Merkel Puts Rescue Fund to German Vote

By Rainer Buergin and Patrick Donahue - Oct 26, 2011 4:20 PM GMT+0700

German lawmakers are set to back a planned increase in the European rescue fund’s capacity, strengthening Chancellor Angela Merkel’s hand before a Brussels summit that aims to quell the euro-area debt crisis.

With contagion threatening Italy, European leaders are also tightening the screws on Prime Minister Silvio Berlusconi to bring concrete reforms to today’s summit as part of a package of measures needed to stem the risk posed to the global economy.

Merkel will address lawmakers on the crisis at noon in the lower house in Berlin, the Bundestag, before her government puts plans to bulk up the 440 billion-euro ($612 billion) rescue fund to a vote. The coalition ensured cross-party support after persuading the main opposition Social Democrats and Greens to sign up to a motion that includes a cap on German guarantees.

“The chancellor will travel to Brussels today bolstered by a clear and very broad mandate from the German Bundestag,” Peter Altmaier, the deputy parliamentary leader and chief party whip of Merkel’s Christian Democratic Union, said in an interview on Deutschlandfunk radio.

German backing to increase the effectiveness of the European Financial Stability Facility is just one piece in the crisis-fighting jigsaw puzzle being assembled. Agreement is still missing on how to bolster the EFSF, reductions in Greece’s debt load and recapitalizing banks.

Euro, Stocks

The 17-nation euro gained 0.1 percent to $1.3926 as of 11:03 a.m. in Berlin after climbing to as much as $1.3960 yesterday, the highest since Sept. 8. The benchmark Stoxx Europe 600 Index was little changed.

The Bundestag is scheduled to vote at about 2 p.m. as it exercises powers over budgetary matters that it won last month after complaints by coalition lawmakers they were being steamrolled into accepting decisions made in Brussels affecting German finances.

“We’re all in new territory,” Merkel said yesterday.

In Italy today, la Repubblica newspaper reported that Berlusconi agreed with Umberto Bossi, leader of the Northern League party which holds the key to Berlusconi’s parliamentary majority, to hold early elections in exchange for a deal on reforms on pensions, liberalization and bureaucracy. Berlusconi agreed to step down by January and to bring elections forward to March of next year 2012, la Repubblica said.

ECB Bond-Buying

The motion before parliament lays down guidelines for Merkel to take to Brussels, including a cap on German guarantees at the existing level of 211 billion euros and a request that the budget committee or the full chamber be given another vote after leverage models have been worked up. It also “notes” that there is no need for the European Central Bank’s secondary- market bond-buying program to remain in place once the enhanced rescue fund is enacted.

“For us it was a condition that the Bundestag, respecting the central bank’s independence, has a clear position: no more unconditional debt-buying by the ECB,” Carsten Schneider, the Social Democratic Party’s budget spokesman in parliament, told reporters after a budget committee meeting late yesterday.

German bonds rose today, with two-year yields falling two basis points, or 0.02 percentage point, at 0.55 percent, after being as low as 0.52 percent, the least since Oct. 6. German bonds have returned 6.95 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, as investors sought a debt-crisis refuge.

Merkel’s bloc has 330 seats in the 620-member Bundestag, allowing her to pass legislation with a simple majority of 311 votes with as many as 19 coalition dissenters. With the help of SPD and Green support, she won a Sept. 29 ballot on enhancements to the EFSF by 523 votes in favor to 85 against.

“We need a simple coalition majority,” Klaus-Peter Flosbach, the finance-policy spokesman of Merkel’s Christian Democratic bloc in parliament, said in an e-mailed statement. “I have no doubt that we’ll achieve that.”

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Patrick Donahue in Berlin at pdonahue1@bloomberg.net

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

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Merkel Puts Rescue Fund to German Vote

By Rainer Buergin and Patrick Donahue - Oct 26, 2011 4:20 PM GMT+0700

German lawmakers are set to back a planned increase in the European rescue fund’s capacity, strengthening Chancellor Angela Merkel’s hand before a Brussels summit that aims to quell the euro-area debt crisis.

With contagion threatening Italy, European leaders are also tightening the screws on Prime Minister Silvio Berlusconi to bring concrete reforms to today’s summit as part of a package of measures needed to stem the risk posed to the global economy.

Merkel will address lawmakers on the crisis at noon in the lower house in Berlin, the Bundestag, before her government puts plans to bulk up the 440 billion-euro ($612 billion) rescue fund to a vote. The coalition ensured cross-party support after persuading the main opposition Social Democrats and Greens to sign up to a motion that includes a cap on German guarantees.

“The chancellor will travel to Brussels today bolstered by a clear and very broad mandate from the German Bundestag,” Peter Altmaier, the deputy parliamentary leader and chief party whip of Merkel’s Christian Democratic Union, said in an interview on Deutschlandfunk radio.

German backing to increase the effectiveness of the European Financial Stability Facility is just one piece in the crisis-fighting jigsaw puzzle being assembled. Agreement is still missing on how to bolster the EFSF, reductions in Greece’s debt load and recapitalizing banks.

Euro, Stocks

The 17-nation euro gained 0.1 percent to $1.3926 as of 11:03 a.m. in Berlin after climbing to as much as $1.3960 yesterday, the highest since Sept. 8. The benchmark Stoxx Europe 600 Index was little changed.

The Bundestag is scheduled to vote at about 2 p.m. as it exercises powers over budgetary matters that it won last month after complaints by coalition lawmakers they were being steamrolled into accepting decisions made in Brussels affecting German finances.

“We’re all in new territory,” Merkel said yesterday.

In Italy today, la Repubblica newspaper reported that Berlusconi agreed with Umberto Bossi, leader of the Northern League party which holds the key to Berlusconi’s parliamentary majority, to hold early elections in exchange for a deal on reforms on pensions, liberalization and bureaucracy. Berlusconi agreed to step down by January and to bring elections forward to March of next year 2012, la Repubblica said.

ECB Bond-Buying

The motion before parliament lays down guidelines for Merkel to take to Brussels, including a cap on German guarantees at the existing level of 211 billion euros and a request that the budget committee or the full chamber be given another vote after leverage models have been worked up. It also “notes” that there is no need for the European Central Bank’s secondary- market bond-buying program to remain in place once the enhanced rescue fund is enacted.

“For us it was a condition that the Bundestag, respecting the central bank’s independence, has a clear position: no more unconditional debt-buying by the ECB,” Carsten Schneider, the Social Democratic Party’s budget spokesman in parliament, told reporters after a budget committee meeting late yesterday.

German bonds rose today, with two-year yields falling two basis points, or 0.02 percentage point, at 0.55 percent, after being as low as 0.52 percent, the least since Oct. 6. German bonds have returned 6.95 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, as investors sought a debt-crisis refuge.

Merkel’s bloc has 330 seats in the 620-member Bundestag, allowing her to pass legislation with a simple majority of 311 votes with as many as 19 coalition dissenters. With the help of SPD and Green support, she won a Sept. 29 ballot on enhancements to the EFSF by 523 votes in favor to 85 against.

“We need a simple coalition majority,” Klaus-Peter Flosbach, the finance-policy spokesman of Merkel’s Christian Democratic bloc in parliament, said in an e-mailed statement. “I have no doubt that we’ll achieve that.”

To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Patrick Donahue in Berlin at pdonahue1@bloomberg.net

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

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Thai PM Warns of Inner Bangkok Flooding

By Daniel Ten Kate and Supunnabul Suwannakij - Oct 26, 2011 10:50 AM GMT+0700

Thai Prime Minister Yingluck Shinawatra said a “50-50” chance remained that inner Bangkok would avoid flooding as a deluge approaches the city and a coming high tide pushes up water levels.

“I’m still confident that we can protect Bangkok today,” Yingluck told reporters, adding that authorities would be able to defend the city’s main international airport, Suvarnabhumi. Last night she spelled out a worst-case scenario in a national address, warning that water may “run through the center of Bangkok,” with the severity depending on elevation.

