U.S. Stock Futures Are Little Changed Before Euro-Area Meeting

By Rita Nazareth - Mar 12, 2012 9:34 PM GMT+0700

U.S. stocks were little changed, following a four-week gain in the Standard & Poor’s 500 Index, as investors weighed whether a Chinese slowdown will lead to an easing of monetary policy at the world’s second-largest economy.

Financial (S5FINL) and commodity shares led the losses in the S&P 500 among 10 industries. Chesapeake Energy Corp. (CHK) and Mosaic Co. dropped at least 1.5 percent. JPMorgan Chase & Co. (JPM) sank 1.8 percent to pace declines in banks as the cost of insuring against default on European sovereign bonds rose to the highest in eight weeks. Oracle Corp. (ORCL) slumped 2 percent after the software maker was cut at Jefferies Group Inc.

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March 12 (Bloomberg) -- David Kostin, chief U.S. equity strategist at Goldman Sachs Group Inc., talks about the outlook for U.S. stocks, corporate earnings and investor sentiment. Kostin speaks with Erik Schatzker Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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March 12 (Bloomberg) -- Jonathan Golub, chief U.S. market strategist at UBS Securities LLC, talks about outlook for U.S. markets, financials and oil prices. Golub speaks with Erik Schatzker, Stephanie Ruhle and Scarlet Fu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

The S&P 500 fell 0.2 percent to 1,367.87 at 10:33 a.m. New York time. The benchmark index advanced 2.1 percent in the past four weeks. The Dow Jones Industrial Average rose 3.37 points, or less than 0.1 percent, to 12,925.39 today.

“China is a big question mark,” said Erick Maronak, chief investment officer of Victory Capital Management Inc. in New York. His firm oversees $28 billion. “What’s their true rate of growth and how much will they have to ease to get things back on track?” he said. “Europe is still going to be a huge work in progress for many years. Now that there’s some greater visibility on how the Greece situation is going to unfold, everyone starts looking at dominoes two and three.”

Global stocks fell today as China had the biggest trade deficit last month in at least 22 years, the weakest January- February factory-production gain since 2009, and retail sales were below the median economist estimate, government data showed March 9 and 10. The central bank said in a statement today it will maintain a prudent monetary policy while fine-tuning and taking preemptive measures as appropriate.

Commodities Slump

Energy and raw material shares retreated amid concern about slower demand from China. The S&P GSCI index of 24 commodities slid 1 percent. Chesapeake Energy dropped 1.7 percent to $24.14. Mosaic (MOS) fell 1.5 percent to $54.71.

Investors also watched the latest developments in Europe’s attempts to tame its debt crisis. Euro-area finance ministers gather in Brussels today to sign off on the 130 billion-euro ($170 billion) second rescue package for Greece. They’ll also focus on Spain’s budget-cutting efforts and Portugal’s aid program, underscoring their desire to prevent contagion.

Banks had the biggest decline among 24 industries in the S&P 500, dropping 1.3 percent. JPMorgan slumped 1.8 percent to $40.31. Morgan Stanley (MS) decreased 2.2 percent to $17.97. Wells Fargo & Co. (WFC) retreated 1.5 percent to $31.19.

The S&P 500 gained 9 percent this year through March 9 amid better-than-expected data about the U.S. economy and as companies exceeded analysts’ profit forecasts for a 12th straight quarter.

‘Greater Challenges’

Oracle fell 2 percent to $29.53. The world’s second-largest software maker was cut to hold from buy at Jefferies Group Inc., citing “greater challenges” to its engineered systems strategy.

Michael Kors Holdings Ltd. fell 3.5 percent to $47.86. The luxury-goods maker and retailer named for the designer who founded it filed for a secondary offering of 25 million shares.

Walt Disney Co. (DIS) increased 0.7 percent to $42.54. The largest U.S. entertainment company by market value was raised to buy from neutral at Janney Montgomery Scott.

Transportation and industrial shares are diverging in the U.S., a signal that equity investors are starting to agree with what the bond market already knows: this economic recovery will remain sluggish for months to come.

Technology Bubble

The Dow Jones Transportation Average has fallen 3.9 percent from its six-month high on Feb. 3, while the Dow Jones Industrial Average (INDU) added 0.5 percent. The gauge of 20 shipping companies from FedEx Corp. to United Continental Holdings Inc. (UAL) peaked before the rest of the market when the technology bubble popped in 2000 and began slipping into a bear market three months before broader benchmark indexes in 2007.

While Laszlo Birinyi, the founder of Birinyi Associates Inc., says falling transport stocks don’t signal an end to the three-year bull market that doubled the S&P 500, money managers at Robert W. Baird & Co. and Legg Mason Inc. say the 25 percent rise in the index since October may have gone too fast.

Transport stocks are falling as 10-year Treasury yields stay near 2 percent, with economists forecasting the slowest post-recession recovery since World War II.

“In a healthy market, everything is going in the same direction,” said Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird, which oversees $85 billion. “When that starts to diverge, that raises a flag that potential trouble may be brewing.”

Most Expensive

Monster Beverage Corp. (MNST)’s escalating profit from energy drinks pumped full of caffeine and nitrous oxide may tempt acquirers to chase what would be the most expensive takeover in the industry’s history.

After the stock more than doubled in the last year, Monster Beverage is valued at 20 times earnings before interest, taxes, depreciation and amortization, the priciest multiple of any North American soft-drink maker greater than $500 million, according to data compiled by Bloomberg that includes net debt. The $10.4 billion company, which got its start selling juices in the 1930s, has the highest operating margins in the industry and is projected to boost earnings 70 percent in the next three years, analysts’ estimates compiled by Bloomberg show.

“What Monster’s so successfully done in the last few years is proven that demand for energy drinks is fairly universal among young people,” Caroline Levy, a beverage and household products analyst for Credit Agricole Securities USA Inc. in New York, said in a telephone interview. “This business is now too big to ignore. If you’re a player in soft drinks, I think it’s very hard not to be in the highest-margin, highest-growth category out there.”

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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Commodities Drop With Most Stocks on China’s Export Data; Treasuries Climb

By Rob Verdonck and Michael P. Regan - Mar 12, 2012 9:41 PM GMT+0700

Oil and copper snapped a three-day advance while most U.S. stocks fell and the yuan weakened after Chinese exports grew at a slower pace than forecast, fueling concern about the global economic recovery. Treasuries rose.

The S&P GSCI Index of commodities lost 1 percent at 10:37 a.m. in New York as oil dropped 1.7 percent and copper fell 0.8 percent. The Standard & Poor’s 500 Index lost 0.2 percent to 1,368.1 as two stocks fell for each that rose on U.S. exchanges. The Stoxx Europe 600 Index (SXXP) slipped 0.4 percent. Ten-year Treasury note yields slipped two basis points to 2.01 percent. The yen strengthened against all 16 of its most-traded peers and the dollar appreciated versus 15 of 16.

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Oil fell to $106.27 a barrel. Photographer: Daniel Acker/Bloomberg

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March 12 (Bloomberg) -- Sony Kapoor, managing director of Re-Define, talks about the outlook for the European economy as the region’s finance ministers prepare to approve a second bailout package for Greece. He speaks with Mark Barton on Bloomberg Television's "On the Move." (Source: Bloomberg)

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March 12 (Bloomberg) -- Kathy Matsui, chief Japan equity strategist and co-head of Asia investment research at Goldman Sachs Group Inc. in Tokyo, talks about the impact of the March 11 disaster on Japan's stock market and investor sentiment. Matsui speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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March 9 (Bloomberg) -- Yuuki Sakurai, chief executive officer at Fukoku Capital Management Inc. in Tokyo, talks about Japanese companies' recovery after last year's March 11 disaster and the prospects for the nation's economy. Sakurai speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

China weakened its daily fixing for the yuan by the most since August 2010 after reporting the biggest trade deficit in at least 22 years on March 10, sapping optimism that was spurred last week by stronger-than-forecast jobs data in the U.S. European finance ministers are meeting in Brussels today to complete the 130 billion-euro ($170 billion) aid package for Greece and discuss Spain’s budget-cutting efforts.

