Obama Says Budget Constraints Won’t Cut U.S. Pacific Plans

By Julianna Goldman and Margaret Talev - Nov 17, 2011 11:20 AM GMT+0700

President Barack Obama said cutting the U.S. budget won’t reduce the nation’s military and economic commitments to the Asia-Pacific region in remarks that reflect a U.S. effort to contain China’s growing regional influence.

“Our enduring interests in the region demand our enduring presence in this region,” Obama said in remarks to Australia’s Parliament today. “The United States is a Pacific power, and we are here to stay.”

The 25-minute address in Australia’s capital of Canberra is intended to be the anchor of Obama’s nine-day trip to the region as he outlines what he called a “deliberate and strategic decision” to put the U.S. in position for a long-term role in an area that accounts for half of the global economy. Obama is seeking to address concerns that the U.S. won’t be able to act as a counter-weight to China’s rising military and economic influence because of domestic budget constraints.

“Reductions in U.S. defense spending will not -- I repeat, will not -- come at the expense of the Asia Pacific,” Obama said. “As we plan and budget for the future, we will allocate the resources necessary to maintain our strong military presence in this region. We will preserve our unique ability to project power and deter threats to peace.”

Debt Cutting

The president is in Australia as a 12-member special committee in the U.S. Congress is closing in on a Nov. 23 deadline to come up with a plan to trim the U.S. budget deficit by at least $1.5 trillion over the next decade. Failure to enact a debt-cutting plan this year would force $1.2 trillion in automatic spending cuts beginning in 2013, including $500 billion from the defense budget over 10 years. That would be on top of about $450 billion in Pentagon cuts already planned in the next decade.

Obama and Australian Prime Minister Julia Gillard yesterday announced a defense accord to deploy U.S. Marines in northern Australia beginning next year. The troops will be deployed on a six-month rotation, starting with 250 personnel and eventually expanding to as many as 2,500. The two nations also agreed to more cooperation between the Royal Australian Air Force and the U.S. Air Force, resulting in more U.S. aircraft passing through northern Australia.

Backing Up

“Doing this with Gillard is a way to tell everyone in Asia ‘look, the U.S. is in town and the U.S. will back you up if you need to be backed up,’” said Robert Dujarric, director of the Institute of Contemporary Asian Studies at Temple University’s Tokyo campus. “This is part of the entire process of strengthening relationships against China.”

Japan’s Chief Cabinet Secretary Osamu Fujimura said today his country has been briefed by both Australia and the U.S. on their agreement.

“We believe the decision will improve the capability of U.S. forces in the region and contribute to regional security, which we welcome,” he told reporters in Tokyo.

Obama pledged that U.S. commitments to the security of South Korea will never waiver and that it would be vigilant against aggression from the North.

“Indeed, we also reiterate our resolve to act firmly against any proliferation activities by North Korea,” Obama said. “The transfer of nuclear materials or material by North Korea to states or non-state entities would be considered a grave threat to the United States and our allies. And we would hold North Korea fully accountable for the consequences of such action.”

Obama said U.S. engagement in the region is about economics as well as defense.

Obama’s Priority

“Asia is critical to achieving my highest priority: creating jobs and opportunity for the American people,” he said. “With most of the world’s nuclear powers and nearly half of humanity, this region will largely define whether the century ahead will be marked by conflict or cooperation, needless suffering or human progress.”

The U.S. this year has exported more to the Pacific Rim than to Europe and exports to the region last year supported 850,000 U.S. jobs, according to figures from the Commerce and State Departments. Obama has set a goal of doubling U.S. exports in five years to $3.14 trillion a year by the end of 2014, from $1.57 trillion in 2009, and Asia is central to that plan.

Company Earnings

Asia’s growth has boosted earnings for its companies and led to stock market gains that have beaten U.S. equities. The MSCI Asia Pacific Index of stocks has outperformed the Dow Jones Industrial Average seven of the past nine years through 2010.

Some of the best-known U.S. brands count on Asian customers to fill their order books. Dallas-based Texas Instruments Inc. (TXN) gets 74 percent of its $14 billion in annual revenue from Asia. For Santa Clara, California-based Intel Corp. (INTC), it’s 67 percent of $58 billion, and Phoenix-based Freeport-McMoran Copper & Gold Inc. (FCX) reaps 42 percent of its $22 billion annual revenue from the region.

At the Asia-Pacific Economic Cooperation summit he hosted in Hawaii during the weekend, Obama announced the U.S., Australia and seven other nations will join in forming a Trans- Pacific Partnership trade accord within a year in what would be the biggest U.S. pact since the 1994 North American Free Trade Agreement.

After standing yesterday alongside Gillard and saying that U.S. moves on defense and trade aren’t meant to isolate China and he will continue to seek a cooperative relationship with the world’s second-biggest economy, Obama said the U.S. won’t back down from criticizing the country when necessary.

Welcoming China

“All of our nations have a profound interest in the rise of a peaceful and prosperous China -- and that is why the United States welcomes it,” Obama said. “We will do this, even as we continue to speak candidly with Beijing about the importance of upholding international norms and respecting the universal human rights of the Chinese people.”

At various points over the past week in Honolulu and in Canberra, Obama has stepped up criticism of China on security, trade and economic issues, saying the country needs to adhere to international standards if it wants to compete in the global marketplace. Today, without mentioning China, Obama indirectly continued that criticism, noting currency and intellectual property issues, repeatedly saying 21st century economies must adhere to common standards.

Clear Rules

“We seek economies that are open and transparent,” Obama said. “We seek trade that is free and fair. And we seek an open international economic system, where rules are clear and every nation plays by them.”

The defense initiative will anchor an American presence in the western Pacific that can help safeguard sea lanes that carry more than $5 trillion of commerce, about $1.2 trillion of it U.S. trade, and boost the U.S. military presence close to the South China Sea.

The area also is a potential new source of energy as demand in Asia rises with economic growth. Chinese studies cited by the U.S. Energy Information Agency in 2008 said the South China Sea could hold 213 billion barrels of oil. While the sea borders several countries, China claims “indisputable sovereignty” over most of it.

South China Sea

The South China Sea will be part of a discussion on maritime security at the East Asia Summit in Bali, Indonesia, Obama’s next stop on his trip.

Obama noted that he’ll be the first U.S. president to attend the summit and said together nations can “address shared challenges, such as proliferation and maritime security, including cooperation in the South China Sea.”

The Philippines is to propose an initiative at the summit for resolving South China Sea disputes. Secretary of State Hillary Clinton said yesterday in Manila that the U.S. will upgrade a defense treaty to give the Philippines more naval support.

Obama will meet with the 10-member Association of Southeast Asian Nations in Bali tomorrow, where leaders will decide whether to endorse Myanmar’s bid to chair the regional meetings in 2014.

Obama was more cautious in his criticism of Myanmar, saying that human rights violations persist despite the release of political prisoners, including Nobel laureate Aung San Suu Kyi.

“We will continue to speak clearly about the steps that must be taken for the government of Burma to have a better relationship with the United States,” Obama said.

Later today, Obama will travel north to Darwin, which was attacked by the Japanese during World War II and symbolizes the U.S.-Australian alliance. He’ll address Australian troops and U.S. Marines at the Royal Australian Air Force Base.

To contact the reporters on this story: Julianna Goldman in Canberra at jgoldman6@bloomberg.net; Margaret Talev in Canberra at mtalev@bloomberg.net

To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net; Mark Silva at msilva34@bloomberg.net

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Greece Turns to Budget After Confidence Vote

By Maria Petrakis, Paul Tugwell and Marcus Bensasson - Nov 17, 2011 4:56 PM GMT+0700

Greek Prime Minister Lucas Papademos turns his attention to finalizing next year’s budget and a voluntary debt swap, key demands set for the country to receive international financing a day after he won a confidence vote.

Finance Minister Evangelos Venizelos will present the 2012 spending plan to the new cabinet for approval before it’s submitted to parliament for discussion by lawmakers, which he said could be this week. Demonstrators at the same time will gather in Athens to commemorate a student uprising today.

“The policy of fiscal consolidation is necessary after the mistakes of the past several years to create the foundations for a new type of sustainable development,” Papademos told parliament yesterday. “The road is long and requires persistent effort and implies large adjustment costs.”

Papademos, a former European Central Bank vice president, won a three-month mandate to implement budget measures and ensure a bailout of 130 billion euros ($176 billion) agreed to with euro partners on Oct. 26. That will also mean arranging a voluntary swap of Greek debt that aims to slice 100 billion euros off the country’s debt burden of 355 billion euros.

The first priority is to get a loan payment of 8 billion euros by the middle of next month to avert a collapse of the financial system.