Water levels in parts of Bangkok may reach as high as 1.5 meters (4.9 feet) if a major breach occurs in dikes to the north of the capital, she said, with depths reaching about 50 centimeters in most places, she said. It would take up to a month to drain floodwaters from Bangkok in that case, she said.

Asked today how confident she was that the dikes would hold, Yingluck responded, “50-50.”

Diverting a three-meter-deep wall of water approaching Bangkok is key to sparing the city from the severity of floods that have inundated about 10,000 factories north of the city, disrupting the supply chains of Apple Inc. and Toyota Motor Corp. The effort hinges on the strength of untested dikes, said Adri Verwey, a specialist with Deltares, a Netherlands-based research institute, who is advising Yingluck.

‘High Pressure’

“The problem is the dikes have never been put under such high pressure,” said Verwey, who has been helping advise Thai officials with the support of the Dutch government. “If there are too many breaches, then you will easily have extensive areas with more than a meter of water in downtown Bangkok, especially Sukhumvit, which is very low-lying.’”

Thailand’s government announced yesterday a 5-day holiday starting tomorrow for 21 northern and central provinces including Bangkok to give people time to prepare for flooding. Commercial banks and financial markets will remain open, according to the Bank of Thailand.

“We are trying to encourage people in Bangkok to stay outside the city during this critical period when tides will peak,” city Governor Sukhumbhand Paribatra said after Yingluck’s speech. A widespread evacuation of the city of almost 10 million people “is impossible,” he said.

Water levels rose further on Bangkok’s outskirts yesterday as about 4 billion cubic meters of water approached the capital from the north, Sukhumbhand said, raising concern that flood barriers may be inadequate.

‘Bigger Mass’

Rainfall about 25 percent more than the 30-year average filled upstream dams to capacity, prompting authorities to release large amounts of water this month down a flood plain the size of Florida. About 9,850 factories with an investment value of 800 billion baht ($26 billion) have been flooded, said Chalitrat Chandrubeksa, a deputy government spokesman, leaving 660,000 workers at risk of losing their jobs.

The biggest mass of water is still about 30 kilometers north of Bangkok, said Anond Snidvongs, executive director of the government’s Geo-Informatics and Space Technology Development Agency. The amount water now seeping into northern Bangkok is “so small we don’t even see it on satellite maps,” he said in an interview yesterday.

“Ten centimeters is not that big of a flood,” Anond, one of Yingluck’s advisers, said as he studied a satellite photograph at the government’s flood operations command. “People in Bangkok don’t see the bigger mass. This is what we are worried about from a strategic point of view.”

Dike Strength Unknown

The government has made progress over the past few days in reducing that bigger pool of water in Pathum Thani, to Bangkok’s north, by diverting it away from the capital and reducing flows into the area, he said. The water level has dropped by 17 centimeters in that time, he said.

“The best-case scenario is that we maintain the situation as it is and all the dikes hold,” Anond said. “We don’t know the probability of that, and I don’t think anyone knows, because we don’t know the strength of the dikes.”

The Chao Phraya river, whose banks are lined with hotels including the Oriental and the Shangri-La, overflowed in some areas after water levels reached a record of 2.30 meters above sea level Oct. 24, exceeding the 2.27-meter peak reached in 1995, Sukhumbhand said yesterday. Bangkok has an average elevation of less than two meters above sea level.

Yingluck had vowed to protect airports, power plants and major transport routes from floodwaters that she said may take six weeks to drain through rivers and Bangkok’s 1,682 canals.

Airport Closure

Don Mueang, the nation’s second-biggest airport and the site of the government’s flood-relief operations, was forced to close yesterday as floodwaters rose, said Kantpat Mangalasiri, the airport’s director. Suvarnabhumi Airport, the nation’s biggest, is operating normally, Airports of Thailand Pcl, which operates the airfield, said yesterday.

At least 373 people have been killed because of seasonal monsoon rains and flooding since July 25, the Department of Disaster Prevention and Mitigation said today. More than 100,000 people are living in about 1,700 government evacuation centers, which can handle as many as 800,000 people, according to government data.

The three-month-old disaster will cut about 1 percentage point from economic growth, causing the economy to expand less than 3 percent this year, central bank Governor Prasarn Trairatvorakul said yesterday. The budget for rehabilitation may exceed 100 billion baht ($3.2 billion), Prasarn said.

Apple, Toyota Disruptions

Companies including Apple, Toyota and Honda Motor Co. are facing the worst supply disruptions since the March earthquake that struck Japan. Thailand makes about a quarter of the world’s hard-disk drives and serves as a production hub for Japanese car makers and electronics firms.

Toyota will maintain its investment in the country, Yukitoshi Funo, the company’s deputy managing director, said after meeting Yingluck yesterday.

Thailand’s Cabinet yesterday approved a plan to provide 325 billion baht of loans to companies and residents affected by the disaster, and will waive corporate income taxes for companies in industrial estates for eight years, Industry Minister Wannarat Charnnukul said.

The three-month-long disaster has severed road and rail links, destroyed crops and shut down some production of food and drinking water, disrupting the ability of supermarkets in the capital to restock shelves. Conflicting warnings about the severity of the crisis have sparked panic buying of water, eggs and instant noodles.

The government will accelerate imports of food, beverages and household items from Southeast Asian countries after flooding reduced local supplies by 40 percent, Permanent Secretary for Commerce Yanyong Phuangrach said yesterday.

To contact the reporters on this story: Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net; Supunnabul Suwannakij in Bangkok at ssuwannakij@bloomberg.net

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

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Netflix Declines Most Since 2004 After Losing 800,000 U.S. Subscribers

By Cliff Edwards - Oct 25, 2011 8:54 PM GMT+0700
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The Netflix Inc. website is displayed for a photograph in New York. Photographer: Scott Eells/Bloomberg

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Oct. 25 (Bloomberg) -- William Raduchel, a technology consultant and former executive at AOL Time Warner, discusses the outlook for Netflix Inc. Netflix tumbled 27 percent to $87 in extended trading yesterday after predicting losses for "a few quarters" in 2012 and delaying global expansion plans because of faltering results in the U.S., its largest market. Raduchel speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Netflix Inc. (NFLX) dropped the most in seven years after the video-rental service said it lost 800,000 U.S. subscribers in the third quarter, more than expected, and predicted more cancellations over a price increase.

Netflix plunged 37 percent to $75.28 at 9:39 a.m. New York time, for the biggest intraday decline since October 2004. The stock closed at an all-time high of $298.73 on July 13, according to Bloomberg data.

The outlook suggests Netflix has been unable to contain a subscriber revolt over a price increase and aborted plan to force subscribers into separate streaming and DVD services. The company now forecasts losses in 2012 because of costs to offer content in the U.K. and Ireland, and will delay further expansion until profitability is restored.

“Pausing is a good thing from an investor standpoint,” Chief Executive Officer Reed Hasting said in an interview. “We are going to pause and restore our global profitability.”

Hastings, responding to questions, said he has no plans to step down and declined to comment on discussions with Netflix directors.

Domestic subscribers fell to 23.8 million as of Sept. 30 from 24.6 million three months earlier, a bigger decline than the company projected in September, according to a website statement yesterday. This quarter, U.S. customers will fall short of the 24.9 million analysts were predicting.

Subscriber Fallout

Investors are trying to gauge the extent of the fallout from the price increase and aborted plan to put DVD customers on a new service called Qwikster.

“To show even modest U.S. subscriber growth in the fourth quarter will require significant ramp-up in Netflix’s marketing spending,” said Paul T. Sweeney, director of research for Bloomberg Industries.

Hastings downplayed the likelihood of a big increase in marketing efforts.

“Our streaming marketing has been very effective in the past two years,” Hastings said. “We are going to work on improving the user interface, expanding to more platforms and delivering more content. There’s no grand gestures, there’s just a lot of steady and intense efforts.”

