U.S. House Passes Spending, Disaster Aid Plan

By Laura Litvan - Sep 22, 2011 10:34 PM PT

The Republican-led House passed a stopgap spending bill containing federal disaster aid two days after rank-and-file party members helped defeat a nearly identical measure, offering no resolution to a fight with Senate Democrats that threatens a government shutdown.

The measure, passed 219-203 early today, would provide $3.65 billion in aid to victims of Hurricane Irene and other natural disasters as part of a measure funding the government until Nov. 18. Democrats who control the Senate say they won’t accept legislation they say doesn’t provide enough for disaster victims and contains offsetting spending cuts they reject.

The House measure “is not an honest effort at compromise” and will be rejected by the Senate, that chamber’s Majority Leader Harry Reid said in a statement late yesterday.

The stopgap measure would implement budget levels agreed to last month in a compromise to raise the debt ceiling. Tea Party- backed lawmakers helped defeat the bill Sept. 21 because they said it spends too much.

The Federal Emergency Management Agency says it needs additional funding to aid victims of Hurricane Irene by Sept. 27. The rest of the government will run out of money Sept. 30 and Congress plans to be out of session next week for Rosh Hashanah, the Jewish new year.

House Majority Leader Eric Cantor, a Virginia Republican, said lawmakers may have to work into this weekend to find an agreement.

Green-Technology Program

Democrats object to a proposed $1.5 billion cut in a green- technology auto-loan program to offset some of the cost of the disaster assistance.

The latest measure is identical to the defeated bill except that it also would rescind $100 million from a program that provided a $535 million federal loan guarantee to Solyndra LLC, which filed for bankruptcy protection this month.

Two days ago, 48 House Republicans unhappy with the measure’s overall cost joined 182 Democrats opposed to the proposed cut in the auto industry-loan program to derail the measure, 230-195. The vote was another setback for Speaker John Boehner, who has faced challenges in managing a large freshmen class of Tea Party-backed Republicans that earlier this year threatened a shutdown and a default on obligations to government bondholders.

In today’s vote shortly after midnight, 213 Republicans and six Democrats supported the slightly revised measure, while 24 Republicans and 179 Democrats opposed it.

‘No Threat’

Boehner of Ohio said at a news conference yesterday there is “no threat” of a government shutdown.

“I have no fear in allowing the House to work its will,” Boehner told reporters. “Does it make my life a little more difficult? Yes it does.”

The speaker “has a true governing problem” on his hands, Sarah Binder, a senior fellow at the Brookings Institution in Washington, said yesterday. “There are two dozen House Republicans who have voted against the April budget deal, the August deficit deal and the continuing resolution.”

Senator Richard Durbin of Illinois, the second-ranking Democratic leader, said, “We’re watching the Tea Party shut- down movie for the third time this year.”

House Minority Leader Nancy Pelosi of California told reporters that Democrats would oppose all efforts to offset disaster aid with other cuts.

Weary Public

The dispute carries political risk for Republicans because polls show the public is weary of the rancor that marked previous battles over the budget. Disapproval ratings for Congress are at historic highs, and Republicans are faring worse than Democrats in polls.

In a Sept. 10-15 CBS News/New York Times poll, 72 percent of adults surveyed disapproved of the job performance of Republicans in Congress and just 19 percent approved. Democrats had a disapproval rating of 63 percent and an approval rating of 28 percent. The poll of 1,452 adults had a margin of error of plus or minus 3 percentage points.

The higher disapproval ratings for Republicans stem largely from perceptions that Boehner and other party leaders are unwilling to compromise with Democrats on key issues, said Michael Dimock, research director of the Pew Research Center.

Market Drop

Stocks tumbled and Treasury 10-year yields dropped to a record amid concern central banks are running out of tools to prevent another recession. The Dow Jones Industrial Average fell 391.01, or 3.5 percent, to 10,733.83. Ten-year Treasury yields fell as low as 1.6961 percent, the lowest since Federal Reserve figures began in 1953.

Republicans said the earlier version of the bill was designed to pass with the support of Democrats, complaining that lawmakers such as Norm Dicks of Washington, the ranking member of the Appropriations Committee, withdrew their backing.

Tennessee Representative Jim Cooper said he and some other Democrats may accept a “less partisan” offset for disaster spending. Republicans “don’t have to poke us in the eye,” he said.

Democrats got a boost from the U.S. Chamber of Commerce, which said in a letter to senators that the auto-loan program “promotes manufacturing in the U.S. and is an important component of America’s energy security.”

Republican leaders were only able to lift the borrowing cap last month with the help of Democrats. The new legislation would set spending levels for the “discretionary” budget for the upcoming fiscal year agreed to as part of the debt limit deal. Democrats say they have no intention of reopening that debate.

