U.S. Stocks Fall on Europe Woes After Last Week’s Rally

U.S. stocks fell, pulling the Standard & Poor’s 500 Index down from the highest level since 2007, as European finance chiefs deadlocked at debt-crisis talks and New York-area manufacturing slumped.
Bank of America Corp. (BAC) and Morgan Stanley slid more than 2.4 percent after two weeks of gains. Alcoa Inc. (AA) tumbled 2.6 percent as commodity shares plunged. Cliffs Natural Resources Inc. (CLF) lost 7 percent after its rating was cut by JPMorgan Chase & Co. (JPM) Apple Inc. (AAPL) gained 1.2 percent as pre-orders of its iPhone 5 topped 2 million units in one day. Office Depot Inc. (ODP) rose 5.3 percent after Starboard Value LP took a stake in the company.

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Traders work on the floor of the New York Stock Exchange during afternoon trading on Sept. 14, 2012. Photographer: Mario Tama/Getty Images

1:00

Sept. 17 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks fell, after the Standard & Poor’s 500 Index rallied to its highest level since 2007, as European finance chiefs deadlocked at debt-crisis talks and New York area manufacturing slumped. (Source: Bloomberg)

4:37

Sept. 17 (Bloomberg) -- Bloomberg’s Trish Regan, Matt Miller and Adam Johnson report on today’s ten most important stocks including Bloomin' Brands, Office Depot and Apple. (Source: Bloomberg)

5:47

Sept. 17 (Bloomberg) -- Tim Hartzell, chief investment officer at Sequent Asset Management LLC, discusses Federal Reserve policy, U.S. stocks and investor sentiment towards Europe. He talks with Guy Johnson on Bloomberg Television's "The Pulse." (Source: Bloomberg)

4:24

Sept. 17 (Bloomberg) -- David Kotok, chief investment officer at Cumberland Advisors Inc., talks about Federal Reserve monetary policy and investment strategy. Kotok speaks with Adam Johnson and Trish Regan on Bloomberg Television's "Street Smart." (Source: Bloomberg)

The S&P 500 slid 0.3 percent to 1,461.19 at 4 p.m. in New York. The Dow Jones Industrial Average dropped 40.27 points, or 0.3 percent, to 13,553.1. About 5.7 billion shares traded hands on U.S. exchanges today, 5.4 percent below the three-month average.
“It looks like we need to take a small breather after the sizable rally that we’ve had,” Randy Frederick, managing director of active trading and derivatives at Charles Schwab Corp., said in an interview from Austin, Texas. His firm has $1.83 trillion in client assets. “There’s the potential for a small pull-back, but I think we will move back into the bull territory later in the week unless there’s an unexpected negative news event.”

EU Concern

The S&P 500 rallied last week to the highest level since December 2007 as the Federal Reserve’s plan to buy mortgage securities fueled demand for riskier assets. Commodity, financial and industrial shares had the biggest gains among 10 groups in the benchmark gauge, helping to extend its two-week advance to 4.2 percent. The index is about 7 percent away from its all-time high set in October 2007.
Stocks fell today as European Union finance ministers failed to agree on a timetable for a more unified banking sector and clashed over terms of bailout requests and the role of the European Central Bank at a meeting Sept. 14 in Cyprus. Citigroup Inc. became the latest bank to cut its growth forecast for China. At least 13 banks and brokerages have reduced their 2012 economic growth forecasts for the world’s second-largest economy this month.

Empire Manufacturing

U.S. equities also declined as the Federal Reserve Bank of New York’s general economic index dropped to minus 10.41, the lowest since April 2009, from minus 5.85 in August. The median forecast of 53 economists in a Bloomberg survey called for minus 2. Readings less than zero signal contraction in the so-called Empire State Index that covers New York, northern New Jersey and southern Connecticut.
“To me the only question is if the stock market is going to correct its current overbought condition by going sideways, or if it is going to correct back to the 1,400-1,422 support,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, wrote in an e-mail today. His firm oversees $350 billion.
Financial and commodity shares had the biggest declines among 10 groups in the S&P 500. The Morgan Stanley Cyclical Index (CYC) tumbled 1.2 percent after rallying for four straight days. The Dow Jones Transportation Average slipped about 1.5 percent and the S&P Supercomposite Homebuilding (S15HOME) Index lost 1.9 percent after rallying 8.5 percent last week.
The KBW Bank Index declined 1.7 percent as 23 of its 24 companies slipped. Bank of America, which climbed 20 percent in the past two weeks, tumbled 2.6 percent to $9.30 for the second- biggest drop in the Dow. Morgan Stanley (MS) declined 2.4 percent to $17.80. Wells Fargo & Co. (WFC) fell 2.2 percent to $35.33 after Stifel Nicolaus & Co. cut the fourth-largest U.S. bank by assets to hold from buy.

Commodities Slide

Alcoa, the largest U.S. aluminum producer, fell the most in the Dow, sliding 2.6 percent to $9.58, as the S&P GSCI Spot Index of 24 commodities fell 2.2 percent, the most since July.
Cliffs Natural Resources slipped 7 percent to $42.36 for the biggest decline in the S&P 500. JPMorgan downgraded the stock to neutral from overweight.
Netflix Inc. (NFLX) fell 5.8 percent to $57.02. The world’s largest video-subscription service was rated underperform in new coverage at Macquarie Capital USA Inc.
Boeing Co. (BA) lost 1.9 percent to $69.92. Oppenheimer & Co. analyst Yair Reiner said shares of the world’s largest maker of cargo aircraft may fall, citing GEnx engine issues after one cracked on a Boeing 787 Dreamliner during testing in Charleston, South Carolina, on July 28, spewing hot metal parts.

Apple Rises

Apple gained 1.2 percent to a record $699.78 and exceeded $700 in extended trading for the first time ever. Pre-orders of its iPhone 5 topped 2 million units in one day, more than double the sales record set by the previous model of the device. Because demand for the iPhone 5 exceeds the initial supply, some pre-orders will be delivered to customers in October, rather than September as previously planned, Apple said today in a statement.
Office Depot rose 5.3 percent to $2.60. Starboard Value, a New York-based investment firm, took a 13.3 percent stake in the company, becoming its largest shareholder, and said the retailer must improve its financial results.
Gilead Sciences Inc. (GILD) rose 6.1 percent, the most in the S&P 500 (SPXL1), to $65.80 after JPMorgan analyst Geoff Meacham said the company’s AIDS drug, called Stribild, may emerge as a market leader based on a survey of 52 HIV specialists.