Domestic streaming subscriptions are forecast to decline this month, level off in November and rebound in December to end at 20 million to 21.5 million, Netflix said. DVD subscriptions will fall “sharply” to 10.3 million to 11.3 million customers.

Fourth-Quarter Outlook

Fourth-quarter profit will be $19 million to $37 million, or 36 cents to 70 cents a share, on revenue of as much as $875 million, the company said. Analysts were projecting profit of $1.10 a share on sales of $919 million, according to Bloomberg data. The company earned $47.1 million, or 87 cents a share, on sales of $595.9 million, a year earlier.

Domestic subscriber growth is particularly important because Netflix has used its wide lead over U.S. rivals to finance growth in its streaming business and expand overseas.

Netflix had projected a loss of 600,000 users on Sept. 15 to end the third quarter at 24 million. The actual results were in line with the average loss of 780,000 customers seen by 10 analysts in a Bloomberg survey.

Domestic churn, a measure of subscriber turnover, jumped to 6.3 percent in the third quarter from 4.2 percent in the prior three months. The company’s total subscriber count, including service in Canada and Latin America, fell to 25.3 million from 25.6 million

For the third quarter, Netflix reported net income rose 65 percent to $62.5 million, or $1.16 a share. Analysts projected 95 cents, the average of 25 estimates. Sales rose 49 percent to $821.8 million, beating expectations of $812.8 million.

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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Ex-Goldman Director Gupta Faces Charges

By Patricia Hurtado - Oct 26, 2011 11:01 AM GMT+0700

Rajat Gupta, the former Goldman Sachs Group Inc. director once accused of feeding inside information Galleon Group LLC’s Raj Rajaratnam, will face federal charges, a person familiar with the matter said, making him the highest-ranking executive to be named in the probe.

Gupta, 62, will surrender to FBI agents in New York today, the person said. After a four-year securities-fraud investigation of insider trading at hedge funds, Gupta will be charged in a case prosecuted by Manhattan U.S. Attorney Preet Bharara, according to the person, who declined to be identified because the matter isn’t public.

“Any allegation that Rajat Gupta engaged in any unlawful conduct is totally baseless,” his lawyer, Gary Naftalis, said in an e-mailed statement after the charges were reported yesterday. “He did not trade in any securities, did not tip Mr. Rajaratnam so he could trade, and did not share in any profits as part of any quid pro quo.”

The case against Gupta comes seven months after federal prosecutors in court first called him and Rajaratnam’s brother Rengan “unindicted co-conspirators.”

Gupta isn’t being charged based on evidence provided by Raj Rajaratnam, said the person familiar with the matter. The charges against him are based on evidence uncovered by the Federal Bureau of Investigation’s investigation, the person said.

Ellen Davis, a spokeswoman for Bharara, declined to comment. Jim Margolin, an FBI spokesman, didn’t immediately return a call seeking comment yesterday.

Central Figure

Rajaratnam, the central figure in what prosecutors have called the largest crackdown on insider trading at hedge funds in U.S. history, was arrested in October 2009. He was convicted of conspiracy and securities fraud by a Manhattan federal jury in May and sentenced to 11 years in prison on Oct. 13. More than 50 people have been charged in the probe.

In an interview in Newsweek this month, Rajaratnam said prosecutors pushed him to plead guilty to one criminal charge and inform against Gupta. Rajaratnam understood that he would be sentenced to as little as five years in prison, according to the Newsweek article.

Rajaratnam told Newsweek that he refused to inform on Gupta or wear a wire to record him for the FBI.

Blankfein’s Testimony

At Rajaratnam’s trial, Goldman Sachs Chief Executive Officer Lloyd Blankfein testified that Gupta violated the New York-based bank’s policies by allegedly telling the defendant about the company’s results and plans.

The U.S. Securities and Exchange Commission in March filed an administrative action contending Gupta passed inside information to Rajaratnam about Goldman Sachs and Procter & Gamble Co. That action was dropped in August after Gupta, who denied the allegations, sued the SEC for violating his rights by not bringing its case in federal district court.

In the administrative proceeding, the SEC had claimed Gupta tipped Rajaratnam, 54, about Berkshire Hathaway Inc.’s $5 billion investment in New York-based Goldman Sachs. The agency also said Gupta told Rajaratnam about quarterly earnings of Goldman Sachs and Cincinnati-based P&G, the world’s largest consumer products company.

Gupta left the Goldman Sachs board in 2010 and stepped down from P&G’s board in March.

Aside from serving on those two boards, Gupta from 1994 to 2003 ran McKinsey & Co., the global consulting firm. He remained a senior partner there until 2007.

Northwestern, Harvard

He has been on advisory boards at Northwestern University’s Kellogg School of Management, University of Pennsylvania’s Wharton School, Massachusetts Institute of Technology’s Sloan School of Management and Harvard Business School, his alma mater. In 2001, Kolkata-born Gupta founded the Indian School of Business in Hyderabad.

As of May 2010, Rajaratnam had a stake in a fund managed by New Silk Route NSR Partners LLC, co-founded by Gupta. At a January 2007 benefit honoring Rajaratnam called “A Night for India,” Gupta was the honorary chairman along with conductor Zubin Mehta, according to a program.

Blankfein said Gupta and other board members were told in October 2008 that Goldman was facing the possibility of a quarterly loss for the first time since it went public in 1999. Prosecutors said Gupta tipped Rajaratnam, who sold Galleon’s position in Goldman, warding off millions of dollars in losses.

Gupta Recording

At the Galleon co-founder’s trial, prosecutors also played a secret recording of a July 2008 phone call in which Gupta can be heard telling Rajaratnam that the Goldman Sachs board had discussed acquiring a commercial bank or an insurance company.

The SEC brought its action against Gupta in Washington on March 1. He sued in Manhattan federal court on March 18, claiming the SEC violated his rights by pursuing an administrative action rather than a lawsuit. Gupta would have more procedural protections in district court, including the right to a jury trial and the use of federal rules of evidence.

U.S. District Judge Jed Rakoff ruled in July that Gupta could argue that the agency intentionally singled him out for unfair treatment in retaliation for claiming his innocence. The judge said that all the SEC’s other lawsuits related to the Galleon insider-trading case were in federal court.

The agency dropped its administrative proceeding in August and agreed that it would bring any subsequent action against Gupta in district court. Gupta agreed to withdraw his lawsuit against the SEC.

The imminent charges against Gupta were reported earlier by the New York Times.

To contact the reporters on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net

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

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Asian Stocks Decline as European Leaders Struggle to Resolve Debt Crisis

By Yoshiaki Nohara - Oct 26, 2011 9:21 AM GMT+0700

Asian stocks fell, snapping a three- day rally, as uncertainty grew over how much progress European leaders are making on a plan to fight the sovereign-debt crisis ahead of a summit today in Brussels.

Nissan Motor Co., Japan’s third-largest carmaker by market value that gets 15 percent of its revenue in Europe, fell 0.9 percent. Mitsubishi Corp., a Japanese trading company, slid 1.6 percent after United Parcel Service Inc. slumped as declining shipments from Asia to the U.S. curbed growth in the company’s international business. Newcrest Mining Ltd., Australia’s biggest gold producer, rose 3.5 percent as gold futures gained.

The MSCI Asia Pacific Index fell 0.5 percent to 118.71 as of 11:18 a.m. in Tokyo. About two stocks dropped for each that rose on the index and nine of the 10 industry groups on the gauge slid.

“At the end of the day, every asset class globally will be hostage to the announcements out of Europe,” saidPrasad Patkar, who helps manage about $1 billion at Platypus Asset Management Ltd. in Sydney. The market “is still volatile, but I don’t think there’s any directional implication to it until we know what happens in Europe.”

The cancellation of a meeting of European Union finance ministers spurred concern that the region’s leaders will fail to agree on how to tame the sovereign-debt crisis. European leaders will hold a summit today in Brussels as they seek to bolster a rescue fund, recapitalize banks and provide debt relief to Greece.