Senator Charles Schumer of New York said, “You can’t shake hands on an agreement at the end of July and then they say ‘oh no, it’s up for negotiation again’ in September.”

The measure is H.R. 2608.

To contact the reporters on this story: Laura Litvan in Washington at llitvan@bloomberg.net

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

Read more...

Apple Opens New China Stores But Trails Target

By Bloomberg News - Sep 22, 2011 10:37 PM PT

Apple Inc. (AAPL) is opening stores in the China region at a quarter the pace it forecast 19 months ago, giving rival makers of smartphones and tablet computers time to gain users in the world’s biggest mobile-phone market.

Apple opened its third store in Shanghai today and will open its first one in Hong Kong tomorrow, bringing the total to six in a region with the company’s highest-grossing outlets. That compares with the 25 stores that Ron Johnson, then Apple’s head of retail, said last year it targeted by February 2012.

The iPhone maker is only “scratching the surface” of Chinese demand after sales in the region surged six-fold to $3.8 billion last quarter, Apple Chief Executive Officer Tim Cook said in July. Still, delays in store openings may give makers of smartphones and tablets equipped with Google Inc. (GOOG)’s Android software room to gain market share, said Shaun Rein, managing director of China Market Research Group.

“In many ways they are still behind the curve, and they are opening stores too slowly,” said Rein, whose Shanghai-based company advises retailers and other clients about operating businesses in China. “Before, Apple had clear dominance in terms of technology, but now the gap is being lowered because of Android.”

Apple is expanding distribution of its products including the iPhone and iPad in China as competition with Android device makers including Samsung Electronics Co. and Lenovo Group Ltd. (992) intensifies. Kristin Huguet, a spokeswoman at Apple, declined to give the company’s latest target for store openings in China.

Leaving for Penney

The company, the world’s biggest by market value, accounted for 13 percent of China’s smartphone market by shipments in the second quarter, third behind Nokia Oyj (NOK1V)’s 36 percent and Samsung’s 15 percent, according to estimates at research firm Gartner Inc. Apple ranks first worldwide, according to researcher Strategy Analytics.

Apple aimed to have as many as 25 stores in the China region over two years, Johnson said Feb. 25, 2010, when the Cupertino, California-based company only had one store in the mainland. Johnson left in June to become J.C. Penney Co.’s chief executive officer.

“I don’t think anyone really expected them to come up with 25 stores in 24 months,” said David Wolf, CEO of Wolf Group Asia, a Beijing-based marketing strategy consulting firm. “Apple set a very high bar for themselves in a market where the logistical challenges are profound.”

‘Larger, Better’

China’s Jiefang Daily, citing Johnson, reported this February that the company may delay the 25-store target to focus on “larger and better” locations. Apple’s Huguet declined to confirm or deny the comments.

“They have been quite cautious so far,” said Sun Peilin, an analyst at research firm Analysys International in Beijing. “For Apple, they have now seen the benefits and potential of the market, and I think they will speed up the store openings.”

The new Shanghai store is the company’s biggest in China. The one in Hong Kong is located at the International Finance Center in the central business district.

“It’s a big store, and the design is quite good,” said Cui Lizhen, who traveled from his home province of Jilin and waited 40 hours outside the new outlet in Shanghai before the opening at 9:00 a.m. local time today.

In Hong Kong, about 10 people camped outside Apple’s store with their backpacks and folding chairs at 7:45 a.m. local time today, more than 25 hours before the opening tomorrow.

Retail Partners

A lack of stores hasn’t stopped growth. Shipments of the iPhone, Apple’s best-selling product, jumped to 2 million in China in the second quarter, compared with 300,000 a year earlier, according to Gartner analyst Sandy Shen. The figures include sales through unauthorized channels, or the so-called gray market, she said.

Having more stores would mean higher sales not only at the company’s own retail locations, Wolf said. The “halo” effect of the stores boosts the image of the products and lifts sales even at the resellers, he said.

Apple has more than 900 sales agents in mainland China, including stores operated by Studio A Inc., a unit of Taiwan’s Cheng Uei Precision Industry Co. That company’s chairman is Gou Tai-chiang, brother of billionaire Terry Gou, head of Apple supplier Foxconn Technology Group. In 2009, Apple started selling the iPhone through China Unicom (Hong Kong) Ltd., its carrier partner in China.

Apple’s distribution network in China has failed to keep up with demand, forcing customers to buy from vendors not sanctioned by the company. Only half of the 1.07 million Apple iPads sold in China in the second quarter were through authorized vendors, according to Analysys.

Apple may have scaled back the pace of store openings in China to focus on flagship locations, Wolf said.

“Location is important and iconic,” he said. “Apple’s performance is excellent, but not quite outstanding. I’d give them a strong B+.”