Debt swap

Papademos and Venizelos met separately with Charles Dallara, the head of the Institute of International Finance, which represents more than 450 financial companies, in Athens late yesterday as talks resumed on the debt swap.

Dallara will brief the press in Frankfurt today after he and his deputy, Hung Tran, met with representatives of financial services firms to discuss the voluntary agreement to accept writedowns on Greek debt holdings, according to an e-mailed statement. The press briefing will take place at 5 p.m. local time at Deutsche Bank AG’s headquarters in Frankfurt.

Greece regards the two proposals put forward by Dallara as unacceptable because they don’t meet European Union requirements to reduce the country’s debt to 120 percent of GDP by 2020, Kathimerini newspaper reported today, without saying how it got the information.

“The Greek debt swap has always been a fragile project, owing to its voluntary nature,” Thomas Costerg, an economist at Standard Chartered Bank in London, said in an e-mail. “Even assuming that the deal goes through, it remains uncertain that a 50% haircut will be sufficient to put Greece back on a sustainable debt track.”

Payment Plan

Greece plans to pay lenders 50 cents for each euro the government borrowed under the terms of the bailout plan agreed to at the Oct. 26 summit. Its 4 percent notes due in August 2013 now trade at 34.5 cents. Fitch Ratings says the agreement with creditors would amount to a “default event” if implemented, while the International Swaps and Derivatives Association says it won’t trigger credit-default swaps.

The euro fell 0.2 percent to $1.3468 at 11:48 a.m. Athens time, approaching a five-week low as Spain sold less than its maximum target in a debt sale today.

Greece’s benchmark stock index lost 0.9 percent to 711.38. The yield on the 10-year Greek bond added 22 basis points to 28.86 percent. Two-year note yields fell 282 basis points to 110.64 percent after adding 303 basis points yesterday.

Rising Debt

Greece’s debt will reach 163 percent of gross domestic product this year and jump to 198 percent in 2012, the European Commission said in its economic forecast. The estimate doesn’t include the effects of the debt swap. That compares with 173 percent predicted by the government in its 2012 draft budget.

A total of 255 lawmakers in the 300-strong Greek Parliament supported the confidence motion and 38 were against, Speaker Filippos Petsalnikos said yesterday.

Today is the anniversary of the 1973 student uprising against a military dictatorship ruling Greece at the time. Police will deploy 5,000 personnel to guard the march, according to a spokeswoman yesterday. Protesters will pass through central Athens, scene of demonstrations of thousands of people and violent clashes over the past year.

Papademos Poll

Papademos formed a government on Nov. 11 after four days of political arguing that followed global turmoil sparked by former Prime Minister George Papandreou’s plans for a referendum on the terms of the country’s second European bailout.

Disbursement of funds was halted by German Chancellor Angela Merkel and French President Nicolas Sarkozy after Papandreou called for the national vote, which he later dropped.

Most Greeks believe the national unity government led by Papademos is the best chance for the country, according to a poll by Alco SA for Newsit website. Sixty-six percent of the 1,000 Greeks surveyed between Nov. 14 and Nov. 16 responded positively to a question on whether the interim government was best placed to keep Greece in the euro area, compared with 22 percent who responded negatively.

Papademos travels to Brussels next week for his first meeting as premier with European Union President Herman Van Rompuy and European Commission President Jose Barroso.

Greece’s budget deficit in the first 10 months of the year widened 11 percent to 20.1 billion euros from 18.1 billion euros a year earlier, according to preliminary figures received by e- mail from the Finance Ministry in Athens yesterday. The figure is in line with a target of 20.4 billion euros, it said.

The new government needs to push ahead with plans to cut 30,000 state workers and reduce pensions and wages to meet conditions for the loans. Unions have said they plan a general strike when the 2012 budget is voted in parliament.

To contact the reporters on this story: Maria Petrakis at mpetrakis@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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Europe Stocks Extend Drop on Spain Bond Sale

By Stephen Kirkland and Lynn Thomasson - Nov 17, 2011 5:27 PM GMT+0700

Stocks fell for a fourth day, the longest stretch of losses in two months, as Spanish and French borrowing costs rose and China’s central bank said it’s not ready to loosen inflation controls. U.S. equity index futures erased gains.

The MSCI All-Country World Index slipped 0.5 percent at 10:25 a.m. in London. The Stoxx Europe 600 Index declined 1.2 percent, while Standard & Poor’s 500 Index futures slid 0.1 percent. The yield on the 10-year Spanish bond rose 34 basis points to 6.75 percent, a euro-era record, with similar-maturity French yields jumping to 2 percentage points more than benchmark German bunds, also a euro-lifetime high. The cost of insuring against default on European government debt approached a record. The Swiss franc weakened against all 16 most-traded peers. Oil erased gains.

Spain sold 3.56 billion euros ($4.8 billion) of bonds at 6.975 percent, while France sold 3.332 billion euros of 2016 notes yielding 2.82 percent. The European Central Bank bought Italian government bonds today, said two people with knowledge of the transactions, who declined to be identified because the trades are private. U.S. housing starts probably fell last month, economists said before a Commerce Department report.

“It’s clear that there’s no escaping the gravity of the European debt story as central bankers continue their struggle to find an appropriate resolution,” said Harley Salt, head of sales trading at IG Markets in Melbourne. “Bond yields can expect to remain very much in focus.”

‘Difficult Environment’

Six stocks fell for each that gained in the Stoxx 600 and all 19 industry groups declined. Voestalpine AG sank 4.9 percent as Austria’s biggest steelmaker cut its profit outlook for the full year, citing a “difficult economic environment.” Christian Hansen Holding A/S slid 4.3 percent as a person familiar with the transaction said PAI Partners sold a 1.7 billion-krone ($308 million) stake in the Danish food- ingredients maker.

The increase in S&P 500 futures indicated the U.S. gauge will rebound from yesterday’s 1.7 percent drop. Applied Materials Inc. slid 2.5 percent in after-hours New York trading as the largest producer of chipmaking equipment forecast first- quarter sales and profit that missed analysts’ predictions.

A report at 10 a.m. New York time may show manufacturing in the Philadelphia region expanded at the fastest pace in seven months in November, a sign U.S. factories may provide more support for the recovery. The Federal Reserve Bank of Philadelphia’s general economic index increased to 9 from 8.7 last month, according to the median estimate of economists surveyed by Bloomberg.

Jobless Claims

Other data may show U.S. housing starts fell 7.3 percent in October, the biggest drop since April, and initial claims for jobless benefits were little changed last week, economists said.

French five-year yields climbed 10 basis points. The extra yield investors demand to hold the nation’s 10-year debt instead of bunds increased 13 basis points to 203 basis points.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose six basis points to 361, compared with a record 362 reached on Nov. 15.

The cost for European banks to fund in the U.S. currency rose for a fourth day, to the highest since December 2008. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, increased to 124 basis points below the euro interbank offered rate, from 123 yesterday.

Franc Weakens

The Swiss franc slid 0.3 percent against the euro and depreciated 0.1 percent versus the dollar, falling for the fourth straight day. The euro appreciated 0.2 percent to $1.3488, snapping a three-day decline.

New York crude fell 0.3 percent to $102.23 a barrel. Nickel, aluminum, zinc and copper fell more than 1 percent.

The MSCI Emerging Markets Index slipped 0.2 percent. The Hang Seng China Enterprises Index sank 1 percent in Hong Kong. Poland’s WIG20 Index lost 1.6 percent in Warsaw, led by KGHM Polska Miedz SA, the country’s only copper producer. India’s Sensex sank 1.5 percent.

To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net

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Amazon’s Kindle Fire Draws Heat From New Nook: Rich Jaroslovsky

By Rich Jaroslovsky - Nov 17, 2011 4:00 AM GMT+0700
Bloomberg Opinion

There’s a lot of heel-nipping in the tablet market these days.

Amazon.com Inc. (AMZN) just released the Kindle Fire, the most serious attempt yet to take on Apple Inc. (AAPL)’s mighty iPad 2. Meanwhile, Barnes & Noble Inc. (BKS) has shipped the Nook Tablet, which in turn takes aim at Amazon.

I’ve tried both new devices and my conclusion is that there’s no clear winner. They’re both compact, capable color- screen media-consumption devices for budget-minded users who don’t need all the features and functions of a full-blown tablet.

There’s a lot to like about the Fire. I like the way Amazon has integrated its content services -- books, magazines, videos, music. I like how it uses the Cloud, in this case, Amazon’s remote servers, to store content and make it accessible when I want it, reducing the need for a lot of storage. (The Fire only holds 8 gigabytes -- same as the base model iPod touch.)

Most of all, I like the price: $199, less than half the cheapest iPad.

