Romney’s 13.9% Tax Rate Shows Power of Investment Tax Preference

By Richard Rubin and Jesse Drucker - Jan 25, 2012 4:30 AM GMT+0700

Republican presidential candidate Mitt Romney’s 13.9 percent tax rate in 2010 shows how wealthy investors can use the preferential treatment of income classified as capital gains and dividends to minimize payments to the federal government.

The returns also provide a glimpse into the financial life of Romney, whose campaign estimates the fortune he built in the private-equity industry at between $190 million and $250 million. Romney and his wife, Ann, receive money from blind trusts that invest in hedge funds and receive profits that flow from Romney’s investments at Bain Capital LLC.

“The most affluent Americans in recent years have pulled away from the rest of us, and the reason is at least in part that they are able to compound their wealth at very, very low tax rates,” said Edward Kleinbard, a law professor at the University of Southern California. “Romney’s tax return, with its heavy reliance on income taxed at low capital gains rates, demonstrates that.”

The Romneys earned $21.6 million in 2010 and paid $3 million in income taxes, about the same amount that they gave to charity. The former Massachusetts governor earned more than half his income from capital gains and dividends, which are taxed at a top rate of 15 percent, rather than the 35 percent top rate for ordinary income. His campaign released the returns today.

“Oh, I’m sure people will talk about it,” Romney, 64, said during a debate in Tampa, Florida, last night. “You’ll see my income, how much taxes I’ve paid, how much I’ve paid to charity. You’ll see how complicated taxes can be.”

Near the Top

Romney’s income puts him near the top of U.S. taxpayers. In 2008, according to the Internal Revenue Service, the median adjusted gross income was $33,048, which Romney earned in less than a day. Reaching the top 1 percent of taxpayers required $380,354 in adjusted gross income, about Romney’s earnings in a week.

The Romneys received a $1.6 million refund after filing their 2010 return because they overpaid taxes during the year. They pay estimated taxes and at the end of the year, the tax return reconciles their payments. They had the refund applied to their 2011 taxes.

The campaign also released an estimated tax return for 2011 showing that Romney had an effective tax rate of 15.4 percent on $20.9 million in adjusted gross income. That return hasn’t been filed with the IRS.

Rekindling Debate

The discussion of Romney’s returns has reignited the political debate over the tax treatment of investments and particularly carried interest, or the profits stake that private-equity managers receive from successful investments even if they don’t invest their own money. It is taxed at capital gains rates, and President Barack Obama and many Democrats want to reverse that policy, calling it unfair.

Romney’s 2010 income included $7.4 million in carried interest, said Ben Ginsberg, national counsel for the campaign. Romney, who touts his track record in investing in companies such as Staples Inc. and The Sports Authority Inc., received $5.5 million in carried interest in 2011.

During 2010 and 2011, Romney paid $7.5 million less in taxes than he would have if various Obama tax plans were implemented, including letting the tax cuts enacted in 2001 and 2003 expire and taxing carried interest as ordinary income, said Seth Hanlon, director of fiscal reform for the Center for American Progress Action Fund, a Washington research group often aligned with Democrats.

Ginsberg said Romney has paid 100 percent of what he owes the government.

Just Capital Gains

Romney’s carried interest income stems from his tenure at Bain, which ended in 1999.

“His position on carried interest is that it’s capital gains income and capital gains should be treated as capital gains,” Romney adviser Eric Fehrnstrom told reporters in Tampa today.

Romney’s return indicates that he carried forward $4.8 million in capital losses from previous years, an indication that he didn’t report positive capital gains on his 2009 return. The campaign didn’t release tax returns from before 2010.

“It’s an extensive disclosure and we feel it satisfies” the requests for Romney to release his returns, Ginsberg told reporters today.

Resisting Release

Romney, who lost the South Carolina primary on Jan. 21 and is competing in the Jan. 31 contest in Florida, would fare better financially under rival Newt Gingrich’s tax plan than under his own. Gingrich would end all taxation of capital gains; Romney wouldn’t let high-income taxpayers receive that break.

In 2010, the Romneys took more than $4.5 million in itemized deductions, including almost $3 million in charitable contributions. The couple donated $1.5 million in 2010 to the Church of Jesus Christ of Latter-Day Saints, which also received donations from the family’s foundation. They contributed $2.6 million to the Mormon church in 2011, according to the estimated return.

Romney didn’t take travel deductions related to his income from public speaking, said Ken Brier, a tax attorney in Needham, Massachusetts, who described Romney’s returns as “pretty squeaky clean.”

“He’s gone pretty light on his deductions,” Brier said. “I guess he doesn’t want anyone to question it.”

Gifts to Children

The returns also demonstrate how, using sophisticated estate planning, Romney has been able to give millions of dollars to his children free of estate and gift taxes, because of a legal structure known as a “grantor trust.”

Romney established three trusts to which he contributed assets. The campaign said his children were listed as beneficiaries, though didn’t specify of which trusts. The income generated by the trusts triggers a tax obligation for Romney. By picking up that tax bill, Romney found a legal way to transfer money to his children free of gift taxes, said Mark G. Bosswick, managing partner at Berdon LLP, an accounting firm in New York.

In addition, any appreciation of the stock after it was donated to the trusts grows free of gift and estate tax, assuming a gift tax was calculated at the time of the donation. The estate tax won’t be applied to the appreciation of assets that are no longer in his estate.

“It’s a great technique because not only are you doing the initial gift, but by him paying the taxes on the trusts’ income each year he’s making additional gifts to the trust beneficiaries free of gift tax,” Bosswick said. “Plus, any appreciation of the investments will not be subjected to estate and gift tax.”

AMT Activated

It’s unclear if any of the trusts were “revocable,” he said, which would mean the money would go back to Romney and negate the tax benefit.

The Romneys paid $232,989 because of the alternative minimum tax, which is designed to prevent people from avoiding taxes legally. That parallel tax system doesn’t eliminate the preference for investment income.

Anthony Nitti, a tax partner at WithumSmith & Brown in Aspen, Colorado, who works with high-income clients, said the Romneys’ trusts have investments in such places as the Cayman Islands. Even if they didn’t make those investment decisions, he said, “there’s some sophisticated tax planning going on.”

The 2010 return shows that the Romneys’ blind trusts have invested in an array of funds in tax-favored jurisdictions, including the Caymans, Ireland and Luxembourg. Such offshore funds attract investments from overseas investors who don’t want to file disclosures with the IRS, said Bradley Smallberg, a CPA at Smallberg Sorkin & Co. LLP in Melville, New York.

Fully Taxable

Brad Malt, a partner at Ropes & Gray LLP in Boston who operates the family’s blind trusts, said those funds and the Romneys’ profits from them are fully taxable and fully reported.

“When we make an investment in a Cayman fund, we’re presented with investment documents,” he said. “The sponsor has already chosen where the fund is to be organized.”

The Romneys had a bank account in Switzerland, the return shows. The account for one of the trusts at UBS AG held about $3 million and it has since been closed, Malt said.

Malt, who began working as the Romneys’ trustee in 2003, said during that time he was unaware of any IRS audit of the couple’s tax returns.

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Jesse Drucker in New York at jdrucker4@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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IMF Cuts Global Growth Forecast; Sees Recession

By Sandrine Rastello - Jan 25, 2012 3:22 AM GMT+0700

The International Monetary Fund cut its forecast for global growth and warned that the European debt crisis threatens to derail the world economy.

“The epicenter of the danger is Europe but the rest of the world is increasingly affected,” Olivier Blanchard, the fund’s chief economist, said today at a news conference in Washington. “There’s an even greater danger, namely that the European crisis intensifies. In this case the world could be plunged into another recession.”

The fund, in an update of its World Economic Outlook report, lowered its estimate for global growth this year to 3.3 percent from a September forecast of 4 percent. The expansion next year will be 3.9 percent, down from 4.5 percent. The euro area may enter a “mild recession” in 2012 as it shrinks 0.5 percent. The U.S. outlook was unchanged at 1.8 percent growth.

The forecasts hinge on increased efforts in the 17-country euro area to fight the financial turmoil. The IMF called on European policy makers to increase the size of the region’s rescue fund and for the European Central Bank to continue its support of the region to limit contagion to other countries.