“It’s been a much better start to the year than most investors had expected,” Henrik Drusebjerg, a Copenhagen-based strategist at Nordea Bank AB who helps oversee $230 billion, said in an interview today. “What most of us had expected as a return for the whole year has come around in two months. If there’s anything indicating that global growth is having problems, people will be very quick to take some profits.”

Oil Declines

The S&P GSCI Total Return Index of raw materials had rallied 8.8 percent through last week, while the S&P 500 had climbed 9 percent in its best start to a year since 1998.

Oil fell to $105.63 a barrel, natural gas declined 2.9 percent to $2.257 per million British thermal units and copper dropped to $3.8260 a pound. Cotton tumbled more than 1.5 percent.

Exports from China rose 18.4 percent last month from a year earlier, while imports gained 39.6 percent. Analysts forecast a 31.1 percent increase in overseas sales and that inbound shipments would rise 31.8 percent, based on estimates from Bloomberg News surveys.

“The data from China is a downside pressure on the oil market,” said Ken Hasegawa, a commodity-derivative sales manager at Newedge Group in Tokyo. “The trade deficit is much bigger than expected.”

The yuan weakened to 6.3266 per dollar for the biggest drop since January. The daily reference rate was set 0.33 percent lower at 6.3282 per dollar. The currency can move 0.5 percent either side of the fixing.

Among U.S. stocks, gauges of financial and energy shares fell at least 0.5 percent for the biggest declines as utilities, consumer-staples and phone companies had the biggest gains among the 10 main groups. JPMorgan Chase & Co., American Express Co. and Caterpillar Inc. had the biggest declines in the Dow Jones Industrial Average, while Alcoa Inc. and Merck & Co. rose the most.

Transportation and industrial shares are diverging from the rest of the U.S. market, a signal that equity investors are starting to agree with what the bond market already knows: this economic recovery will remain sluggish for months to come.

The Dow Jones Transportation Average fell 3.9 percent from its six-month high on Feb. 3 through March 9, while the Dow Jones Industrial Average added 0.5 percent. The gauge of 20 shipping companies from FedEx Corp. to United Continental Holdings Inc. peaked before the rest of the market when the technology bubble popped in 2000 and began slipping into a bear market three months before broader benchmark indexes in 2007.

Treasury Auction

The benchmark 10-year U.S. Treasury yield halted a three- day increase as the nation prepared to sell $32 billion of three-year notes today. Two-year yields were down less than one basis point at 0.318 percent.

Retail sales in the U.S. increased 1.1 percent in February, the most in five months, according to the median estimate of economists in a Bloomberg News survey before Commerce Department figures due tomorrow. Data on March 9 showed nonfarm payrolls increased by 227,000 in February after rising by a revised 284,000 the prior month. The unemployment rate held at a three- year low of 8.3 percent.

Among European stocks, Temenos Group AG dropped 4.3 percent after the company terminated merger talks with Misys Plc. Banca Monte dei Paschi di Siena SpA sank 5.6 percent after its biggest investor reached an agreement with banks that hold part of its stake as collateral on a loan. Mining companies and banks had the largest declines of the 19 industries in the Stoxx Europe 600 Index (SXXP) .

The cost of insuring European sovereign bonds rose for a second day, with the Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments climbing four basis points to an eight-week high of 355.5.

Indian shares rose after the policy makers unexpectedly cut reserve requirements for lenders. The BSE India Sensitive Index, or Sensex, gained 0.5 percent after the central bank on March 9 reduced the amount of deposits lenders need to set aside as reserves to ease a cash squeeze in the banking system.

To contact the reporters on this story: Rob Verdonck in London at rverdonck@bloomberg.net; Michael P. Regan in New York at mregan12@bloomberg.net

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

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Euro Weakness Wanes as Draghi Prompts Traders to Tame Views

By Liz Capo McCormick, Emma Charlton and Lukanyo Mnyanda - Mar 12, 2012 6:53 PM GMT+0700

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Euro Pessimism Wanes as ECB Cash Floods Banks

The world’s biggest banks are less pessimistic about the euro as the European Central Bank provides unlimited cash to the region’s financial system, Germany may avoid recession and Greece looks to complete the biggest sovereign debt restructuring in history.

Strategists at Bank of America Corp. and Morgan Stanley raised their estimates for the euro this month, as the median estimates of more than 50 strategists surveyed by Bloomberg increased for the second and third quarters. The 17-nation currency is up about 1.3 percent from an almost 10-year low on Jan. 16 against nine developed-market peers.

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Euro notes from an automated teller machine (ATM) in Vienna, Austria, on March 6, 2012. Photographer: Akos Stiller/Bloomberg

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March 12 (Bloomberg) -- Holger Schmieding, chief economist at Berenberg Bank, discusses the European Central Bank's role in stemming the sovereign-debt crisis. He speaks with Owen Thomas and Linda Yueh on Bloomberg Television's "Countdown." (Source: Bloomberg)

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March 12 (Bloomberg) -- Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., talks about the outlook for the euro, dollar and currency market volatility. He speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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March 9 (Bloomberg) -- Peter Rosenstreich, chief currency strategist at Swissquote Bank SA, talks about the outlook for the euro. He speaks from Geneva with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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The ECB headquarters in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

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Mario Draghi, president of the European Central Bank (ECB), gave banks more than 1 trillion euros ($1.31 trillion) of three-year loans in December and February. Photographer: Hannelore Foerster/Bloomberg

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The euro’s rise contrasts with the dollar’s decline after $2.3 trillion in debt purchases by the Federal Reserve from 2008 to June 2011. Photographer: Hannelore Foerster/Bloomberg

While the crisis that led to bailouts of Greece, Portugal and Ireland and the restructuring of Greek debt caused the euro to weaken 8.7 percent versus the dollar since August, traders who predicted a breakup of the single currency are being silenced. ECB President Mario Draghi gave banks more than 1 trillion euros ($1.31 trillion) of three-year loans in December and February, and German business confidence rose to a seven- month high.

“We’ve been gradually feeling better about Europe,” David Woo, the global head of rates and currencies at Bank of America Merrill Lynch in New York, said in a telephone interview on March 2. Draghi’s loans have supported the euro, he said. “That combined with the fact that the global economic outlook has improved, including U.S. growth gaining momentum, has made us less bearish on the euro.”

Euro Gains

Bank of America increased its June 30 call to $1.30 from $1.25, according to a Feb. 29 note.

The euro depreciated 0.6 percent last week to $1.3123 and is 8.8 percent higher than the average of about $1.2067 since its inception in January 1999. It strengthened 0.2 percent to 108.22 yen, taking its year-to-date advance to 8.6 percent against Japan’s currency.

The euro was little changed today at $1.3111 at 7:50 a.m. New York time. It fell 0.4 percent to 107.77 yen.

Draghi cut the ECB’s benchmark interest rate twice, to 1 percent, and expanded the central bank’s balance sheet to more than 3 trillion euros since assuming office Nov. 1, reversing the strategy of predecessor Jean-Claude Trichet, who oversaw 0.25 percentage-point rate increases in April and July.

‘Unquestionable Success’

The measures fueled a rally in Europe’s markets as lenders used cash borrowed under the ECB’s longer-term refinancing operations, or LTROs, to buy higher-yielding assets. Italian two-year note yields have dropped more than six percentage points from a euro-era peak 8.12 percent in November, and similar-maturity Spanish notes have declined more than 3.5 percentage points from 6.12 percent the same month.