When I booted up the Fire, all my previous Amazon purchases appeared automatically and Amazon made it exceedingly easy for me to add more content. I bought a couple of books, some songs and a movie for a long airplane ride. All downloaded quickly and efficiently. There’s also an online store with some 8,500 Amazon- approved apps, far fewer than Apple has for the iPad, but still respectable.

Prime Content

Users of Amazon’s $79-a-year Prime service get access to a library of thousands of TV shows and older movies, somewhat akin to Netflix Inc. (NFLX)’s streaming service. The Fire comes with a one- month trial subscription.

So I like almost everything about the Kindle Fire -- except, well, the device itself.

The Fire is plain, a chunky black rectangle with a 7-inch backlit color screen. It’s shorter than the Nook Tablet, a bit thicker and heavier. In action, it feels sluggish. There can be a noticeable lag when you’re turning pages in an e-book or using an app.

I also had trouble with the accelerometer, the sensor that changes the view from portrait to landscape when you turn the Fire. I sometimes found myself looking at an upside-down app for several moments until the Fire sorted things out. And my loaner fell short of Amazon’s claimed eight hours of battery life.

Silk Isn’t Smooth

Amazon claims that its Web browser, Silk, has been optimized for speed, but in side-by-side comparisons I couldn’t discern any advantage over the iPad’s Safari browser. A few times the device told me it was connected to a Wi-Fi network while Silk claimed it wasn’t. There’s no 3G data service for the Kindle Fire, nor are there Bluetooth, a physical volume control, or a camera of any kind.

The Fire runs Google Inc. (GOOG)’s Android mobile-phone operating system. So does the $249 Nook Tablet, whose earlier version, the Nook Color, remains on the market with a newly lowered $199 price tag.

The Nook Tablet, like the Fire, operates only over Wi-Fi and has no camera. In other ways, though, it is the reverse of the newest Kindle. Where the Fire is physically plain, the Nook is sleek and more visually appealing. The $50 price differential buys you not only twice the memory and twice the storage of the Fire, but also longer battery life and a slot for an SD expansion card.

Smooth Scrolling

Barnes & Noble’s one-year head start in developing software really shows: scrolling is smoother, the screen reorients itself faster and the device just generally feels zippier.

Where B&N falls short is exactly where Amazon shines -- in the variety of content available and how well it’s integrated into the overall user experience.

Books aren’t the problem. The Nook’s selection is impressive and it has some nice flourishes. On-the-go parents, for instance, will appreciate not only the kid-friendliness of the Nook Tablet but also a feature that lets them record a child’s favorite story in their own voice.

For many other uses, though, the Nook Tablet relies on third-party apps in place of the one-stop shopping approach of Amazon and Apple. For movies and TV shows, there’s Netflix and Hulu Plus; for music, Pandora; and so on. Each requires a separate membership with its own login and, in the case of Netflix and Hulu Plus, credit card information.

Like Amazon, Barnes & Noble has its own app store that pales next to the iPad’s in terms of both numbers and quality.

Ultimately, the choice between these two devices comes down to Amazon’s lower price and ecosystem versus Barnes & Noble’s polish and network of brick-and-mortar stores to provide in- person support. In either case, paying half what an iPad costs will require you to decide which half of the iPad experience you’re willing to do without.

(Rich Jaroslovsky is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Rich Jaroslovsky in San Francisco at rjaroslovsky@bloomberg.net.

To contact the editor responsible for this story: Manuela Hoelterhoff at mhoelterhoff@bloomberg.net.

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U.S. Banks Face Contagion Risk From European Debt: Fitch

By Dakin Campbell - Nov 17, 2011 2:20 PM GMT+0700

U.S. banks face a “serious risk” that their creditworthiness will deteriorate if Europe’s debt crisis deepens and spreads beyond the five most-troubled nations, Fitch Ratings said.

“Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,” the New York-based rating company said yesterday in a statement. Even as U.S. banks have “manageable” exposure to stressed European markets, “further contagion poses a serious risk,” Fitch said, without explaining what it meant by contagion.

The “exposures” of U.S. lenders to major European banks and the stressed nations of Greece, Ireland, Italy, Portugal and Spain, known as the GIIPS, are smaller than those to some of the continent’s larger countries, Fitch said.

The six biggest U.S. banks -- JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C), Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. and Morgan Stanley (MS) -- had $50 billion in risk tied to the GIIPS on Sept. 30, Fitch said. So-called cross-border outstandings to France for all except Wells Fargo were $188 billion, including $114 billion to French banks. Risk to Britain and its banks was $225 billion and $51 billion, respectively.

Europe’s debt crisis has toppled four elected governments, with the last two, in Greece and Italy, falling last week. Italian bond yields remained at about 7 percent -- the threshold that led Greece, Portugal and Ireland to seek bailouts -- and shares of French banks, including BNP Paribas (BNP) SA and Societe Generale (GLE) SA, dropped amid concern they’ll need more capital.

Stocks Slump

U.S. stocks slumped after the Fitch report. The Standard & Poor’s 500 Index slid 1.7 percent and the 24-company KBW Bank Index declined 1.9 percent.

Investor demand for the relative safety of Treasuries during the European debt crisis has sent the difference between U.S. short-term yields and bank rates surging to levels not seen in more than two years.

The gap between the London interbank offered rate and the overnight index swap, or what traders expect the Federal Reserve’s benchmark to be over the term of the contract, widened to 38 basis points today. It was the highest level since June 2009.

Swap Spreads

U.S. five-year swap spreads climbed to 45 basis points, the most since August 2009. Investors use swaps to exchange fixed and floating interest rates. The spread, the gap between the fixed component and the yield on similar-maturity Treasuries, is a measure of bank creditworthiness.

The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, widened to 47 basis points today, or 0.47 percentage point, the most since June 2010.

Yields have yet to reach the levels seen three years ago when credit markets froze and the U.S. economy was in a recession. The TED spread was as wide as 4.64 percentage points in October 2008.

While U.S. banks have hedged some of their risk with credit-default swaps, those may not be effective if voluntary debt forgiveness becomes “more prevalent” and the insurance provisions of the instruments aren’t triggered, Fitch said in the report. The top five U.S. banks had $22 billion in hedges tied to stressed markets, according to Fitch.

Partial Disclosure

Disclosure practices also make it difficult to gauge U.S. banks’ risk, Fitch said. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in the event of a European default, giving only net numbers or excluding some derivatives altogether.

Guarantees provided by U.S. lenders on government, bank and corporate debt in Greece, Italy, Ireland, Portugal and Spain rose by $80.7 billion to $518 billion in the first half of 2011, according to the Bank for International Settlements.

Also yesterday, Moody’s Investors Service downgraded the senior debt and deposit ratings of 10 German public-sector banks, citing its assumption that “there is now a lower likelihood” that the lenders would get external support.

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

To contact the editor responsible for this story: Rick Green at rgreen18@bloomberg.net

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European Stocks Extend Losses After Spain Sells Bonds at Auction

By Sarah Jones - Nov 17, 2011 4:49 PM GMT+0700
Enlarge image

A trading board displays the day's volume on the WIG20 index, at the Warsaw stock exchange in Warsaw, Poland. The Stoxx 600 declined 0.4 percent at 236.14. Photographer: John Guillemin/Bloomberg

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Nov. 17 (Bloomberg) -- Richard Corbett, adviser to European Council President Herman Van Rompuy, discusses the sovereign-debt crisis. He speaks from Brussels with Francine Lacqua on Bloomberg Television's "Countdown." (Source: Bloomberg)

European stocks extended losses after borrowing costs rose at a Spanish government bond sale. U.S. index futures and Asian shares were little changed.

BNP Paribas SA and Credit Agricole SA (ACA) paced losses in banks, both dropping at least 2.5 percent. ASML Holding NV (ASML) slid 1.6 percent after Applied Materials Inc. forecast earnings that missed analyst estimates. Centrica Plc (CNA) declined 1.6 percent after the utility warned profits may fall short of forecasts.

The Stoxx 600 slid 1 percent to 234.59 at 9:48 a.m. in London as Spanish 10-year bond yields rose to a euro-era record and French five-year yields jumped to a six-month high. Futures on the Standard & Poor’s 500 Index expiring in December added less than 0.1 percent and the MSCI Asia Pacific Index declined 0.1 percent.

“It’s clear that there’s no escaping the gravity of the European debt story as central bankers continue their struggle to find an appropriate resolution,” said Harley Salt, head of sales trading at IG Markets in Melbourne. “Bond yields can expect to remain very much in focus.”

