of OAO Severstal. Photographer: Peter Foley/Bloomberg

Russian billionaire Alexey Mordashov, driving a $2 billion-a-year expansion program at steelmaker OAO Severstal, is investing in new U.S. output just as largest rival ArcelorMittal shutters plants to weather a slump in demand.

Severstal, Russia’s second-biggest steelmaker, will double capacity at its Columbus plant in Mississippi when it starts a $505 million mill this month, according to a company presentation. It also plans to bring $756 million of new output online at its Dearborn, Michigan, plant by the end of 2011, and complete a $600 million mini-mill in Balakovo, Russia, in 2013.

“We don’t see any indication of the problem in the steel market,” Mordashov, the 46-year-old chief executive officer of Cherepovets-based Severstal, said in an interview in London. “Our order book is full, we even managed to increase prices slightly recently, we have a good view for October.”

As Severstal adds production, ArcelorMittal (MT), the world’s biggest steelmaker, is cutting back to counter surplus capacity in Europe. The company idled plants in Luxembourg, France and Germany last month as orders from the European construction industry dropped amid economic stagnation.

ArcelorMittal’s stock has lagged behind peers this year, tumbling 56 percent in Amsterdam. Severstal has lost 37 percent in Moscow, while Nippon Steel Corp. and South Korea’s Posco each slid 28 percent. Severstal’s potential return this year is estimated at 104 percent, ranking it sixth among global peers, Bloomberg consensus estimates show. Russian companies occupy the top four places, while ArcelorMittal ranks 11th.

Russian Benefit

While ArcelorMittal and Severstal both sell steel in Europe and the U.S., Severstal benefits from lower expenses at its Russian mills, where the average cost of steel-slab output is about $400 a metric ton, compared with as much as $600 a ton in Europe, said Dmitry Smolin, an analyst at UralSib Capital.

“Severstal has a different strategy from ArcelorMittal” and benefits from operating in Russia, the most profitable emerging market, the Moscow-based analyst said by telephone. “ArcelorMittal has large exposure in Europe.”

ArcelorMittal said Sept. 27 it will idle a furnace and two rolling mills at Rodange and Schifflange, Luxembourg, following an earlier decision to suspend furnaces at Eisenhuttenstadt, Germany, and Florange, France. The company confirmed today it will also take furnaces off line in Spain, citing “continuing weakness” in demand. It plans to save $1 billion next year by shuttering plants and moving production to cheaper sites.

Shares Slide

ArcelorMittal dropped as much as 4.9 percent in Amsterdam, the steepest intraday decline since Sept. 23, and traded down 3.5 percent at 11.715 euros by 10:30 a.m. local time. Severstal fell 2.1 percent to 325.10 rubles in Moscow.

Both steelmakers plan to boost investment in mining as they seek to avert rising raw-material costs. Severstal, which has snapped up iron-ore mines in Brazil and Liberia, seeks to almost triple ore output by 2020. Coking-coal volumes will more than double over the period, helping boost steel production by a third to 19.6 million tons, the company said last week.

ArcelorMittal has also acquired mining assets in Brazil and Liberia, and said in July it would increase capital spending this year to $5.5 billion, from a previous target of $5 billion.

“China steel demand growth is expected to continue to absorb new supply of iron ore, keeping global supply/demand tight,” the company said last month in a presentation. “We expect continued growth in steel consumption in the developing world,” it said, adding that margins need to improve before new capacity is justified outside China.

Steel Drops

European hot-rolled steel coil, used in cars and buildings, has slumped 17 percent from its February peak to 527.50 euros ($699.60) a metric ton. Coil exported from the Black Sea has dropped to $717.50 from $790 in the period, Metal Bulletin data show. Input costs have more than doubled since 2005, with an almost threefold jump in iron-ore and coking-coal fees.

Steel companies in Europe and North America have struggled to pass on higher raw-material costs to customers as slower economic growth erodes demand. In the U.S., Severstal sold three unprofitable steel mills in March, after separating its Italian Lucchini SpA unit last year.

Severstal, the biggest Russian steelmaker after Evraz Group SA (EVR), has followed competitors in tapping emerging markets, where demand growth has outpaced expansion elsewhere. The company agreed in December to form a joint steel venture with NMDC Ltd. in India. It also plans to spend as much as $3.5 billion at the Putu Range in Liberia and as much as $2 billion at the Amapa iron-ore project in Brazil, it said last week.