Europe’s benchmark Stoxx Europe 600 Index (SXXP) has soared 27 percent since last year’s low on Sept. 23, while Germany’s DAX Index is up 39 percent from its lowest since 2009 on Sept. 12.

The ECB’s three-year loans have been an “unquestionable success” in unlocking credit markets, Draghi said on March 8, after policy makers kept their main borrowing rate at 1 percent. “We are observing a significant inflow, a return of interest, of confidence in the euro.”

Europe’s common currency jumped 1 percent versus the dollar on March 8 as a report showed German industrial output rose more than economists forecast in January. German exports increased 2.3 percent in January, a March 9 report from the Federal Statistics Office in Wiesbaden showed. The Munich-based Ifo institute said on Feb. 23 that its business climate index climbed to 109.6 last month, the highest reading since July.

Predictions of Demise

Predictions of the euro’s demise have waned. “We had a completely irrational market panic at the end of last year, where many people were talking about a breakup of the currency bloc,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a telephone interview on March 9. “Thanks to the ECB, markets are now returning to a semblance of calm and the breakup sentiment is diminishing.”

It will probably trade at $1.34 by the end of June, according to John Normand, London-based head of global currency strategy at JPMorgan Chase & Co., the biggest U.S. lender.

“The ECB’s balance-sheet expansion has been overwhelmingly focused on relieving credit stress, and has had fewer negative impacts in terms of reducing short-term interest rates and raising inflation expectations,” Normand said in an interview on March 9. “That’s why the euro is remaining stable.”

Less ‘Aggressive’

Strategists at Morgan Stanley said March 2 they expect the euro to trade at $1.34 at the end of the quarter, up from a $1.27 forecast a month earlier. They also boosted their estimate for Sept. 30 to $1.24 from $1.18.

“We now believe the ECB will not be quite as aggressive with its policy response and we are not likely to see as deep rate cuts as we were expecting before,” Ian Stannard, head of European foreign-exchange strategy at the bank in London, said in a telephone interview on March. 6. “It looks as if the need for the ECB to take further measures has been reduced and that should allow the euro’s decline to unfold at a slower pace.”

Morgan Stanley now expects a 25 basis-point rate cut this year, coming in the second quarter, compared with a prior forecast for a 50 basis-point reduction in 2012. The firm predicts the euro will slide to $1.19 by year-end.

Its resilience has surprised some of the largest investors in the more than $4 trillion-a-day market. John Taylor, founder of currency hedge fund FX Concepts LLC, predicted in January 2011 that the euro would fall to parity, and still says it will get there eventually, sliding to between $1.15 and $1.18 by May.

‘Looking Awful’

“The euro has reason to go down now more so than ever,” he said in a telephone interview on March 9. “This Greek debt deal does nothing other than show that you could lose a lot of money investing in those bonds. Spanish bonds are looking awful. This is just another one of these pauses for the euro. The only question is how long does that pause last.”

Even as the outlook has improved, forecasters say there are more declines to come. The euro will end the second quarter at $1.28 and $1.29 by the conclusion of the third quarter, Bloomberg surveys of economists show. While both are up by one cent since February, the euro will be at $1.29 at the end of the first quarter in 2013, according to another median forecast.

Low rates and the bank loans are prompting traders to sell the euro to fund purchases of higher-yielding assets. The carry trade of borrowing in euros to buy the currencies of Mexico, Brazil, Norway and Australia has returned about 31 percent on an annualized basis since the day before the ECB’s second three- year LTRO on Feb. 29 after being little changed in 2011.

Growth Forecasts

The euro-area economy may contract by 0.4 percent this year, with recessions in countries including Greece and Italy. Germany will probably grow by 0.6 percent, and 1.5 percent in 2013, according to median predictions of economists in Bloomberg surveys. U.S. gross domestic product will expand by 2.2 percent this year and by 2.5 percent in 2013, surveys show.

“If you look at which economy is relatively stronger, it would have to be the U.S.,” Frances Hudson, who helps manage about $237 billion as a global strategist in Edinburgh at Standard Life Investments, Scotland’s second-biggest biggest money manager, said in a March 6 telephone interview. “We are very heavy the dollar and light the euro.”

U.S. employers boosted payrolls by 227,000 in February, while the unemployment rate stayed at 8.3 percent, the Labor Department said March 9. Job growth over the last six months was the strongest since 2006.

Fed’s Pledge

The euro’s advance contrasts with the dollar’s decline after $2.3 trillion in debt purchases by the Federal Reserve from 2008 to June 2011. The IntercontinentalExchange Inc.’s Dollar Index (DXY), which tracks the U.S. currency against those of six trading partners, is down 11 percent to 79.959 from 89.624 in March 2009, its peak since the bankruptcy of Lehman Brothers Holdings Inc. in September 2008.

A Fed pledge to keep rates at about zero through 2014 is weakening the dollar the most of any major currency this year except the yen.

“The Fed’s strong commitment to very easy policy until 2014, that’s certainly a factor that’s bearish for the dollar,” Steven Saywell, head of foreign-exchange strategy for Europe in London at BNP Paribas SA, said in a telephone interview on March 8. BNP Paribas forecasts the euro will end the third quarter at $1.40.

Hedge funds and other large speculators have reduced wagers that the common currency will slide. The so-called net short position was 116,473 contracts as of March 6, from 171,347 in January, statistics from the Washington-based Commodity Futures Trading Commission show.

‘Doomsday Scenario’

Draghi’s actions have reduced a measure of European banks’ reluctance to lend. The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, was 54.7 basis points at the end of last week, data compiled by Bloomberg show. That’s down from 101 basis points in December, the most since the sovereign crisis began.

“The expectation of a doomsday scenario in the euro region has passed,” Pierre Lequeux, head of currency management in London at Aviva Investors, which manages about $424 billion, said in a telephone interview on March 6. “The ECB has been fantastic, liquidity is on tap for banks and that’s a good thing for confidence. The global scenario is also a bit less gloomy than it was six months ago. There are reasons to be positive on the euro.”

To contact the reporters on this story: Liz McCormick in New York at emccormick7@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net; Lukanyo Mnyanda in Edinburgh News at lmnyanda@bloomberg.net

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

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IPhone Failing to Gain Market Share in China as Samsung Lead Triples: Tec

By Bloomberg News - Mar 11, 2012 11:01 PM GMT+0700

Apple Inc. (AAPL) got a second partner in China to sell the iPhone in the world’s biggest mobile-phone market. The deal may be too late to catch Samsung Electronics Co. (005930), with a market share that’s three times larger and growing.

China Telecom Corp. (728) began selling the iPhone last week as Apple tries to build on its 7.5 percent share of the country’s smartphone sales. Samsung controlled 24.3 percent of the market for phones that can play videos and games, according to Gartner Inc., using a strategy of allying with all three of the nation’s third-generation networks since such services started in 2009.

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Models display Samsung Electronics Co. Galaxy Nexus smartphones in Hong Kong. Samsung controls 24.3 percent of the market in China for phones that can play videos and games, according to Gartner Inc., using a strategy of allying with all three of the nation ’s third-generation networks since such services started in 2009. Photographer: Jerome Favre/Bloomberg

Succeeding in China is important for Apple as shipments of smartphones in the country are projected to jump 52 percent this year to 137 million units, overtaking the U.S. for the first time as the world’s biggest market. Unlike Samsung’s strategy of partnering with all carriers, Apple has limited its own success by not making a device compatible with the nation’s biggest operator, China Mobile Ltd. (941)

“I don’t expect Apple to replace Samsung any time soon,” Gartner analyst Sandy Shen said in an interview. “China Telecom is the nation’s smallest carrier, so the extent to which they can help Apple is quite limited.”