Stocks fell as talks over Greek debt restructuring reached a stalemate. The S&P 500 dropped 0.2 percent to 1,313.20 at 2:08 p.m. New York time, after declining as much as 0.8 percent earlier.

‘Noticeably Deteriorated’

“The near-term outlook has noticeably deteriorated,” the IMF said in the report.

Blanchard said the worst could be avoided “with the right set of measures.”

Confidence in Europe’s strategy for coping with the crisis was dealt a setback late yesterday in Brussels when European finance ministers pushed bondholders to provide greater debt relief for Greece.

Euro governments sought to fill a deeper-than-expected hole in Greece’s finances by saddling investors with a lower interest rate on exchanged bonds, setting up a confrontation in the runup to a Jan. 30 European Union summit. At the same time, efforts to shore up Greece were flanked by headway on a German-inspired deficit-reduction treaty and indications that a cap on rescue lending might be boosted.

To avoid a 1930s-style worldwide depression, the IMF Managing Director Christine Lagarde yesterday called on other countries to play their part. The IMF, which co-finances loans to Greece, Ireland and Portugal, identified a potential global financing need of $1 trillion in coming years and is seeking $500 billion in new lending resources from its member countries to address potential loan demand.

Developing Economies

The IMF predicts growth of 5.4 percent in developing economies this year, down from 6.1 percent forecast in September, reflecting “the deterioration in the external environment, as well as the slowdown in domestic demand in key emerging economies,” according to the report.

China’s estimated expansion was cut to 8.2 percent from 9 percent. India is expected to grow 7 percent in 2012, 0.5 percentage point less than in September forecasts. A forecast for Brazil was lowered by 0.6 percentage point to 3 percent.

Richer nations will expand 1.2 percent this year instead of 1.9 percent, the IMF said. Japan is seen growing 1.7 percent, 0.6 percentage point slower than four months ago.

Survey of Economists

The estimated expansion compares with world growth of 3.8 percent in 2011 and 5.2 percent in 2010. Economists surveyed by Bloomberg News from Jan. 6 to Jan. 11 forecast global expansion of 3.4 percent this year and 4 percent in 2013, according to the median of 72 forecasts.

Italy and Spain’s outlooks had the steepest cuts among large developed economies. Italian gross domestic product will contract 2.2 percent this year compared with a prior forecast for 0.3 percent growth, while Spanish GDP will shrink 1.7 percent compared with a previously estimated 1.1 percent expansion, the fund projected.

Greek (GDBR10) and Italian bonds had their worst years on record in 2011 as Europe’s financial woes intensified, also halting a two- year rally in equities. The Stoxx Europe 600 Index tumbled 11 percent last year and the MSCI All-Country World Index slid 9.4 percent.

More recently, investor demand for short-term sovereign debt such as Spanish and Italian two-year notes has rallied across the euro area since the ECB issued 489 billion euros ($637 billion) in unlimited three-year loans to euro-region banks last month.

Bond Purchases

The Frankfurt-based ECB also has bought 217 billion euros of bonds from distressed member countries since May 2010. It kept its benchmark interest rate at 1 percent this month following two straight reductions.

“The ECB should continue to provide liquidity and stay fully engaged in securities purchases to help maintain confidence in the euro,” the IMF said in the report.

It also recommended “additional and timely monetary easing” in Europe while more broadly calling for supportive monetary policy in advanced economies.

The IMF cautioned countries that have fiscal room to maneuver, including in the euro area, against “overdoing fiscal adjustment in the short term” because it may damp growth further and damage market confidence.

‘Political Paralysis’

That’s also a risk in the U.S., where the IMF sees “political paralysis” potentially leading to an abrupt unwinding of stimulus spending. Still, the U.S. and Japan need to spell out their plans to reduce debt in the medium term because “neither country can take for granted its status as a safe haven.”

In advanced economies, “continued adjustment is necessary for medium-term debt sustainability, but should ideally occur at a pace that supports adequate growth in output and employment,” the IMF said in its separate Fiscal Monitor report released today.

The IMF based its forecasts on oil at $99 a barrel, close to current trading prices, and sees non-oil commodities prices falling by 14 percent this year. Emerging economies need to focus on responding to weakening domestic demand and slowing external demand, the IMF said.

Developing economies where inflation is under control and that have surpluses, such as China, should boost spending for the poorest, it said. Countries with less fiscal room including “many” in Latin America should stop raising interest rates.

To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

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

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Amazon Fire Takes Android for Free While Leaving Google Apps Behind: Tech

By Peter Burrows - Jan 25, 2012 3:04 AM GMT+0700

Since Google Inc. (GOOG) introduced its Android operating system in 2007, the company’s strategy has been simple: Give it to developers for free and make money when consumers click ads on the Web or through apps. That model is hitting a snag.

Amazon.com Inc. (AMZN) and Chinese Internet giants Baidu Inc. and Tencent Holdings Ltd. are using Android as a building block for their devices, skipping preloaded applications such as Gmail, Google Maps and YouTube that generate ad revenue for Google, as well as its app store. Amazon’s Kindle Fire tablet, which is gaining ground on Apple Inc. (AAPL)’s iPad, comes with none of those apps.

“The Fire may be the best Android tablet out there, even though it’s the least Android-y of all of them,” said Noah Elkin, an analyst at New York-based research firm EMarketer Inc. “The Google experience is very much in the background.”

Mobile advertising is one of Google’s fastest-growing markets, with industrywide revenue projected to rise to $20.6 billion in 2015 from $3.3 billion in 2010, according to Gartner Inc. With online traffic increasingly coming through apps instead of mobile browsers, Google’s push to wring mobile-ad revenue from Android could be impeded if more device makers emulate and succeed with Amazon’s scaled-back approach.

“Part of the reason Android is so important as an operating system is that it lets Google put its mobile services front and center,” said Ken Sena, an analyst at Evercore Partners Inc.

Mobile Apps

According to Flurry Inc., a software company that tracks usage of apps, the average smartphone owner uses a mobile app -- for example, seeking a restaurant by clicking on the OpenTable Inc. icon on a phone, instead of using a browser to access the website -- 94 minutes a day, compared to 72 minutes accessing websites via a browser. A year ago, time was almost equally split.

“This may be small potatoes now, but increasingly it’s going to be way search gets conducted,” Sena said.

Many buyers may not know that the Kindle Fire, estimated to be the best-selling Android tablet ever, thanks to strong holiday sales, is even an Android tablet.

Amazon uses its own app store instead of Google’s Android Marketplace, and, like Apple, tightly controls which programs can appear there. The Fire also features Amazon’s one-click e- commerce shopping experience, already familiar to millions of Amazon customers.

Apple Model

The device’s success -- with 5.5 million sold during the holiday shopping season, according to Anthony DiClemente, an analyst at Barclays Capital -- shows that many consumers are looking for such seamless interplay between software and hardware.

“Apple has taught everyone that people value an integrated ecosystem that just works,” said Michael Gartenberg, an analyst at Gartner. “There’s a real possibility that Android could succeed, but not deliver what Google hopes it will.”

Google executives say it’s more important for the company to expand the Android ecosystem currently than it is to profit from it. The more devices run on Android, the more people will do mobile search and the more likely app makers are to develop programs for the platform.

“We’re in the early stages of monetization” of Android, Google Chief Executive Officer Larry Page said on a Jan. 19 earnings conference call with analysts. “We see a lot of potential for us to make money on Android.”

Search Advertising

Google’s main source of revenue is advertising on its search engine. Like Apple and its App Store, Mountain View, California-based Google takes a 30 percent cut on sales of apps from its Android Marketplace.

Of an estimated $44.6 billion in sales this year, $5.8 billion will come from mobile, according to Cowen & Co. Less than half of Google’s mobile revenue comes from through mobile apps, according to Sena. Google’s mobile business could expand to more than $10 billion in four years, said Mark Mahaney, an analyst at Citigroup Inc. That would outpace the 66 percent total sales growth expected for Google from 2011 to 2015, the average estimate of analysts surveyed by Bloomberg.

Yet even if 10 percent of all mobile app-related sales on Android devices came through Amazon’s Kindle Fire -- which cuts Google out of the equation -- Google would lose out on less than $300 million in revenue.