Obama Rally

As politicians debate whether Americans are better off than they were four years ago, the stock market is saying yes. With 50 days before the national election, the S&P 500 has rallied 82 percent and touched a four-year high since President Barack Obama took office.
The advance puts the gauge closer to the all-time high than any of the world’s biggest stock markets, data compiled by Bloomberg show. The benchmark index of American equity is trading at 14.9 times reported earnings, the biggest discount to MSCI’s global measure since March 2010.
“We are in a healthier state right now,” Chris Hyzy, who helps oversee about $325 billion as chief investment officer of U.S. Trust in New York, said in a Sept. 12 phone interview. “Next year, we think the growth clip in the United States and the globe is going to be better than expected. Over the next three years, we are bullish.”
To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Amanda Gould in New York at agould27@bloomberg.net
To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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Apple IPhone 5 Pre-Orders Top 2 Million, Doubling Record

By Ryan Faughnder and Adam Satariano - Sep 18, 2012 2:12 AM GMT+0700

 Apple Inc. (AAPL) said advance sales of its iPhone 5 topped 2 million units in one day, more than double the record set by the previous model of the device.

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The new iPhone 5 during an Apple special event in San Francisco. Photographer: Justin Sullivan/Getty Images

10:50

Sept. 17 (Bloomberg) -- Christopher Grisanti, founding partner at Grisanti Capital Management, talks about investment strategy and the outlook for Apple Inc. Grisanti speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "Market Makers." (Source: Bloomberg)

3:39

Sept. 17 (Bloomberg) -- Brian White, an analyst at Topeka Capital Markets, talks with Bloomberg's Betty Liu about the pre-orders for Apple's iPhone 5. They speak on Bloomberg Television's "In The Loop." (Source: Bloomberg)

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Sept. 17 (Bloomberg) -- Apple Inc. said pre-orders of its iPhone 5 topped 2 million units in one day, more than double the sales record set by the previous model of the device. Betty Liu reports on Bloomberg Television's "In The Loop." (Source: Bloomberg)

1:51

Sept. 17 (Bloomberg) -- Dominic Chu reports on Apple's stock valuation. He speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

0:17

Sept. 17 (Bloomberg) -- A handful of people have begun camping out in front of Apple Inc.'s Fifth Avenue store on New York in anticipation of iPhone 5, which goes on sale in retail stores on Sept. 21. (Source: Bloomberg)

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People camp out in front of an Apple store in New York on Monday. Photographer: Peter Foley/Bloomberg

Because demand for the iPhone 5 exceeds the initial supply, some of the smartphones will be shipped to customers in October, Cupertino, California-based Apple said today in a statement. Most orders will be delivered on Sept. 21, the same day the handset arrives in U.S. retail outlets, Apple said.
“Clearly it’s a blowout,” said Brian White, an analyst at Topeka Capital Markets in New York, in an interview. He had anticipated sales of 1.3 million to 1.5 million units in the first 24 hours and up to 12 million by the end of the month. “These estimates look conservative.”
Apple gained 1.2 percent to $699.78 at the New York close and traded as high as $700.44, a record, in extended trading.
The iPhone is Apple’s best-selling product, making up about two-thirds of its profit. The company’s entry into the smartphone market in 2007 resulted in sales of 244 million iPhone units as of June and helped Apple become the world’s most valuable company. The new model, unveiled last week in San Francisco, has a bigger screen, light-weight body design, faster chip and new software features.

Shattered Record

“IPhone 5 pre-orders have shattered the previous record held by the iPhone 4S and the customer response to the iPhone 5 has been phenomenal,” said Philip Schiller, Apple’s senior vice president of global marketing, in the statement.
Apple is vying with Samsung Electronics Co. and other smartphone manufacturers for customers in a global market that grew 79 percent to $219.1 billion last year. Samsung, which releases several handsets a year using Google Inc. (GOOG)’s Android operating system, was the world’s biggest seller of smartphones in 2011. By contrast, Apple releases only one iPhone a year, resulting in pent-up demand.
AT&T Inc. (T), the largest U.S. phone company, said its customers ordered a record number of the iPhone 5. Subscribers ordered more of the new model than any previous iPhone both on its first day of advance sales and during the weekend, AT&T said in a statement today, without providing details.
With so much demand, production bottlenecks may curb how many iPhones Apple can sell, said Ben Reitzes, an analyst at Barclays Capital Inc. The new touch-screen glass technology for the iPhone 5 is one of the biggest potential sources of supply constraints, he said.
“We still believe Apple is facing significant production constraints,” Reitzes said in note to clients today. Manufacturing delays could postpone some purchases until later this year or early 2013, he said.
From October to December, Apple may sell 50 million iPhones, said Mike Walkley, an analyst at Canaccord Genuity Inc. The new iPhone hits stores this week in the U.S., Australia, Canada, France, Germany, Hong Kong, Japan, Singapore and the U.K. It goes on sale in 22 more countries on Sept. 28.
“It’s pretty clear there was a lot of pent-up demand for the new phone,” Walkley said in an interview.
To contact the reporters on this story: Ryan Faughnder in New York at rfaughnder@bloomberg.net; 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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Apple Reaches $700 as IPhone 5 Shatters Sales Record

By Adam Satariano and Ryan Faughnder - Sep 18, 2012 3:47 AM GMT+0700

Peter Foley/Bloomberg

People in line at the Apple Inc. store on Fifth Avenue in advance of the sale of the iPhone 5 in New York, on Sept. 17, 2012. The iPhone 5 is expected to go on sale at stores on Sept. 21.

Apple Inc. (AAPL) surpassed $700 in late trading after announcing record first-day orders for the latest iPhone, fueling optimism that the company will keep generating the revenue growth that transformed it from a niche computer manufacturer into the world’s most valuable business.

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Apple Inc. shares surpassed $700 in late trading after announcing record first-day orders for the latest iPhone. Photographer: David Paul Morris/Bloomberg

Shares climbed as high as $700.44 after reaching a record $699.78 at the close in New York. The stock has advanced 73 percent this year.
The iPhone 5, which features a bigger screen, faster chip and a lighter body, sold 2 million units in first-day orders, more than double a record set by the previous model, Apple said. Since its 2007 debut, the device has become Apple’s top-selling product, accounting for about two-thirds of profit. Signs of robust demand reinforced expectations that Apple will withstand accelerating competition from Samsung Electronics Co. (005930) and Google Inc. (GOOG) in the $219.1 billion smartphone market.
“It leaves me in awe,” said Rex Ishibashi, chief executive officer of Callaway Digital Arts Inc. (2326), which develops games for the iPhone. “It’s reflective of how important these devices and these digital technologies have become in our lives.”
Apple’s surge gathered steam Sept. 14, after it began taking orders for iPhone 5. Apple’s website said new orders wouldn’t ship until Sept. 28, a week after the handset is due in stores, an indication that supply may be running thin.
“The initial batch is sold out,” Shaw Wu, an analyst at Sterne Agee & Leach Inc., said in an interview. He raised his sales estimate for the quarter ending in September to 26 million units, from 23 million. “We think that could turn out to be conservative.”