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

Read more...

G-20 Vows to Tackle ‘Renewed’ Global Risks

By Scott Rose and Cheyenne Hopkins - Sep 22, 2011 11:03 PM PT
Enlarge image

Nicolas Sarkozy, president of France. Photographer: Jock Fistick/Bloomberg

Play Video

Sept. 23 (Bloomberg) -- Group of 20 finance chiefs pledged to address rising risks to the global economy and pushed Europe to contain its sovereign debt crisis after concern the world is on the brink of another recession sent stocks tumbling. Bloomberg's Linda Yueh reports on Bloomberg Television's "First Look" with Linzie Janis. (Source: Bloomberg)

Group of 20 finance chiefs pledged to address rising risks to the global economy and pushed Europe to contain its sovereign debt crisis after concern the world is on the brink of another recession sent stocks tumbling.

Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” G-20 finance ministers and central bank governors said in a statement late yesterday in Washington. Many urged Europe to implement a July promise to expand the powers of a rescue fund, Japanese Finance Minister Jun Azumi said.

The previously unplanned communique suggests authorities are alert to worries among investors, while they stopped short of outlining fresh policies to buoy growth. The worsening European debt turmoil and threat of a U.S. slump yesterday pushed the MSCI All-Country World Index of 45 nations into a bear market for the first time in more than two years.

“Verbal support without any concrete action is no longer convincing,” said Joe Lau, an economist at Societe Generale (GLE) SA in Hong Kong. “Investors are now looking for viable credible actions from policy makers and, given the amount of nervousness and uncertainty out there, that may not even be enough.”

While stocks came off their lows after the G-20 statement was released during the Asian day, the MSCI Asia Pacific Ex Japan index headed for its lowest close since June 2010.

Europe’s Pledge

The euro region vowed in the G-20 statement to increase the flexibility of the European Financial Stability Facility and to “maximize its impact” by the time the group next meets Oct. 14-15. Some officials signaled earlier in the day they may use leverage to increase the firepower of the EFSF, which was designed to stem the sovereign-debt crisis.

The G-20 officials cited “financial system fragility” and “heightened downside risks from sovereign stresses” among the threats to growth. They said they will ensure banks are adequately capitalized and have access to liquidity, while reiterating an aversion to volatility in currency markets.

The statement was released as the International Monetary Fund and World Bank prepare to start their annual meetings today, with data this week highlighting economic weakness around the globe.

U.S. consumer confidence dropped last week to its lowest point since the recession ended in 2009, and the output of European service companies and manufacturers this month shrank for the first time in more than two years. FedEx Corp. (FDX), an economic bellwether delivering goods from financial documents to pharmaceuticals, cut its full-year profit forecast as demand dropped in the U.S. and Asia.

‘Danger Zone’

“The world is in a danger zone,” World Bank President Robert Zoellick told reporters. Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian warned a fresh financial crisis is brewing, and Royal Bank of Scotland Group Plc predicted a euro-area recession will begin in the fourth quarter.

European authorities have drawn the most criticism for failing to contain a debt crisis that began in Greece two years ago and has since left that country on the verge of default, Portugal and Ireland requiring bailouts, and speculators threatening to dump the bonds of Italy and Spain.

Message for Sarkozy

In a sign of growing international irritation, U.K. Prime Minister David Cameron and five other G-20 leaders yesterday wrote to French President Nicolas Sarkozy to demand European governments “act swiftly to resolve the euro crisis” and consider “all possible options to ensure long-term stability in the world’s second-largest international currency.” Sarkozy is the current G-20 chairman.

In Washington, officials from China and Japan, the second- and third-biggest economies, indicated that their support for Europe will have limits and the region needs to solve the debt crisis itself. Japan’s Azumi said that while his nation can buy EFSF bonds if needed, there is no “blank check.”

“At the margin we can do quite a bit to help,” Chinese central bank Deputy Governor Yi Gang said in a panel discussion at the IMF. At the same time, “the real solution of the European sovereign debt crisis has to be done by Europeans themselves.”

Finance officials from Brazil, Russia, India, China and South Africa -- the so-called BRICS -- said in a statement they are “open to consider, if necessary, providing support through the IMF or other international financial institutions in order to address the present challenges to financial stability.”

Geithner’s Prediction

The European Central Bank may act to address risks to growth as soon as next month should economic data disappoint, Governing Council member Luc Coene said in an interview yesterday. An interest-rate cut isn’t ruled out, and the extension of long-term loans to banks is another possibility, he said.

U.S. Treasury Secretary Timothy F. Geithner predicted Europe will act “with more force” to end its troubles.