The Stoxx 600 closed unchanged yesterday, after swinging between gains and losses at least 10 times during the day, as the European Central Bank bought Italian and Spanish bonds and Mario Monti became Italy’s new prime minister. The gauge has lost 19 percent from this year’s high on Feb. 17 as Greece teeters on the edge of a default and other indebted nations grapple with record bond yields.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

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

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US President Obama says Asia-Pacific is key to future

(BBC News) President Barack Obama: ''The United States is a Pacific power, and we are here to stay''

US President Barack Obama has said that the Asia-Pacific region will play a key role in defining the world's future.

"The United States is a Pacific power, and we are here to stay," he stated in a speech to the Australian parliament, sending a clear message to Beijing.

His comments came after Australia agreed to host a full US Marine taskforce in the coming years.

China has questioned the move, which many analysts see as being a counter to Beijing's growing influence.

Speaking in Canberra, Mr Obama said the US was now turning its attention to the region.

"Let there be no doubt: in the Asia-Pacific in the 21st Century, the United States of America is all in," he said.
Key player

Mr Obama said that given its size, resources and the economic growth that the region had witnessed in recent years, Asia-Pacific countries were playing an increasingly important role globally.

"With most of the world's nuclear powers and some half of humanity, Asia will largely define whether the century ahead will be marked by conflict or co-operation, needless suffering or human progress."

"As a Pacific nation, the United States will play a larger and long-term role in shaping this region and its future by upholding core principles and in close partnership with our allies and friends."

Mr Obama said that, as the world's biggest economy, the US was keen to increase its presence in the region and play a bigger role in its development and progress.

At the same time he told the Australian parliament that the US was working towards getting its own economy back on track.

He said the US had taken some hard decisions to cut its deficit and will continue to do more to ensure that growth rebounded.
China factor

Mr Obama underlined that the alliance between the US and Australia was an indispensable one and had never been stronger.

However, the growing proximity - especially a bigger US military presence in Australia - has not gone down well with China.

The US president used his speech in Canberra to emphasise a willingness to co-operate with Beijing and improve communication between the superpowers.

"We've seen that China can be a partner, from reducing tensions on the Korean peninsula, to preventing proliferation," he said.

"We'll seek more opportunities for co-operation with Beijing, including greater communication between our militaries, to promote understanding and avoid miscalculation."

However, Mr Obama called upon the authorities in Beijing to change their policies as well.

"We will do this, even as [we] continue to speak candidly with Beijing about the importance of upholding international norms and respecting the universal human rights of the Chinese people," he added.
Seeking stability

The agreement to increase the US military presence in Australia comes at a time when nations in the region are becoming wary of China's growing military might and its domination of the Pacific waters.

Australia's Prime Minister Julia Gillard said that maintaining peace and stability in the region was key to its economic growth and success.

Ms Gillard added that the partnership between Australia and the US had been a "bedrock of stability" in the region.

There are concerns that, as the US tries to cut its defence spending in a bid to reduce its debt, it might reduce its presence in the region.

However, Mr Obama tried to quell those fears, saying that he remained committed to the region.

"Reductions in US defence spending will not - I repeat - will not come at the expense of the Asia-Pacific," he said.

"My guidance is clear - as we plan and budget for the future we will allocate the resources necessary to maintain our strong military presence in this region.

"We will preserve our unique ability to project power and deter threats to peace.

"We will keep our commitments, including our treaty obligations to allies like Australia, and we will constantly strengthen our capabilities to meet the needs of the 21st century."


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Gold Demand Advanced 6% in Third Quarter

By Nicholas Larkin - Nov 17, 2011 1:00 PM GMT+0700

Gold demand rose 6 percent in the third quarter from a year earlier as Europe’s debt crisis spurred investors to accumulate the metal as a protection of wealth and push prices to a record, the World Gold Council said.

Global demand gained to 1,053.9 metric tons worth a record $57.7 billion, the London-based industry group said today in a report. Investor purchases of exchange-traded funds and products, bars and coins outpaced a drop in jewelry demand and increase in recycled supplies, the council said.

Gold climbed to a record $1,921.15 an ounce in London on Sept. 6 and is heading for an 11th consecutive annual increase. Holdings in bullion-backed ETPs yesterday were within 1 percent of the all-time high in August as concerns about Europe’s debt crisis and slowing economic growth boosted demand. European bar and coin demand topped that in India or China, the council said.

“I can’t see European bar and coin investment being poor in the fourth quarter given the euro-zone problem,” Marcus Grubb, managing director of investment research at the council, said in a phone interview from London yesterday. “When you look at China and India, the investment figures are likely to be good because you still have an inflation problem in both countries.”

Gold for immediate delivery traded at $1,769.77 an ounce at 4:24 p.m. yesterday in London. Prices averaged about $1,706 in the third quarter, up 39 percent from a year earlier and 13 percent higher than the second quarter.

European Demand

Investment jumped 33 percent to 468.1 tons in the latest quarter. Bar and coin purchases increased 29 percent to 390.5 tons. The bar and coin demand in Europe more than doubled to 118.1 tons from 50.3 tons a year earlier and was the most since the fourth quarter of 2008, according to Grubb. The average demand in Europe since 2005 is 10 tons a quarter, he said. The data for Europe covers France, Germany, Switzerland, U.K., Spain, Benelux, Italy and Scandanavia.

ETP holdings gained 81.7 tons in the period, compared with 32 tons a year earlier, data compiled by Bloomberg show. Investors owned 2,314.4 tons in the products as of yesterday, more than all but four central banks. Assets reached a record 2,330 tons on Aug. 18.

Billionaire investor John Paulson cut his holdings in the SPDR Gold Trust, the biggest gold-backed ETP, by 36 percent to 20.3 million shares in the third quarter, government filings showed this week.

Jewelry demand fell 10 percent to 465.6 tons in the third quarter, the council said. Usage in India fell 26 percent to 125.3 tons, and the country and China accounted for 57 percent of global purchases, according to the report. Total gold demand fell 23 percent in India and rose 17 percent in China.

India, China

India’s bar and coin purchases totaled 78 tons in the quarter, compared with China’s 62.2 tons. China’s demand for those assets had overtaken India’s in the first quarter.

Central-bank and government-institution purchases jumped more than sixfold to 148.4 tons in the quarter, the council said. Central banks may buy 450 tons for this year, signaling about 100 tons will be purchased in the fourth quarter, Grubb said. The demand is centered on central banks in Latin America, central Asia and the Far East, he said.

Total supply increased 2 percent to 1,034.4 tons in the quarter from a year earlier as recycled output rose 13 percent to 426.5 tons, the council said. Mine output gained 5 percent to 746.2 tons, it said.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net.

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Indicator Shows China Maintaining Momentum

By Bloomberg News - Nov 17, 2011 12:44 PM GMT+0700

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Nov. 17 (Bloomberg) -- Andrew Polk, Beijing-based economist for The Conference Board, talks about the outlook for China's economy and central bank monetary policy. The Conference Board's leading indicator for China rose, suggesting the world’s second-biggest economy is weathering moderating export growth and a government campaign to curb consumer and property prices. Polk speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

A Chinese leading indicator rose, suggesting the world’s second-biggest economy is weathering moderating export growth and a government campaign to curb consumer and property prices.

The index increased 0.4 percent to 160.2 in September, The Conference Board said on its website today, citing a preliminary reading. The gauge is designed to capture prospects over the coming six months. August’s index was revised to a 0.6 percent gain from a previous 0.5 percent increase.

The People’s Bank of China said yesterday growth is slowing as a result of the government’s macroeconomic policies and that the economy’s momentum remains “strong.” The comments indicate the central bank will implement “selective easing” such as cutting lenders’ reserve requirements rather than any “across- the-board” loosening, Credit Suisse AG said in a report today.

The leading index “is still expanding strongly,” confirming China’s “soft-landing story,” Andrew Polk, a Beijing-based economist at The Conference Board, said on Bloomberg Television. The European debt crisis remains the nation’s biggest risk, and “if that takes a drastic turn for the worse, then we’re looking at some pretty serious hit in China’s export market,” he said.

The benchmark Shanghai Composite Index rose 0.1 percent as of 1:17 p.m. local time today. The gauge has lost 12 percent this year amid government’s policy tightening and worsening global outlook.

Index Components

The leading index’s six components are loans by financial institutions, raw-material supplies, deliveries and new export orders information from the manufacturing purchasing managers’ index, consumer expectations, and total floor space started. The central bank publishes the first two components and the statistics bureau releases the other four.

The leading index, first published in May 2010, has successfully signaled turning points in China’s economic cycle if plotted back to 1986, the organization says.

The central bank yesterday said it can’t loosen control over prices and reiterated Premier Wen Jiabao’s pledge to “fine-tune” policies when needed. While inflation may continue to moderate, “the foundation for price stability is not yet solid,” the bank said in its third-quarter monetary policy report.