Mining ‘Essential’

“Mining is an essential part of our company, a very strong generator of revenues and earnings,” Mordashov said Sept. 29. “Our strategy is about upstream integration into raw materials and presence on the markets with good opportunities to grow, first of all emerging markets.”

Severstal and Hyderabad-based NMDC have agreed to invest 150 billion rupees ($3.1 billion) to build a steel plant in the southern Indian state of Karnataka, NMDC Chairman Rana Som said Sept. 28 in New Delhi. ArcelorMittal and Posco (005490) have already unveiled plans for steel projects in the state.

“Asia is very, very attractive,” Mordashov said. “Countries like Indonesia, Vietnam could be interesting for us just because of the fundamentals. Latin America as well could give us good opportunities, especially taking into account access to raw materials.”

Brazil Expansion

In May, Severstal agreed to buy 25 percent of SPG Mineracao, which owns iron-ore exploration licenses in northern Brazil, and has an option to buy a further 50 percent. The company, which also mines gold in Guinea and Burkina Faso, has scaled back in developed markets such as the U.S., where it sold plants to Renco Group Inc. in March, retaining the Dearborn and Columbus sites.

“It’s good to be in mature markets as long as you can have a sound business model, like we have in the U.S. now after the reshuffle of our portfolio,” Mordashov said. “Because of very clear fundamentals, we believe we should follow the trend of the market and be more focused on Asia.”

Severstal may not be as resilient to market volatility as Mordashov’s comments suggest, UralSib’s Smolin said, citing decisions to backtrack on bullish investments in the past.

“I have a strong ‘deja vu’ with September 2008 when Severstal last presented its strategy,” Smolin said. “The company was then convincing investors of great prospects in the developed markets in Europe and the U.S. Afterwards, Severstal had to reshuffle its asset portfolio and is now presenting plans which may again be based on more bullish market fundamentals than the ones shared by its global rivals.”

Top 5

In 2015 or 2016, Severstal aims to be among the world’s top 5 steelmakers by earnings before interest, tax, depreciation and amortization. “Of course we can’t predict the future,” Mordashov said. “Investment activities could be significantly undermined in case of a negative development in the economic situation. But we don’t see it yet.”

Commodities, down 20 percent in six months, will resume gains in the long term, according to the CEO. “All commodities will be in good demand because this demand is based on strong fundamentals.”

To contact the reporter on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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Verizon Puts Highest Since ’05 After Shares Rally Most in Telecom: Options

By Jeff Kearns and Cecile Vannucci - Oct 4, 2011 4:38 PM GMT+0700
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Verizon’s implied volatility, the key gauge of options prices, for contracts expiring in three months surged 73 percent since its July 1 low to 26.37 yesterday. Photographer: Denis Doyle/Bloomberg

Options traders are the most bearish in six years on Verizon Communications Inc. (VZ), convinced it will decline after the largest U.S. wireless operator posted the industry’s biggest stock-market rally.

Three-month options to protect against a 10 percent drop in the shares cost 44 percent more than those wagering on an advance, according to data compiled by Bloomberg. The gap reached 47 percent on Sept. 28, the widest since July 2005, when it was 49 percent, data compiled by Bloomberg show. Three months after that peak, Verizon tumbled 15 percent to a three-year low.

Investors are betting the economic slowdown that has sent the Standard & Poor’s 500 Telecommunication Services Index down 6.9 percent this year will pull down New York-based Verizon. While the stock has the biggest increase among phone companies at a time when the S&P 500 is within 1 percent of a bear market, Verizon lost 45 percent during the financial crisis of 2008, data compiled by Bloomberg show.

“It’s part of the very negative tone to the market that there’s a lot of puts outstanding,” Brian Barish, who oversees about $7.5 billion as president of Cambiar Investors LLC in Denver. Verizon has “been a safe haven and held up very well but the market has been very destructive. At some point in bear markets, they tend to get to everything and this is one of those last haven stocks that’s yet to fall.”