Baidu, Tencent, Dell

Still, Amazon isn’t the only company whose plan is to push Android into the background. In smartphones, Baidu and Tencent, leaders in China’s Internet search and social-networking markets, have created their own software suites to run on top of Google’s operating system. Last month, Dell Inc. (DELL) unveiled a smartphone, the Streak Pro, that will be sold in China. It is the first device designed to run Baidu Yi, which includes Baidu’s own programs for search, books, maps, music and local recommendations.

Neither Baidu nor Tencent can point to Amazon-like successes with these efforts so far. Dell also isn’t a powerful player in tablets, said Gene Munster, an analyst at Piper Jaffray Cos.

Facebook Inc., on the other hand, is an important wildcard. Tim Bajarin, president of San Jose, California-based consultancy Creative Strategies Inc., expects Facebook to introduce an Android-based phone that wouldn’t include Google’s apps. Instead, the user interface would be designed around its social network and software from other app makers.

Google’s Terms

So far, Google has pursued an all-or-nothing approach to licensing its suite of applications. In contract talks, licensees may choose to use all or most of Google’s mobile apps, or none of them. This means that to get popular apps such as Gmail and Google Maps, the licensee may also need to agree to use Google Talk, a Skype-like app for making phone calls, or Contacts, a tool for managing contact details.

Google insists on these terms to ensure that consumers aren’t prevented from using apps that have become de facto standards, and because Google’s apps are designed to work well together, Android chief Andy Rubin has said. It’s also about making money.

“There’s something that’s funding all this free software, and it’s Google’s business model” to generate revenue from search and its own apps, Rubin said at a press event on Dec. 21.

Some rivals say Google is unfairly using its influence to push its own mobile offerings. Skyhook Wireless Inc. is suing Google for allegedly preventing Motorola Mobility Holdings Inc. and another phonemaker from using Skyhook’s location-tracking software, by insisting they make Google’s alternative the default on their Android products.

‘Play Nice’

Many device makers have little choice other than to take a full suite of Google apps. Without Android, companies such as Samsung Electronics Co. (005930) and HTC Corp. would have no platform for competing with Apple. With no must-have apps or services of their own, these device makers would be at a disadvantage without Google apps.

“I don’t know if any other manufacturers have the clout to do what Amazon is doing,” said Bajarin. “They need to play nice with Google.”

Amazon doesn’t. Rather than make money on the hardware --it sells the Kindle Fire at a loss for $199 -- its strategy is to make devices that let customers stream or buy more movies, music and books from its online store. To do that, Amazon created its own mobile-app store and a browser called Silk. Amazon will make $136 on each Kindle Fire, thanks to movie and book downloads onto the device, according to Ross Sandler, an analyst at RBC Capital Markets.

Google Phone?

Android devices that ship without Google’s services aren’t a total loss for the company, said Maha Ibrahim, a partner at Menlo Park, California-based investment firm Canaan Partners.

“Google has done an incredible job getting Android out there,” she said. “They’d rather have Android be part of these devices than not.” Fire owners can still do Internet searches via Google or use Youtube.com or the Google Maps website.

Google may opt to create its own integrated phone that highlights its services, as the Fire does for Amazon. The company agreed in August to acquire Motorola Mobility. Gartenberg, the Gartner analyst, expects Google to introduce a tablet that showcases the company’s latest technology, just as it has done with Nexus-branded smartphones in recent years.

“One way or another, they need to have a tablet that’s a strong No. 3 to iPad and the Fire,” said Evercore’s Sena.

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

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

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S&P 500 Ends Five-Day Rally

By Rita Nazareth - Jan 25, 2012 5:08 AM GMT+0700

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Jan. 24 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks retreated, ending a five-day advance in the Standard & Poor’s 500 Index, amid a stalemate between European finance ministers and Greek bondholders over how to resolve the nation’s debt crisis. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)

U.S. stocks retreated, ending a five-day advance in the Standard & Poor’s 500 Index, amid a stalemate between European finance ministers and Greek bondholders over how to resolve the nation’s debt crisis.

Travelers Cos., the only insurer in the Dow Jones Industrial Average, sank 3.8 percent as earnings fell. McDonald’s Corp. (MCD) slid 2.2 percent after saying that foreign- currency fluctuations will cut 2012 profit. Verizon Communications Inc. dropped 1.6 percent as it reported a loss. Peabody Energy Corp. (BTU) declined 1.7 percent as earnings missed estimates. Apple Inc. (AAPL) surged 7.7 percent at 5:07 p.m. New York time after reporting record quarterly sales and profit.

The S&P 500 fell 0.1 percent to 1,314.65 at 4 p.m. New York time. The benchmark gauge for American equities rose 2.1 percent over the previous five days. The Dow Jones Industrial Average retreated 33.07 points, or 0.3 percent, to 12,675.75.

“It’s all about the negotiations of Greek debt,” Mike Ryan, the New York-based chief investment strategist at UBS Wealth Management Americas, said in a telephone interview. His firm oversees $715 billion. “There’s concern that, if it spills over, it undermines some of the progress being made. I’m still not convinced that they solved all of their problems. The next question is how deep of an impact that will have on earnings.”

Global stocks slumped as European finance ministers pushed bondholders to provide greater debt relief for Greece, spurring concern the nation may fail to make a March 20 bond payment. The International Monetary Fund cut its forecast for the global economy. President Barack Obama tonight will lay out what he calls a “blueprint” for revitalizing the economy in his third State of the Union address before a joint session of Congress.

Beating Forecasts

The S&P 500 yesterday capped its longest rally since December as data bolstered confidence in the economy and most quarterly reports exceeded forecasts. Of the 74 companies in the S&P 500 that reported results since Jan. 9, 48 posted per-share earnings that beat projections, Bloomberg data show.

Travelers retreated 3.8 percent, the most in the Dow, to $58. The insurer said fourth-quarter profit fell on lower investment income and a smaller reserve benefit, capping the company’s least profitable year since 2004.

McDonald’s declined 2.2 percent to $98.75. The company, which gets about 60 percent of its revenue outside the U.S., said profit may be trimmed as the European debt crisis sinks the region’s currency. Foreign-exchange fluctuations may cut 2012 profit by as much as 18 cents a share and first-quarter earnings by as much as 3 cents, Chief Financial Officer Peter Bensen said today on a conference call.

Phone Companies

A measure of phone companies had the biggest loss in the S&P 500 among 10 groups, slumping 1.3 percent. Verizon (VZ) slid 1.6 percent to $37.79. The second-largest U.S. phone company reported a fourth-quarter loss after booking a pension charge and having higher subsidy costs for rising iPhone sales. On a conference call, Verizon gave a 2012 earnings-forecast range whose bottom trailed analysts’ estimates. AT&T Inc. (T) declined 1 percent to $30.09.

Peabody retreated 1.7 percent to $36.86. Sales from Australian mines fell to 6.2 million tons from 6.7 million tons. “Geological issues” reduced output at North Goonyella in Australia, Peabody said. The company is also moving a longwall, a type of coal face at an underground mine, at the Twentymile pit in Colorado, which will interrupt production there.

Zions Bancorporation (ZION) had the biggest loss in the S&P 500, falling 7.6 percent to $17.15. The Salt Lake City-based bank was cut to “hold” from “buy” at Stifel Nicolaus & Co. after reporting fourth-quarter earnings that missed the average analyst estimate.

Handbag Maker

Coach Inc. (COH) jumped 5.8 percent to $67.97. The largest U.S. luxury handbag maker reported a 15 percent increase in quarterly profit that topped analysts’ estimates, driven by holiday sales in North America.

Waters Corp. (WAT) soared 8 percent, the most in the S&P 500, to $85.04. The maker of laboratory products and instruments posted quarterly profit and sales that beat analysts’ estimates.

Apple surged 7.7 percent to $452.68 as it reported results after regular trading hours. Holiday purchases of the new iPhone helped the company steer clear of the consumer spending slump that has hurt rival technology companies.

Earnings probably grew 3.4 percent for S&P 500 companies in the fourth quarter, according to a Bloomberg survey of analysts. The projection has fallen from 6.2 percent at the end of last year. The global economy is forecast to grow 2.3 percent in 2012, according to the median projection in a survey of economists, down from the estimate of 3.4 percent in July.