Exxon, Microsoft

Apple surpassed Exxon Mobil Corp. to become the biggest company in the world by market capitalization last year after overtaking Microsoft Corp. (MSFT) as the most valuable technology company in 2010. Before his death in October, co-founder Steve Jobs mastered a strategy of pushing Apple beyond its core business of selling computers into new markets, including digital music and mobile phones. Each new family of products helped the company boost revenue while inducing investors to snap up more shares.
Revenue increased to $35 billion in the June quarter from $1.73 billion in the last quarter before Jobs returned to Apple in 1997. Apple’s shares crossed the $600 threshold in July, after passing $500 in February and $400 last year.
IPhone sales last quarter alone reached $16.2 billion, 33 percent higher than Google Inc.’s total and almost as much as Microsoft Corp.’s $18.1 billion in revenue.

58 Million

As many as 58 million units of the iPhone 5 may sell by the end of the year, according the average estimate of analysts surveyed by Bloomberg. That could generate as much as $36.2 billion in sales for Apple.
Apple has grown adept at keeping existing customers and drawing new ones through incremental improvements to the hardware and software of its products while also cultivating a developer community that cranks out thousands of applications for use on the company’s phones and computers, said Dan Morris, chief investment officer at Morris Capital Advisors, whose largest holding is Apple.
The company’s shares are also getting a boost from a legal victory in August, when a jury said Samsung copied the iPhone. The outcome of the California trial may result in a ban on certain Samsung phones in the U.S., and it ratchets up pressure on Apple competitors to make their products less like the iPhone and iPad.

TV Challenges

Gains in coming months will hinge on the success of future products, such as a smaller version of the iPad tablet, which according to people with knowledge of the matter, will be released in October. Apple is also trying to make headway with products that let users view TV shows and movies on Apple devices. Yet the company has struggled to come to terms with communications providers over how products will be crafted, and media companies have been reluctant to cede control over content and customer relationships.
“That may be a tough market for them,” Morris said.
For now, the share rally is poised to continue, according to analysts who, on average, are predicting that Apple will rise to about $773 in the coming 12 months, data compiled by Bloomberg show.
To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net; Ryan Faughnder in New York at rfaughnder@bloomberg.net
To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Oil Drops Most in Eight Weeks as Price Falls $3 in Minute

By Moming Zhou and Margot Habiby - Sep 18, 2012 4:18 AM GMT+0700 Oil declined more than $3 in less than a minute as October options were about to expire, ending the day with the largest drop in eight weeks.
Futures tumbled to $94.83 at 1:54 p.m. from $97.88 in the same minute on a surge in volume. The price slipped earlier after the Federal Reserve Bank of New York’s general economic index, known as the Empire State Index, reached a three-year low, indicating possible weakness in demand.

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Oil declined more than $3 in less than a minute in late trading as October options were about to expire, ending the day with the largest drop in eight weeks. Photographer: Plamen Petkov/Bloomberg

“Today it’s the price making the news, not the news making the price,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “In the larger scheme of things, I would go with the idea that this is profit-taking run amok.”
Oil for October delivery fell $2.38, or 2.4 percent, to settle at $96.62 a barrel on the New York Mercantile Exchange. Prices are down 2.2 percent this year. The decline was the largest since July 23. Prices traded above $98 before the slump that started shortly after 1:50 p.m.
Crude options for the October futures expired today. The futures expire on Sept. 20.
Brent for November settlement fell $2.87, or 2.5 percent, to $113.79 a barrel on the London-based ICE Futures Europe exchange.
The most active October options in electronic trading on the Nymex were the $98 puts, which gained $1 to $1.38 a barrel with 2,920 lots trading.

Volume Surge

Trading volume stayed below 300,000 before picking up after 1:50 p.m. and rising to 633,000 at 3:44 p.m. The low early volume, due to the Jewish New Year holiday Rosh Hashana, contributed to the drop, said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. The three-month average volume is 536,000.
“Transactions in a low volume just sort of set this up,” he said. Speculation that the U.S. government would release oil from Strategic Petroleum Reserve also boosted prices, he said.
Jay Carney, the White House spokesman, said in e-mailed comments that there is “no change” in oil reserve releases. He said on Aug. 30 that the Obama administration is continuing to look at all its options to make sure high oil prices don’t crimp the global economy.
“I think it’s a combination of options expiration and Rosh Hashana,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “My guess is that someone had an order they had to fill before options expired and there’s light volume because of the holiday.”

CME Group

CME Group Inc., owner of the Nymex, said it did not suffer any technical issues as oil, gasoline and heating oil dropped on the exchange, said Chris Grams, a spokesman for CME. Gasoline and heating oil declined more than 2 percent.
The U.S. Commodity Futures Trading Commission in Washington will look into the decline and trading surge.
“When price and volume move so fast and so dramatically, it raises our antennas immediately,” Commissioner Bart Chilton said. “We need to get a quick visual on what happened and why. In this sort of circumstance, I always want to know what the cheetah traders -- the high-frequency traders -- were doing.”
Commissioner Scott O’Malia said the CFTC is contacting CME and IntercontinentalExchange Inc. to learn more.
Oil fell in trading before the late decline as manufacturing in the New York region contracted more than forecast in September and as the dollar gained against the euro.
The Federal Reserve Bank of New York’s general economic index, known as the Empire State Index, tumbled to minus 10.41, the lowest level since April 2009. Readings less than zero signal contraction. The index covers New York, northern New Jersey and southern Connecticut.

‘Geopolitical Risk’

“The underlying economy has yet to be helped by all this economic stimulus,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “We’re probably going to need a new catalyst or else we’re probably going to consolidate for several days. There’s enough geopolitical risk to keep the market from breaking down.”
The euro fell as much as 0.4 percent to $1.3084 after finance chiefs deadlocked at euro-area debt-crisis talks. A stronger dollar reduces oil’s appeal as an investment alternative. Oil advanced as much as 0.5 percent in intraday trading on concern that protests in the Middle East would lead to supply disruptions.
“Today’s price action appeared to highlight an unusually nervous market environment in which the oil complex has become heavily reliant upon intangible forces such as economic stimulus measures and Middle East tensions for sustainable price strength,” said Jim Ritterbusch, president of Ritterbusch & Associates, a Galena, Illinois-based consulting company, in a note to clients.
To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net; Margot Habiby in Dallas at mhabiby@bloomberg.net
To contact the editor responsible for this story: Bill Banker at bbanker@bloomberg.net

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Today, Mitt Romney Lost the Election

By Josh Barro Sep 18, 2012 5:02 AM GMT+0700 You can mark my prediction now: A secret recording from a closed-door Mitt Romney fundraiser, released today by David Corn at Mother Jones, has killed Mitt Romney's campaign for president.
On the tape, Romney explains that his electoral strategy involves writing off nearly half the country as unmoveable Obama voters. As Romney explains, 47 percent of Americans "believe that they are victims." He laments: "I'll never convince them they should take personal responsibility and care for their lives."
So what's the upshot? "My job is not to worry about those people," he says. He also notes, describing President Obama's base, "These are people who pay no income tax. Forty-seven percent of Americans pay no income tax."
This is an utter disaster for Romney.
Romney already has trouble relating to the public and convincing people he cares about them. Now, he's been caught on video saying that nearly half the country consists of hopeless losers.
Romney has been vigorously denying President Obama's claims that his tax plan would raise taxes on the middle class. Now, he's been caught on video suggesting that low- and middle-income Americans are undertaxed.
(That one is especially problematic given the speculation about what's on Mitt's unreleased pre-2010 tax returns.)
Corn tells us there are more embarrassing moments on segments of the video he hasn't released yet. Romney jokes that he'd be more likely to win the election if he were Hispanic. He makes some awkward comments about whether he was born with a "silver spoon" in his mouth.
But those are survivable. The really disastrous thing is the clip about "victims," and the combination of contempt and pity that Romney shows for anyone who isn't going to vote for him.
Romney is the most opaque presidential nominee since Nixon, and people have been reduced to guessing what his true feelings are. This video provides an answer: He feels that you're a loser. It's not an answer that wins elections.
(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter.)
Read more breaking commentary from Bloomberg View at the Ticker.