The 16.8 percentage-point gap in China between Cupertino, California-based Apple and Samsung almost doubled from the third quarter. While Samsung is No. 1 and Apple No. 5 in China, the global story is different: Worldwide, Apple passed its Suwon, South Korea-based competitor to become the biggest smartphone vendor in the fourth quarter, according to Gartner.

China Mobile

Apple’s partnerships with China’s second- and third-largest carriers give it access to about 34 percent of the nation’s 988 million mobile users, while Samsung targeted the whole market. iPhones aren’t sold to China Mobile’s 655 million subscribers, a number almost equal to the combined population of the U.S., Brazil and Mexico.

“Having access to more subscribers gives vendors like Samsung an advantage,” said Teck Zhung Wong, a Beijing-based analyst with IDC China, who forecast the 52 percent jump in smartphone sales this year. “If Apple is going to continue to grow in the Chinese market, it has to consider very seriously a handset with China Mobile.”

China Telecom had a total of 129.3 million wireless users at the end of January, including 38.7 million 3G subscribers.

Apple introduced the iPhone in 2007 in the U.S. exclusively with AT&T Inc. (T) and added a second carrier partner last year in Verizon Communications Inc. (VZ)

Pelting Eggs

Apple chose not to make a phone with China Mobile because the operator had a unique 3G standard called TD-SCDMA, even after the Chinese company’s Chairman Wang Jianzhou met with the then Chief Executive Officer Steve Jobs in early 2010. Wang told the company’s annual meeting in May that he didn’t expect Apple to introduce an iPhone until the carrier rolled out the fourth- generation TD-LTE network by end of this year.

China Unicom (Hong Kong) Ltd. (762) was the nation’s first carrier to offer the iPhone with a service contract in October 2009.

Even though Apple trailed Samsung, Nokia Oyj (NOK1V), Huawei Technologies Co. and ZTE Corp (000063) in China’s smartphone market, people still crave an iPhone.

Apple’s oldest store in China was pelted with eggs from a crowd of customers on Jan. 13 when the shop, in Beijing’s Sanlitun district, failed to open on the first day of sales for the iPhone 4S. After police sealed off the area to remove more than 500 people, Apple said it would suspend sales of iPhones at all its stores.

‘Didn’t Bet High Enough’

The maker of iMac computers and iPad tablets underestimated the “staggering” demand for the iPhone 4S when it started sales in China in January, Chief Executive Officer Tim Cook said. “We thought we were betting bold,” Cook said Jan. 24. “We didn’t bet high enough.”

The iPhone 4S has been “an incredible hit” with customers around the world, Apple spokeswoman Carolyn Wu said in an e-mail. Apple “can’t wait to get it into the hands of even more customers in China,” Wu said, declining to comment further on the company’s handset strategy in China.

Samsung’s approach to China is “the same” as other markets, Juha Park, senior vice president of product strategy, said in an interview in Barcelona.

“We make product innovation and make our brand very desired in the market,” Park said. “That’s what we do to become a major player. We have been doing quite strong growth in the China market.”

Unlocked IPhone

Even without an agreement with Apple or a device that’s compatible with its high-speed 3G network, China Mobile still has 15 million iPhone users, spokeswoman Rainie Lei said. Those China Mobile users buy unlocked devices and surf the web at slower 2G speeds, or else connect to Wi-Fi hotspots for a faster connection.

China Telecom projects that the iPhone will “significantly enhance its long term sustainable growth and value creation despite the short term pressure on its profitability,” spokeswoman Lisa Lai said in an e-mail.

“For China Telecom, its 4S launch comes late and the low- hanging fruit may already be exhausted,” said Lisa Soh, a Hong Kong-based analyst at Macquarie Group Ltd.

The egg pelting also resulted in Apple losing one advantage it had over Samsung -- its own retail stores stopped selling iPhones. Apple said at the time the move was “for the time being.” Apple’s Wu said the phones remain available through Apple’s online store in China, and declined to provide an update on when the shops would resume sales of the devices.

That leaves Samsung free to further widen its gap.

“It’s just one country, but it’s such a big market and its portion in the global market is huge, so Samsung is trying to act fast to capture the market,” said Kim Young Chan, a Seoul- based analyst at Shinhan Investment Corp. “Dealing with different network standards will give them a pretty valuable competitive edge.”

To contact Bloomberg News staff for this story: Edmond Lococo in Beijing at elococo@bloomberg.net; Jun Yang in Seoul at jyang180@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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U.S. Soldier Kills 16 Afghan Civilians in Shooting Spree in Taliban Area

By Eltaf Najafizada - Mar 12, 2012 6:13 AM GMT+0700

US soldiers keep watch at the entrance of a military base near Alkozai village following the shooting of Afghan civilians allegedly committed by a rogue US soldier in Panjwayi district, Kandahar province on March 11, 2012. Photograph: Jangir/AFP/Getty Images

A U.S. soldier shot to death 16 Afghan civilians in their homes before returning to his base and being taken into custody, Afghan and NATO officials said.

The shooting spree yesterday threatens to reignite anti- American protests weeks after a Koran-burning incident triggered violence. Women and children were among those killed in the attacks in the southern province of Kandahar, which has been a stronghold for the Taliban.

President Barack Obama called Afghan President Hamid Karzai “to express his shock and sadness” and pledge “his administration’s commitment to establish the facts as quickly as possible and to hold fully accountable anyone responsible,” according to a White House statement.

Karzai said the incident shows “great oppression and cruelty” toward the people of Afghanistan, according to a statement from his office. “The people of Afghanistan want full reports and clarity on the incident’s details from the United States of America,” Karzai said.

The soldier who allegedly shot the Afghan civilians is from Joint Base Lewis-McChord, Washington, according to a U.S. official who spoke on condition of anonymity because he wasn’t authorized to speak publicly. Catherine Caruso, a public affairs specialist at the base near Tacoma, said she had no information about the identity of the shooter and referred questions to the North Atlantic Treaty Organization’s International Security Assistance Force in Afghanistan.

Complicated Negotiations

The shooting may complicate the already complex negotiations with Afghanistan on its relationship with the U.S. military after 2014, when NATO plans to hand off responsibility for security to the Afghan government. Those negotiations have been made more difficult by the Koran burning last month and by a video in January showing at least four U.S. Marines urinating on Taliban corpses.

The International Security Assistance Force said the attack was being investigated.

“What we know is that a U.S. soldier left his forward operating base in the night hours from Saturday into Sunday, went into the nearby villages and opened fire on civilians in those villages,” Brigadier General Carsten Jacobson, speaking for the ISAF, said in a video statement. The unidentified serviceman turned himself in after the incident and was being questioned, he said.

Among the dead were nine children and three women, Karzai said in a statement. Five others were wounded. ISAF personnel were tending to the wounded, Jacobson said.

House to House

The soldier went to three houses in the villages of Najib Yan and Alokozai in Kandahar’s Panjwayi district and opened fire, according to villagers who spoke to Bloomberg News by telephone.

“The soldier killed four of my family members including my wife, sisters and a baby nephew,” Habibullah Khan said by telephone. “I was out of the district in the city of Kandahar, but when I came back I saw blood and all four people had been killed in their beds.”

The attacker brought 11 of the dead into one home and set the bodies on fire, according to Mohammed, a tribal elder in the district who asked that his last name not be used. The Associated Press and Reuters also reported that bodies had been set alight. AP and the BBC said the soldier was a staff sergeant.

The soldier is 38 years old and is married with two children, ABC News said, citing a U.S. official it didn’t name. The soldier was on his first tour of duty in Afghanistan after three tours in Iraq, according to the report on ABC’s website.

Taliban Reacts

“The so-called American peace keepers have once again quenched their thirst with the blood of innocent Afghan civilians in Kandahar province,” the Taliban said in a statement posted on a website used by the insurgents, according to the AP.