For now, European parliaments are focused on approving a plan to widen the scope of the 440-billion euro ($593 billion) EFSF to allow it to buy the debt of stressed euro-area governments, aid troubled banks and offer credit lines. Its current role is to sell bonds to fund rescue loans for cash- strapped governments.

The ratification process, which has so far been completed by just six nations, has drawn fire from some investors for being protracted and failing to provide the fund with enough cash to prevent the turmoil spreading beyond Greece. Curbing the scope of policy makers to do more is the suspicion that taxpayers in AAA-rated countries such as Germany and Finland would balk at stumping up even more rescue money.

Europe’s Options

Speculation has grown that Europe may eventually ratchet up the fund’s spending power through leverage, with European Union Monetary Affairs Commissioner Olli Rehn and French Finance Minister Francois Baroin indicating yesterday they may be willing to do so. One proposal is for the facility to use the bonds it sells as collateral to borrow more cash from the ECB.

Another idea is to mimic a U.S. program established following the 2008 collapse of Lehman Brothers Holdings Inc. by allowing the fund to offer the ECB credit protection for buying more sovereign bonds.

“It is very important that we look at the possibility of leveraging the EFSF resources and funding to have a stronger impact and make it more effective,” Rehn said. Baroin said separately that policy makers “need the right firewall to prevent contagion” and can discuss giving the fund “the necessary strength.”

To contact the reporters on this story: Scott Rose in Moscow at rrose10@bloomberg.net; Cheyenne Hopkins in Washington at chopkins19@bloomberg.net

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

Read more...

Europe Mulls Increasing Rescue Fund Firepower

By Mark Deen and Shamim Adam - Sep 22, 2011 1:50 PM PT
Enlarge image

Francois Baroin, France's finance minister, right, speaks with Christine Lagarde, managing director of the International Monetary Fund (IMF), during a meeting of the G7 finance ministers and members of the Deauville Partnership in Marseille, France, on Sept. 10, 2011. Photographer: Chris Ratcliffe/Bloomberg

Play Video

Sept. 22 (Bloomberg) -- Richard Clarida, global strategic adviser at Pacific Investment Management Co., talks about the outlook for global monetary policy. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

Play Video

Sept. 22 (Bloomberg) -- International Monetary Fund Managing Director Christine Lagarde talks about "downside risks" for the global economy, the IMF's mission and goals for its annual meetings in Washington this week, and the European sovereign-debt crisis. Lagarde, speaking with Tom Keene on Bloomberg Television's "InBusiness With Margaret Brennan," also discusses IMF funding and her experience in preparing for her new job. (Source: Bloomberg)

European finance chiefs said they may use leverage to increase the financial firepower of their regional bailout fund as a selloff in stocks signaled renewed concern that policy makers are failing to ward off a global economic slump.

The call to consider raising their fund’s ammunition -- made by French Finance Minister Francois Baroin and European Union Commissioner Olli Rehn -- suggests Europe’s policy makers are alert to concern among investors and foreign governments that they now lack the muscle to quell their debt turmoil if it spreads toward Italy and Spain.

How to tackle Europe’s woes will top the agenda when finance ministers and central bankers from the Group of 20 nations gather for dinner in Washington tonight ahead of the annual meetings of the International Monetary Fund and World Bank. They convene after global stocks entered a bear market and Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian warned the world is on the brink of another financial crisis.

“There has been a significant increase in the financial requirements of international intervention,” El-Erian said in Washington. “You need a lot more firepower in order to be a circuit breaker.”

July Plan

European parliaments are now focused on approving a July plan to expand the scope of the 440-billion euro ($593 billion) European Financial Stability Facility to allow it to buy the debt of stressed euro-area governments, aid troubled banks and offer credit lines. Its current role is to sell bonds to fund rescue loans for cash-strapped governments.

The ratification process has drawn fire from some investors for being protracted and failing to provide the fund with enough cash to prevent the crisis leaking beyond Greece. Curbing the scope of policy makers to do more is the suspicion taxpayers in AAA-rated countries such as Germany and Finland would balk at stumping up even more rescue cash.

That has fanned speculation Europe may eventually ratchet up the fund’s spending power, perhaps by using the bonds it sells as collateral to borrow more cash from the European Central Bank. Another proposal is to mimic a U.S. program established following the 2008 collapse of Lehman Brothers Holdings Inc. by allowing the fund to offer the ECB credit protection for buying more sovereign bonds.

EFSF Resources

“It is very important that we look at the possibility of leveraging the EFSF resources and funding to have a stronger impact and make it more effective,” EU Monetary Affairs Commissioner Rehn said in Washington. Baroin said separately that policy makers “need the right firewall to prevent contagion” and can discuss giving the fund “the necessary strength.”

German officials have so far rejected using the ECB to increase the power of the bailout fund, warning it could push the central bank further into the realm of fiscal policy. Former German Finance Minister Hans Eichel nevertheless suggested today that the rescue fund be given “unlimited powers” to convince investors that leaders are determined to beat the crisis.