Nikkei, Kospi

Japan’s Nikkei 225 Stock Average slid 0.6 percent and South Korea’s Kospi Index lost 0.4 percent. Australia’s S&P/ASX 200 rose 0.5 percent, reversing an earlier loss of as much as 1.3 percent after a report showed inflation slowed last quarter.

Asian firms tied to Europe fell. Nissan lost 0.9 percent to 685 yen. Sony Corp., Japan’s No. 1 exporter of consumer electronics that gets 21 percent of its sales in Europe, declined 0.6 percent to 1,541 yen. HSBC Holdings Plc, Europe’s biggest lender, slid 0.5 percent to HK$65.05 in Hong Kong. Esprit Holdings Ltd., a clothier that counts Europe as its biggest market, shed 1.2 percent to HK$10.30.

Futures on the Standard & Poor’s 500 Index gained 0.3 percent today. In New York, the index fell 2 percent yesterday as UPS reduced its airlift capacity for Asia as shipments to the U.S. decreased, the Atlanta-based company said after announcing third-quarter earnings. International deliveries overall increased 4.6 percent, trailing the 6.2 percent gain in the previous three months. UPS stock fell 2.1 percent to $69.35 in New York.

Asia traders fell. Mitsubishi Corp. slid 1.6 percent to 1,507 yen, while Marubeni Corp., a Japanese trading company, lost 1.9 percent to 424 yen.

Consumer Confidence

U.S. stocks extended losses yesterday after consumer confidence unexpectedly slumped in October to the lowest level since March 2009, when the economy was in a recession. A separate report showed home prices in 20 U.S. cities dropped more than forecast in August, highlighting one of the obstacles facing the economic recovery in its third year.

“You can’t say the U.S. economy is going well, judging from economic reports,” said Hiroichi Nishi, an equities manager in Tokyo at SMBC Nikko Securities Inc. “People are also concerned Europe’s crisis will slow a recovery in the global economy, and they want to wait for the results of the European summit.”

Exporters to the U.S. dropped. Honda Motor Co., Japan’s second-largest carmaker by market value, lost 1.6 percent to 2,304 yen. Samsung Electronics Co., South Korea’s biggest exporter of consumer electronics that gets 22 percent of its sales in America, dropped 1.3 percent to 933,000 won.

Gold Rises

The MSCI Asia Pacific Index declined 13 percent this year through yesterday, compared with a 2.3 percent loss by the S&P 500 and a 13 percent drop by the Stoxx Europe 600 Index. Stocks in the Asian benchmark are valued at 12.1 times estimated earnings on average, compared with 12.4 times for the S&P 500 and 10.3 times for the Stoxx 600.

Gold producers advanced as gold futures for December delivery gained 2.9 percent. Newcrest Mining rose 3.5 percent to A$34.40. Rival St. Barbara Ltd. added 2.8 percent to A$2.24.

Gold futures settled at $1,700.40 on the Comex in New York, after touching $1,704.70, the highest for a most-active contract since Sept. 23.

Olympus Corp., the maker of endoscopes that has lost more than half its market value amid a scandal involving $687 million in payments to advisers, dropped 7.8 percent to 1,096 yen after being placed on margin trading watch list by the Tokyo Stock Exchange.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

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

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Crude Declines From 12-Week High on Europe Debt Talks, Rising Stockpiles

By Ben Sharples - Oct 26, 2011 8:34 AM GMT+0700

Oil declined from a 12-week high in New York on concern that plans to tackle Europe’s debt crisis will falter as crude stockpiles rise in the U.S., the world’s biggest consumer of the commodity.

Futures slipped as much as 0.9 percent, falling for the first time in four days. European finance chiefs canceled a meeting today before national leaders hold a summit to agree on a blueprint to rein in the crisis. Crude inventories climbed 2.71 million barrels last week, according to the American Petroleum Institute. An Energy Department report today may show supplies increased 1.48 million barrels.

“The market is beginning to back off a little bit before tonight’s European summit,” said Ric Spooner, a chief market analyst at CMC Markets in Sydney. “The market has run up quite a lot in advance. The cancellation of the finance ministers’ meeting has created a source of uncertainty.”

Crude oil for December delivery declined as much as 86 cents to $92.31 a barrel in electronic trading on the New York Mercantile Exchange and was at $92.82 at 12:28 p.m. Sydney time. The contract yesterday increased $1.90, or 2.1 percent, to $93.17, the highest settlement since Aug. 2. Prices are up 1.6 percent this year.

Brent oil for December settlement was at $111.16 a barrel, up 24 cents, on the London-based ICE Futures Europe exchange. The European benchmark contract was at a premium of $18.34 to New York crude, compared with a close of $17.75 yesterday and a record settlement of $27.88 on Oct. 14.

Europe, Stockpiles

European leaders are in Brussels today for the emergency summit. Finance ministers will now meet at an as-yet undetermined time after the summit to complete its main elements, including safeguarding banks and writing down Greek debt, according to a European Union official.

U.S. gasoline supplies rose 153,000 barrels to 209.7 million barrels last week, the API report showed. The Energy Department report was forecast to show inventories declined 1.75 million barrels, according to the median of 12 analyst estimates in a Bloomberg News survey.

The industry-funded API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.

Oil in New York also declined after reports showed consumer confidence in the U.S. unexpectedly sank and home prices stagnated.

The New York-based Conference Board’s household sentiment index slumped to 39.8 in October, the lowest level since March 2009 and less than the most pessimistic forecast in a Bloomberg News survey. Property values in 20 cities were little changed in August from the prior month and down 3.8 percent from 2010, according to S&P/Case-Shiller.

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net

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

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HP to Challenge Intel With ARM-Based Servers

By Ian King and Aaron Ricadela - Oct 26, 2011 8:10 AM GMT+0700
ewlett-Packard Co. (HPQ), the largest computer maker, is planning to sell servers based on ARM Holdings Plc (ARM) technology, two people familiar with the matter said, posing a challenge to Intel Corp. (INTC)’s dominance.

Hewlett-Packard is working on the chips with Austin, Texas- based Calxeda Inc., a company partly owned by U.K.-based ARM, said the people, who declined to be identified because the plans haven’t yet been made public.

The move would escalate ARM’s rivalry with Intel, which accounts for about 90 percent of the processors used in servers, the powerful machines that run websites and corporate networks. ARM aims to enter the $9 billion server-processor market by building chips that will help companies rein in the cost of maintaining expanding fleets of servers.

“One of the biggest issues today in the server farms is power management,” ARM Vice President Michael Inglis said in an interview last week. He said his company doesn’t comment on agreements before they’re officially announced.

Laura Beck, a spokeswoman for Calxeda, also declined to comment on a possible accord with Hewlett-Packard. Calxeda has a product release event scheduled for Nov. 1, she said, without providing details. Michael Thacker, a spokesman for Palo Alto, California-based Hewlett-Packard, declined to comment.

Calxeda designs chips based on technology more commonly used in mobile phones to create processors for cheaper servers that consume less electricity. Such machinery is increasingly being used in so-called cloud computing centers, which provide access to software and computing tasks remotely, over the Internet, rather than through companies’ own systems.

ARM Encroaches

Though he declined to discuss specific customers, Inglis said ARM-based chips will appear first in machines that are used to support basic access to websites, then graduate into more powerful systems.

“As we move forward into 2014 you’ll begin to see systems emerging,” he said.

Intel, based in Santa Clara, California, is already playing catch-up with ARM in the swiftly expanding market for smartphones. ARM’s technology is the most widely used in mobile phone processors. Intel has said its chips will begin appearing in handset models next year.

ARM is putting pressure on Intel in other areas. Chipmakers such as Qualcomm Inc. (QCOM) and Nvidia Corp. (NVDA) are working on ARM technology-based chips that they say will appear in more tablets and laptop-like devices.

Relying on Servers

Intel has come to rely on its server chip business more for growth and profitability as PCs face competition from tablets and phones. Intel’s Data Center group grew 35 percent last year, compared with a 21 percent gain by the division that provides chips for PCs.