‘Soft Earnings’

“The market is not terribly disappointed by what appear to be soft earnings compared to where we’ve been,” David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., said in a telephone interview. His firm oversees $600 billion. “There’s a creeping sense of optimism that things are going to improve. That lessens the fear that along with softness in Europe we’ll have a global recession.”

Collective Brands Inc. (PSS) rallied 6.4 percent to $15.89. The company may extract the biggest takeover premium of any apparel retailer in the world as the maker of Saucony and Sperry Top- Sider shoes lures private equity buyers.

Collective Brands, which said in August it was reviewing options to boost shareholder value, may attract interest from buyout firms and rivals such as Wolverine World Wide Inc. (WWW) when bids are due next week, according to people familiar with the process. The company, which also owns the Payless ShoeSource chain, could be worth as much as $27 a share based on the value of its separate businesses, Morningstar Inc. said.

Half the Price

While the 87 percent premium would be the largest of any deal in the industry worth at least $100 million, it still allows acquirers to get Collective Brands at half the price of its competitors relative to sales, according to data compiled by Bloomberg. In a breakup, an apparel company could keep the wholesale brands, which boosted sales by 25 percent in the first nine months of 2011, while a private equity firm would run the Payless chain for its cash flow, Auriga USA LLC said.

“On the retail side of the business, this seems like almost a perfect set-up for a private equity company,” R.J. Hottovy, director of consumer research at Chicago-based Morningstar, said in a telephone interview. “The wholesale brands alone would be an attractive acquisition target for any of the major branded footwear players.”

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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Obama Stance on Fossil Fuel Angers Industry

By Jim Efstathiou Jr. and Aaron Clark - Jan 25, 2012 3:58 AM GMT+0700

President Barack Obama is taking credit for higher U.S. oil and gas production and lower imports, angering industry groups and Republicans who say he is working against domestic energy production.

American energy will be a major theme of Obama’s State of the Union address to Congress tonight, Jay Carney, the White House spokesman, said in a briefing yesterday. In his first campaign ad this year, Obama boasts that U.S. dependence on foreign oil is below 50 percent for the first time in 13 years.

Since Obama took office, U.S. natural gas production averaged 1.89 trillion cubic feet a month through October, 13 percent higher than the average during President George W. Bush’s two terms, according to Energy Department data. Crude oil production is 2 percent higher, the department said.

“To be sure that is not because the White House meant for that to happen,” said Pavel Molchanov, an analyst at Raymond James & Associates Inc.

Republicans say the numbers are misleading. Onshore oil and gas production on federal lands directly under Obama’s control is down 40 percent compared to 10 years ago, according to Spencer Pederson, a spokesman for Representative Doc Hastings, a Washington Republican and chairman of the House Natural Resources Committee. In 2010, the U.S. signed the fewest number of offshore drilling leases since 1984.

‘Drill Baby Drill’

“The president is responding to what America’s gut feeling is, that we should be less dependent on foreign oil, and he’s trying to take credit for it,” Hastings said in an interview. “His policies are exactly the opposite.”

Four years ago, Obama campaigned against Republican vice presidential nominee Sarah Palin’s rally to “Drill Baby Drill.” Today he is highlighting fossil fuel gains to blunt charges that his policies are contributing to higher energy costs, according to Tyson Slocum, energy program director for Public Citizen, a Washington-based consumer advocacy group, said in an interview.

“The Republican narrative is that Obama is shoveling huge amounts of money to his cronies in the renewable industry, and blocking the real energy that American needs,” Slocum said in an interview. “It’s a false narrative. The administration has been focused on green energy, but they haven’t been against fossil fuels.”

Federal Leases

In a January report, the American Petroleum Institute in Washington said that in two years the number of new leases to drill on federal lands declined 44 percent to 1,053 in 2010. The report blamed “new rules, policies and administrative actions that are not conducive to oil and natural gas production.”

Lower imports are the result of lower demand, and increasing production has come despite Obama’s policies, according to Jack Gerard, American Petroleum Institute President. The U.S. needs a “course correction” on energy policy that includes faster permitting on federal lands in the West and in the Gulf of Mexico, he said.

The group, whose members include Exxon Mobil Corp., the largest U.S. oil company, convened a conference call with reporters today to comment on what Obama is expected to say on domestic energy in tonight’s address.

“We hope that the actions match the words,” Gerard said on the call. “The truth is that the administration has sometimes paid lip service to more domestic energy development, including more oil and natural gas development.”

Offshore Drilling

The American Enterprise Institute, a Washington group that supports free markets, called Obama’s Jan. 18 decision to deny a permit for TransCanada Corp. (TRP)’s $7 billion Keystone XL oil pipeline, part of his “crusade against fossil fuels.”

“The losses due to the Obama administration’s death-grip on offshore drilling and its unwillingness to open federal lands or issue timely permits for exploration far outweigh any energy gains that the White House may tout this week,” Thomas Pyle, president of the Washington-based Institute for Energy Research, said in a statement.

Obama last year called on Congress to eliminate “billions in taxpayer” subsidies for oil companies and to invest instead in renewable sources of power. In 2010, he proposed drilling for oil and natural gas off the U.S. East Coast, weeks before BP Plc (BP/)’s Macondo well in the Gulf of Mexico failed, spewing 4.9 million barrels of oil and triggering a temporary administration ban on offshore exploration.

Oil Production

Higher production of oil, gas and renewable fuels will reduce the share of net imports in total U.S. energy consumption to 13 percent by 2035 from 22 percent in 2010, the Energy Department said yesterday.

Much of the growth has come from North Dakota, where oil producers have spurred a fivefold increase in output by using intensive drilling practices in the Bakken, a geologic formation that stretches from southern Alberta to the northern U.S. Great Plains.

“If you’re in the White House when it happens, you should get the credit or the blame for it,” Joshua Freed, vice president for clean energy for Third Way, a Washington-based group that says it advocates policies that appeal to the political center, said in an interview.

U.S. oil production increased to 5.5 million barrels a day in 2010 from 5.1 million in 2007, according to the Energy Department. Over the next 10 years, gains in oil-shale and Gulf of Mexico output will lift domestic production to 6.7 million barrels a day, a level not seen since 1994.

To contact the reporters on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net; Aaron Clark in New York at aclark27@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net

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BofA: Investment Bankers Face 25% Pay Cut

By Esteban Duarte and Hugh Son - Jan 25, 2012 2:40 AM GMT+0700

Bank of America Corp., the second- biggest U.S. lender by assets, told its investment bankers to expect compensation packages that average 25 percent less than last year, said two people with knowledge of the discussions.

Executives gave the guidance this month ahead of formal 2011 pay discussions scheduled for this week, said the people, who declined to be identified because the talks are private. The compensation cut includes salary and bonus, the people said. Jessica Oppenheim, a spokeswoman for the Charlotte, North Carolina-based company, said she couldn’t comment.

“Until things really come back, no one should be expecting compensation like they got in the past,” said Jeanne Branthover, a managing director at Boyden Global Executive Search Ltd. in New York. “There are going to be very strong people who will not be compensated as they expected, and they will keep their ears open to move for more money.”

Wall Street firms are curbing pay for investment bankers and traders as the companies succumb to revenue and regulatory pressures. Bank of America Chief Executive Officer Brian T. Moynihan, 52, is scouring the global banking and markets unit for expenses to cut after a 58 percent stock plunge last year.

Typical Pay

While the company doesn’t break out pay data for its investment bankers, people in the industry with several years of experience may earn from about $500,000 into “the millions,” Branthover said. Bank of America’s global banking and markets unit had about 12,000 people at the start of 2011, according to a company presentation.

The division, run by co-chief operating officer Thomas K. Montag, reported its second straight quarterly loss last week as the European sovereign-debt crisis roiled markets. The business lost $443 million in the fourth quarter, following a $302 million loss in the preceding period. Its annual profit plunged to $2.97 billion last year from $6.3 billion in 2010.

Fees from investment banking, which includes advising clients on mergers and acquisitions as well as managing sales of shares and bonds, declined 35 percent in the fourth quarter to $1.1 billion, the bank said. The market was “challenging” because of Europe and the fallout from Standard & Poor’s downgrade of the U.S. credit rating, the lender said.