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Most U.S. Stocks Fall as Europe Offsets Bank, Tech Rally

By Inyoung Hwang - Aug 21, 2012 4:00 AM GMT+0700

Most U.S. stocks fell, after the Standard & Poor’s 500 Index rose to its highest level since April, as investor concern about Europe’s debt crisis overshadowed a rally in technology and financial companies.

Best Buy Co. lost 10 percent after saying its founder declined an offer from the board to conduct due diligence and go to shareholders with his buyout offer. Apple Inc. (AAPL) jumped 2.6 percent to its highest price ever, pacing a technology rally. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) added at least 1.1 percent as financial companies recovered from early losses.

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Traders work on the floor of the New York Stock Exchange. Photographer: Scott Eells/Bloomberg

7:36

Aug. 20 (Bloomberg) -- Adam Parker, U.S. equity strategist at Morgan Stanley, talks about the outlook for the U.S. stock market. He speaks with Linzie Janis on Bloomberg Television's "Street Smart." (Source: Bloomberg)

8:24

Aug. 20 (Bloomberg) -- James Bianco, president of Bianco Research LLC, Brian Angerame, a portfolio manager at Legg Mason Inc.'s ClearBridge Advisors, and Gina Martin Adams, an equity strategist at Wells Fargo Securities LLC, talk about Federal Reserve policies and their investment strategies. They speak with Trish Regan on Bloomberg Television's "Street Smart." (Source: Bloomberg)

10:18

Aug. 20 (Bloomberg) -- Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc, discusses investment strategy and the outlook for the Standard & Poor's 500 Index. He talks with Deirdre Bolton, Julie Hyman, Alix Steel and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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An employee cuts lumber for customers at a Lowe's Cos. store in the Brooklyn borough of New York. buyout offer. Lowe’s Cos. fell 4.2 percent after missing analysts’ profit predictions and cutting its earnings forecast. Photographer: Victor J. Blue/Bloomberg

The S&P 500 (SPX) was almost unchanged at 1,418.13 at 4 p.m. in New York, within a point of a four-year high set in April. The gauge fell 0.4 percent earlier as Germany’s Bundesbank stepped up its criticism of the European Central Bank’s bond-buying program. The Dow Jones Industrial Average lost 3.56 points, or less than 0.1 percent, to 13,271.64. Seven stocks fell for every five declining on U.S. exchanges, with volume at 4.9 billion shares, 23 percent below the three-month average.

“We’re at a pretty formidable technical resistance here,” Michael Strauss, who helps oversee about $26 billion of assets as the chief investment strategist at Commonfund in Wilton, Connecticut, said in a telephone interview. “The Bundesbank does have a hard problem with this,” he said, referring to the ECB’s bond-buying program. “Germany is being put in the position as being the lender of last resort in Europe.”

The S&P 500 last week capped its longest stretch of weekly gains since January 2011 as economic reports beat forecasts and Germany backed the ECB’s bond-buying plan. Trading volume and volatility have dropped this month as vacationing traders await policy clues from the Federal Reserve’s summit at the end of the month and an ECB meeting in September.

‘Stability Risks’

Government bond purchases “entail significant stability risks,” the Bundesbank said in its monthly report today. The ECB’s governing council may decide at its next gathering to set yield limits on each country’s debt, Spiegel magazine reported yesterday, without saying where it got the information. The ECB said the council has not discussed any plan to target the bond yields and that “it is absolutely misleading to report on decisions,” a bank spokesman said in an e-mailed statement.

Reports in the U.S. this week will show that combined purchases of new and existing houses increased to a 4.89 million annual rate in July from a 4.72 million pace in June, according to the median forecasts in surveys of economists before releases from the National Association of Realtors on Aug. 22 and the Commerce Department the next day. Bookings for long-lasting goods may have climbed the most this year, a release from the Commerce Department will show Aug. 24, according to the median estimate.

Jackson Hole

The Fed will on Aug. 22 release minutes from the Aug. 1 meeting of the Federal Open Market Committee, when policy makers declined to initiate a third round of monetary stimulus, a policy known as quantitative easing. The S&P 500 has rallied 11 percent since June 1 on speculation the central bank may signal more easing at the Kansas City Fed’s annual conference on Aug. 30 to Sept. 1 in Jackson Hole, Wyoming.

The 13 percent rally in the S&P 500 this year through Aug. 17 has lifted the gauge to its highest level ever compared with strategists’ forecasts, a sign that the best may be over for U.S. equities in 2012.

Shares have climbed 2.1 percent above the average projection of 1,389 from 13 firms from Morgan Stanley to JPMorgan tracked by Bloomberg. That’s the biggest premium on record for this time of year, according to data going back to 1999. Estimates by strategists in August have come true for the last three years, with the S&P 500 rising 11 percent on average through December, the data show.

‘Core Fundamentals’

“The core fundamentals are not really a reason to be long stocks,” said Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc, in an interview on Bloomberg Television’s “In the Loop” with Deirdre Bolton. “Core fundamentals, earnings and revenue growth have deteriorated to a great extent.”

Phone and consumer discretionary companies posted the biggest declines out of 10 groups in the S&P 500, falling more than 0.5 percent.

Best Buy erased 10 percent for the biggest decline in the S&P 500 to $18.16. The retailer’s board proposed that founder Richard Schulze, beginning in January, be allowed to take his buyout offer to shareholders, should the board decide to reject any definitive proposal to acquire shares. Schulze didn’t accept the proposal, according to Best Buy.

Lowe’s Tumbles

Lowe’s Cos. tumbled 5.8 percent to $26.26. The second- largest U.S. home-improvement retailer reported second-quarter earnings that trailed analysts’ estimates as comparable-store sales fell. Adjusted earnings per share were 65 cents. Analysts had projected 70 cents. The retailer cut its full-year profit forecast to $1.64 a share from a projection of $1.83 a share in May.

Waste Management Inc. (WM) decreased 3 percent to $34.60 after Barron’s reported the trash handler may be poised to fall as much as 15 percent because of operating performance. Garbage volume has been little changed to down for years because of conservation, recycling and slow industrial growth, Barron’s said.