Implied Volatility

Verizon’s implied volatility, the key gauge of options prices, for contracts expiring in three months surged 73 percent since its July 1 low to 26.37 yesterday. Historical volatility for the past three months jumped to 24.13 yesterday, the highest level since June 2009.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 160 percent in the third quarter, its biggest increase on record. The volatility gauge is trading above its 21-year historical average of 20.46 and rose 5.8 percent to 45.45 yesterday. In Europe, the VStoxx Index (V2X), which measures the cost of protecting against losses in the Euro Stoxx 50 Index, gained 5 percent to 51.09 at 11:36 a.m. in Frankfurt.

Verizon shares fell 1.3 percent to $36.34 yesterday. They’re up 1.6 percent in 2011, compared with a decline of 13 percent for the S&P 500 Index.

The price of puts to sell Verizon should the company fall 10 percent versus calls to buy is the second-highest among eight S&P 500 telecom companies, Bloomberg data show. Larger rival AT&T Inc. (T) has the highest level of the price relationship known as skew. Sprint Nextel Corp. (S) had the lowest, with puts priced 4.6 percent higher.

Higher Yields

Robert Varettoni, a spokesman for Verizon, declined to comment on the stock price or options trading.

Verizon shares have fallen less than other companies this year in part because investors seeking higher yields are buying the stock for its annual dividend payout, according to Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York. The stock currently yields 5.4 percent, Bloomberg data show. Those traders also may be paying more for protection because they want to keep owning the shares, he said.

“It could be what we’re seeing is hedging strategies from yield investors,” Moffett said in a telephone interview yesterday. “It’s trading at a huge premium to AT&T.”

Verizon has a price-to-earnings ratio of 16.7, 27 percent higher than the valuation for Dallas-based AT&T, the largest U.S. wireline telecom-services company, and 36 percent above the S&P 500 Index.

AT&T Takeover

The New York-based company may also be attractive because it’s not going through a big change similar to AT&T’s $39 billion proposed takeover of T-Mobile USA Inc., according to John Butler, a Bloomberg Industries analyst. AT&T has clashed with the Justice Department and rivals like Sprint Nextel as it seeks to complete the acquisition.

“The telcos are attractive in a choppy macroeconomic environment because they offer a generous yield relative to other S&P stocks,” Butler said in a telephone interview from Princeton, New Jersey, yesterday. “People look at Verizon and they’re like, ‘You know what? If I had to choose between owning Verizon and AT&T, I’m going to choose Verizon because they don’t have the distraction of that merger going on right now.’”

January $30 puts, with their strike price 17 percent below yesterday’s closing level, had the biggest ownership among all Verizon options. January $31 puts had the biggest increase in open interest over the past week, adding 6,764 contracts to 19,676. The shares haven’t closed below $31 for more than a year.

“Since the stock has been going up of late, that would let you know that in a certain sense the options market reflects that the upside has been realized,” Ophir Gottlieb, managing director of client services at San Francisco-based Livevol Inc., a provider of options-market analytics, said in a telephone interview yesterday. “It’s the downside risk that’s the potential.”

To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net

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

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European Telecoms Oppose EU Network Plan

By Matthew Campbell and Jonathan Browning - Oct 4, 2011 3:52 PM GMT+0700

Telecom Italia SpA (TIT), Telefonica SA (TEF) and Europe’s other former phone monopolies are bridling at a fresh regulatory review of their profits from copper networks, saying the result may crimp proceeds needed to build faster fiber lines.

The extent of EU regulation of telecommunications investment is “simply crazy,” Telecom Italia Chief Executive Officer Franco Bernabe said at a technology conference in Brussels yesterday. The same day, Neelie Kroes, the EU’s commissioner for digital affairs, said the 27-member bloc would review whether companies charge rivals too much for access to copper lines.

European politicians, desperate to boost the use of faster Web services to meet targets, aid economic growth and catch up with Asia, argue that profits from existing networks may make the phone incumbents less willing to invest in new technologies. The former monopolies, faced with falling revenue in their home markets from traditional voice calls, say the reverse is true as they need copper profits to invest in faster fiber networks.

By taking “copper prices down at the same time as they want to stimulate fiber deployment, that is an equation that doesn’t fit at all,” Jon Fredrik Baksaas, CEO of Telenor ASA (TEL), the largest Nordic phone company, said in an interview.