Protests over the burning of Korans in a trash dump at a U.S. air base led to attacks on U.S. personnel in Afghanistan last month. Two American advisers were shot dead in the Interior Ministry Feb. 25, while nine Afghans were killed and two American soldiers wounded in a suicide car-bombing in eastern Afghanistan Feb. 27.

Yesterday’s shootings appear to be “an individual act” and are not being linked to “the incidents that happened recently,” Jacobson said.

“This deeply appalling incident in no way represents the values of ISAF and coalition troops or the abiding respect we feel for the Afghan people,” U.S. Marine General John R. Allen, commander of ISAF, said in a statement. “Nor does it impugn or diminish the spirit of cooperation and partnership we have worked so hard to foster with the Afghan National Security Forces.”

Promises of Accountability

U.S. Defense Secretary Leon Panetta, who also called Karzai, said in a statement that he gave Karzai assurances that “we will hold any perpetrator who is responsible for this violence fully accountable under the law” and that “I am fully committed to ensuring that our cooperation continues.”

While Panetta didn’t say so in his statement, the U.S. retains legal jurisdiction over American troops under a U.S.- Afghan accord, according to a Jan. 5, 2011, report by the Congressional Research Service.

Elected officials in the U.S. debated the attack’s potential impact on already tense U.S.-Afghan relations.

“One incident like this can change the equation” Virginia’s Republican Governor Bob McDonnell said on NBC’s “Meet the Press” yesterday. “It’s tragic because we have so many brave” soldiers serving in Afghanistan, he said.

‘Anger and Sorrow’

Asked yesterday about U.S. involvement in Afghanistan, Republican presidential contender Newt Gingrich said the mission is “not doable” at the current level of U.S. military forces.

“We are risking the lives of men and women for a mission frankly that is not worth doing” Gingrich said on “Fox News Sunday.”

Senator John McCain, the top Republican on the Senate Armed Services Committee, said “anger and sorrow” over the shootings shouldn’t distract from the U.S. mission in Afghanistan.

“We should not forget the attacks on the United States of America in 9/11 originated in Afghanistan,” McCain of Arizona said. “And if Afghanistan dissolved into a situation where the Taliban were able to take over or a chaotic situation, it could easily return to an al-Qaeda base for attacks on the United States.”

To contact the reporter on this story: Eltaf Najafizada in Kabul at enajafizada1@bloomberg.net

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

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Oil Drops From Highest Price in a Week on Concern Economic Growth to Slow

By Jacob Adelman - Mar 12, 2012 8:20 AM GMT+0700

Oil fell from the highest price in more than a week in New York on speculation fuel demand will falter after Chinese export data signaled an economic slowdown.

Futures slid as much as 0.5 percent. China had its biggest trade deficit in at least 22 years last month, a March 10 report by the customs bureau showed. Overseas shipments rose 18.4 percent, compared with a median estimate of 31.1 percent in a Bloomberg News survey. Crude imports climbed to a record 5.87 million barrels a day on seasonal agricultural demand and as the nation fills emergency storage reserves.

“The data from China is a downside pressure on the oil market, said Ken Hasegawa, a commodity-derivative sales manager at Newedge Group in Tokyo. ‘‘The trade deficit is much bigger than expected.’’

Crude for April delivery fell as much as 55 cents to $106.85 a barrel in electronic trading on the New York Mercantile Exchange and was at $106.87 at 10:17 a.m. Tokyo time. The contract climbed 82 cents to settle at $107.40 a barrel on March 9, the third day of gains and the highest close since March 1. Prices are up 8.1 percent this year.

Brent oil for April settlement slid 49 cents to $125.49 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract was at a premium of $18.62 to New York-traded West Texas Intermediate grade, compared with a record $27.88 on Oct. 14.

China Slowdown

China’s trade deficit follows reports last week that showed the weakest January-February factory-production gain since 2009 and retail sales below the median economist estimate. China was the second-biggest oil consumer in 2010 with about 11 percent of global demand, according to BP Plc (BP/)’s Statistical Review of World Energy. The U.S. accounted for 21 percent.

The nation’s crude imports beat the previous record of 5.6 million barrels a day in September 2010 and 5.46 million in January, according to Bloomberg calculations from data released March 10 by the Beijing-based General Administration of Customs. Fuel demand typically rises during the nation’s spring planting season that begins this month. The country also started filling emergency petroleum reserve tanks at Lanzhou in the northwest, Yu Baocai, a vice president at China National Petroleum Corp., said March 7.

Crude prices may fall this week as calls for negotiations between nuclear powers and Iran may reduce tension that’s helped bolster crude prices this year, a Bloomberg News survey showed. Fourteen of 28 analysts, or 50 percent, forecast oil will fall through March 16. Ten respondents, or 36 percent, predicted prices will rise and four estimated there will be little change.

Hedge Fund Bets

Hedge funds reduced bullish bets on oil for the first time in five weeks, pushing prices to the lowest level since mid- February, as concern about conflict with Iran decreased. Large speculators cut wagers on rising prices by 7.3 percent in the week ended March 6, falling from a 10-month high, according to the Commodity Futures Trading Commission’s Commitments of Traders report on March 9.

President Barack Obama said on March 6 that there is a ‘‘window of opportunity” for diplomacy and sanctions to compel Iran to give up any effort to develop nuclear weapons. Catherine Ashton, the European Union’s foreign policy chief, said March 6 that world powers are ready to resume talks with Iran over its disputed nuclear work.

Iran will never bow to international military threats, the official state television station reported President Mahmoud Ahmadinejad as saying yesterday.

To contact the reporter on this story: Jacob Adelman in Tokyo at jadelman1@bloomberg.net

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

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Citigroup Names Peter Tague Co-Head of Mergers Worldwide With Mark Shafir

By Ambereen Choudhury and Jeffrey McCracken - Mar 12, 2012 8:08 AM GMT+0700

Citigroup Inc. (C), ranked seventh among mergers and acquisitions advisers last year, promoted Peter Tague to co-head of its global M&A business.

Tague joins Mark Shafir, who’s been sole head since 2008, New York-based Citigroup said in a memo distributed last week and obtained by Bloomberg News. Shafir will focus on his other role, overseeing technology, media and telecommunications investment-banking, according to the memo.

Tague and Shafir “will be tasked with expanding the wallet and market share of our M&A franchise and increasing our participation in landmark and cross border transactions,” Raymond J. McGuire, the head of investment banking, said in the memo. Mark Costiglio, a spokesman for Citigroup, confirmed the statement.

Citigroup’s advisory revenue dropped 5 percent to $684 million last year, or less than 1 percent of the bank’s net revenue across all business lines. Tague was most recently a vice chairman in the M&A group, and previously worked in an internal strategy role.

Before that, he held positions overseeing the global energy, power, and chemicals investment-banking group and European merger advisory. Tague has worked at Citigroup or predecessor firms since at least 1995, according to records on the website of the Financial Industry Regulatory Authority.

Tague advised Dow Chemical Co. on its $16.5 billion acquisition of Rohm & Haas Co. in 2009, and Apache Corp. (APA) on its $7 billion purchase of oilfields in the U.S., Canada and Egypt from BP Plc (BP/) in 2010. He counseled London-based Peninsular & Oriental Steam Navigation Co. on its 2006 sale to Dubai Ports World for $6.8 billion.

Ben Druskin, who was co-head of technology, media and telecommunications investment banking along with Shafir, moved to a new role as chairman of the group, McGuire said in the memo.

To contact the reporter on this story: Ambereen Choudhury in London at achoudhury@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net

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Japanese Stocks Rise Third Day on U.S. Jobs Data, Japan Machinery Orders

By Yoshiaki Nohara - Mar 12, 2012 8:39 AM GMT+0700

March 12 (Bloomberg) --　The Nikkei 225 Stock Average (NKY) headed for its biggest three-day advance since October after better- than-expected U.S. jobs data boosted the earnings outlook for exporters. Shares also gained after Japanese machinery orders beat expectations.