China posted the lowest inflation in five months in October after a year-long campaign to tame prices that included higher interest rates, lending curbs and restrictions on home purchases. Economic growth slowed to 9.1 percent last quarter, the least since 2009, government data show.

The government won’t adopt any “drastic” easing through the end of this year apart from aiding smaller companies and banks and loosening credit restrictions, according to Polk.

China’s growth may slow to around 8.5 percent this quarter with full-year growth at “just over 9 percent,” he said. Other risks facing the economy include a cooling real-estate market and a local government debt problem that could cause further credit crunch, he added.

To contact the editor responsible for this story: Ken McCallum at kmccallum4@bloomberg.net

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Gingrich Defends Payments From Freddie Mac as He Gets Increased Scrutiny

By John McCormick - Nov 17, 2011 12:01 PM GMT+0700

Newt Gingrich defended payments of at least $1.6 million he received from mortgage company Freddie Mac, saying he provided “strategic advice over a long period of time” and that his work would remind voters of his knowledge of how Washington works.

On campaign stops in Iowa where he might have basked in a recent surge in state and national polls to the upper ranks of Republican presidential contenders, Gingrich yesterday also said scrutiny of the payments was justified.

“Everything is legitimate,” Gingrich told reporters when asked whether the queries into his mortgage work were warranted. “This is the presidency.”

His campaign announced it would release all the documents it legally could on payments to Gingrich by Freddie Mac since he left Congress in early 1999. Gingrich said the fees were sent to his consulting firm, the Gingrich Group, and that he couldn’t remember the details of the contracts. “You are asking me about 12 years ago,” he said.

The questions were prompted by a Bloomberg News report that Gingrich made between $1.6 million and $1.8 million in consulting fees from two contracts with the agency that he has scolded on the campaign trail. He has blamed Freddie Mac of helping cause the mortgage crisis in the U.S. housing market.

Historian’s ‘Advice’

Gingrich at a Nov. 9 debate acknowledged receiving $300,000 from Freddie Mac in 2006, saying he was paid to offer “advice as a historian.” He said he gave them “advice on precisely what they didn’t do,” which was to stop making loans to people with no credit history.

He said yesterday that the “strategic advice” he also provided would underscore “that I know a great deal about Washington, and if you want to change Washington -- we just tried four years of amateur ignorance and it didn’t work very well -- so having somebody who actually knows Washington might be a really good thing.”

Asked by a reporter if the payments might cause some to think he was being bought to be a friendly voice for Freddie Mac, he said, “No, I don’t think that any more than your institution is being bought when people advertise in it.”

Renewed Review

The focus on Gingrich’s Freddie Mac connection shows the advantages -- and disadvantages -- of his improved standing in the Republican presidential field. With the Republican nomination contests set to start in Iowa on Jan. 3, Gingrich’s rise has brought with it a renewed examination of a decades-long career in government and the private sector.

The former speaker of the U.S. House was asked at a forum in Des Moines if he could convince voters that he can handle a full examination.

“If three or four weeks from now, I have confronted the scrutiny, as you put it, in an even-keeled way, then they’ll be able to relax and go, ‘Oh, he was certainly even-keeled,’” he said. “If I blow up and do something utterly stupid, they’ll be able to say, ‘Gee, I wonder who the next candidate is?’”

Gingrich, 68, said he is expecting more probing questions about his career.

“Everybody will dig up everything they can dig up,” he said. “That’s fine. They should.”

Poll Results

A CNN national poll released this week showed Gingrich near the top of the Republican field, along with former Massachusetts Governor Mitt Romney.

A Bloomberg News poll also released this week showed Gingrich in the top tier of candidates in Iowa. Among those likely to attend the caucuses, Gingrich received support from 17 percent, putting him in a statistical tie with businessman Herman Cain, U.S. Representative Ron Paul of Texas and Romney.

“Newt Gingrich is not out of this thing, and I think he’s performed well in many of these debates and that has been a benefit to his candidacy,” Republican Governor Terry Branstad of Iowa told reporters this week. “It’s still a very much wide- open race.”

A challenge for Gingrich is that almost half of respondents in Bloomberg’s Iowa poll said they would rule out a candidate who has been married three times and had an extramarital affair.

Gingrich is in his third marriage. And in a March 2007 interview with a Christian group, Focus on the Family, he admitted to having had an extramarital affair at roughly the same time he was criticizing former President Bill Clinton for his affair with Monica Lewinsky.

Heightened attention to Gingrich’s ties to Freddie Mac could present another obstacle.

‘Small Part’

In responding to the Bloomberg News story, the Gingrich campaign said in an e-mail statement, “Freddie Mac was a small part of the client and revenue base of the Gingrich Group and Newt’s various small businesses.”

As a candidate, Gingrich had been mostly written off after more than a dozen of his campaign staff members -- including his national co-chairman and campaign manager -- resigned in June following discord over strategy, the role of the candidate’s wife, Callista, and money problems.

Gingrich is the latest Republican to see his poll numbers rise as some in the party search for an alternative to Romney, who has led in fundraising and polls much of the year.

2008 Race

Social conservatives, who turn out in large numbers in the Iowa caucuses, four years ago balked at Romney’s past support of abortion rights and the Massachusetts health-care law he signed. Romney finished second in the 2008 caucuses to former Arkansas Governor Mike Huckabee, a showing that helped derail his presidential bid.

R.C. Hammond, a Gingrich spokesman, said that as of yesterday the campaign didn’t have any campaign offices or paid staff members in Iowa. That, though, is about to change, he said.

Gingrich’s wrap-up of a three-day swing through Iowa included an appearance yesterday at the Machine Shed Restaurant in suburban Des Moines. He typically started his remarks with a history lesson -- this one about former President John Quincy Adams.

He also shook virtually every hand in the room and signed autographs. “Obviously, I’d love for you to be with me on Jan. 3,” he told potential caucus-goers.

Tom Allen, 69, a church pastor who hasn’t decided whom he favors in the Republican race, was among those who came to see Gingrich, and his reaction was positive.

“He’s at the top of the list,” Allen said. “I respect his intelligence and his tenure in leadership.”

To contact the reporter on this story: John McCormick in Urbandale, Iowa, at jmccormick16@bloomberg.net

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

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Jaroslovsky: Kindle Fire Draws Heat From Nook

By Rich Jaroslovsky - Nov 17, 2011 4:00 AM GMT+0700
Bloomberg Opinion

There’s a lot of heel-nipping in the tablet market these days.

Amazon.com Inc. (AMZN) just released the Kindle Fire, the most serious attempt yet to take on Apple Inc. (AAPL)’s mighty iPad 2. Meanwhile, Barnes & Noble Inc. (BKS) has shipped the Nook Tablet, which in turn takes aim at Amazon.

I’ve tried both new devices and my conclusion is that there’s no clear winner. They’re both compact, capable color- screen media-consumption devices for budget-minded users who don’t need all the features and functions of a full-blown tablet.

There’s a lot to like about the Fire. I like the way Amazon has integrated its content services -- books, magazines, videos, music. I like how it uses the Cloud, in this case, Amazon’s remote servers, to store content and make it accessible when I want it, reducing the need for a lot of storage. (The Fire only holds 8 gigabytes -- same as the base model iPod touch.)

Most of all, I like the price: $199, less than half the cheapest iPad.

When I booted up the Fire, all my previous Amazon purchases appeared automatically and Amazon made it exceedingly easy for me to add more content. I bought a couple of books, some songs and a movie for a long airplane ride. All downloaded quickly and efficiently. There’s also an online store with some 8,500 Amazon- approved apps, far fewer than Apple has for the iPad, but still respectable.

Prime Content

Users of Amazon’s $79-a-year Prime service get access to a library of thousands of TV shows and older movies, somewhat akin to Netflix Inc. (NFLX)’s streaming service. The Fire comes with a one- month trial subscription.

So I like almost everything about the Kindle Fire -- except, well, the device itself.

The Fire is plain, a chunky black rectangle with a 7-inch backlit color screen. It’s shorter than the Nook Tablet, a bit thicker and heavier. In action, it feels sluggish. There can be a noticeable lag when you’re turning pages in an e-book or using an app.

I also had trouble with the accelerometer, the sensor that changes the view from portrait to landscape when you turn the Fire. I sometimes found myself looking at an upside-down app for several moments until the Fire sorted things out. And my loaner fell short of Amazon’s claimed eight hours of battery life.

Silk Isn’t Smooth

Amazon claims that its Web browser, Silk, has been optimized for speed, but in side-by-side comparisons I couldn’t discern any advantage over the iPad’s Safari browser. A few times the device told me it was connected to a Wi-Fi network while Silk claimed it wasn’t. There’s no 3G data service for the Kindle Fire, nor are there Bluetooth, a physical volume control, or a camera of any kind.