The European Commission yesterday unveiled two consultations to examine prices for regulated wholesale access to copper and fiber networks. The body is also considering how to standardize wholesale pricing rules in EU markets.

High-Speed Targets

Operators weren’t expecting another consultation process before more progress had been made on existing proposals, Vivendi SA CEO Jean-Bernard Levy said.

To catch up to leading countries such as South Korea, the European Commission has called for 50 percent of European households to have Internet connections above 100 megabits per second by 2020, about 10 or 20 times typical current speeds. The body has proposed using some of the EU’s structural funds, which pay for infrastructure in poorer member-states, to finance broadband development in certain areas and called for faster release of unused bands of radio spectrum.

While some former monopolies attacked Kroes’s plans as unwanted regulatory interference, operators that didn’t inherit a network supported her plans and said the European Commission needs to reassess how access prices are calculated.

Network Spat

“Network owners in many countries are making excessive profits over their largely depreciated copper infrastructure,” said Ilsa Godlovitch, director of the European Competitive Telecommunication Association. “This means that consumers are paying very high prices and investments on fiber networks are just not happening.”

The association represents operators such as Vodafone Group Plc (VOD), the world’s biggest mobile-phone company, and Spanish broadband provider Jazztel Plc. (JAZ)

Cesar Alierta, CEO of Telefonica, Spain’s biggest phone operator, said that the network owners should be able to benefit from their investments.

“We will not invest for the benefit of those who do not invest,” Alierta said in Brussels, referring to rival operators. “The time has come to make the market rules work.”

The 21-company Bloomberg Europe Telecommunications Services Index fell 1 percent at 9:46 a.m. in London, led by Telefonica, which slipped 1.6 percent in Madrid. France Telecom SA (FTE) lost 1.3 percent in Paris. Deutsche Telekom AG (DTE) fell 0.4 percent in Frankfurt.

Google Pressure

Access to fast networks is key for operators as the industry develops new business models based on data services and consumers flock to smartphones such as Apple Inc. (AAPL)’s iPhone and handsets based on Google Inc. (GOOG)’s Android system to download music, watch videos online and surf the Web.

One reason for former monopolies’ eagerness to guard profits from copper networks is their failure to develop lucrative new services, said Patrik Karrberg, a researcher at the Information Systems Innovation Group at the London School of Economics.

“They had, and continue to have, the option of going more into services and some have been much better than others,” Karrberg said in an interview. “In the current regulatory environment, data is a commodity, but for a great video service, for example, you can charge much more.”

Most European operators are seeing profits stagnate or decline in their home markets because of competition and mounting investment needs.

Profit Falls

Deutsche Telekom, Europe’s largest phone company, reported a 6.5 percent decline in second-quarter profit before some items. Telefonica saw second-quarter profit slump 27 percent as domestic competition cut earnings. France Telecom, that country’s largest operator, posted a 2.2 percent decline in first-half net income, and is beginning asset sales in Europe to rebalance toward faster-growing markets.

In July, the CEOs of Vivendi, Deutsche Telekom, and equipment supplier Alcatel-Lucent SA presented a joint strategy for ensuring faster deployment of high-speed networks to the EU, including proposals for new investment incentives and limits to some types of regulation. Operators weren’t expecting another consultation process before more progress had been made on existing proposals, said Vivendi’s Levy.

While former monopolies are calling for less state regulation, they’re also complaining about unfair treatment from U.S. technology companies such as Apple and Google, whose bandwidth-hungry video services have supplanted phone companies’ own online offerings.

‘Afraid of You’

Executives including France Telecom’s Stephane Richard last year called for mandatory payments from Internet companies to telecommunications operators to offset network costs. Since then, the two sides may have become more conciliatory.

Google and France Telecom were in talks about working together to reduce network costs, with other operators in similar discussions, according to people familiar with the situation in June. Telenor’s Baksaas said that Google is in talks with operators in an “industry-wide discussion as well as partner discussions.”

“I’ve been speaking to all of them, and they’re afraid of you too,” William Kennard, the U.S. ambassador to the EU, said of Internet companies. “They know that they need access to your customers.”

Operators may also be able to spur profits by charging more for the heaviest users of scarce bandwidth instead of offering all-you-can-eat fixed- and mobile-data plans.