The market for server processors will be about $9 billion this year, according to IDC, a Framingham, Massachusetts-based researcher.

ARM’s stock has surged 39 percent this year, and the company reported profit more than doubled in the third quarter as sales jumped 22 percent.

Hewlett-Packard, the top maker of personal computers, is also Intel’s biggest customer, accounting for about 19 percent of its revenue, according to Bloomberg data.

Hewlett-Packard shares fell 3.7 percent to $25.05 yesterday in New York. Intel rose less than 1 percent to $24.63. ARM rose 2.5 percent to 590 pence at the close of trading in London.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

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

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Tata Teleservices May Take Part in India Mobile Consolidation, DoCoMo Says

By Cornelius Rahn and Ketaki Gokhale - Oct 26, 2011 5:01 AM GMT+0700

NTT DoCoMo Inc., Japan’s biggest mobile-phone operator, said its partner Tata Teleservices Ltd. in India may take part in consolidation in the world’s second- largest wireless market.

“If you look at the positioning of Tata Teleservices, it is possible that they can be part of this consolidation,” Masatoshi Suzuki, a DoCoMo senior executive vice president in charge of overseas strategy, said in an interview in Geneva yesterday. “We need to look at the possibility of growth as well as at the regulatory environment.”

DoCoMo has invested 260 billion yen ($3.4 billion) in Tata Teleservices, India’s No. 6 operator, since 2009 to get a slice of a market where there are 70 mobile connections for every 100 people. India is the only major nation other than China that Tokyo-based DoCoMo considers a growth market, Suzuki said. The country has 14 active operators and buying competitors may create “a lot of losses” for the purchaser because it would have to return wireless frequencies to regulators, he said.

India restricts the amount of spectrum a company holds to 15 megahertz for a so-called circle in some regions and 12.4 megahertz in other parts, according to the Department of Telecommunications. India has 22 telecommunication zones, or circles. Each circle needs to have a minimum three carriers and the combined market share of a merged entity is limited to 40 percent. A phone service operator can’t own more than 10 percent of another carrier that operates in the same circle.

Spectrum Sharing

“The larger regulatory framework has the impulse to encourage competition,” Suzuki said. “With the current framework I don’t think we’ll see a large-scale consolidation.”

India this month said it plans to make more spectrum available to mobile-phone operators, permit sharing and trading of airwaves and aid mergers so that handsets can reach every villager. Airwaves held by some government departments, companies and telecommunications operators may be freed up,Kapil Sibal, India’s telecommunications minister, said Oct. 10.

Bharti Airtel Ltd., India’s largest mobile-phone carrier, said last year its plans to offer nationwide high-speed services were thwarted after a “severe spectrum shortage” drove up prices at an auction for third-generation airwaves. Nine of India’s 15 mobile-phone service providers have 3G spectrum, with Bharti owning permits for 13 of the nation’s 22 telecommunications zones and Vodafone Group Plc holding nine.

Vodafone Venture

Vodafone, the world’s biggest mobile-phone company, this year increased its stake in its Indian venture with Essar Group as the British operator aims to tap fast-growing markets to make up for sluggish growth in Europe.

DoCoMo plans to keep its 26 percent stake in Tata Teleservices stable, Suzuki said, adding that it usually takes about four to five years for an Indian wireless company to become profitable. He declined to comment on Tata Teleservices’s profitability.

Rajeev Narayan, a spokesman for Tata Teleservices, didn’t immediately respond to an e-mail seeking comment.

Competition among the 15 mobile-phone service providers pushed call charges to less than one U.S. cent a minute, eroding profitability at the carriers.

The wireless market in India, Asia’s third-biggest economy, is forecast by research firm Gartner Inc. to exceed 872 million active users by the end of 2014, compared with 601.7 million at the end of July.

Overseas Markets

DoCoMo is also in talks with international phone-service providers for bringing handsets it has helped develop to overseas markets. In September, the company announced a deal with France Telecom SA to bring Sharp Corp.’s “Aquos” smartphone to France. Such cooperation deals help lower DoCoMo’s procurement costs while expanding the reach of services and functions it has developed, Suzuki said.

The company is also maintaining a strategy of investing in software developers and distributors outside of Japan and closing partnerships in order to tailor applications and other services to local markets, he said.

In August, the company acquired a 25 percent stake in Vietnamese online music and TV provider VMG Media JSC for 1.4 billion yen. The following month, it invested an additional 28.4 million euros ($40 million) in Germany’s net mobile AG, in which it bought a majority stake in 2009, to expand electronic payment services. DoCoMo also agreed with China’s biggest search engine operator, Baidu Inc., to set up a venture to make games and other mobile-phone content.

To contact the reporters on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net; Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net

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Perry Tax Cut Plan Offers Simplicity Layered Atop Complexity

By Richard Rubin - Oct 26, 2011 12:18 AM GMT+0700

Texas Governor Rick Perry’s flat-tax fiscal plan would provide broad tax cuts to households that embrace it while retaining the existing system’s complexity as a choice for others.

The plan, announced today in a speech in South Carolina by the Republican presidential candidate, would create a single tax rate of 20 percent for individuals and a $12,500 per-person exemption. Taxpayers could choose that system or file under the existing tax code with all of its exemptions, credits and deductions, a setup that economist Jared Bernstein described as a “complicated beast” that creates parallel systems.

“The thing that makes the tax system complex is not graduated rates,” said Bernstein, a former adviser to Vice President Joseph Biden and a senior fellow at the Center on Budget and Policy Priorities in Washington, which advocates policies that help low-income families. “That’s one of the big misunderstandings of this flat-tax discussion. You can have as many rates as you want and figure out what you owe on a postcard.”

Perry, who has been lagging in the polls of the Republican race, said his plan would simplify tax filing, reduce tax compliance costs and unleash economic growth.

“It reorders the way they do business in Washington by reinventing the tax code,” Perry said in his speech, where he displayed a postcard-sized tax return.

Flat-Tax Deviation

Perry’s proposal deviates from the flat-tax regime embraced by his adviser, the publisher and former presidential candidate Steve Forbes. Like the Forbes plan, Perry offers a single rate, eliminates taxes on investment income and provides exemptions for low-income taxpayers.

Still, Perry is proposing a few twists on the flat-tax concept. By giving taxpayers a choice between the systems, he doesn’t remove complexity from the tax system and avoids the kinds of tax increases for lower-income people that have led to criticism of rival Herman Cain’s plan for 9 percent income, business and sales taxes.

In the simpler system Perry proposes, he would retain tax breaks for mortgage interest, charitable contributions and state and local taxes for people earning less than $500,000 a year.

No ‘Fear’ Reform

“He’s just taken the fear out of tax reform,” said Grover Norquist, president of Americans for Tax Reform, a small- government group in Washington.

Such efforts usually involve “a bunch of politicians in D.C.” making changes that leave a taxpayer fearing that “I don’t know, but I fear I’m going to get screwed,” he said.

With the choice offered by Perry, taxpayers will gravitate to the system that gives them the most benefits, Norquist said. Perry’s proposal doesn’t punish people who have organized their financial lives around tax breaks such as the mortgage interest deduction or the earned income tax credit, he said.

“It just strikes me as political pandering at its worst,” said Leonard Burman, a former Treasury Department official who now teaches at Syracuse University in New York. “It doesn’t seem like a serious policy proposal.”

Low-income taxpayers, who benefit from refundable tax credits for work and children that generate benefits in excess of their tax liability, might prefer the current system.

Perry, who has described himself as “dismayed at the injustice” that nearly half of households don’t pay federal income taxes, wouldn’t change that number with his plan, Burman said.

Eliminates Some Taxes

Wealthy taxpayers, attracted by the lower rate and the elimination of taxes on capital gains, dividends and estates, likely would migrate to the new system. The top rate on wage income is now 35 percent, and the top tax rate on most long-term capital gains in 15 percent.

In an interview with the New York Times and CNBC, Perry said he was unconcerned if analyses of his plan showed that high-income taxpayers would benefit.