The Fire runs Google Inc. (GOOG)’s Android mobile-phone operating system. So does the $249 Nook Tablet, whose earlier version, the Nook Color, remains on the market with a newly lowered $199 price tag.

The Nook Tablet, like the Fire, operates only over Wi-Fi and has no camera. In other ways, though, it is the reverse of the newest Kindle. Where the Fire is physically plain, the Nook is sleek and more visually appealing. The $50 price differential buys you not only twice the memory and twice the storage of the Fire, but also longer battery life and a slot for an SD expansion card.

Smooth Scrolling

Barnes & Noble’s one-year head start in developing software really shows: scrolling is smoother, the screen reorients itself faster and the device just generally feels zippier.

Where B&N falls short is exactly where Amazon shines -- in the variety of content available and how well it’s integrated into the overall user experience.

Books aren’t the problem. The Nook’s selection is impressive and it has some nice flourishes. On-the-go parents, for instance, will appreciate not only the kid-friendliness of the Nook Tablet but also a feature that lets them record a child’s favorite story in their own voice.

For many other uses, though, the Nook Tablet relies on third-party apps in place of the one-stop shopping approach of Amazon and Apple. For movies and TV shows, there’s Netflix and Hulu Plus; for music, Pandora; and so on. Each requires a separate membership with its own login and, in the case of Netflix and Hulu Plus, credit card information.

Like Amazon, Barnes & Noble has its own app store that pales next to the iPad’s in terms of both numbers and quality.

Ultimately, the choice between these two devices comes down to Amazon’s lower price and ecosystem versus Barnes & Noble’s polish and network of brick-and-mortar stores to provide in- person support. In either case, paying half what an iPad costs will require you to decide which half of the iPad experience you’re willing to do without.

(Rich Jaroslovsky is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Rich Jaroslovsky in San Francisco at rjaroslovsky@bloomberg.net.

To contact the editor responsible for this story: Manuela Hoelterhoff at mhoelterhoff@bloomberg.net.

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Oil Declines; Asia Stocks Pare Losses

By Lynn Thomasson - Nov 17, 2011 1:24 PM GMT+0700
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The euro, the Australian dollar and New Zealand’s dollar declined for a fourth day versus the greenback. Photographer: Chris Ratcliffe/Bloomberg

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Nov. 17 (Bloomberg) -- Khiem Do, Hong Kong Kong-based head of multi-asset strategy at Baring Asset Management Ltd., talks about Europe's sovereign debt crisis and its implications for Asian financial markets. Do speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Oil fell from a five-month high as concern increased that Europe’s debt crisis may spread and China’s central bank said it’s not ready to loosen inflation controls. Asian stocks swung between gains and losses and U.S. equity futures climbed.

Crude slid 0.4 percent to $102.23 a barrel as of 3:05 p.m. in Tokyo, after reaching $102.89 yesterday. The MSCI Asia Pacific Index swung between a loss of 0.8 percent and a gain of 0.3 percent. A gauge of Chinese shares lost 0.4 percent. Standard & Poor’s 500 Index futures climbed 0.5 percent ahead of data that that may show increased manufacturing in the Philadelphia region.

The MSCI China (MXCN) Index fell for a third day, the longest streak of losses in almost seven weeks. While inflation may continue to moderate, “the foundation of price stability is not yet solid,” the People’s Bank of China said yesterday in its third-quarter monetary policy report. The spread of the euro zone’s debt woes to “core countries” in the 17-nation group may cause “systemic risks” in the global economy, the central bank said.

The euro gained 0.3 percent to $1.3503. France auctions as much as 8.2 billion euros of debt today after yields on the nation’s 10-year bonds rose yesterday to a euro-era record relative to benchmark German bunds. Spain is issuing as much as 4 billion euros of a new benchmark security maturing in January 2022. The nation’s 10-year yield reached the highest since August yesterday.

Futures on the S&P 500 rose to 1,236.50. The U.S. equity benchmark fell 1.7 percent yesterday, the most in a week, after Fitch Ratings said that while American lenders have “manageable direct exposures” to Greece, Ireland, Italy, Portugal and Spain, further turmoil in those markets poses a “serious risk.”

Economic reports later today may show manufacturing in the Philadelphia region expanded in November at the fastest pace in seven months, a sign U.S. factories may provide more support for the recovery. U.S. housing starts fell 7.3 percent in October from a month ago, the biggest drop since April, based on economists’ estimates from a Bloomberg survey.

To contact the reporter on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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China’s Home Price Slide Has Analysts Betting on Government Policy Change

By Bloomberg News - Nov 17, 2011 9:02 AM GMT+0700

Chinese housing data may show prices in the nation’s four biggest cities are falling as Premier Wen Jiabao pledges to maintain a one-and-a-half year battle to lower prices to a “reasonable” level.

Housing prices in Beijing, Shanghai, Guangzhou and Shenzhen -- home to 66 million people -- dropped from a month earlier by as much as 0.3 percent in October, a government report will show tomorrow, according to five analysts surveyed by Bloomberg News. Prices in the cities have stalled since July, data has showed.

Analysts at firms including Barclays Capital Research and asset managers such as CBRE Global Investors are betting price declines will force a policy reversal as the tightening weighs on economic growth. A rout in prices and drop in new developments would be felt from Australia and Latin America, where raw materials exports are fueling growth, to Europe and Japan, where machinery makers rely on Chinese sales.

“If the property sector slumps and ends with a hard landing, it will lead to a hard landing for the Chinese economy,” said Liu Li-gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd. “There’s no other industries in China that can replace real estate in the short- term as a new economic growth engine.”

Residential property accounted for 6.1 percent of the country’s gross domestic product last year, according to Citigroup Inc. China’s real estate investment rose 31.1 percent in the first 10 months, compared with 36.5 percent in the same time last year, while industrial output in October grew at the slowest pace in a year, according to the statistics bureau.

Denting Growth

Housing construction accounts for about 20 percent of China’s steel consumption, according to Mysteel Research Institute, the nation’s biggest steel research firm.

Zoomlion Heavy Industry Science & Technology Co., China’s second-biggest maker of construction equipment, said the nation’s demand for cranes and excavators will continue to slow next year because of waning economic growth. Meeting the company’s 50 billion yuan ($7.9 billion) sales target this year will be “challenging,” Chairman and Chief Executive Officer Zhan Chunxin said in a Nov. 15 interview in Hong Kong.

A 10 percent to 30 percent decline in property prices next year will shave at least 0.5 percentage point to 1 percentage point off gross domestic product, Barclays’ Hong Kong-based economist Huang Yiping said in an phone interview. The government is likely to “micro-adjust” or even reverse policy restrictions if home prices drop by 20 percent, he said.

Prices Easing

The government will not “sit on the sideline to watch a free fall of prices,” Huang wrote in a report on Nov. 8.

In April last year, China’s cabinet raised minimum mortgage rates and down-payment ratios for some home purchases, saying “more forceful” steps were needed to cool speculation. Authorities tightened further this year and imposed housing purchase restrictions in about 40 cities. Premier Wen said that the country won’t waver on its property market curbs on Nov. 7 in a visit to Russia.

The government’s October home prices data for 70 Chinese cities is due tomorrow. Prices gained in fewer than half of the cities monitored in September for a second month, according to the national statistics bureau.

China Vanke Co., the country’s biggest public-traded developer, said last month’s contracted sales fell 33 percent from a year ago. Poly Real Estate Group Co., the second largest, posted a 39 percent drop.

Low on Property

A gauge tracking China’s property shares in the benchmark Shanghai Composite Index slumped 13 percent this year, while half of the 10 worst performers in the past three months on the MSCI China Index were Chinese developers.

“We are very low on property stocks and the reason is that we expect a decline in the residential area of between 15 to 30 percent in the next two years,” Mark Mobius, who oversees $40 billion as Hong Kong-based executive chairman of Franklin Templeton Investments’ Emerging Markets Group, said in an interview.

Local governments are scrapping land sales as prices reverse. The southern Chinese city of Guangzhou canceled 12 of the 18 plots of land on offer on Nov. 2, the second time in two weeks, while the central city of Wuhan postponed the auction of nine plots of land twice last month.

The Housing Authority of Shanghai, the country’s financial center, ordered developers on Oct. 26 to re-register their projects with the government if price cuts exceed 20 percent, according to the official Xinhua News agency. The move came after several protests occurred in the city after developers including China Overseas Property Group Co. cut prices.