“Trading was strong in the first part of the year, but with the issues in Europe, the U.S. downgrades, the downgrades of our company and changes in client risk appetite, results were weak in the second half,” Moynihan said last week on a conference call with analysts. “We need that business to come back or we’ve got to do more in expenses.”

Expense Cuts

Moynihan may trim as much as $3 billion in annual costs from investment and commercial banking, trading, and wealth- management units in the latest phase of his efficiency plan, dubbed Project New BAC. That is in addition to the $5 billion targeted from retail and back-office operations, mostly accomplished through eliminating 30,000 jobs.

The review, which is scheduled to be complete in April, probably will include staff reductions. Firms including Barclays Plc and Credit Suisse Group AG have dismissed staff as revenue from trading stocks and bonds has eroded.

Compensation declines at Bank of America mirror actions by other firms. Morgan Stanley (MS) is reducing pay for senior investment bankers and traders by an average of 20 percent to 30 percent for 2011, people with knowledge of the move said last week. The firm is also capping immediate cash bonuses at $125,000 as it seeks to defer the pay of senior executives.

Goldman Sachs, JPMorgan

Goldman Sachs Group Inc. (GS) reduced compensation and benefits expense 21 percent to $12.2 billion in 2011. That was enough to provide $367,057 to each of its 33,300 employees, down from $430,700 for the 35,700 workers at the end of 2010.

JPMorgan Chase & Co. (JPM), the biggest and most profitable U.S. bank, reported earlier this month that it lowered pay at its investment bank 9 percent in 2011, enough for an average $341,552 per person. Average compensation is derived by dividing the overall compensation pool by the number of employees, and doesn’t represent actual pay for individuals.

To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net

To contact the editors responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net David Scheer at dscheer@bloomberg.net.

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Apple Profit More Than Doubles on IPhone Demand

By Adam Satariano - Jan 25, 2012 5:30 AM GMT+0700

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Jan. 24 (Bloomberg) -- Gregg Abella, a portfolio manager at Investment Partners Asset Management, talks about the outlook for Apple Inc. He speaks with Cory Johnson on Bloomberg Television's "Bloomberg West." Emily Chang also speaks. (Source: Bloomberg)

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Jan. 24 (Bloomberg) -- Gene Munster, an analyst at Piper Jaffray Cos., talks about Apple Inc.'s fiscal first-quarter profit and Yahoo! Inc.'s fourth-quarter revenue and outlook under newly appointed Chief Executive Officer Scott Thompson. Munster speaks with Emily Chang on Bloomberg Television's "Bloomberg West." Jon Erlichman also speaks. (Source: Bloomberg)

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Jan. 25 (Bloomberg) -- Kenneth Schapiro, president of Condor Capital Management, talks about the outlook for Apple Inc. Apple reported quarterly profit that more than doubled as holiday purchases of the iPhone catapulted sales to a record and helped the company steer clear of the consumer-spending slump that has hurt rival companies. Schapiro speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Apple Inc. (AAPL) reported quarterly profit that more than doubled as holiday purchases of the iPhone catapulted sales to a record and helped the company steer clear of the consumer-spending slump that has hurt rival companies.

Fiscal first-quarter profit surged to $13.1 billion, or $13.87 a share, Apple said today in a statement. Sales rose 73 percent to $46.3 billion. Analysts surveyed by Bloomberg on average estimated profit of $10.14 a share on sales of $39 billion. Per-share profit for the quarter was more than the company earned in any fiscal year before 2010.

Apple sold 37 million iPhones, up from the previous record of 20.34 million. Customers snapped up the 4S model that went on sale in October, a week after the death of co-founder Steve Jobs. The results mark the first time the company’s quarterly revenue topped Hewlett-Packard Co. (HPQ)’s, underscoring how its focus on sleek touch-screen mobile devices has reshuffled leadership in the industry.

“Those numbers are just unimaginable,” said Michael Obuchowski, chief investment officer at First Empire Asset Management, which has $4 billion under management, including Apple shares. “It’s still an extremely well-managed company and they are showing that the product pipeline is sufficient even now to generate growth rates that are unrivaled.”

Apple shares soared as much as 12 percent to $468.95 in extended trading, surpassing their record closing price of $429.11 on Jan. 18. The stock, up 25 percent in the past 12 months, had closed at $420.41 in New York today before the report.

Higher Forecasts

Cupertino, California-based Apple, in looking ahead to results for the second quarter, forecast revenue of about $32.5 billion and profit of $8.50 a share. That compares with average analysts’ predictions for sales of $31.9 billion and profit of $7.96 a share.

In the first quarter, which ended on Dec. 31, the company exceeded the highest analysts’ estimates for sales and profit, and topped the most optimistic forecasts for iPhone and iPad shipments. A year earlier, the company had profit of $6 billion, or $6.43 a share.

Apple sold 15.4 million iPads, topping the 13.5 million projected by analysts. IPhone sales on average were predicted to reach 30.2 million.

“Apple’s momentum is incredibly strong, and we have some amazing new products in the pipeline,” Apple Chief Executive Officer Tim Cook said in the statement. The period was the first full quarter since Cook took over as CEO in August, when Jobs stepped down, six weeks before his death.

Mobile Versus PCs

The results contrast with those of companies such as Microsoft Corp. (MSFT) and Intel Corp. (INTC), which are grappling with slower personal-computer sales in part because customers are choosing to buy smartphones and tablets like the iPad instead. They are trying to catch up by rolling out new mobile products, including Microsoft’s Windows 8 operating system, designed to integrate more smoothly with smartphones and tablets.

Rival smartphone makers also have struggled to keep pace with Apple. HTC Corp. (2498) and Motorola Mobility Holdings Corp. (MMI), two of the biggest companies whose devices run Google Inc. (GOOG)’s Android operating system, disappointed investors with results for their most recent quarters. Research In Motion Ltd., which has lost 90 percent of its market value since 2008, replaced its co-CEOs this week.

Apple collects more than half of the profits in the mobile- phone market, according to Horace Dediu, a former Nokia analyst who now operates the Asymco industry-research website.

Apple’s ‘Own Tune’

“Everybody else is losing market share if they compete against Apple,” said Brian Marshall, an analyst at ISI Group in San Francisco. “They are dancing to their own tune.”

Holiday iPhone demand helped Apple gain market share on manufacturers including Samsung Electronics Co. and HTC. In December, about 45 percent of U.S. shoppers who bought a smartphone in the previous three months said they purchased an iPhone, up from 25 percent in a study done two months earlier, according to Nielsen Co. Android phones were selected by 47 percent of buyers, down from 62 percent.

Competitors also haven’t been able to match the success of the iPad, with Apple controlling 62 percent of the tablet market in the third quarter, according to researcher IDC.

The popularity of the iPad and iPhone has also buoyed sales of Apple’s lineup of Mac computers. The company sold 5.2 million Macs in the first quarter, up from 4.9 million in the previous quarter.

Hewlett-Packard had revenue of $32.1 billion in its most recent quarter, which ended in October. The Palo Alto, California-based computer maker will report fiscal first-quarter results next month.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

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

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U.S. Stocks Decline on Greek Debt Stalemate

By Rita Nazareth - Jan 24, 2012 9:31 PM GMT+0700

U.S. stocks retreated, snapping a five-day rally for the Standard & Poor’s 500 Index, amid a stalemate between European policy makers and Greek bondholders over how to resolve the nation’s debt crisis.

The S&P 500 fell 0.4 percent to 1,311.45 at 9:30 a.m. New York time. The index rose 2.1 percent over the past five days.

“There’s too little movement on the political front in Brussels and Athens,” said Witold Bahrke, a senior strategist at Copenhagen PFA Pension A/S where he helps manage assets worth $45 billion. “Markets are experiencing a small setback as results on Greek debt talks are still too meager.”

Global stocks fell as European finance ministers pushed bondholders to provide greater debt relief for Greece, denting newfound confidence in Europe’s strategy for coping with the debt crisis. President Barack Obama tonight will lay out what he calls a “blueprint” for revitalizing the economy in his third State of the Union address before a joint session of Congress. The Federal Reserve begins a two-day policy meeting.

The S&P 500 yesterday capped its longest rally since December as data bolstered confidence in the economy and most quarterly reports exceeded forecasts. Of the 66 companies in the S&P 500 that reported results since Jan. 9, 42 posted per-share earnings that beat projections, Bloomberg data show.