“If it had unlimited power, it would calm the market,” Eichel said at a panel discussion in Bloomberg LP’s London office organized by GLG Research. “The risk with unlimited powers is lower than if it has limited funds.”

Credit Crisis

U.S. Treasury Secretary Timothy F. Geithner, who said in an interview this week that Europe will adopt some of the same measures the U.S. used to combat its credit crisis, today predicted it will act “with more force” to end its troubles.

Until governments act, IMF Managing Director Christine Lagarde said in a Bloomberg Television interview with Tom Keene that the ECB must continue to provide “solid, reliable” funding for troubled economies.

In a sign currently-stronger economies may be willing to support the weak, finance officials from Brazil, Russia, India, China and South Africa -- the so-called BRICS -- said in a statement that they are “open to consider, if necessary, providing support through the IMF or other international financial institutions in order to address the present challenges to financial stability.”

There may be limits to what they’re willing to do. China can support the European and global economies only “at the margin” and Europe must find its own the solution to its crisis, Chinese central bank Deputy Governor Yi Gang said in Washington.

‘Decisive Action’

U.K. Prime Minister David Cameron and five other G-20 leaders wrote to French President Nicolas Sarkozy to urge him to use his chairmanship of the body to find agreement on “decisive action” to support growth.

The risk of not doing so was underscored by a fall in Treasury 10-year yields to a record and a dip in oil below $80 a barrel. The MSCI All-Country World Index extended its losses from its May peak beyond 20 percent and emerging-market stocks plunged the most in almost three years. FedEx Corp., an economic bellwether that delivers goods ranging from pharmaceuticals to financial documents, cut its full-year profit forecast as demand dropped in the U.S. and Asia.

“The world is in a danger zone,” World Bank President Robert Zoellick told reporters.

To contact the reporters on this story: Mark Deen in Washington at markdeen@bloomberg.net Shamim Adam in Washington at sadam2@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Read more...

China, Japan Say Europe Must Fix Own Crisis

By Sho Chandra, Sara Eisen and Aki Ito - Sep 22, 2011 8:58 PM PT
Enlarge image

Yi Gang, deputy governor of the People's Bank of China. Photographer: Qilai Shen/Bloomberg

Play Video

(Corrects headline in report originally published Sept. 16 to say Chu says China cannot be a `white knight' for the global economy.) Sept. 16 (Bloomberg) -- Victor Chu, chairman of Hong Kong-based First Eastern Investment Group, talks about China's economy, Hong Kong's currency policy and global financial markets. Chu, speaking with Stephen Engle at the World Economic Forum's Annual Meeting of the New Champions in Dalian, China, also discusses an unauthorized trading at UBS AG. They speak on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Officials from China and Japan, the world’s second- and third-biggest economies, indicated that their support for Europe will have limits and the region needs to solve its own debt crisis.

Japanese Finance Minister Jun Azumi said in Washington yesterday that while his nation can buy European Financial Stability Facility bonds if needed, there is no blank check.

“At the margin we can do quite a bit to help,” Chinese central bank Deputy Governor Yi Gang said in a panel discussion yesterday at the International Monetary Fund in the same city. At the same time, “the real solution of the European sovereign debt crisis has to be done by Europeans themselves.”

Group of 20 finance chiefs pledged coordinated efforts to tackle rising risks as Greece teeters on the brink of default and stocks plunge around the world. Weak growth, high unemployment, sovereign stresses and turbulence in financial markets are “renewed challenges facing the global economy,” the officials said in a statement released late Sept. 22.

Azumi said that euro-area nations had “said that this is a euro-area problem, and that the euro-area nations should be the ones to solve the problem. We don’t reject that view, we respect it.”

While additional aid is “a possibility” if Europe succeeds in creating a system for dealing with crises, “it’s not like we’re going to provide a blank check,” Azumi told reporters.

Seeking China’s Help

Yi Gang’s remarks came amid investors’ expectations that China may help stabilize the euro region, after Italy this month followed Spain, Portugal and Greece in seeking investment from the world’s fastest-growing major economy. Chinese Premier Wen Jiabao, facing calls to widen support for indebted European countries, signaled this month developed nations should cut deficits and open markets rather than rely on China to bail out the world economy.

Also this month, other Chinese officials indicated the country is prepared to offer assistance. Zhang Xiaoqiang, vice chairman of China’s top economic planning agency, said the nation is willing to buy euro bonds from countries involved in the sovereign debt crisis “within its capacity.”

In the panel discussion yesterday, Yi said his nation’s involvement could be at the country level or with the European Union, and could also extend to cooperation with the IMF.