Foreign Investors

Billionaire investor George Soros is planning a property fund to invest in real estate projects in China, 21st Century Business Herald reported Nov. 15. CBRE Global Investors, manager of $94.8 billion of real estate assets, is mulling its first investment in China’s housing market in four years in anticipation the government will start easing its property curbs, Greater China Country Manager Richard van den Berg said in an interview this week.

“We might see that the government by middle or end of next year will start easing credit,” he said in an interview in Hong Kong on Nov. 14. “For us, that means the fundamentals which are strong will then give a boost again to property pricing.”

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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Limited Budget Won’t Cut Pacific Plans: Obama

By Julianna Goldman and Margaret Talev - Nov 17, 2011 9:22 AM GMT+0700
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U.S. President Barack Obama, left, speaks as Julia Gillard, Australia's prime minister, looks on during a news conference at Parliament House in Canberra. Photographer: Mark Graham/Bloomberg

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Nov. 17 (Bloomberg) -- Adam Lockyer, a lecturer in U.S. politics & foreign policy at the University of Sydney, talks about President Barack Obama's visit to Australia, and a defense agreement that will deploy American Marines on Australian bases next year. Lockyer speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

President Barack Obama said cutting the U.S. budget won’t reduce the nation’s military and economic commitments to the Asia-Pacific region in remarks that reflect a U.S. effort to contain China’s growing regional influence.

“Our enduring interests in the region demand our enduring presence in this region,” Obama said in remarks to Australia’s Parliament today. “The United States is a Pacific power, and we are here to stay.”

The 25-minute address in Australia’s capital of Canberra is intended to be the anchor of Obama’s nine-day trip to the region as he outlines what he called a “deliberate and strategic decision” to put the U.S. in position for a long-term role in an area that accounts for half of the global economy. Obama is seeking to address concerns that the U.S. won’t be able to act as a counter-weight to China’s rising military and economic influence because of domestic budget constraints.

“Reductions in U.S. defense spending will not -- I repeat, will not -- come at the expense of the Asia Pacific,” Obama said. “As we plan and budget for the future, we will allocate the resources necessary to maintain our strong military presence in this region. We will preserve our unique ability to project power and deter threats to peace.”

Budget Cuts

The president is in Australia as a 12-member special committee in the U.S. Congress is closing in on a Nov. 23 deadline to come up with a plan to trim the U.S. budget deficit by at least $1.5 trillion over the next decade. Failure to enact a debt-cutting plan this year would force $1.2 trillion in automatic spending cuts beginning in 2013, including $500 billion from the defense budget over 10 years. That would be on top of about $450 billion in Pentagon cuts already planned in the next decade.

Obama and Australian Prime Minister Julia Gillard yesterday announced a defense accord to deploy U.S. Marines in northern Australia beginning next year. The troops will be deployed on a six-month rotation, starting with 250 personnel and eventually expanding to as many as 2,500. The two nations also agreed to more cooperation between the Royal Australian Air Force and the U.S. Air Force, resulting in more U.S. aircraft passing through northern Australia.

“Doing this with Gillard is a way to tell everyone in Asia ‘look, the U.S. is in town and the U.S. will back you up if you need to be backed up,’” said Robert Dujarric, director of the Institute of Contemporary Asian Studies at Temple University’s Tokyo campus. “This is part of the entire process of strengthening relationships against China.”

Nuclear Threat

Obama pledged that U.S. commitments to the security of South Korea will never waiver and that it would be vigilant against aggression from the North.

“Indeed, we also reiterate our resolve to act firmly against any proliferation activities by North Korea,” Obama said. “The transfer of nuclear materials or material by North Korea to states or non-state entities would be considered a grave threat to the United States and our allies. And we would hold North Korea fully accountable for the consequences of such action.”

Obama said U.S. engagement in the region is about economics as well as defense.

Obama’s Priority

“Asia is critical to achieving my highest priority: creating jobs and opportunity for the American people,” he said. “With most of the world’s nuclear powers and nearly half of humanity, this region will largely define whether the century ahead will be marked by conflict or cooperation, needless suffering or human progress.”

The U.S. this year has exported more to the Pacific Rim than to Europe and exports to the region last year supported 850,000 U.S. jobs, according to figures from the Commerce and State Departments. Obama has set a goal of doubling U.S. exports in five years to $3.14 trillion a year by the end of 2014, from $1.57 trillion in 2009, and Asia is central to that plan.

Asia’s growth has boosted earnings for its companies and led to stock market gains that have beaten U.S. equities. The MSCI Asia Pacific Index of stocks has outperformed the Dow Jones Industrial Average seven of the past nine years through 2010.

Some of the best-known U.S. brands count on Asian customers to fill their order books. Dallas-based Texas Instruments Inc. (TXN) gets 74 percent of its $14 billion in annual revenue from Asia. For Santa Clara, California-based Intel Corp. (INTC), it’s 67 percent of $58 billion, and Phoenix-based Freeport-McMoran Copper & Gold Inc. (FCX) reaps 42 percent of its $22 billion annual revenue from the region.

Trans-Pacific Trade

At the Asia-Pacific Economic Cooperation summit he hosted in Hawaii during the weekend, Obama announced the U.S., Australia and seven other nations will join in forming a Trans- Pacific Partnership trade accord within a year in what would be the biggest U.S. pact since the 1994 North American Free Trade Agreement.

After standing yesterday alongside Gillard and saying that U.S. moves on defense and trade aren’t meant to isolate China and he will continue to seek a cooperative relationship with the world’s second-biggest economy, Obama said the U.S. won’t back down from criticizing the country when necessary.

“All of our nations have a profound interest in the rise of a peaceful and prosperous China -- and that is why the United States welcomes it,” Obama said. “We will do this, even as we continue to speak candidly with Beijing about the importance of upholding international norms and respecting the universal human rights of the Chinese people.”

China Criticism

At various points over the past week in Honolulu and in Canberra, Obama has stepped up criticism of China on security, trade and economic issues, saying the country needs to adhere to international standards if it wants to compete in the global marketplace. Today, without mentioning China, Obama indirectly continued that criticism, noting currency and intellectual property issues, repeatedly saying 21st century economies must adhere to common standards.

“We seek economies that are open and transparent,” Obama said. “We seek trade that is free and fair. And we seek an open international economic system, where rules are clear and every nation plays by them.”

The defense initiative will anchor an American presence in the western Pacific that can help safeguard sea lanes that carry more than $5 trillion of commerce, about $1.2 trillion of it U.S. trade, and boost the U.S. military presence close to the South China Sea.

The area also is a potential new source of energy as demand in Asia rises with economic growth. Chinese studies cited by the U.S. Energy Information Agency in 2008 said the South China Sea could hold 213 billion barrels of oil. While the sea borders several countries, China claims “indisputable sovereignty” over most of it.

South China Sea

The South China Sea will be part of a discussion on maritime security at the East Asia Summit in Bali, Indonesia, Obama’s next stop on his trip.

Obama noted that he’ll be the first U.S. president to attend the summit and said together nations can “address shared challenges, such as proliferation and maritime security, including cooperation in the South China Sea.”

The Philippines is to propose an initiative at the summit for resolving South China Sea disputes. Secretary of State Hillary Clinton said yesterday in Manila that the U.S. will upgrade a defense treaty to give the Philippines more naval support.

Myanmar Expectations

Obama will meet with the 10-member Association of Southeast Asian Nations in Bali tomorrow, where leaders will decide whether to endorse Myanmar’s bid to chair the regional meetings in 2014.

Obama was more cautious in his criticism of Myanmar, saying that human rights violations persist despite the release of political prisoners, including Nobel laureate Aung San Suu Kyi.

“We will continue to speak clearly about the steps that must be taken for the government of Burma to have a better relationship with the United States,” Obama said.

Later today, Obama will travel north to Darwin, which was attacked by the Japanese during World War II and symbolizes the U.S.-Australian alliance. He’ll address Australian troops and U.S. Marines at the Royal Australian Air Force Base.

To contact the reporters on this story: Julianna Goldman in Canberra at jgoldman6@bloomberg.net; Margaret Talev in Canberra at mtalev@bloomberg.net

To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net; Mark Silva at msilva34@bloomberg.net

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Google Opens Music Store in Android Market

By Andy Fixmer and Douglas MacMillan - Nov 17, 2011 5:58 AM GMT+0700

Google Inc. (GOOG), the world’s largest Internet-search company, introduced a music service that lets people buy songs through the Android Market, stepping up competition with Apple Inc. (AAPL)’s iTunes store.

Users will be able to store and stream as many as 20,000 songs on Google Music, the company said today at an event in Los Angeles. Google has forged partnerships with 1,000 record labels, including Vivendi SA (VIV)’s Universal Music Group and EMI Group Ltd., letting it offer a total of 13 million songs.