Phone companies “are going to have to go to consumption- based billing,” said Jim Balsillie, CEO of BlackBerry-maker Research in Motion Ltd. (RIMM) “If someone drives a car 100 kilometers, and someone else drives a car 200 kilometers, it has to cost them half as much.”

To contact the reporters on this story: Matthew Campbell in Brussels at mcampbell39@bloomberg.net; Jonathan Browning in Brussels jbrowning9@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.netvroot@bloomberg.net;

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Goldman Cuts Global GDP Estimate; Sees Recessions

By Shamim Adam - Oct 4, 2011 12:49 PM GMT+0700

Goldman Sachs Group Inc. cut its global growth forecast for this year and next, predicting recessions in Germany and France as the European economy stalls and the risk of a contraction in the U.S. grows.

The world economy will probably expand 3.8 percent this year and 3.5 percent in 2012, compared with earlier predictions of 3.9 percent for 2011 and 4.2 percent for next year, Goldman Sachs economists Jan Hatzius and Dominic Wilson wrote in an Oct. 3 report. The company lowered its forecast for earnings growth in Asia excluding Japan in a separate report today.

Europe’s worsening sovereign debt woes and the threat of a U.S. recession have roiled global stock markets, erasing about $13 trillion from equities since May. The debt crisis has infected the European banking system, making financial institutions wary of lending to each other and pushing overnight deposits with the European Central Bank last week to the highest in more than a year.

“The further deterioration in the economic and financial situation in the Euro area has led us to downgrade our global GDP forecast significantly,” the economists said. “Over the next few quarters, we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery.”

Euro Region

Goldman Sachs predicts the Euro region will expand 0.1 percent in 2012, down from an earlier forecast of 1.3 percent. It expects growth of 1.6 percent for this year. Goldman also lowered its end-2011 forecast for the euro to $1.38 per dollar from an earlier projection for it to trade at $1.40.

The ECB has been forced to purchase sovereign bonds to prevent the crisis from spreading to larger euro nations, and is providing banks with unlimited liquidity for up to six months against eligible collateral as governments struggle to restore investor confidence in the 17-member region.

The Frankfurt-based central bank is likely to ease its liquidity policies further this month as a result of an increase in financial risk, Hatzius and Wilson said. The ECB will also probably cut its benchmark interest rate by 50 basis points to 1 percent by December, they said.

“The increase in spillovers from the Euro area, primarily via tighter financial conditions, is the primary reason why we have also downgraded our forecasts for the U.S. further,” the economists said. “We now see the risk of a renewed U.S. recession at around 40 percent.”

Flagging U.S.

The U.S. economy will expand 1.7 percent this year and 1.4 percent in 2012, Goldman Sachs predicts. It had earlier estimated a 2 percent growth rate for the world’s largest economy next year.

The Federal Reserve announced last month that it would replace $400 billion of short-term debt in its portfolio with longer-term Treasuries, a so-called Operation Twist, in an effort to further reduce borrowing costs and strengthen the flagging U.S. economy.

“We expect additional easing of monetary policy beyond the ‘Operation Twist’ announced recently, although this may not come until sometime in the first half of 2012,” Hatzius and Wilson said. “In addition, the market’s focus on changes in the Fed’s guidance on future policies -- including a greater emphasis on the employment part of the ‘dual mandate’ and/or a temporarily higher inflation target -- is likely to intensify.”

‘Downside Risk’

Asia excluding Japan stocks faces a “downside risk” of 10 percent to 15 percent, Goldman Sachs analysts led by Timothy Moe wrote in a report today.

Earnings per share may grow 10 percent this year and increase 7 percent next year, lower than an earlier prediction of 11 percent growth for both years, according to the analysts. They also cut their 12-month forecast for the MSCI Asia Pacific excluding Japan Index to 480 from 530.

Goldman Sachs analysts also lowered their forecasts for 2011 and 2012 oil prices. Crude prices will end this year at $112.50 a barrel, compared with a previous estimate of $119.50. It will be $122.50 a barrel at the end of 2012, compared with an earlier forecast of $138.50, according to the report.

“The oil market continues to destock as prices anticipate a potential crisis,” the economists said. “If the crisis does not occur, the oil market risks running into pressing supply constraints, requiring sharply higher prices than we currently forecast to force demand in line with supplies.”

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

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

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