Sony Corp. (6758), Japan’s No. 1 exporter of consumer electronics, rose 0.8 percent after the yen reached a 10-month low against the dollar last week. Hitachi Construction Machinery Co. (6305) gained 1.7 percent. Commodities trader Mitsubishi Corp. (8058) added 0.4 percent as metal prices climbed.

The Nikkei 225 Stock Average advanced 0.3 percent to 9,962.62 as of 10:04 a.m. in Tokyo. The broader Topix Index gained 0.2 percent to 850.01 after adding 1.3 percent last week.

“The downside risk to U.S. growth is fairly limited from here,” said Andrew Pease, Sydney-based chief investment strategist for the Asia-Pacific region at Russell Investment Group, which manages about $150 billion. “Five months ago, the markets were so cheap because of fears of Europe’s financial meltdown and another U.S. downturn. Now that both of those fears have been alleviated somewhat, the markets have been reweighted.”

Futures on the Standard & Poor’s 500 Index (SPXL1) fell 0.2 percent today. The index rose 0.4 percent in New York on March 9 after a 227,000 increase in payrolls last month topped the median projection of economists in a Bloomberg News survey.

Yen Gains

The yen touched 82.65 per dollar on March 9, the lowest since April 27, boosting the value of overseas income at Japanese companies. The currency rose against all of its major counterparts today, weighing on gains in equities.

Stocks also advanced as euro-area finance ministers will gather in Brussels today to sign off on a 130 billion-euro ($170 billion) bailout package for Greece. The nation on March 9 completed a debt swap seen as key to containing Europe’s debt crisis.

A Japanese government report today showed machinery orders gained 3.4 percent in January after falling 7.1 percent in December.

Gains were limited after the 25-day Toraku index, which compares the number of advancing and declining shares on the Tokyo Stock Exchange, rose to 143 last week. A reading of more than 120 indicates to some investors that a loss is likely.

Quake Recovery

The Topix (TPX) has gained 11 percent since March 15 last year, when the measure plunged four days after the record earthquake and tsunami struck Japan’s northeast and caused a nuclear disaster. The gain, buoyed by global monetary easing and reconstruction demand, boosted the value of shares on the index to 1.24 times book value, compared with 1.12 in March 2011.

The Bank of Japan is starting two-day meeting at which it’s expected to keep interest rates unchanged, according to 12 of 14 economists surveyed by Bloomberg News. The central bank on Feb. 14 surprised the market by increasing its government bond purchase program and setting an inflation goal of 1 percent.

The London Metal Exchange Index of prices for six industrial metals including copper and aluminum rose 1.9 percent on March 9.

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

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

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Obama’s Re-Election Case Bolstered as Jobs Data Point to Stronger Economy

By Mike Dorning - Mar 10, 2012 2:01 AM GMT+0700

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Alan Krueger on U.S. Jobs Report, Economy

A surge in new jobs last month that held the U.S. unemployment rate to 8.3 percent highlights a strengthening economy that bolsters President Barack Obama as he approaches the November election .

The jobs report “is another plus for the president,” said Stu Rothenberg, editor of the nonpartisan Rothenberg Political Report in Washington.

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President Barack Obama at the Daimler Trucks North America Freightliner plant in Mount Holly, North Carolina on March 7, 2012. Photographer: Nell Redmond/UPI/Landov

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March 9 (Bloomberg) -- James Guyette, chief executive officer of Rolls-Royce North America, talks about the February employment report, the outlook for U.S. economy and expansion prospects for the company. Guyette speaks with Mark Crumpton on Bloomberg Television's “Bottom Line.” (Source: Bloomberg)

“These numbers suggest the economy is moving in the right direction,” he said. “It’s likely to make people more optimistic, and that’s always, always good for an incumbent president.”

Employers added 227,000 jobs in February, more than forecast, the Labor Department reported today in Washington. The median projection of economists in a Bloomberg News survey called for a 210,000 increase. Job growth was revised upward for the prior two months.

The unemployment rate held steady after dropping for five consecutive months from 9.1 percent in August.

“For voters who are used to an unemployment rate that starts with a 9, this looks like progress,” said Dan Schnur, a campaign adviser to Republican presidential candidate John McCain’s first bid for the White House in 2000. “It might not be a huge victory for Obama’s re-election campaign. But it’s not going to be a significant drag on him either.”

‘Better Days Ahead’

Obama said the jobs report shows “the economy is getting stronger” in a speech today to workers at a Rolls-Royce Holdings Plc (RYCEY) factory in Prince George County, Virginia, that manufactures jet engine parts. “It gives me confidence there are better days ahead.”

Rick Santorum, a former Pennsylvania senator seeking the Republican Party’s 2012 presidential nomination, said today the economy is recovering “in spite of” the Democratic Obama administration’s policies.

“Certainly a quarter of a million jobs, roughly, being added is a positive step forward,” Santorum said in an interview on Bloomberg Television’s “Political Capital with Al Hunt” airing this weekend.

The administration “has consistently seen, you know, bad job reports because of bad policies that have led to those job reports,” he said. “And eventually, you know, the economy does recover, in spite of the headwinds that this administration has put in its place.”

Gasoline Prices

The strengthening economy is beginning to translate into greater public optimism, even with recent increases in gasoline prices.

Consumer confidence climbed to a four-year high last week, according to the Bloomberg Consumer Comfort Index (COMFCOMF). For a fifth straight week, half of those surveyed also rated their personal finances as positive, bolstered by a resilient stock market, faster job growth and rising wages.

The Commerce Department last week reported that the economy grew at a 3 percent annual pace in the final quarter of 2011, up from a 1.8 percent gain the prior three months.

A pickup in economic growth during an election year is helpful to an incumbent president such as Obama, said Christopher Wlezien, a political science professor at Temple University in Philadelphia and co-author with Robert Erikson of the forthcoming book “The Timeline of Presidential Elections.”

“It matters more and more as time goes by. It probably matters more now than it did three months ago,” he said.

Slow Improvement Forecast

While potential threats loom -- such as further gasoline price increases, a war in the Middle East or a worsening of the European debt crisis -- most private forecasts anticipate slow improvement in the unemployment rate in the months before Election Day, Nov. 6.

“Over the last several months, the economy has gone from being a net negative for Obama to probably something close to a wash,” said Schnur, director of the Unruh Institute of Politics at the University of Southern California in Los Angeles, interviewed before the release of the jobs report.

The trajectory of the economy is typically much more important in presidential elections than the actual unemployment rate, Wlezien said.

“The point is really are we getting better or are we getting worse and how fast is it changing,” Wlezien said. “Whether the unemployment rate is 6 percent or 9 percent matters less.”

Reagan’s Victory

For example, there was not much difference between the 7.5 percent unemployment rate when President Jimmy Carter lost re- election in November 1980 and the 7.2 percent rate four years later when President Ronald Reagan won re-election by a landslide, he said.

The distinction was the trend lines as each president went before voters. Under Reagan, unemployment had dropped 1.3 percentage points during the 12 months before the election; under Carter, joblessness had risen 1.6 percentage points over the same time period.

The median projection for unemployment during the final quarter of the year is 8.1 percent, according to a Bloomberg News survey of 75 economists conducted Feb. 3 to Feb. 9.

Joel Prakken, senior managing director of Macroeconomic Advisers LLC in St. Louis, who is among those projecting the 8.1 percent jobless rate, said a drop below 8 percent by the election is “within the margin of error” of the forecast. That would break a psychological barrier and further boost public confidence, he said.

Monthly Surprises

“I wouldn’t discount the possibility,” Prakken said. “It’s surprised many how quickly the unemployment rate has fallen. If we just got one or two more monthly surprises, it could be below 8 percent before the election.”