Google has expanded into music, television and movies to help promote its Android smartphone operating system, which works with the Android Market. The company, based in Mountain View, California, also sees music as a way to deepen its social- networking features.

“Music is more important to Google than ever before,” Jamie Rosenberg, director of digital content for Android, said at the event. The service will offer reviews, band information and exclusive content from artists such as Coldplay. Users will get 90-second previews of songs before they buy.

For record labels, the effort helps ensure that consumers purchase their music legally. It also decreases music companies’ reliance on Apple’s iTunes, the leading seller of digital songs.

“Any new legitimate place to consume music legally is the best tool we have to combat piracy,” Rob Wells, who oversees digital operations at Universal Music, said at the event.

Google shares fell 0.8 percent to $611.47 at the close today in New York. The stock has climbed 2.9 percent this year.

To contact the reporters on this story: Andy Fixmer in Los Angeles at afixmer@bloomberg.net; Douglas Macmillan in San Francisco at dmacmillan3@bloomberg.net

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

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AOL’s Brad Garlinghouse Said to Be Stepping Down From Struggling Company

By Douglas MacMillan - Nov 17, 2011 8:36 AM GMT+0700

AOL Inc. (AOL)’s Brad Garlinghouse, an executive brought on in 2009 to help revive growth at the Internet company, is stepping down, according to a person with direct knowledge of the matter.

Garlinghouse, who has run the applications and commerce group and AOL’s Silicon Valley operations, previously worked at Yahoo! Inc. and Silver Lake Partners. Sarah Lacy, a senior editor at TechCrunch, the technology blog that AOL bought last year, also intends to depart, according to another person familiar with the situation, who asked not to be identified because the plans haven’t been made public.

The turnover deals a blow to AOL’s comeback effort, led by Chief Executive Officer Tim Armstrong. Already the company has struggled to hang on to users and advertisers, which are increasingly flocking to social-networking sites such as Facebook Inc. AOL shares have declined 37 percent this year.

“Brad’s a really strong manager and when you lose strong people, it’s never a good thing for a company,” said Geoff Ralston, a partner at educational startup incubator Imagine K12, who worked with Garlinghouse at Yahoo.

Garlinghouse joined AOL before its spinoff from Time Warner Inc., part of a team tasked with transforming the dial-up Internet service into a modern Web portal.

‘Manifesto’ Writer

Garlinghouse gained renown at Yahoo in 2006 when he sent a scathing memo to the company’s top brass. In what came to be known as the “Peanut Butter Manifesto,” Garlinghouse said Yahoo had spread itself too thinly across many businesses. He was hired at AOL to bring that same sense of focus to the New York-based company.

Lacy, an author and former columnist for Businessweek and co-host of Yahoo’s TechTicker video series, joined TechCrunch in 2009, before the blog’s acquisition by AOL. Her departure follows that of Michael Arrington, the TechCrunch founder who left in September to start a venture fund.

Kiersten Hollars, a spokeswoman for AOL in Palo Alto, California, didn’t respond to requests for comment.

Garlinghouse’s departure was previously reported by the GigaOm technology site.

To contact the reporter on this story: Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

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

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Seagate Raises Prices, Braced for Thai Floods

By Peter Burrows - Nov 17, 2011 8:46 AM GMT+0700

Compared with the scores of companies in the disk drive industry with operations in Thailand, Seagate Technology Plc (STX) is lucky.

Only 180 of its 15,400 workers are among the 13 million people whose homes have been swamped. The floodwaters that have engulfed much of the industrial heartland north of Bangkok for the past six weeks have spared both of Seagate’s sprawling Thai factories, Bloomberg Businessweek reports in its Nov. 21 edition. In fact, the weather at Seagate’s plant in Teparuk, which is outside the flood zone, has been uncharacteristically dry, says Thailand country manager Jeffrey D. Nygaard.

Still, Seagate Chief Executive Officer Stephen J. Luczo is forecasting difficult times for the drive industry. Each of the hundreds of thousands of drives Seagate’s Thai factories ship every day contain parts from 130 or so suppliers, many still under three feet of water. The projections by some Wall Street analysts that production will be back to pre-flood levels by summer are nonsense, Luczo says.

“This is going to take a lot longer than people are assuming, until the end of 2012 at least,” he says. “And by then, demand will have gone up.”

Luczo, 54, is spending less time on his hobbies -- he’s an avid snowboarder who owns a music label, a movie studio and an Indy race-car team -- to focus on the recovery. If his forecast is right, anyone who needs a hard drive -- from laptop and DVR makers to the operators of data centers that host top websites and social networks -- will feel the pinch.

Locking Up Capacity

Average drive prices have already jumped about 20 percent because of the flooding, which is affecting infrastructure that churns out roughly 40 percent of the world’s drives.

Seagate’s two biggest competitors, Western Digital Corp. (WDC) and Toshiba Corp. (6502), both have major factories in the flood zone, and industry production this quarter is expected to be 50 million drives short of its 180 million target. Only now are retailers and local distributors feeling the effects.

“It’s going to be very interesting to see who gets drives and who doesn’t,” says Luczo. He says he’s talking with customers suddenly eager to lock up some of Seagate’s capacity, even with the higher prices. Some have offered $250 million upfront, he says.

200 Parts

All the cash in the world won’t help if Luczo and other drive manufacturers can’t get the parts they need. In spite of their cheapness -- a megabyte of storage has dropped from $50 in 1981 to a tenth of a cent today -- disk drives are incredibly complex.

Inside each one, an almost weightless suspension arm hovers above a magnetic disk spinning as fast as 7,200 revolutions per minute. The arm holds a recording head the size of a pepper flake, which sits above the disk at a height measured in nanometers -- less than the ridges of a fingerprint, as marketers like to say.

Each disk drive contains more than 200 parts, most of them designed for specific models. Many suppliers are family-owned businesses that manufacture one-of-a-kind industrial molds or specialty chemicals.

Few of the companies in this finely tuned supply chain, lured to Thailand by low wages and government incentives, ever thought they would need to worry about massive floods. When suspension arm maker Hutchinson Technology Inc. (HTCH) opened a plant in the Rajana Industrial Park seven miles from the Chao Phraya River a year ago, it had no problem getting flood insurance, says CEO Wayne Fortun.

Diving for Equipment

Hours after the levee broke on Oct. 10, his plant was filled with six feet of water. Employees moved some inventory and equipment to the second floor, but some $50 million worth of highly specialized gear remains bolted to the ground. Fortun still has no idea what’s salvageable.

“The water was down to four feet at last report,” he says. “We’re hopeful it will be dry by the first week of December.”

Plant managers at Nidec Corp. (6594), which makes motors for disk drives and also has a factory at Rajana, decided not to wait for the water to subside at its seven flooded factories. According to company spokesman Masashiro Nagayasu, they cut a hole in the roof of the Rajana factory, sent divers into the toxin-laden waters to unbolt some heavy equipment, and lifted it onto waiting boats. Some of the equipment is now being used in Nidec factories in China and the Philippines.

‘Calloused’ by Competition

“This supply chain has been calloused and toughened by years of competition,” says John Rydning, an analyst at market research firm IDC, who said on Nov. 10 that he thinks drive shortages may ease by mid-2012.

Luczo says that’s an overly optimistic view. No doubt he has an incentive to encourage buyers to worry about the future and place orders now, at elevated prices.

Still, even after the waters subside, it could take a year for suppliers to replace their gear, and many may have to relocate. Luczo is thinking about requiring Seagate’s suppliers to be outside the flood plain. That’s if they can come up with the capital: Seagate is fronting loans to some, and others may try to tap the $4.2 billion reconstruction fund announced by the Thai government.

With so many weak links, some analysts say the entire industry could be stymied.

“It doesn’t matter how many steering wheels you have if you can’t get enough transmissions,” says Richard Kugele, an analyst at Needham & Co.

Underappreciated?

Luczo has argued for years that drive makers are underappreciated. Since the 1980s, PC manufacturers and other customers have squeezed Seagate, Western Digital and other big disk-drive makers for the absolute lowest prices. To increase Seagate’s bargaining power, Luczo shelled out $1.3 billion to buy Samsung’s hard-drive operation in April.

Now, the flood is giving Luczo more leverage on prices than any merger could, and Seagate’s stock has gained 67 percent since Sept. 30, to more than $17. Luczo says he could raise prices 40 percent but instead is offering 20 percent hikes to those who commit to one- to three-year contracts.

“People are going to appreciate the complexity of this business,” he says.

To contact the reporter on this story: Peter Burrows in San Francisco at pburrows@bloomberg.net

To contact the editor responsible for this story: Barrett Sheridan at bsheridan3@bloomberg.net

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