Corinthian Colleges Inc. (COCO) slipped 1.2 percent to $2.42. The for-profit college operator forecast revenue in the first quarter will be no more than $405 million, missing the average analyst estimate of $406.4 million.

Financial stocks rose 0.3 percent after dropping as much as 0.3 percent earlier. Bank of America, the second-largest U.S. bank by assets, climbed 1.9 percent to $8.15. JPMorgan, the biggest bank in the nation by assets, added 1.1 percent to $37.37.

Apple Soars

Technology stocks increased 0.3 percent. Hewlett-Packard Co. soared 2.9 percent to $20.09 for the biggest gain in the Dow.

Apple, the world’s most valuable company, advanced 2.6 percent to $665.15. The company’s market value reached $623.52 billion, higher than Microsoft Corp.’s record of $620.6 billion, according to Howard Silverblatt, senior index analyst at S&P, in a note today. The iPhone and iPad maker surpassed $600 billion in market value last week on speculation that production has started on a smaller version of the iPad tablet as well as a new television product.

Facebook Inc. (FB), the operator of the world’s largest social- networking service, jumped 5 percent to $20.01 after falling last week to a record low that was close to half the stock’s initial public offering price of $38 in May.

Health-care stocks added 0.3 percent as a group. Coventry Health Care Inc. (CVH) surged 20 percent to $42.04. Aetna Inc. (AET), a health insurer, will pay $42.08 a share for the medical-care provider in cash and stock, the companies said in a statement today. Aetna’s shares climbed 5.6 percent to $40.18.

To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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Banks Use $1.77 Trillion to Double Treasury Purchases

By Cordell Eddings and Daniel Kruger - Aug 21, 2012 1:43 AM GMT+0700

The gap between U.S. bank deposits and loans is growing at the fastest pace in two years, providing lenders with more funds to buy bonds and temper the biggest sell-off in Treasuries since 2010.

As deposits increased 3.3 percent to $8.88 trillion in the two months ended July 31, business lending rose 0.7 percent to $7.11 trillion, Federal Reserve data show. The record gap of $1.77 trillion has expanded 15 percent since May, the biggest similar-period gain since July, 2010. Banks have already bought $136.4 billion in Treasury and government agency debt this year, more than double the $62.6 billion in all of 2011, pushing their holdings to an all-time high of $1.84 trillion.

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A statue of the Albert Gallatin, the 4th Secretary of the Treasury, from the north patio of the U.S. Treasury Building. Photographer: Pablo Martinez Monsivais/AP Photo

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A flag waves over the U.S. Treasury building in Washington. Photographer: Chip Somodevilla/Getty Images

Faced with a slowing U.S. economy, unemployment above 8 percent for more than three years and regulations forcing them to hold more and higher-quality assets, banks are lending at below pre-recession levels. The bond purchases help explain why even after rising this month, Treasury 10-year note rates are about half the 3.5 percent median forecast of 43 economists in a Bloomberg survey a year ago.

“Bank deposits continue to explode and in turn they continue to buy Treasuries as the economy loses momentum, inflation is trending down, Europe continues to hang over our heads and political uncertainty reigns” said Michael Mata, a money manager in Atlanta at ING Investment Management Americas, which oversees about $160 billion. “There is no reason for interest rates to climb in any meaningful way any time soon.”

Borrowing Rises

While the gap has narrowed to $1.75 trillion as of Aug. 8 as lending of $7.12 trillion trailed $8.87 trillion in deposits, the gap is more than 17 times the $100 billion average in the decade before credit markets seized up, Fed data show.

Commercial and industrial lending reached a peak of $1.61 trillion in October 2008, a month after the bankruptcy of Lehman Brothers Holdings Inc. As the credit crisis deepened, loans tumbled to $1.2 trillion two years later, before recovering to $1.46 trillion Aug. 1.

The recent rise isn’t keeping up with record bank deposits as savings of U.S. households have risen to 4.4 percent of incomes as of June from 1.7 percent in 2007, the data show.

“Every bank is looking for a way to increase their yield,” said Mike Pearce, president of Bank of The West in Grapevine, Texas, whose company has been purchasing government securities after deposits grew faster than loans in 2010 and 2011. Instead of earning the Federal Funds rate of zero to 0.25 percent on the deposits, its bond holdings are yielding about 3.25 percent, he said.

Seeking Safety

Bank Treasury holdings reached $500 billion, the highest since June 2011, even with interest rates minus inflation for benchmark 10-year notes of 0.38 percent, compared to the average of 1.26 percent over the past decade.

Yields on 10-year Treasury notes rose 15 basis points, or 0.15 percentage point, last week to 1.81 percent. The price of the 1.625 percent security maturing in August 2022 declined 1 12/32, or $13.75 per $1,000 face value, or 98 9/32. The yield was little changed to 1.81 percent today.

They increased from a record low 1.379 percent on July 25 as investors became more optimistic about the economy. The U.S. added 163,000 jobs last month, a government report showed Aug. 3, more than the 100,000 projected by analysts. Sales at U.S. retailers increased 0.8 percent, more than the 0.3 percent forecast and following a 0.5 percent slide in June, Commerce Department data released Aug. 14 showed.

Rate Forecast

The benchmark notes will yield 1.60 percent by the end of September, below June’s projection of 1.90 percent, median estimates in separate Bloomberg surveys show. The year-end forecast fell to 1.65 percent from 2.1 percent.

Banks may be forced into more risky assets and lending practices if yields continue to hover about record low levels, said David Hendler, an analyst at financial research firm CreditSights Inc. in New York. Their net interest margin, a measure of lending profitability, has declined to 3.52 percent, the lowest since 2009, according to FDIC data.

“It doesn’t pay to be aggressive right now if you are a bank, but continuing to buy bonds near these levels is not sustainable in the long run,” Hendler said in an Aug. 14 telephone interview.

The Federal Reserve said in its quarterly survey of senior loan officers, released Aug. 6, that “domestic banks, on balance, continued to report having eased their lending standards across most loan types over the past three months.” Lending standards for large and medium-sized firms loosened, while those for small business were little changed for the fourth consecutive period.

Recession Legacy

Wall Street’s five biggest banks are off to their worst start in four years. JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley had combined first-half revenue of $161 billion, down 4.5 percent from 2011 and the lowest since $135 billion in 2008. The firms blamed the decline on low interest rates and a drop in trading and deal-making.

Low government bond yields are a legacy of the credit crisis that caused more than $2 trillion in write downs and losses at global financial institutions, according to data compiled by Bloomberg.

After cutting its target rate for overnight loans between banks in 2008 to a range of zero to 0.25 percent, the Fed under Chairman Ben S. Bernanke bought $2.3 trillion of Treasury and mortgage-related debt to reduce market interest rates and stimulate the economy.

The central bank owned $1.66 trillion of Treasuries as of August, ahead of China’s $1.16 trillion.

Extra Deposits

Investors are more willing to accept low yields “when you have large demand from the Fed as well as natural demand from banks,” said Matthew Duch, a fixed-income money manager at Calvert Investments, which oversees more than $12 billion in assets. “Are bonds where banks want to be right now? No, but given the uncertainty over regulation, the economy and still weak loan demand in the market it’s the best of lots of bad options,” he said.