Unemployment rates are difficult to project as the economy recovers from recession because of the way the indicator is computed, Prakken said. Only people actively seeking work are counted as unemployed. As an economy improves, workers who had given up looking for a job typically resume seeking one and consequently add to the number of people counted as unemployed.

The economy needs to add 125,000 jobs per month to keep up with population growth, Prakken said. Employment growth must be higher if discouraged workers pour back into the job market, as happened in February.

The labor force participation rate, the share of working- age people who either have a job or are seeking one, rose in February to 63.9 percent from 63.7 percent.

Underemployment Drops

The so-called underemployment rate, which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking, decreased to a three-year low of 14.9 percent from 15.1 percent.

The slow-growth scenario that most forecasters anticipate sets the stage for a “classic glass-half-full, glass-half-empty argument” between the political parties over the jobless rate during the summer, Schnur said.

Republican front-runner Mitt Romney previewed just such a critique on the night of the Super Tuesday Republican primaries on March 6, arguing that 8.3 percent unemployment may be the best the Obama administration can achieve, yet the country “can do better” than an 8 percent rate.

The White House has focused on the progress made since Obama took office in January 2009. The U.S. lost 818,000 jobs that month.

“We’re picking up from a relatively slow growth rate,” Prakken said. “It’s good news for the president but it’s still pretty dicey.”

To contact the reporter on this story: Mike Dorning in Washington at mdorning@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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Greece Deal Triggers $3B in Default Swaps: ISDA

By Abigail Moses and Mary Childs - Mar 10, 2012 7:57 AM GMT+0700

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ISDA Says Greece Deal Triggers $3B in Default Swaps

A committee of credit-default swaps traders will expedite an auction to settle about $3 billion of contracts tied to Greece after the nation took steps to force investors to participate in the biggest sovereign-debt restructuring in history.

Traders will hold the auction March 19 to “maximize” the number of bonds that can be used to set payout amounts, the New York-based International Swaps and Derivatives Association said on the committee’s website yesterday. Auctions, which set a recovery value on the underlying bonds, typically are held about a month after credit events are triggered.

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Evangelos Venizelos, Greece's finance minister, during a news conference in Athens on March 9, 2012. Photographer: Kostas Tsironis/Bloomberg

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March 9 (Bloomberg) -- Hans Humes, president of Greylock Capital Management, talks about the credit event declared by the International Swaps & Derivatives Association with regard to Greece's use of collective action clauses forcing investors to take losses under the nation's debt restructuring. The ISDA's determinations committee ruled the use of CACs is a restructuring credit event, triggering payouts on $3 billion of default insurance. Humes speaks with Adam Johnson, Trish Regan and Michael McKee on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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March 9 (Bloomberg) -- Peter Tchir, founder of TF Market Advisors, talks about the International Swaps & Derivatives Association's determination that Greece's debt restructuring will trigger payouts on default insurance. He speaks with Mark Crumpton on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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March 9 (Bloomberg) -- Michael Harris, director of trading at Campbell & Co., and John Herrmann, president of Herrmann Forecasting LLC, talk about the triggering of payouts on Greek default insurance and the U.S. economy. They speak with Trish Regan, Sara Eisen and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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March 9 (Bloomberg) -- Joseph Tanious, a market strategist at JPMorgan Asset Management, and Todd Schoenberger, a managing director at Landcolt Trading LLC, talk about Greece’s debt restructuring, the global economy and investment strategy. They speak with Trish Regan, Lisa Murphy and Adam Johnson on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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March 9 (Bloomberg) -- Italy's Deputy Finance Minister Vittorio Grilli said the use of collective action clauses in a Greek debt restructuring won't necessarily constitute a credit event. David Tweed reports from Milan on Bloomberg Television's "The Pulse" with Maryam Nemazee. (Source: Bloomberg)

Audio Download: Gross Says Greek Default Swaps to Be Triggered

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Greece’s use of collective action clauses forcing investors to take part in the sovereign restructuring should trigger $3 billion of insurance payouts under rules governing credit-default swap contracts. Photographer: Kostas Tsironis/Bloomberg

The viability of credit swaps as a hedge for about $257 billion of government debt was questioned after ISDA rejected a request on March 1 to declare whether the swaps were triggered because the restructuring effectively subordinated private investors to the European Central Bank. Banks, hedge funds and institutional investors use swaps to protect against losses or to speculate on creditworthiness.

“It’s important to keep investor confidence in this instrument as it will affect the ability of sovereigns to issue bonds,” according to Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam, who said the decision will “restore confidence” in the market. “If you want to attract investor demand, you have to offer them an instrument that will allow them to hedge exposure, and CDS is the best instrument for that.”

Collective Action

Greece’s use of collective action clauses, or CACs, in its debt restructuring triggers payouts on the contracts, ISDA’s determinations committee said in a statement yesterday. Before the ruling, the cost of five-year Greek swaps rose to a record $7.68 million upfront and $100,000 annually to insure $10 million of debt.

Investors with 95.7 percent of Greece’s privately held bonds will participate in the swap after the CACs are triggered, the Finance Ministry said. Bondholders tendered 152 billion euros ($199.5 billion) of Greek-law bonds, or 85.8 percent, and 20 billion euros of foreign-law debt. Greece extended its offer to holders of non-Greek law bonds to March 23, after which sweeteners will no longer be available.

‘Preliminary List’

“ISDA has already been working with members to put together a preliminary list” of bonds that can be used in the auction, ISDA General Counsel David Geen said on a conference call with reporters yesterday.

The committee is considering “the range of obligations that are either currently outstanding or may be outstanding once some of these exchanges occur,” ISDA Chief Executive Officer Robert Pickel said on the call.

In a restructuring credit event, investors have the right to choose whether to settle their contracts.

Policy makers including former ECB President Jean-Claude Trichet opposed payouts on Greek swaps on concern traders would be encouraged to bet against failing nations and worsen the region’s debt crisis.

A swaps trigger “raises the question of which country is next and which banks are most exposed,” Hank Calenti, a bank analysts at Societe Generale SA in London, wrote in a note. “Less than six months ago we had the head of the ECB exhorting that there must be no credit event on Greece.”

Swaps Stigma

While policy makers had hoped to achieve debt sustainability in Europe’s most indebted nations without triggering default swaps, political determination to avoid the stigma of a credit event waned as Greece struggled to meet the terms of its bailout.

Standard & Poor’s downgraded the nation to selective default on Feb. 27 after the government retroactively inserted CACs into bond terms. Moody’s Investors Service, which downgraded the nation’s sovereign rating to its lowest level of C on March 2, said today it considers the nation to have defaulted.

Greece reached its target for participation in the debt restructuring after using CACs to force the hand of holdouts.

“I’ve been surprised throughout at the strong desire not to trigger CDS,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “This should be good for anyone seeking protection elsewhere, such as Spain or Italy.”

ISDA’s Geen said the determination should resolve concerns that credit swaps aren’t effective hedges.

Issue ‘Moot’

“That issue, of course, is moot at this point,” he said, “but we think it’s a fair question.” ISDA definitions contain “a number of conditions that must be met before a credit event can occur, which are important to balance the interests of the buyer and the seller,” he said.

Credit-default swaps on Greece cover $3.16 billion of debt, down from about $6 billion last year, according to the Depository Trust & Clearing Corp. That compares with a swaps payout of $5.2 billion on Lehman Brothers Holdings Inc. in 2008.

The actual payout on Greece will be “much smaller” than the net amount reported by DTCC, Pickel said. A gross $68.9 billion of contracts were outstanding as of March 2 before accounting for offsetting trades.