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

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

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Romney Paid 13.9% Tax Rate on $21.6 Million in 2010

By Richard Rubin - Jan 24, 2012 9:11 PM GMT+0700

Republican presidential candidate Mitt Romney earned $21.6 million in 2010 and paid 13.9 percent of that amount in income taxes, using the preferential rate on investment income and charitable deductions to pay a smaller share of his earnings than top wage earners typically do.

The former private-equity executive and Massachusetts governor earned more than half of his income from capital gains and dividends, which are taxed at a top rate of 15 percent, rather than the 35 percent top rate for ordinary income. His campaign publicly released the returns today.

“Oh, I’m sure people will talk about it,” Romney said during a debate in Tampa, Florida, last night. “You’ll see my income, how much taxes I’ve paid, how much I’ve paid to charity. You’ll see how complicated taxes can be.”

Romney’s income puts him near the very top of U.S. taxpayers. In 2008, according to the Internal Revenue Service, the median adjusted gross income was $33,048, which Romney earned in less than a day. Reaching the top 1 percent of taxpayers required $380,354 in adjusted gross income, about Romney’s earnings in a week.

The Romneys received a $1.6 million refund after filing their 2010 return because they overpaid taxes during the year. They pay estimated taxes and at the end of the year, the tax return reconciles their payments. They had the refund applied to their 2011 taxes.

Estimate for 2011

The campaign also released an estimated tax return for 2011 showing that Romney had an effective tax rate of 15.4 percent on $20.9 million in adjusted gross income. That return hasn’t been filed with the IRS.

The discussion of Romney’s tax returns has reignited the political debate over the tax treatment of investments and particularly carried interest. That is the profits stake that private-equity managers receive from successful investments even if they don’t invest their own money. It is taxed at capital gains rates, and President Barack Obama and many Democrats want to reverse that policy, calling it unfair.

Romney’s 2010 income included $7.4 million in carried interest, said Ben Ginsberg, national counsel for the campaign. Romney, a former executive at Bain Capital LLC, received $5.5 million in carried interest in 2011.

“Governor Romney has paid 100 percent of what he owes,” Ginsberg said.

Corporate Tax

Ginsberg added that “much of the income” subject to the preferential rate on investments has already been taxed at rates of up to 35 percent in the corporations in which they were earned.

Billionaire investor Warren Buffett, who is calling for raising taxes on high-income Americans, said he blames Congress, not Romney, for the governor’s tax rate.

“It’s the wrong policy to have,” Buffett told Bloomberg Television’s Betty Liu in an interview yesterday. “He’s not going to pay more than the law requires, and I don’t fault him for that in the least. But I do fault a law that allows him and me earning enormous sums to pay overall federal taxes at a rate that’s about half what the average person in my office pays.”

In 2008, according to IRS statistics, fewer than 15 percent of taxpayers earning more than $200,000 had effective tax rates of less than 15 percent.

Romney, who lost the South Carolina primary Jan. 21, is competing in the Jan. 31 contest in Florida against his main rival, former House Speaker Newt Gingrich.

Gingrich’s Plan

Ginsberg said Romney would fare better financially under Gingrich’s tax plan than under his own. Gingrich would end all taxation of capital gains; Romney wouldn’t let high-income taxpayers receive that break.

The 203-page return of Romney and his wife, Ann, along with returns from trusts and a foundation, provide a glimpse into the candidate’s financial life. The net worth of the 64-year-old Romney is between $190 million and $250 million, according to an estimate from his campaign.

In 2010, the Romneys had more than $4.5 million in itemized deductions, including almost $3 million in charitable contributions. The couple donated $1.5 million in 2010 to the Church of Jesus Christ of Latter-Day Saints, which also received donations from the family’s foundation. They contributed $2.6 million to the Mormon church in 2011, according to the estimated return.

Anthony Nitti, a tax partner at WithumSmith & Brown in Aspen, Colorado, said Romney’s return is a “pretty extreme example” of someone receiving income at preferential tax rates on investments.

‘High Net Worth’

“For a high net-worth individual, there’s nothing here that surprises me,” said Nitti, who reviewed the return for Bloomberg News.

The Romneys paid the alternative minimum tax, which is designed to prevent people from avoiding taxes legally. That parallel tax system doesn’t eliminate the preference for investment income.

Nitti, who works with high-income clients, said the Romneys’ trusts have investments in such places as the Cayman Islands. Even if the Romneys didn’t make those investment decisions, he said, “there’s some sophisticated tax planning going on.”

The 2010 return shows that the Romneys’ blind trusts have invested in an array of assets based around the world, including the Caymans. The Romneys had a bank account in Switzerland, the return shows. The account has since been closed, said Brad Malt, a partner at Ropes & Gray LLP in Boston who operates the family’s blind trusts.

‘Fully Disclosed’

“I thought that was prudent as a matter of diversification for trusts of this size,” he said. “I would like to emphasize that this bank account, in contrast to some that we’ve read about that have been the subject of criminal activity, is a fully legal, fully disclosed, fully reported bank account.”

Malt, who began working as the Romneys’ trustee in 2003, said during that time he was unaware of any IRS audit of the couple’s tax returns.

Romney’s income probably didn’t place him among the top 400 taxpayers. For the past several years, reaching that list required an adjusted gross income of more than $100 million.

In 2008, John McCain’s presidential campaign released the senator’s tax returns for the previous two years, 2007 and 2006, said Douglas Holtz-Eakin, who served as policy director for the Arizona Republican’s campaign.

Those tax documents, released on April 18, 2008, showed that McCain earned $405,409 in 2007 and paid $118,660 in federal taxes. He gave $105,467 to charity, the records show.

McCain’s campaign didn’t release tax returns for his wife, Cindy, who is chairman of the Phoenix-based Hensley & Co., one of the largest beer distributors in the U.S.

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

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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Stocks in Europe Drop as Greek Debt Talks Reach Impasse; French Banks Fall

By Adria Cimino - Jan 24, 2012 9:37 PM GMT+0700

European (SXXP) stocks declined from a five-month high as the region’s finance ministers failed to agree on a debt-swap deal for Greece and called for a greater contribution from bondholders.

Banks tumbled, pacing losses on the Stoxx Europe 600 Index. Societe Generale SA and Credit Agricole SA (ACA) retreated at least 5.5 percent after Standard & Poor’s cut the banks’ credit ratings. Siemens AG (SIE), Europe’s largest engineering company, dropped 3 percent after saying that achieving its goals for the year has become harder. Petroplus Holdings AG plunged its lowest price ever after planning to file for insolvency.

The Stoxx 600 fell 1 percent to 254.5 at 2:36 p.m. in London. The gauge has still risen 4.1 percent so far this year as reports added to optimism that the global economy is strengthening.

“It seems as if we are far from an agreement,” said Yves Maillot, the Paris-based head of investments at Robeco Gestions SA, which oversees $6.8 billion. “The problem of solvency of countries remains, along with the question of Greece. The market situation is fragile. Market sentiment has been more positive recently, with investors factoring in the European (SXXP) Central Bank’s easing for banks.”

The region’s finance ministers, meeting in Brussels yesterday, balked at putting up more public money for Greece, calling on bondholders to provide greater debt relief in order to point the way out of the two-year-old debt crisis.

Aid Package

Euro-area governments stood by an October offer of 130 billion euros ($170 billion) for a second Greek aid package. Officials want to fill a deeper-than-expected hole in the nation’s finances by saddling investors with a lower interest rate on exchanged bonds.

Meanwhile, Greek Finance Minister Evangelos Venizelos said the Greek government intends to wrap up debt-swap talks with private investors by Feb. 1.

A report today showed that a combined measure of European services and manufacturing output unexpectedly expanded in January, led by Germany, the region’s largest economy.

A euro-area composite index based on a survey of purchasing managers in both industries jumped to 50.4, a five-month high, from 48.3 in December, London-based Markit Economics said in an initial estimate today. Economists forecast a reading of 48.5, according to the median of 17 estimates in a Bloomberg News survey. Fifty is the dividing line between expansion and contraction.

National benchmark indexes fell in all of the 18 western European markets except Iceland. France’s CAC 40 lost 1.1 percent, while the U.K.’s FTSE 100 dropped 0.9 percent. Germany’s DAX retreated 1.1 percent.