Banks have “very conservative” balance sheets, JPMorgan Chief Executive Officer Jamie Dimon said in a July 13 conference call with analysts. The bank lent out $700 billion of its $1.1 trillion in deposits in the second quarter. “That would generally be considered totally conservative,” Dimon said.

JPMorgan increased the Treasury and government agencies portion of their available-for-sale credit portfolio to $11.743 billion as of June 30, from $8.351 billion at the start of the year, according to a filing with the Securities and Exchange Commission on Aug. 9.

Added Incentive

“We get a lot of deposits in,” he said. “The extra deposits of $423 billion, plus equity, plus some other net liabilities, give us $522 billion that’s not being lent out that we have to invest.”

The global supply of the highest-quality securities, as measured by ratings companies, is poised to fall by as much as $4 trillion. Reforms such as the Dodd-Frank financial-overhaul law and global regulations set by the Bank for International Settlements require institutions to hold more top-graded debt.

Lenders have an added incentive to buy Treasuries after the Basel Committee on Banking Supervision proposed rules in 2011 that banks increase available capital to bolster the cushion against potential losses and better measure and control their risk. Treasuries’ safety and liquidity makes them suitable capital under regulations designed to prevent a repeat of the global financial crisis.

Wrong Direction

Loans are being damped by the slow recovery. Gross domestic product expanded at a 1.5 percent annual rate in the second quarter after a revised 2 percent gain in the prior three months, below the average of 2.6 percent since 1982, the Commerce Department said on July 27.

The share of U.S. households viewing the economy as heading in the wrong direction rose to 45 percent in August, the highest since November, from 36 percent in July, the Bloomberg Consumer Comfort survey showed today. The monthly expectations gauge dropped to minus 22 from minus 11. The weekly Bloomberg Consumer Comfort Index fell to minus 44.4 in the period ended Aug. 12, the lowest since January, from minus 41.9.

Household purchases, which account for about 70 percent of GDP, grew at the slowest pace in a year, according to the commerce department’s report on GDP.

Stimulus Pledge

Fed policy makers said Aug 1 they would provide more monetary stimulus “as needed.”

“There’s all sorts of good long-term developments that are occurring on household balance sheets, but you sense the Fed would like them to be not quite as thrifty and instead put a little more money to work,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “But that’s not going to happen without salary incomes rising.”

That explains the gap between deposits and lending, said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City who advises community banks on more than $30 billion of investments.

“It’s a function of inherently weak demand for loans and that relates to inherently weak demand in the economy,” he said. “Consumers, households, businesses: they’re paying down debt, they’re saving money, they’re not borrowing. They don’t have an appetite.”

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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Asian Stocks Advance as China Moves to Ease Cash Crunch

By Jonathan Burgos - Aug 21, 2012 10:54 AM GMT+0700

Asian stocks rose, with the regional benchmark index heading for a three-month high, as China moved to alleviate a cash crunch and ahead of U.S. reports that are expected to show the world’s biggest economy is improving.

Samsung Electronics Co. (005930), the world’s No. 1 mobile-phone maker by sales, gained 1.3 percent in Seoul. Asia Pacific Breweries Ltd. jumped 4.8 percent in Singapore after Heineken NV raised its offer for a controlling stake in the maker of Tiger beer. PICC Property & Casualty Co. advanced 5.8 percent in Hong Kong after China’s biggest non-life insurer posted higher first- half earnings.

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The Woodside Petroleum Ltd. logo is displayed atop the company's headquarters in Perth. Photographer: Ron D'Raine/Bloomberg

The MSCI Asia Pacific Index (MXAP) added 0.5 percent to 121.36 as of 12:47 p.m. in Tokyo, heading for its highest close since May 8. About five shares rose for every three that fell in the gauge. The measure advanced in the past three weeks on expectations China will ease monetary policy and amid signs the U.S. economy is strengthening.

“U.S. economic data has been better, with the housing sector turning around,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion in assets. “Eventually, Asian exports will rebound. Asian equities aren’t overvalued after recent gains and Chinese equities are dearth cheap. China’s economic slowdown remains a key concern.”

U.S. Reports

China’s nation’s central bank stepped up reverse-repurchase operations today to ease a cash crunch, injecting 150 billion yuan ($24 billion) using seven-day contracts and a further 70 billion yuan via 14-day agreements, according to a trader at a primary dealer required to bid at the auctions. That’s the biggest injection since July 3.

Reports in the U.S. this week will show that combined purchases of new and existing houses increased to a 4.89 million annual rate in July from 4.72 million in June, according to the median forecast in surveys of economists before releases from the National Association of Realtors tomorrow and the Commerce Department the next day. Bookings for long-lasting goods may have climbed the most this year, a release will show Aug. 24, according to economist estimates.

Asian exporters gained. Samsung Electronics rose 1.3 percent to 1.3 million won in Seoul. Toyota Motor Corp., the world’s biggest carmaker, advanced 1.1 percent to 3,280 yen in Tokyo. Nintendo Co., the maker of Wii game consoles, increased 2.1 percent to 8,950 yen.

South Korea’s Kospi Index rose 0.5 percent, while Taiwan’s Taiex Index climbed 1 percent. Australia’s S&P/ASX 200 Index gained 0.7 percent and Japan’s Nikkei 225 Stock Average (NKY) added 0.1 percent. Hong Kong’s Hang Seng Index slipped 0.1 percent and China’s Shanghai Composite Index advanced 0.6 percent.

Cash Injection

Futures on the Standard & Poor’s 500 Index rose less than 0.1 percent today. The underlying gauge yesterday closed little changed at 1,418.13. Trading volume and volatility have dropped this month as traders await policy clues from the Federal Reserve’s summit at the end of the month and a European Central Bank meeting in September.

Government bond purchases “entail significant stability risks,” Germany’s Bundesbank said in its monthly report yesterday. The ECB’s governing council may decide at its next gathering to set yield limits on each country’s debt, Germany’s Spiegel magazine reported Aug. 19, without saying where it got the information. The ECB council hasn’t discussed any plan to target the bond yields, a central bank spokesman said in an e- mailed statement.

Asia Pacific Breweries climbed 4.8 percent to S$53 in Singapore after Heineken boosted its bid for Fraser & Neave Ltd.’s stake in the Southeast Asian brewer to S$5.6 billion ($4.5 billion). Trading in the stocks was halted on Aug. 17 before announcements on the bid, and the city’s stock market was closed yesterday.

PICC Property

PICC Property & Casualty jumped 5.8 percent to HK$9.31. First-half net income climbed 24 percent from a year earlier to 6.53 billion yuan ($1 billion), the Beijing-based insurer said in a statement to the Hong Kong stock exchange yesterday.

Of the 444 companies in the Asia-Pacific index that have reported quarterly earnings since July 1, and for which Bloomberg has estimates, about 54 percent have failed to meet projections, according to data compiled by Bloomberg.