“We went through what are the ways to really give incentives to those that are going to risk their capital to create the jobs,” he said. “Those that want to get into the class warfare and talk about, oh my goodness, there are going to be some folks here who make more money out of this, or have access to more money, I’ll let them do that.”

Asked whether he thought the U.S. shouldn’t have a progressive tax system, Perry said, “I do. I think you need to have a tax system that basically is flat, fair and simple.”

Other Plans

Other Republicans, including presidential candidate Newt Gingrich and House Budget Committee Chairman Paul Ryan of Wisconsin, have offered optional tax system proposals.

Ryan’s plan wouldn’t allow taxpayers to make an annual choice between the systems. Instead, his proposal would require individuals to choose the current system or a simpler system within 10 years and then switch only once in their lifetimes or upon a major event such as marriage or divorce.

Former Massachusetts Governor Mitt Romney, who polls show is vying with Cain for frontrunner status in the nomination contest, wants to extend expiring income tax cuts, eliminate the estate tax and eliminate taxes on investment income for people making less than $200,000. Romney’s plan also would cut the corporate tax rate to 25 percent from 35 percent.

Perry’s plan would cut the corporate tax rate to 20 percent from 35 percent and eliminate corporate tax breaks. He would allow multinational companies to repatriate profits earned overseas at a 5.25 percent rate.

Budget Target

He said he wants to balance the federal budget by 2020 and set a spending cap of 18 percent of the gross domestic product. Ryan’s plan wouldn’t balance the budget until 2040.

Perry’s targets would require significantly lower spending, and he outlined cuts at the Department of Education and the Environmental Protection Agency, along with reductions in spending on Medicare and Medicaid.

Norquist said Perry’s 18 percent goal would improve on the record of the George W. Bush administration, which cut taxes and not spending.

“There was no North Star for what they were trying to do,” Norquist said. “This tells you what the goal is, what we’re trying to do. It’s huge. Just thinking that way changes the world.”

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

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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IBM Names Ginni Rometty as First Female CEO

By Carol Hymowitz and Sarah Frier - Oct 26, 2011 5:55 AM GMT+0700

International Business Machines Corp. named Virginia “Ginni” Rometty to succeed Sam Palmisano as chief executive officer, putting a woman at the helm for the first time in its 100-year history.

Rometty, IBM’s head of sales and marketing, will take the president and CEO posts effective Jan. 1, the Armonk, New York- based company said in a statement today. Palmisano, who’s been CEO since 2002, will remain chairman.

Rometty, 54, takes the reins as steady profit growth pushed IBM shares this year to the highest level since the company went public in 1915. Her experience in sales, services and acquisitions fits with the strategic direction set by Palmisano, who said last year the company will add $20 billion to revenue between 2010 and 2015 by expanding in markets such as cloud computing and analytics.

“We’ve spent a decade developing our strategy in four important areas and I’ll continue that,” Rometty said in an interview. “These are the underpinnings of our growth strategy.”

The succession at IBM has been the result of careful, long- term planning by the company’s board, said Rosabeth Kanter, a Harvard Business School professor who knows Rometty and other IBM executives. Rometty not only held many key positions at IBM during her career, she also has received mentoring and exposure to global leaders important to IBM’s future, she said.

“In contrast to other companies that have abruptly named new CEOs recently, such as Hewlett-Packard, IBM handled this very smoothly over several years,” Kanter said in an interview.

Budget Fights

The 30-year IBM veteran caught Palmisano’s attention in 2002 when she helped integrate the $3.9 billion acquisition of PwC Consulting, IBM’s largest deal ever at the time.

Rometty, then a general manager of the consulting unit, is credited with helping retain PwC’s principal consultants, who didn’t always mesh with IBM’s cost-cutting culture. When Palmisano wanted to cut travel budgets, making consultants stay at Holiday Inns, she helped them fight -- and win, said Ric Andersen, a former PwC consultant who joined IBM in the deal.

Palmisano promoted her to senior vice president of the group in 2005, and she boosted profit at the unit 42 percent in her first two years on the job. During her three decades at IBM, she became known as a polished executive who can close a sale, expanding relationships with companies from State Farm Insurance Co. to Prudential Financial Inc.

“She’s an engaging woman -- great with customers,” said Fred Amoroso, who was her boss in the financial-services consulting division during the 1990s. “Customers just love Ginni.”

Sales Promotion

Amid the recession, Palmisano put her in charge of running the company’s almost $100 billion in sales. Last year, she added marketing and strategy to her responsibilities.

“She is more than a superb operational executive,” Palmisano said in the statement. “With every leadership role, she has strengthened our ability to integrate IBM’s capabilities for our clients.”

Palmisano turned 60 in July, the age at which three of the past four IBM chiefs have stepped down. He’s IBM’s longest- serving CEO who doesn’t share the surname of the company’s founder, Thomas J. Watson.

He will leave a business vastly different than the one he took over. In his first year at the helm, he bought PwC Consulting, and two years later, he sold off the PC business. Those moves coupled with more than $25 billion in software acquisitions helped Palmisano realign what was once the largest computer company into a services and software powerhouse.

Predictably Profitable

The maneuvers made the company predictably profitable, boosting per-share profit for more than 30 straight quarters. Since 2001, Palmisano’s boosted sales by 20 percent, while keeping costs of the 426,000-employee behemoth little changed.

He also used IBM’s cash flow to buy back stock, helping to boost earnings per share and the share price. The company today added $7 billion to its repurchase authorization, raising the buyback program to $12.2 billion.

The appointment of Rometty, with a background beyond technology, underscores the company’s focus on business services, said Bobby Cameron, an analyst for Forrester Research.

“A lot of the company’s strategies now are business- focused, not tech-based,” Cameron said in an interview. “I look at Rometty being put in this spot as evidence of that shift.”

Analysts took the news as a sign of stability.

“I don’t think much changes, and that’s a good thing,” said Brad Zelnick, an analyst at Macquarie Capital USA in New York, who has an “outperform” rating on the stock. “The leadership team has acted in a very cohesive fashion over the years. Especially with Palmisano remaining as chairman, I would expect that the strategy keep consistent.”

Early Days

Rometty grew up in a Chicago suburb, the oldest of four children. In 1979, she got a degree in computer science and electrical engineering from Northwestern University and headed to an internship with General Motors in Detroit, where she met her husband, Mark. After her internship, she joined IBM. She now splits her time between homes in White Plains, New York, and Bonita Springs, Florida, where she and Mark are avid scuba divers.

This month at Fortune magazine’s Power Women Summit, Rometty said she learned shortly after beginning to work that she needed to take risks to advance.

“Really early, early in my career, I can remember being offered a big job,” she said. “Right away I said, ‘You know what? I’m not ready for this job.”

Growth vs. Comfort

That night “as I’m telling my husband about this, he just looked at me and he said, ‘Do you think a man would have ever answered that question that way?” she said. “What that taught me was you have to be very confident even though you’re so self- critical inside. Growth and comfort do not coexist.”

In a commencement speech at her alma mater last year, she explained why she has stayed at IBM as she encouraged the graduating students to seek the largest challenges.

“You have the skills that can be applied to some of the world’s most significant challenges,” she said. “I know that is what has always drawn me to, and kept me at IBM. IBM’s long- standing mantra is ‘Think.’ What has always made IBM a fascinating and compelling place for me, is the passion of the company, and its people, to apply technology and scientific thinking to major societal issues.”

“Every day I get to ‘Think’ and work on everything from digitizing electric grids so they can accommodate renewable energy and enable mass adoption of electric cars, helping major cities reduce congestion and pollution, to developing new micro- finance programs that help tiny businesses get started in markets such as Brazil, India, Africa,” she said. “After 30 years, I’m genuinely excited to get up and apply those problem- solving skills in ways I would never have imagined when I was sitting where you are.”

To contact the reporter on this story: Carol Hymowitz in New York at chymowitz1@bloomberg.net; Sarah Frier in New York at sfrier1@bloomberg.net.

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net.