Odds of a Slump

“We’ve consistently invested in Europe,” Yi said. “We will continue to do so.” A unified and prosperous European economy and a stable euro are “good for the world,” he added.

It is unlikely that the global economy will slide into another slump, in part because “the whole world is still at a very low level” of activity, Yi said. “We have a very moderate recovery” following the financial crisis, which indicates global growth “won’t decrease too much,” he said.

“The probability of that is still rather limited,” Yi said, referring to a double-dip recession. With the right combination of policies, countries can manage the debt crisis and “we can still have moderate growth” in the global economy, he said.

One hurdle is that most nations are constrained in implementing further fiscal and monetary policy measures as they already used them to recover from the last slump, he said.

“Fiscal capacity is very limited,” and “monetary policy is already used pretty much to the limit” in terms of interest rates, quantitative easing and other tools in developed and developing nations, Yi said.

To contact the reporters on this story: Sho Chandra in Washington at schandra1@bloomberg.net; Sara Eisen in New York at seisen2@bloomberg.net; Aki Ito in Tokyo at aito16@bloomberg.net

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

Read more...

European, U.S. Futures Rise; Asian Stocks Decline Amid Global Bear Market

By Shiyin Chen and Shani Raja - Sep 22, 2011 11:31 PM PT

Asian stocks fell, extending their largest weekly loss since 2008, and metals declined as a pledge by Group of 20 nations to tackle rising risks failed to soothe concern the global economy is on the brink of another recession. U.S. and European index futures gained, while Treasuries fell.

The MSCI Asia Pacific excluding Japan Index slumped 2.2 percent as of 2:30 p.m. in Hong Kong. Standard & Poor’s 500 Index futures climbed 0.5 percent after a four-day drop and Euro Stoxx 50 contracts advanced 0.4 percent. The euro rose from near its lowest level in a decade against the yen. The won snapped a four-day slide after South Korea threatened intervention. Oil fell 0.6 percent in New York and copper declined 6.5 percent.

More than $3.4 trillion has been erased from equity values this week, driving global stocks into a bear market. G-20 officials said after talks in Washington they were “committed to a strong and coordinated international response to address the renewed challenges facing the global economy.” The European Central Bank may act to address risks to growth as soon as next month should economic data disappoint, Governing Council member Luc Coene said.

“It would be flippant to suggest this is just a blip,” said Tim Schroeders, who helps manage $1 billion in equities at Pengana Capital Ltd. in Melbourne. “The aggressive selling of equity markets seems to reflect a heightened probability that the world is moving toward a recession. There’s also a sense that policy makers globally are limited in their ability to alleviate the situation because of the need for fiscal austerity.”

Bear Market

The MSCI All-Country World Index slipped 0.3 percent, headed for its lowest close since July 2010. A 4.5 percent drop yesterday dragged the index down more than 20 percent from a May 2 close that was the highest since 2008, meeting some analysts’ definition of a bear market.

Almost six shares retreated for every one that gained on MSCI’s Asia excluding Japan Index. Japanese markets are shut for a holiday today. South Korea’s Kospi Index sank 5.7 percent, Taiwan’s Taiex Index tumbled 3.6 percent and Hong Kong’s Hang Seng Index dropped 1.9 percent.

Futures signal the S&P 500 may rebound from yesterday’s 3.2 percent drop. The gauge has dropped 7.1 percent this week after the Federal Reserve said on Sept. 21 it saw “significant downside risks” in the economy and it will replace $400 billion of short-term debt with longer-term Treasuries to spur growth. Treasury 10-year yields reached an all-time low of 1.70 percent yesterday.

G-20 Statement

The euro strengthened 0.2 percent to $1.3493, rebounding from a 0.8 percent drop yesterday. The shared currency climbed to 102.96 yen, the first gain in six days. It yesterday fell as low as 102.22, the least since 2001. The euro region committed in the G-20 statement to implement a pledge to expand the powers of a rescue fund by the time of the group’s next gathering, scheduled for Oct. 14-15.

French Finance Minister Francois Baroin and European Union Commissioner Olli Rehn yesterday called for officials to consider using leverage to increase the financial firepower of their regional bailout fund.

If the G-20 statement “is enacted, that’s a major, important step and that could provide a floor for risk appetite and for confidence,” said Callum Henderson, global head of foreign-exchange research at Standard Chartered Plc in Singapore. “The good news is the euro is not collapsing.”

Asian Intervention

The won closed 1.1 percent stronger at 1,167.31 per dollar, having been trading at a 0.9 percent loss two minutes before the end of today’s trading in Seoul. The currency tumbled 5.7 percent in the last four days and the finance ministry said today it would “take action” to stabilize the market to combat “excessive” recent moves.