The MSCI Asia Pacific Index retreated 6.4 percent from a Feb. 29 high through yesterday amid concern China’s economy is slowing and Europe’s debt crisis is deepening. Stocks on the measure were valued at 12.6 times estimated earnings on average, compared with 13.7 times for the Standard & Poor’s 500 Index and 11.7 times for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.

To contact the reporter on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net

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

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Apple Reaches Record U.S. Market Value on IPhone Optimism

By Adam Satariano - Aug 21, 2012 11:01 AM GMT+0700

Dale de la Rey/AFP/Getty Images

An Apple store in Hong Kong.

Apple Inc. (AAPL) set a U.S. record for market value yesterday, surpassing the high mark reached by Microsoft Corp. (MSFT) during the Internet heyday, on optimism the next version of the iPhone will meet strong demand.

The shares of Cupertino, California-based Apple rose 2.6 percent to $665.15 at the close in New York, for a market value of $623.5 billion. That overtook Microsoft’s $616.3 billion closing market capitalization on Dec. 27, 1999, according to data compiled by S&P Dow Jones Indices LLC.

Apple is preparing to introduce the next version of the iPhone on Sept. 12 in what will be a design overhaul of its top- selling product, two people with knowledge of the company’s plans said last month. The next iPhone “could be the most impactful product upgrade in Apple’s history” and the company will probably sell as many as 250 million units over the life of the device, according to analysts at FBR Capital Markets.

“With the iPhone they have successfully created a strong customer following in an absolutely enormous marketplace,” Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co., said yesterday. “They have captured the hearts and minds of consumers.”

Apple gets about 70 percent of its profit from the iPhone, Sacconaghi said. The company’s stock has risen an average of 11 percent in the two months before previous iPhone updates have been released, he said.

The new iPhone will have a larger screen and thinner body, and is expected to work with faster, long-term evolution wireless networks being introduced by carriers such as Verizon Wireless and AT&T Inc. (T), according to analysts including Piper Jaffray Cos. (PJC)’ Gene Munster.

Smaller IPad

In addition to the iPhone, Apple also plans to introduce a smaller, cheaper iPad by the end of this year, people familiar with the plans said in July.

Apple, already the world’s most valuable company, has surged more than sevenfold since the iPhone debuted in January 2007. The stock has climbed 64 percent this year.

Because Microsoft’s record was set during the Internet boom, when valuations were inflated by predictions that later failed to materialize, a more significant long-term milestone would be if Apple’s market value tops $1 trillion, David Yoffie, a Harvard Business School professor who has written about Apple, said in an interview yesterday.

“We’re in a period now of much more normalcy, which makes Apple’s accomplishments even more impressive,” Yoffie said.

‘Easily Justified’

While the popularity of the iPhone and iPad make it possible that Apple might surpass that $1 trillion mark, it can be difficult for technology companies to sustain a run of successes like Apple has had over the past decade, he said.

“It doesn’t take much to miss a cycle,” Yoffie said. “Right now this valuation is premised on iPhone 5 and a new smaller iPad coming out, and if these are very good or great products then the valuation will be easily justified. If for any reason they have a hiccup on any of these products, then Apple would be vulnerable.”

PetroChina Co. became the world’s first company to be valued at $1 trillion, when the shares almost tripled on its first day of trading in Shanghai in 2007.

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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Facebook Director Stock Sales Top $1 Billion as Lock-Up Expires

By Brian Womack and Ari Levy - Aug 21, 2012 11:01 AM GMT+0700

Facebook Inc. (FB) director Peter Thiel sold most of his stake in the operator of the world’s largest social-networking website, bringing his proceeds to more than $1 billion, after restrictions on insider sales ended.

Thiel, one of Facebook’s earliest investors, sold about 20.1 million shares in the company on Aug. 16 and Aug. 17, raising $395.8 million, according to a filing yesterday with the U.S. Securities and Exchange Commission. Thiel, a venture capitalist and hedge-fund manager, had already generated $640.1 million in sales during the initial public offering.

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Facebook Inc. director Peter Thiel. Photographer: Jin Lee/Bloomberg

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With an investment of $500,000 in 2004, Thiel is one of the biggest beneficiaries of Facebook’s gain before going public. Later backers haven’t fared as well, with the stock losing almost half its value since the IPO amid signs that the company’s growth is slowing and concerns that more insiders will exit their stakes. The sales disclosed yesterday were tied to a plan adopted on May 18, Facebook’s first day of trading.

“As of last May, he had basically handed over discretion about these sales,” said Stephen Diamond, associate professor of law at Santa Clara University.

Jeremiah Hall, a spokesman for Thiel, and Ashley Zandy, a spokeswoman for Facebook, declined to comment.

Facebook last week unlocked 271.1 million shares, the first of five insider-sale restrictions scheduled during the company’s first year as a public company. Another 1.44 billion shares will be freed up through November.

Shares in Menlo Park, California-based Facebook rose 5 percent to $20.01 at the close in New York yesterday.

Accel Distribution

Another Facebook investor, Accel Partners, distributed more than 50 million shares to investors in the venture capital firm’s funds on Aug. 16, according to another filing yesterday.

Thiel’s sale, at prices from $19.27 to $20.69 a share, represents most of the 27.9 million shares the investor held after the IPO. He still holds more than 5 million shares, and the proceeds don’t reflect underwriter or broker fees.

Thiel freed up extra shares for sale when he converted more than 9 million shares to Class A from Class B, according to a document filed Aug. 10 with the U.S. Securities and Exchange Commission.

As a co-founder of PayPal Inc., he served as chief executive officer until the company was bought by EBay Inc. (EBAY) for $1.5 billion in 2002. Thiel, who’s also a member of the so- called “PayPal Mafia,” used his fortune to start hedge fund Clarium Capital Management LLC and to invest in startups.

One of those startups was Facebook, a social-networking service devoted to college campuses at the time of the investment in 2004. Thiel also participated in a $25 million funding round in 2006 when the company was valued at $500 million.

-- Editors: Reed Stevenson, Tom Giles

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Ari Levy in San Francisco at alevy5@bloomberg.net

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

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Dealers Declining Bernanke Twist Invitation

By Susanne Walker and Cordell Eddings - Jul 10, 2012 2:10 AM GMT+0700

Wall Street banks are increasingly choosing to hoard their U.S. bonds rather than sell them to the Federal Reserve as speculation grows that a slowing economy and global financial turmoil will only make them more dear.

The world’s biggest bond dealers offered an average of $7.2 billion in Treasuries a day to the central bank in June, down 40.5 percent from a high of $12.1 billion in October, data compiled by Bloomberg show. The amount tendered has fallen even as the dealers almost doubled their holdings of the securities.