Bank Shares

A gauge of banking shares was among the worst performers of the 19 industry groups on the Stoxx 600, falling 2.2 percent. Societe Generale (GLE) retreated 7.7 percent to 21.05 euros. Credit Agricole lost 5.6 percent to 4.92 euros.

Societe Generale, France’s second-largest lender, and Credit Agricole had their ratings downgraded to A from A+, with a stable outlook, S&P said yesterday.

“The downgrade of some of these banks follows the downgrade of France,” S&P wrote.

Siemens declined 3 percent to 76 euros. The company said achieving its full-year goals has become harder to reach after profitability at its four divisions slipped as the debt crisis weighs on the economy.

Net income from continuing operations in the fiscal first quarter fell 27 percent to 1.36 billion euros ($1.77 billion), the company said. That missed the average estimate of 1.47 billion euros in a Bloomberg survey of analysts. New orders also dropped, Siemens said.

Petroplus Insolvency

Petroplus sank 83 percent to 25 centimes, its biggest decline and the lowest price since it issued shares to the public in November 2006. The company said it plans to file for insolvency in Switzerland and other jurisdictions. The Swiss refiner that has been trying to avoid bankruptcy had about $1 billion in credit lines suspended last month, preventing it from supplying its plants with crude.

Royal KPN NV (KPN), the biggest Dutch telephone company, fell 7.2 percent to 7.93 euros. The company said 2012 profit and cash flow will be lower. The company reported fourth-quarter earnings before interest, taxes, depreciation, and amortization of 1.32 billion euros, compared with the average analyst estimate of 1.36 billion euros. The company also said there will be no share buyback in 2012.

STMicroelectronics NV (STM) slid 5.3 percent to 5.33 euros. Europe’s largest semiconductor maker predicted that first- quarter revenue will fall as much as 10 percent from the previous three months because of lower sales at its wireless business.

Worst Performance

Chemring Group Plc (CHG) tumbled 14 percent to 388.3 pence for its biggest drop in two months and the worst performance today in the Stoxx 600. The maker of missile avoidance systems for fighter jets reported a 30 percent decline in full-year pretax profit to 90.8 million pounds. Analysts at JPMorgan Chase & Co. cut their 2012 earnings-per-share estimate for the company by 15 percent to 54.3 pence, citing a “more cautious” outlook for growth and margins.

SBM Offshore NV (SBMO), the world’s biggest supplier of floating oil-and-gas platforms, declined 9.9 percent to 13.46 euros, the most since July, after saying its Yme project in Norway faces “increased challenges,” and that its chief financial officer will step down.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

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

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Stocks in Europe Drop on Greek Debt-Talk Stalemate; Natural Gas Advances

By Stephen Kirkland and Lynn Thomasson - Jan 24, 2012 6:27 PM GMT+0700

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Jan. 24 (Bloomberg) -- Jesper Koll, head of equity research at JPMorgan Chase & Co. in Tokyo, talks about the outlook for Japan's economy and stocks. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Jan. 24 (Bloomberg) -- John Vail, chief global strategist and head of asset allocation at Nikko Asset Management, talks about the outlook for Japan's economy, stocks and currency. Vail also discusses the impact of Europe's debt crisis on global financial markets. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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Jan. 24 (Bloomberg) -- Travis Hamilton, managing director at Khan Investment Management Ltd., talks about investing in Mongolia, and the outlook for the country's stocks and economy. Hamilton speaks from Singapore with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

European stocks fell from a five- month high amid a stalemate between regional policy makers and Greek bondholders over how to resolve the nation’s debt crisis. Indian shares surged after the central bank unexpectedly cut the cash reserve ratio.

The Stoxx Europe 600 Index retreated 1.1 percent at 6:25 a.m. in New York. Standard & Poor’s 500 Index futures lost 0.6 percent, while the BSE India Sensitive Index jumped 1.5 percent. The Dollar Index (DXY), which tracks the U.S. currency against those of six trading partners, rose 0.1 percent. Germany’s 10-year bund yield decreased one basis point to 1.96 percent. Natural gas jumped 3 percent.

European finance ministers balked at putting up more public money for Greece, calling on bondholders to provide greater debt relief. Apple Inc., McDonald’s Corp. and Johnson & Johnson are among U.S. companies scheduled to report quarterly results today as the Federal Reserve begins a two-day policy meeting.

“There’s still a lot of uncertainty around Europe and the Greek restructuring issue is still to be resolved,” Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management, said in a Bloomberg Television interview. “After such a big run up in the last month or so, it wouldn’t surprise me to see markets correct a little bit.”

Five shares dropped for every one that gained in the Stoxx 600 (SXXP). The gauge has still risen 3.9 percent in 2012, the best start to a year since 1997. Societe Generale SA and Deutsche Bank AG led financial shares lower, retreating more than 3.5 percent. Royal KPN NV sank 6.4 percent, the most in five months, as the largest Dutch phone company predicted lower 2012 profit and cash flow.

Fed Survey

The decline in S&P 500 futures indicated the U.S. gauge will retreat from the highest level since July. The Richmond Federal Reserve Bank is due to release its manufacturing-sector activity survey for December at 10 a.m. New York time. Earnings have topped estimates at about 64 percent of the 56 companies in the S&P 500 that released results since Jan. 9, data compiled by Bloomberg show.

The yield on Spain’s two-year note fell five basis points to 3.12 percent as the government sold 2.51 billion euros ($3.3 billion of three- and six-month bills, meeting the maximum target for the sale. The Netherlands auctioned 1.84 billion euros of debt maturing in January 2013 and January 2042. The Dutch two-year yield was little changed at 0.24 percent.

The yield on the 10-year U.S. Treasury note was little changed at 2.06 percent before the government sells $35 billion of two-year securities.

Natural Gas Rallies

Natural gas rose as much as 3.6 percent after climbing 7.8 percent yesterday, the most since December 2009. Copper fell 0.3 percent and Brent oil declined 0.3 percent to $110.23 a barrel.

The MSCI Emerging Markets Index (MXEF) slipped 0.3 percent as declines in eastern Europe and Africa offset gains in India. Hungary’s BUX Index (BUX) fell 1.9 percent and Turkey’s ISE National 100 Index slipped 1.1 percent before central bank rate decisions. Benchmark gauges in Russia and South Africa slipped at least 0.7 percent.

India’s Sensex (SENSEX) jumped to the highest level since Nov. 14 after the central bank reduced its cash reserve ratio to 5.5 percent from 6 percent, the first cut to the amount of cash banks must put aside since 2009. Policy makers left borrowing costs unchanged.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net;

To contact the editor responsible for this story: Stuart Wallace at Swallace6@bloomberg.net

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Societe Generale, Credit Agricole Debt Downgraded by S&P

By Dakin Campbell - Jan 24, 2012 3:45 PM GMT+0700

Societe Generale SA (GLE) and Credit Agricole SA (ACA) were among French banks to have their credit grades cut by Standard & Poor’s after France was stripped of its top rating earlier this month.

Societe Generale, France’s second-largest bank by market value, and Credit Agricole, the third-biggest, had their debt downgraded to A from A+ with a stable outlook, S&P said yesterday in statements. Caisse des Depots et Consignations was also cut, to AA+ from AAA.

European nations are grappling with a debt crisis now in its third year as they seek to restore budget order. France’s credit was lowered to AAA from AA+ on Jan. 13 amid downgrades that left Germany the sole nation in the euro area with a stable top rating. The assessments for Societe Generale and Credit Agricole incorporate one level of government support rather than two levels that an AAA rated sovereign would provide, S&P said.

“The downgrade of some of these banks follows the downgrade of France,” S&P said in a statement.

Societe Generale declined as much as 5.2 percent, and was 85 cents, or 3.7 percent, lower at 21.95 euros by 9:23 a.m. in Paris. The stock is up 27 percent since the start of the year. Credit Agricole fell 15 cents, or 2.9 percent, to 5.06 euros.

Societe Generale said S&P's decision was anticipated.

“This downgrade is a direct consequence of the methodology used by S&P, which builds into our rating an element of systemic support by the French state, whose own sovereign rating has been recently cut,” the bank said in a statement.