Indonesia’s rupiah rose 1.5 percent after the nation’s central bank said yesterday it was supporting the currency. India’s rupee dropped to a two-year low after Finance Minister Pranab Mukherjee said two days ago the Reserve Bank of India was prepared to sell dollars.

The cost of protecting Asia-Pacific corporate and sovereign bonds from default fell, after surging yesterday to the highest levels in more than two years, according to traders of credit- default swaps.

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan dropped four basis points to 230 basis points, Credit Agricole SA prices show. The gauge closed at 237.4 in New York yesterday, the highest since May 5, 2009, after the biggest jump since Feb. 17, 2009, according to CMA.

Three-month copper dropped 6.4 percent to $7,182 a metric ton, extending yesterday’s 7.5 percent tumble, the most since October 2008. Nickel dropped 8.4 percent to $17,300 a ton after plummeting as much as 17 percent yesterday and zinc declined 4.9 percent to $1,910.25. An index of six metals traded in London sank 6.4 percent yesterday, the most since May 4, 2010.

Oil fell to $80.17 a barrel on the New York Mercantile Exchange, after earlier gaining 1.6 percent to $81.81. Crude yesterday traded as low as $79.66.

To contact the reporters on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

Read more...

El-Erian Says World Is on Eve of Next Financial Crisis Over Sovereign Debt

By Shamim Adam - Sep 22, 2011 9:52 AM PT

The world is on the eve of the next financial crisis, with sovereign debt its epicenter, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., which runs the biggest bond fund.

The European Central Bank hasn’t put in place a “circuit breaker” to contain the region’s debt crisis, El-Erian, who is also Pimco’s co-chief investment officer, said at an event in Washington today.

Finance ministers and central bankers from the Group of 20 are meeting in Washington this weekend as markets tumble on concern the world economy is slowing and Europe’s sovereign debt crisis threatens to spread beyond Greece. The Stoxx Europe 600 Index sank 4.6 percent to 214.89 at the 4:30 p.m. close in London, the lowest since July 2009.

“There has been a significant increase in the financial requirements of international intervention,” El-Erian said. “You need a lot more firepower in order to be a circuit breaker. Look at how much the ECB has put in and ask yourself the question: has it created a circuit breaker? The answer is no, even though the amounts involved have been massive.”

French Finance Minister Francois Baroin said the G-20 nations will coordinate a response to the European sovereign debt crisis. Baroin, speaking to reporters today in Washington, said European nations must approve a July 21 accord on further financial aid to Greece.

Greek Budget Cuts

The Greek government said today it will accelerate budget cuts to keep emergency loans flowing, extending austerity measures that have deepened a recession and failed to ease doubts that it can avoid default. The latest round of deficit fighting was demanded by international lenders to ensure Greece reaches targets in a 110 billion-euro ($151 billion) bailout and receive a payment due next month.

World Bank President Robert Zoellick said the global economy is “in a danger zone,” and his counterpart at the International Monetary Fund, Christine Lagarde, said “downside risks” are high.

“We’re in it together and we will be able to solve it together,” Lagarde, a former French finance minister, said in an interview on Bloomberg Television. U.S. Treasury Secretary Timothy F. Geithner said Europe will act “with more force” to combat its debt crisis.

In the U.S., stocks tumbled on concern central banks are running out of tools to prevent another recession and after the Federal Reserve said yesterday it saw “significant downside risks” to the economy. The Standard & Poor’s 500 Index fell 2.9 percent to 1,133.09 at 12:51 p.m. on New York.

To contact the reporter on this story: Shamim Adam in Washington at sadam2@bloomberg.net

To contact the editor responsible for this story: Paul Badertscher at pbadertscher@bloomberg.net

Read more...

Global Stocks Drop 20% Into Bear Market

By Lynn Thomasson and Michael Patterson - Sep 22, 2011 10:35 PM PT
Enlarge image

The Dow plunged 500 points on the grim global economic outlook. Photographer: Michael Nagle/Getty Images

Play Video

Sept. 22 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks slumped, giving the Dow Jones Industrial Average its biggest two-day decline since December 2008, amid investors’ concern that policy makers are running out of tools to avoid another global economic recession. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)

Stocks fell, pushing the MSCI All- Country World Index of 45 nations into a bear market for the first time in more than two years, after the worsening European debt crisis and threat of a U.S. recession erased more than $10 trillion from equities since May.

The MSCI index, which slipped 0.3 percent as of 1:33 p.m. in Hong Kong today, has lost more than 20 percent since peaking on May 2, meeting the common definition of a bear market. It tumbled 4.5 percent to a 13-month low of 277.38 yesterday. The MSCI World (MXWO) Index of shares in developed nations also fell into a bear market yesterday, plunging 4.2 percent. The MSCI Emerging Markets Index reached the 20 percent threshold on Sept. 13.