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DeMark Says S&P 500 May ‘Trap’ Bulls After Rally

By Nikolaj Gammeltoft and Adam Johnson - Oct 26, 2011 2:47 AM GMT+0700

The Standard & Poor’s 500 Index may climb above its close yesterday before starting a retreat in the next three weeks that will “trap” bulls, said Tom DeMark, the creator of indicators to show turning points in securities.

After the decline that began today ends just above 1,200, the benchmark gauge for U.S. equities may rally about 5 percent and begin a process that would signal another drop, DeMark said. The index’s peak will come in November after it closes higher on four to six successive days, he said.

“The market is going to build a trap, and many of the people who are bullish are going to be trapped,” DeMark said in an interview today on Bloomberg Television’s “Street Smart” hosted by Lisa Murphy and Adam Johnson. “It’s going to be tired and disappoint everyone.”

The S&P 500 fell 1.9 percent to 1,230.63 as of 3:45 p.m. New York time, after rallying 3.7 percent over three days.

DeMark said on Oct. 18 that the S&P 500 would climb to 1,254 before reversing and falling more than 5 percent. The index closed at 1,254.19 yesterday. His prediction last month that a decrease in the index that started Sept. 16 would end at 1,076 proved prescient when the gauge bottomed at 1,074.77.

‘Labored’ Upside

After it falls to about 1,206, the S&P 500’s “next move is going to be labored and it could take two to three weeks,” DeMark said. “It’s going to be selective rotational and trying on most traders. We don’t see the money being made that we did see off the October low.”

The S&P 500 advanced from the threshold of a bear market early in October on steps by European leaders to support banks and higher-than-estimated corporate earnings. The benchmark gauge rallied 11 percent in October through yesterday, following a five-month decline.

“There’s not that much more upside in the market,” DeMark said in a telephone interview yesterday after the close of regular trading. “The market top is going to be when we’ve had four or five days of successively higher closes on the S&P 500 from today’s close,” he said. “If that happens then we go down very hard.”

DeMark, an adviser to Steven A. Cohen’s SAC Capital Advisors LP, provided consulting to hedge funds including George Soros’s Soros Fund Management LLC and Leon Cooperman’s Omega Advisors Inc.

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

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

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Whitney Tilson, Former Netflix Bear, Buying Company’s Shares After Plunge

By Kelly Bit - Oct 26, 2011 3:46 AM GMT+0700

Whitney Tilson, co-founder of T2 Partners LLC, said he bought shares of Netflix Inc. (NFLX) after it tumbled the most in seven years following reports that the video-rental service lost 800,000 U.S. subscribers in the third quarter.

Tilson had bet against Netflix from at least December, when he first wrote about shorting the stock, until February, when he disclosed to investors in a letter that he covered the short and was no longer confident that his investment thesis was correct. Tilson said he decided to buy shares today because he deemed them “cheap.”

“It’s been frustrating to see our original investment thesis validated, yet not profit from it,” Tilson, 44, said in a statement e-mailed from his New York hedge fund. “The core of our short thesis was always Netflix’s high valuation. In light of the stock’s collapse, we now think it’s cheap and today established a small long position. We hope it gets cheaper so we can add to it.”

Netflix plunged 35 percent to close at $77.37 in New York trading, its biggest drop since Oct. 15, 2004. The shares have declined 56 percent this year.

In a short sale, an investor borrows a security and sells it, expecting to profit from a decline by repurchasing it later at a lower price.

Tilson’s purchase was reported earlier today by the Wall Street Journal.

Subscriber Revolt

Netflix’s outlook suggests it’s been unable to contain a subscriber revolt over a price increase and aborted plan to force subscribers into separate streaming and DVD services. The Los Gatos, California-based company now forecasts losses in 2012 because of costs to offer content in the U.K. and Ireland, and said it will delay further expansion until profitability is restored.

Domestic subscribers fell to 23.9 million as of Sept. 30 from 24.6 million three months earlier, a bigger decline than the company projected in September, according to a website statement yesterday. Subscriber growth is particularly important because Netflix has used its lead over U.S. rivals to finance growth in its streaming business and expand overseas.

Netflix has plummeted 74 percent from a record close of $298.73 on July 13, the day after the company announced it would charge $7.99 each for the mail-order and streaming services, instead of $9.99 for both.

To contact the reporter on this story: Kelly Bit in New York at kbit@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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Europe Struggles for Crisis Remedy

By James G. Neuger - Oct 26, 2011 5:01 AM GMT+0700

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Oct. 26 (Bloomberg) -- Michael McCarthy, chief market strategist at CMC Markets Asia Pacific Pty Ltd. in Sydney, talks about Europe's sovereign debt crisis and its implications for global financial markets. McCarthy speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

European leaders “have risen to the challenge,” German Chancellor Angela Merkel said. French President Nicolas Sarkozy proclaimed their July 21 summit a “historic turning point” and Luxembourg Prime Minister Jean- Claude Juncker called it the “final package, of course,” to put out the debt inferno.

Then they went on vacation. Before they returned to work, the deal fizzled.

The euro’s stewards are back in Brussels today for an emergency summit struggling to heed the world’s calls to once and for all extinguish what U.S. Treasury Secretary Timothy F. Geithner called the “catastrophic risk” of the debt crisis. A potential Greek default threatens shockwaves that could engulf Italy and France, jolt the banking system and spell havoc for the global economy.

“Buck up, this crisis is going to be with us still for a while,” Barry Eichengreen, an economics professor at the University of California at Berkeley, said on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “I fear they’re not going to take the kind of steps to resolve it.”

The gathering marks the interim climax to six days of haggling among finance ministers, central and commercial bankers, chancellors and prime ministers over the shape of Greece’s second bailout, the recapitalization of banks and the retooling of the 440 billion-euro ($612 billion) rescue fund into a more potent weapon.

Two Summits

The 14th crisis summit in 21 months starts with a meeting of all 27 European Union leaders at 6 p.m. The real business gets under way at 7:15 p.m. when chiefs of the 10 non-euro nations depart, leaving the rest to hash out a strategy that they already say requires more work.

The cancellation of a finance ministers’ meeting to precede the summit underscored the holes in the plan. The finance chiefs will now meet at an as-yet undetermined time after the summit to complete its main elements, including safeguarding banks and writing down Greek debt, according to an EU official.

Global exasperation with Europe’s response is deepening, with politicians from Australia to North America prodding the euro area to get ahead of the crisis before it infects the world economy. A Group of 20 meeting in Cannes, France, on Nov. 3-4 is Europe’s self-imposed deadline.

‘Europe Must Deliver’

Europe must “deliver on the commitments they’ve made,” Geithner said in Wilmington, North Carolina, yesterday. “They’re saying a lot of the right things and they’re clearly working on it and they’re moving with a greater sense of urgency. That’s all welcome, but until we see what they come together with, it’s a little hard to evaluate.”

Before arriving in Brussels, some leaders have unfinished business at home. Merkel, the biggest contributor to Europe’s bailouts, has to win parliamentary approval of her anti-crisis strategy, while Italian Prime Minister Silvio Berlusconi strains for more budget cuts.

Greece, recipient of 110 billion euros as the first crisis victim last year, is counting on bond investors to accept “voluntary” losses as high as 60 percent and on euro governments and the International Monetary Fund to lend at least 109 billion euros more to enable it to pay its bills.

Writedowns Up to 60%

“We’re currently debating 50 percent to 60 percent in Europe,” Luxembourg’s Juncker said in an interview in Zurich yesterday. “We’ll have parallel talks in Brussels with banks and we’ll need to see what’s the result of a voluntary participation.”

Strikes, tear gas and 120,000 tons of uncollected garbage on the streets of Athens accompanied the Greek parliament’s approval of more austerity measures, as Greek citizens’ tolerance of EU-mandated budget cuts was stretched to the breaking point.

Greece’s bond writedowns will determine the amount of damage to European banks, which need around 100 billion euros of extra capital, the EU estimated last week.