Funding Needs

S&P said it expects lower investment-banking revenues to weigh on Societe Generale’s operating income. The bank announced in November that it won’t pay a dividend for 2011. The rating on Credit Agricole assumes “the bank will continue to improve its structural funding and liquidity position as part of the plan it announced at the end of 2011, and which provided for a significant reduction in funding needs,” it said.

The banks are likely to meet their 2012 funding needs through some combination of public and private placements, or covered bonds, according to S&P.

“We see the French government as supportive to its banking sector,” the ratings firm said.

S&P said it expects credit losses in France this year and next to rise “only moderately” from 2011.

The ratings company also affirmed the AA- long-term grade for BNP Paribas (BNP) SA, France’s biggest bank, and Credit Logement SA.

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

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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Amazon Fire Takes Android, Leaves Google Apps

By Peter Burrows - Jan 24, 2012 12:15 PM GMT+0700
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Best Buy Co. employees are instructed on how to use the Amazon.com Inc. Kindle Fire tablet computer at a store in New York, U.S. Photographer: Scott Eells/Bloomberg

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Amazon.com Inc.'s Kindle Fire tablet computer. Photographer: Emile Wamsteker/Bloomberg

Since Google Inc. (GOOG) introduced its Android operating system in 2007, the company’s strategy has been simple: Give it to developers for free and make money when consumers click ads on the Web or through apps. That model is hitting a snag.

Amazon.com Inc. (AMZN) and Chinese Internet giants Baidu Inc. and Tencent Holdings Ltd. are using Android as a building block for their devices, skipping preloaded applications such as Gmail, Google Maps and YouTube that generate ad revenue for Google, as well as its app store. Amazon’s Kindle Fire tablet, which is gaining ground on Apple Inc. (AAPL)’s iPad, comes with none of those apps.

“The Fire may be the best Android tablet out there, even though it’s the least Android-y of all of them,” said Noah Elkin, an analyst at New York-based research firm EMarketer Inc. “The Google experience is very much in the background.”

Mobile advertising is one of Google’s fastest-growing markets, with industrywide revenue projected to rise to $20.6 billion in 2015 from $3.3 billion in 2010, according to Gartner Inc. With online traffic increasingly coming through apps instead of mobile browsers, Google’s push to wring mobile-ad revenue from Android could be impeded if more device makers emulate and succeed with Amazon’s scaled-back approach.

“Part of the reason Android is so important as an operating system is that it lets Google put its mobile services front and center,” said Ken Sena, an analyst at Evercore Partners Inc.

Mobile Apps

According to Flurry Inc., a software company that tracks usage of apps, the average smartphone owner uses a mobile app -- for example, seeking a restaurant by clicking on the OpenTable Inc. icon on a phone, instead of using a browser to access the website -- 94 minutes a day, compared to 72 minutes accessing websites via a browser. A year ago, time was almost equally split.

“This may be small potatoes now, but increasingly it’s going to be way search gets conducted,” Sena said.

Many buyers may not know that the Kindle Fire, estimated to be the best-selling Android tablet ever, thanks to strong holiday sales, is even an Android tablet.

Amazon uses its own app store instead of Google’s Android Marketplace, and, like Apple, tightly controls which programs can appear there. The Fire also features Amazon’s one-click e- commerce shopping experience, already familiar to millions of Amazon customers.

Apple Model

The device’s success -- with 5.5 million sold during the holiday shopping season, according to Anthony DiClemente, an analyst at Barclays Capital -- shows that many consumers are looking for such seamless interplay between software and hardware.

“Apple has taught everyone that people value an integrated ecosystem that just works,” said Michael Gartenberg, an analyst at Gartner. “There’s a real possibility that Android could succeed, but not deliver what Google hopes it will.”

Google executives say it’s more important for the company to expand the Android ecosystem currently than it is to profit from it. The more devices run on Android, the more people will do mobile search and the more likely app makers are to develop programs for the platform.

“We’re in the early stages of monetization” of Android, Google Chief Executive Officer Larry Page said on a Jan. 19 earnings conference call with analysts. “We see a lot of potential for us to make money on Android.”

Search Advertising

Google’s main source of revenue is advertising on its search engine. Like Apple and its App Store, Mountain View, California-based Google takes a 30 percent cut on sales of apps from its Android Marketplace.

Of an estimated $44.6 billion in sales this year, $5.8 billion will come from mobile, according to Cowen & Co. Less than half of Google’s mobile revenue comes from through mobile apps, according to Sena. Google’s mobile business could expand to more than $10 billion in four years, said Mark Mahaney, an analyst at Citigroup Inc. That would outpace the 66 percent total sales growth expected for Google from 2011 to 2015, the average estimate of analysts surveyed by Bloomberg.

Yet even if 10 percent of all mobile app-related sales on Android devices came through Amazon’s Kindle Fire -- which cuts Google out of the equation -- Google would lose out on less than $300 million in revenue.

Baidu, Tencent, Dell

Still, Amazon isn’t the only company whose plan is to push Android into the background. In smartphones, Baidu and Tencent, leaders in China’s Internet search and social-networking markets, have created their own software suites to run on top of Google’s operating system. Last month, Dell Inc. (DELL) unveiled a smartphone, the Streak Pro, that will be sold in China. It is the first device designed to run Baidu Yi, which includes Baidu’s own programs for search, books, maps, music and local recommendations.

Neither Baidu nor Tencent can point to Amazon-like successes with these efforts so far. Dell also isn’t a powerful player in tablets, said Gene Munster, an analyst at Piper Jaffray Cos.

Facebook Inc., on the other hand, is an important wildcard. Tim Bajarin, president of San Jose, California-based consultancy Creative Strategies Inc., expects Facebook to introduce an Android-based phone that wouldn’t include Google’s apps. Instead, the user interface would be designed around its social network and software from other app makers.

Google’s Terms

So far, Google has pursued an all-or-nothing approach to licensing its suite of applications. In contract talks, licensees may choose to use all or most of Google’s mobile apps, or none of them. This means that to get popular apps such as Gmail and Google Maps, the licensee may also need to agree to use Google Talk, a Skype-like app for making phone calls, or Contacts, a tool for managing contact details.

Google insists on these terms to ensure that consumers aren’t prevented from using apps that have become de facto standards, and because Google’s apps are designed to work well together, Android chief Andy Rubin has said. It’s also about making money.

“There’s something that’s funding all this free software, and it’s Google’s business model” to generate revenue from search and its own apps, Rubin said at a press event on Dec. 21.

Some rivals say Google is unfairly using its influence to push its own mobile offerings. Skyhook Wireless Inc. is suing Google for allegedly preventing Motorola Mobility Holdings Inc. and another phonemaker from using Skyhook’s location-tracking software, by insisting they make Google’s alternative the default on their Android products.

‘Play Nice’

Many device makers have little choice other than to take a full suite of Google apps. Without Android, companies such as Samsung Electronics Co. (005930) and HTC Corp. would have no platform for competing with Apple. With no must-have apps or services of their own, these device makers would be at a disadvantage without Google apps.

“I don’t know if any other manufacturers have the clout to do what Amazon is doing,” said Bajarin. “They need to play nice with Google.”

Amazon doesn’t. Rather than make money on the hardware -- it sells the Kindle Fire at a loss for $199 -- its strategy is to make devices that let customers stream or buy more movies, music and books from its online store. To do that, Amazon created its own mobile-app store and a browser called Silk. Amazon will make $136 on each Kindle Fire, thanks to movie and book downloads onto the device, according to Ross Sandler, an analyst at RBC Capital Markets.

Google Phone?

Android devices that ship without Google’s services aren’t a total loss for the company, said Maha Ibrahim, a partner at Menlo Park, California-based investment firm Canaan Partners.

“Google has done an incredible job getting Android out there,” she said. “They’d rather have Android be part of these devices than not.” Fire owners can still do Internet searches via Google or use Youtube.com or the Google Maps website.

Google may opt to create its own integrated phone that highlights its services, as the Fire does for Amazon. The company agreed in August to acquire Motorola Mobility. Rubin has said that Google is working on its own tablet design, which will have the brand name Nexus.

“One way or another, they need to have a tablet that’s a strong No. 3 to iPad and the Fire,” said Evercore’s Sena.

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

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

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