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Federal Reserve Chairman Ben Bernanke. Photographer: James Berglie/Zuma Press

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Feb. 22 (Bloomberg) -- Leon Cooperman, chief executive officer of Omega Advisors Inc., talks about investment strategy and President Barack Obama's policies. Cooperman spoke with Bloomberg's Erik Schatzker yesterday. (Source: Bloomberg)

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The Marriner S. Eccles Federal Reserve building in Washington. Photographer: Andrew Harrer/Bloomberg

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Christine Lagarde, managing director of the International Monetary Fund, said “the global growth outlook will be somewhat less than we anticipated just three months ago.” Photographer: Tomohiro Ohsumi/Bloomberg

While the amount of marketable U.S. government debt outstanding has risen to more than $10.5 trillion, Treasuries are proving scarce in a world where five nations in Europe have sought bailouts, the U.S. economy is slowing again and China is weakening. That means interest rates on everything from mortgages to corporate bonds should remain at about record lows.

“People are not willing to sell Treasuries,” said Thanos Bardas, a managing director in Chicago at Neuberger Berman LLC, which oversees about $89 billion in fixed-income assets, in a June 28 telephone interview. “The data in the U.S. doesn’t look as good. The labor market has lost momentum. There will be more upside left in Treasuries despite the low levels of rates.”

Concern that the economy is losing momentum came July 6, when a Labor Department report showed American employers added fewer workers to payrolls in June than forecast and the jobless rate stayed at 8.2 percent.

IMF’s Warning

The International Monetary Fund will reduce its 3.5 percent estimate for global growth this year on weakness in investment, jobs and manufacturing in Europe, the U.S., Brazil, India and China, Managing Director Christine Lagarde said.

“The global growth outlook will be somewhat less than we anticipated just three months ago,” Lagarde said earlier in a July 6 speech in Tokyo. “And even that lower projection will depend on the right policy actions being taken.”

Treasuries rose last week, pushing 10-year yields down 10 basis points, or 0.1 percentage point, to 1.55 percent, according to Bloomberg Bond Trader prices. The benchmark 1.75 percent note rose 28/32, or $8.75 per $1,000 face value, to 101 26/32 in New York.

The 10-year note yield dropped four basis points today to 1.51 percent at 2:44 p.m. New York time, the lowest in more than a month.

The yield has fallen from this year’s high of 2.4 percent on March 20, and has averaged 3.8 percent the past decade. U.S. debt has returned 2.3 percent this year, including reinvested interest, led by a 6.3 percent gain in 30-year bonds.

‘Crowding Out’

Treasuries trail the Standard & Poor’s 500 index (CRY) of stocks, which has returned 9 percent with reinvested dividends, while beating the 6 percent loss posted by the Thomson Reuters/Jefferies CRB Index of raw materials.

“There is a reach for quality in the market,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The Fed and investors are elbowing each other out of the way, and that process is feeding on itself. We are seeing a crowding out effect as there remains a ton of demand for safe assets.”

The Fed under Chairman Ben S. Bernanke bought $2.3 trillion of Treasury and mortgage-related debt to stimulate the economy. It decided in June to extend a policy known as Operation Twist where it sells short-term securities and uses the proceeds to buy longer-term debt to $667 billion from $400 billion.

Primary dealers submitted offers equaling 2.32 times the $1.0804 billion of securities bought by the Fed today, down from an average ratio of 2.93 since the central bank began the program in October.

Bond Stockpiles

At the same time the Fed is trying to obtain Treasuries, the 21 primary dealers have boosted their holdings to $109.2 billion from a net short position as recently as September, according to the central bank. Stockpiles touched a record $136.4 billion on June 6.

As a result the central bank is paying more for less. Dealers pared their offers to sell in each month since March, when they submitted 3.16 times the securities bought by the Fed. The ratio fell to 2.92 in April, 2.82 in May and 2.48 in June.

At the end of May, the Fed was paying 31 cents per $1,000 face amount above intra-day market prices, compared with about 94 cents below in March, according to primary dealer Credit Suisse Group AG. That translates into an extra $312,500 on the purchase of $1 billion of eight to 10-year notes.

Most Expensive

By some measures Treasuries are about the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.947 percent July 6, surpassing the most expensive level ever of negative 0.94 percent set on June 1. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

“The Fed is taking a fair amount out of the market,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut, said in an interview July 3. “With the amount that they are holding, as it gets closer to the end of Twist, it will be difficult to argue that that won’t distort the overall ability for those securities to trade without seeing some type of impact.”

Top-rated securities are in short supply worldwide. The U.S., Germany, Switzerland, Sweden and the U.K. are the only Group-of-10 nations with credit-default swaps trading at less than 100 basis points, the cheapest to insure against default, according to Bloomberg data.

New debt for sale is being snapped up. Bidders offered a record $3.16 for each dollar of the $1.075 trillion of notes and bonds auctioned by the Treasury Department in the first half of the year, a record high, even as yields on 10-year notes fell to all-time lows of 1.4387 percent on June 1.

Falling Yields

Average yields on investment and speculative-grade corporate bonds declined to 4.04 percent last week from about 10.5 percent in early 2009, Bank of America Merrill Lynch indexes show. The average rate for a 30-year mortgage dropped to 3.62 percent on July 5 from more than 5.5 percent in 2009, according to Freddie Mac.

Investors don’t see yields moving higher anytime soon. A measure of market expectations of interest rate changes, the Merrill Option Volatility Estimate, or MOVE, index fell to 70.2 basis points on June 28 after peaking at 264.6 basis points in October 2008. It touched 56.7 on May 7, the lowest since 2007.

‘Most Dangerous’

Demand for bonds has surprised even the most successful investors. Warren Buffett the billionaire chairman of Berkshire Hathaway Inc., in February said in his annual shareholder letter that debt securities and other holdings tied to currencies “are among the most dangerous of assets.” Leon Cooperman, founder of equity hedge fund Omega Advisors Inc., also said in February in a Bloomberg Television interview that bonds will be the worst place for investors to put their money for the next three years.

Many investors failed to anticipate the sluggish recovery. President Barack Obama said the creation of 80,000 jobs in June was “a step in the right direction” though the economy has to grow “even faster.” Republican presidential candidate Mitt Romney called it “another kick in the gut.”

Amid fears of a global slowdown, policy makers at major central banks boosted stimulus measures on July 5 to strengthen their economies.

The European Central Bank lowered its refinancing benchmark to a record low 0.75 percent, while the People’s Bank of China reduced its one-year rate for lending by 0.31 percentage point. The Bank of England raised its asset purchase program by 50 billion pounds ($78 billion), to 375 billion pounds.

Biggest Owner

After cutting its target rate for overnight loans between banks in 2008 to a range of zero to 0.25 percent, the Fed has focused on buying bonds to inject cash into the economy. This has left the central bank as the biggest owner of Treasuries, with $1.67 trillion as of June 27, ahead of China’s $1.15 trillion at the end of the first quarter.

“If the Fed is going to keep this up they will be forced to buy more expensive issues,” said Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets in New York, a primary dealer, in a telephone interview July 3. “If you think the Fed is going to have to buy some issues very aggressively it makes it difficult to be short, so you are very reluctant to sell a large block of that to anyone.”

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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