While there were concerns at the time about a daisy chain of losses if counterparties failed to meet their commitments, the settlement of swaps guaranteeing debt of Lehman, as well as Fannie Mae and Freddie Mac, were “orderly” and caused no major disruptions for the market, according to regulators.

Restructuring Events

Swaps on western European governments can pay out on a credit event triggered by failure to pay, restructuring or a moratorium on payments. A restructuring event can be caused by a reduction in principal or interest, postponement or deferral of payments or a change in the ranking or currency of obligations, according to ISDA rules. Any of these changes must result from deterioration in creditworthiness, apply to multiple investors and be binding on all holders.

The determinations committee which decides whether a credit event has occurred consists of representatives from 15 dealers and investors. The group, which includes Deutsche Bank AG (DBK), Pacific Investment Management Co. and Morgan Stanley, rules after a request is made by a market participant.

The trigger is “a better outcome for markets,” said Jason Brady, a managing director at Thornburg Investment Management Inc., which oversees about $81 billion from Santa Fe, New Mexico. “It means people got what they expected. Yeah, Greece defaulted. We’re not changing that fact at all; why make other parts of the market say something different just because you don’t like that part of the market?”

To contact the reporters on this story: Abigail Moses in London at amoses5@bloomberg.net; Mary Childs in New York at mchilds5@bloomberg.net

To contact the editors responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net

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Greece Pushes Bondholders Into Record Debt Swap

By Maria Petrakis and Rebecca Christie - Mar 9, 2012 9:09 PM GMT+0700

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Greece Forces Losses on Bondholders

Greece pushed through the biggest sovereign restructuring in history after cajoling private investors to forgive more than 100 billion euros ($132 billion) of debt, opening the way for a second bailout.

Euro-region finance ministers agreed on a conference call that the swap meant Greece had met the terms to proceed with a 130 billion-euro rescue package designed to prevent a collapse of the Greek economy. Ministers freed up 35.5 billion euros in public sweeteners and interest now, with a decision on the balance to be made at a March 12 meeting in Brussels.

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Evangelos Venizelos, Greece's finance minister, at a news conference in Athens on March 9, 2012. Photographer: Kostas Tsironis/Bloomberg

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March 9 (Bloomberg) -- Bloomberg's Erik Schatzker, Sara Eisen, Stephanie Ruhle and Scarlet Fu report that investors with 95.7 percent of Greece's privately held bonds will participate in the biggest sovereign debt restructuring in history after the government said it will trigger an option forcing them to take part. They speak on Bloomberg Television's "Inside Track." (Source: Bloomberg)

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March 9 (Bloomberg) -- Pawan Malik, managing director of Navigant Capital, talks about demand for European sovereign debt after Greece received approval to activate collective action clauses. He speaks with Owen Thomas and Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)

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March 9 (Bloomberg) -- Former Greek Finance Minister Stefanos Manos talks about the nation's debt swap agreement and its impact on southern European bonds. He speaks from Athens with Owen Thomas and Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)

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March 9 (Bloomberg) -- Niall Ferguson, a history professor at Harvard University and a Bloomberg Television contributing editor, talks about his interview with International Monetary Fund Managing Director Christine Lagarde Thursday night at the Women in the World conference in New York. Ferguson also talks about the outlook for Europe's debt crisis. He speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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Greek Finance Minister Evangelos Venizelos arrives for a news conference in Athens, on March 9, 2012. Photographer: Thanassis Stavrakis/AP

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“The very strong and positive result provides a major opportunity now for Greece to move ahead with its economic reform program,” Josef Ackermann, chairman of the Institute of International Finance who is also chief executive officer of Deutsche Bank AG, said in an e-mailed statement. Photographer: Chris Ratcliffe/Bloomberg

“It would be a big mistake to think we are out of the woods,” German Finance Minister Wolfgang Schaeuble told reporters in Berlin after the call today. “We have a chance of making it. And we have to seize that opportunity.”

Stocks rose while the euro fell after the government in Athens said it will trigger an option forcing some investors to take part in the exchange. Officials from the International Swaps and Derivatives Association called a meeting today to consider a “potential credit event” relating to Greece.

Participation Rate

Investors with 95.7 percent of Greece’s privately held bonds will participate in the swap after so-called collective action clauses are triggered, the Finance Ministry said. Bondholders tendered 152 billion euros of Greek-law bonds, or 85.8 percent, and 20 billion euros of foreign-law debt. Greece extended its offer to holders of non-Greek law bonds to March 23, after which sweeteners will no longer be available.

The result was “very strong and positive,” said Josef Ackermann, chairman of the Washington-based Institute of International Finance, which led negotiations with the Greek government on behalf of private bondholders. “These are important steps towards resolving the Greek debt crisis, addressing the overall fiscal and sovereign debt problems in the euro area, and restoring financial stability.”

Even with steps taken toward the goal of the exchange, to reduce the 206 billion euros of privately held Greek debt by 53.5 percent, Greece faces hurdles ahead. Europe’s most indebted nation will be saddled with a debt level of 120.5 percent of gross domestic product by 2020 under current targets. The Greek government must continue to meet the terms laid down by its international creditors to receive aid payments at three-monthly intervals. Elections due in April or May might still upend adherence to the measures demanded.

CDS Contracts

With Greece now in a fifth year of recession, Prime Minister Lucas Papademos’s government had said that it was ready to force holders of Greek-law bonds into the swap. The use of collective action clauses may trigger $3 billion of insurance payouts under rules governing credit-default swap contracts.

Greek Finance Minister Evangelos Venizelos said that participation “surpassed expectations” and he would recommend to Cabinet the authority to activate collective action clauses.

“This is a dangerous precedent that has been set,” John Wraith, fixed-income strategist at Bank of America Merrill Lynch, said in an interview on Bloomberg Television’s “Countdown” with Linzie Janis and Owen Thomas. For Greece, “yes, it is probably necessary, but it is just another hurdle crossed rather than some sort of solution.”

The euro weakened for the first time in three days, dropping 0.9 percent to $1.3156 as of 2:45 p.m. in Berlin. The Stoxx Europe 600 Index gained 0.6 percent to 265.61.

‘Mild Negative’

“There was a small possibility that for whatever reason, the participation would be so high that the CACs may not need to get triggered,” Pawan Malik, managing director of Navigant Capital, said in a Bloomberg Television interview. “For the markets this may be a mild negative today.”

The writedown is a key element in European leaders’ efforts to turn the tide against the crisis that first emerged in Greece in late 2009, then forced Ireland and Portugal to follow Greece in requiring bailouts.

Germany and France, Europe’s two biggest economies that have steered the euro-area’s response to the crisis, welcomed the debt-swap take-up. The swap was a “great success” and “good news,” and “hits all the objectives we set ourselves,” French Finance Minister Francois Baroin said on RTL Radio.

Merkel ‘Pleased’

Chancellor Angela Merkel is “pleased” about the “high level of participation of private creditors,” Steffen Seibert, her chief spokesman, said in Berlin. It is “an encouraging result that will help put Greece on a path to stability. What’s important now is for Greece to seize the opportunity offered by this debt swap, meaning it implements the agreed programs.”

Greece’s largest banks, most of the country’s pension funds and more than 30 European banks and insurers including BNP Paribas SA and Commerzbank AG (CBK), had said they would agree to the offer before it closed yesterday at 10 p.m. Athens time.

In the exchange, investors will receive new bonds with a face value of 31.5 percent of the old ones together with notes from the European Financial Stability Facility. The new debt is governed by English law and comes with warrants that will provide extra income in years when Greek economic growth exceeds thresholds. The net present value loss for investors is more than 70 percent.

“Despite all the justified happiness about this issue we have to note that Greece is only buying time,” Michael Kemmer, general manager of the BdB Association of German banks, said in an interview with Deutschlandfunk radio. “This is an important step -- the private sector showed solidarity. That’s good, but the work has only just begun.”

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

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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