What started in Greece and spread to Ireland and Portugal now stalks Italy, the third-biggest euro economy. European officials expect Berlusconi to show up in Brussels with specifics on containing pension spending and a timeline for meeting deficit-reduction targets.

Italian Yields

Berlusconi has yet to complete an austerity package whipped together on an August weekend that led the European Central Bank to start buying Italian bonds. The gains from that support have evaporated. Ten-year Italian notes yield 389 basis points more than benchmark German bunds, the same as on Aug. 4.

The Frankfurt-based central bank has bought 169.5 billion euros in bonds so far, starting with Greece, Ireland and Portugal last year, then extending the coverage to Italy and Spain. The increasingly controversial policy contributed to decisions by both Germans on its council to quit this year.

Euro-area leaders are debating how to obtain an ECB commitment to maintain the purchases without appearing to give orders to the politically independent central bank, three people familiar with the deliberations said.

ECB involvement is crucial because mechanisms to scale up the government-financed rescue fund -- the European Financial Stability Facility -- won’t be ready immediately after the summit and may not deliver enough, the people said.

More Talks Needed

Talks on boosting the EFSF’s 440 billion-euro war chest have centered on two models -- using it to insure bond sales and to fund a special investment vehicle that would court outside money, including from the IMF. Discussions of the second option only began this week, the people said. Its effectiveness would hinge on negotiations with credit-rating companies and international investors, they said.

Debate is continuing over how to pair a planned 500 billion-euro permanent fund with the current pool, which is scheduled to be wound down even though its loans for Greece’s second bailout package will run for up to 30 years.

Leaders will consider amending or scrapping a clause in the statutes of the permanent fund, the European Stability Mechanism, that caps lending during the transition phase between the two funds at 500 billion euros. One proposal is to leave the EFSF’s commitments -- 150 billion euros and counting --untouched by the cap.

In case the EFSF is fully spent once the ESM takes over, getting rid of the limit would give Europe twin funds with combined clout of 940 billion euros. Also up for debate is whether to tone down the ESM’s provisions for bondholder burden- sharing, the people said.

“Europe is finally moving in the right direction but there is a sense that the remedies will fall short of the shock and awe response that is required to stabilize market expectations,” Domenico Lombardi, a former IMF official now at the Brookings Institution in Washington, said yesterday on Bloomberg Television.

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net

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

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U.S. Stocks Decline on Disappointing Economic Data as UPS Slumps

By Rita Nazareth - Oct 26, 2011 4:05 AM GMT+0700

U.S. stocks fell, halting a three- day rally, as United Parcel Service Inc. slumped, economic reports missed estimates and uncertainty grew over how much progress European leaders are making in debt-crisis talks.

UPS, whose deliveries make it a proxy for the economy, lost 2.1 percent as international shipping growth began to cool while U.S. expansion stagnated. 3M Co., the maker Scotch-Brite sponges, sank 6.3 percent after cutting its profit forecast. Netflix Inc. plunged 35 percent as the company projected losses in 2012. Amazon.com Inc. tumbled 14 percent after the close of regular trading as earnings missed analysts’ projections.

The Standard & Poor’s 500 Index fell 2 percent to 1,229.05 as of 4 p.m. New York time, after gaining 3.7 percent over the previous three days. All 10 S&P 500 groups declined as a gauge of financial shares slid 3.1 percent. The Dow Jones Industrial Average sank 207 points, or 1.7 percent, to 11,706.62. The Russell 2000 Index of small companies lost 3 percent.

“It’s going to be a slow recovery,” Mark Bronzo, who helps manage $23 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “The economic data show that we’re in a bottoming process. UPS gave some cautious commentary concerning global growth. In addition, we’re still slave to the events in Europe.”

The S&P 500 rose from the threshold of a bear market early in October on steps by European leaders to support banks and higher-than-estimated corporate earnings. The benchmark gauge for American equities has rallied 8.6 percent so far in October, following a five-month decline.

‘Trap’ Bulls

The benchmark gauge may climb above yesterday’s close before starting a retreat in the next three weeks that will “trap” bulls, said Tom DeMark, the creator of indicators to show turning points in securities.

After the decline that began today ends just above 1,200, the benchmark gauge for U.S. equities may rally about 5 percent and begin a process that would signal another drop, DeMark said. The index’s peak will come in November after it closes higher on four to six successive days, he said.

“The market is going to build a trap, and many of the people who are bullish are going to be trapped,” DeMark said in an interview today on Bloomberg Television’s “Street Smart” hosted by Lisa Murphy and Adam Johnson. “It’s going to be tired and disappoint everyone.”

Benchmark gauges extended losses today after consumer confidence unexpectedly slumped in October to the lowest level since March 2009, when the U.S. economy was in a recession. Separate data showed that home prices in 20 U.S. cities dropped more than forecast in August, highlighting one of the obstacles facing the economic recovery in its third year.

Most-Tied

The Morgan Stanley Cyclical Index of companies most-tied to the economy dropped 2.4 percent. The Dow Jones Transportation Average, a proxy for the economy, declined 2.2 percent. The KBW Bank Index lost 3.2 percent. A gauge of homebuilders in S&P indexes tumbled 4.5 percent.

Stocks also fell as the cancellation of tomorrow’s meeting of European Union finance ministers spurred concern that summits of the region’s leaders will fail to produce agreements on how to tame the debt crisis. European leaders will hold a summit tomorrow as they seek to bolster the region’s rescue fund, recapitalize banks and provide debt relief to Greece.

“It’s hard to get excited in this environment,” Timothy Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group LLC in Bedford Hills, New York, said in a telephone interview. “You have very anemic growth and you have a big question mark about the debt situation in Europe.”

Earnings Season

About three quarters of the S&P 500 companies that reported results since Oct. 11 beat analysts’ projections, the data showed. Earnings have surpassed estimates by an average 5.9 percent. Since 2009, profit has exceeded forecasts by an average 8.5 percent a quarter.

UPS decreased 2.1 percent to $69.35. The company cut its airlift capacity for Asia as shipments to the U.S. decreased, the Atlanta-based company said on a conference call after announcing third-quarter earnings. International deliveries overall increased 4.6 percent, trailing the 6.2 percent gain in the previous three months.

Traders had boosted the price of bearish UPS options to the highest level since 2008 before the company’s quarterly report. The cost of puts to sell was 57 percent higher than calls to buy as of Oct. 21, according to data compiled by Bloomberg. The price relationship known as skew widened 20 percent since Oct. 4. For FedEx Corp., the company’s biggest competitor, the gap in option prices increased 8.6 percent during the period.

Slowing Sales

3M lost 6.3 percent to $77.04. Electronics sales are slowing after several quarters of what 3M called “very good growth.” The company, whose stock rallied 14 percent this month before today, is seeing the effect of a slowdown in developed countries earlier than other manufacturers because some of its products, such as components for liquid-crystal-display TVs, are tied to consumer demand.

Netflix plunged 35 percent, the biggest decline since 2004, to $77.37. The company faces rising content costs, a customer revolt over a price increase and startup costs as it expands into Latin America, followed by the U.K. and Ireland in early 2012. Other new markets will have to wait, Chief Executive Officer Reed Hastings said.

Amazon.com tumbled 14 percent to $195.11 at 4:30 p.m. New York time. The world’s largest Internet retailer reported a plunge in third-quarter profit after it ramped up spending on new products such as the Kindle Fire tablet.

Decline in Shipments

AK Steel Holding Corp. declined 14 percent to $7.47. The third-largest U.S. steelmaker by volume reported less revenue than analysts projected and a decline in shipments.

First Solar Inc., the biggest maker of thin-film solar panels, sank 25 percent to $43.27 as Chairman and founder Mike Ahearn was named interim chief executive officer, replacing Rob Gillette. The company didn’t give a reason for Gillette’s departure.

MF Global Holdings Ltd. tumbled 48 percent, the most since 2008, to $1.86. The futures broker that had its credit rating cut yesterday to the lowest investment grade reported its largest-ever quarterly loss.

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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