The world is poised for a financial crisis, Mohamed El- Erian, chief executive officer of Pacific Investment Management Co., said in Washington yesterday. Finance chiefs from the Group of 20 nations pledged late yesterday to address “heightened downside risks” to the global economy, echoing language used by the Federal Reserve on Sept. 21 when it announced a $400 billion plan to spur growth as the recovery from the worst contraction since the Great Depression falters.

“The market is pricing in a recession,” said Ng Soo Nam, the Singapore-based chief investment officer at Nikko Asset Management Co., which oversees about $154 billion. “Stocks are looking cheap, but it will take a lot of courage to believe that. Things could get worse. The risk of a sovereign-debt default in Greece is the most significant concern.”

Valuations Sink

The MSCI All-Country World Index has retreated 19.8 percent since July 22. It fell after Standard & Poor’s cut the U.S. credit rating following a debate over raising the nation’s borrowing limit, speculation Greece will default intensified, and Chinese inflation accelerated to a three-year high. The slump pushed the price-earnings ratio for the index down to 11.4, the lowest since March 2009 and 46 percent less than the 16-year average, data compiled by Bloomberg show.

The Standard & Poor’s 500 Index extended its drop since its peak on April 29 to 17 percent. The gauge has retreated even as analysts raise projections for 2011 profit to a record $99.34 a share this year from $98.73 on April 29, according to the average analyst estimate in a Bloomberg survey.

Benchmark measures for five out of 24 developed markets haven’t posted a 20 percent slump from their highs: the U.S., U.K., Canada, Singapore and New Zealand, according to data compiled by Bloomberg. Eight out of 21 developing nations aren’t in bear markets, including South Africa. The MSCI Emerging Markets Index has retreated 27 percent since its 2011 high on May 2.

Europe, Asia

The 15 national stock gauges with the biggest losses since the MSCI All-Country World peaked on May 2 are for European countries. Greece’s ASE Index has lost 42 percent, Italy’s FTSE MIB Index has plunged 40 percent and Hungary’s Budapest Stock Exchange Index has retreated 38 percent.

Policy makers are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy,” G-20 finance ministers and central bank governors said in a previously unplanned statement in Washington. Many urged Europe to implement a July promise to expand the powers of a rescue fund, Japanese Finance Minister Jun Azumi said.

The Euro Stoxx 50 Index has tumbled 28 percent since July 22 as Greece edged closer to defaulting on its sovereign debt and the cost of insuring western European countries’ loans rose to records. The MSCI Asia Pacific Index has fallen 19.7 percent since its 2011 high on May 2. China’s Shanghai Composite Index has tumbled 23 percent since its peak in November, and Japan’s Topix has slumped 25 percent since April 2010.

Bad Ending

“Europe is going to continue to unwind and eventually end up badly for the global economy,” Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $4 billion, said in a telephone interview. “There are so many questions, so many uncertainties.”

The 20 percent decline in global equities ended the bull market that began in March 2009. The MSCI All-Country World Index climbed as much as 107 percent during the rally. The measure avoided a bear market in 2010, when it fell 16 percent between April 15 and July 5. The index rebounded after Federal Reserve Chairman Ben S. Bernanke foreshadowed $600 billion in bond purchases meant to prevent deflation and stimulate growth at an Aug. 27, 2010, meeting in Jackson Hole, Wyoming.

Financial stocks, which posted the biggest losses in the last bear market, are leading declines again amid growing concern that European banks will have to write down their holdings of government debt. Banks, brokerages and insurers in the MSCI All-Country World have collectively lost 31 percent since May 2.

SocGen’s Slide

Societe Generale SA of Paris has retreated 66 percent since May 2, the second-biggest loss among financial stocks in the MSCI All-Country behind Athens-based EFG Eurobank Ergasias. UniCredit SpA, based in Milan, has retreated 62 percent. Banks in Europe hold 98.2 billion euros ($132 billion) of Greek sovereign debt, 317 billion euros of Italian government debt and about 280 billion euros of Spanish bonds, according to European Banking Authority data.

Financial companies in the worldwide index sank 77 percent during the last bear market as government bailouts rescued the biggest U.S. banks from collapse and Lehman Brothers Holdings Inc., once the nation’s fourth-biggest securities firm, filed the nation’s largest bankruptcy in September 2008.

More than $37 trillion was erased from global equity values in the previous bear market that lasted for 16 months after the MSCI All-Country World peaked on Oct. 31, 2007. The index fell as much as 60 percent amid the first global recession since World War II and more than $2 trillion in losses and writedowns at financial companies worldwide after housing prices dropped.

“We could be on the eve of the next financial crisis,” Barton Biggs, managing partner and co-founder of hedge fund Traxis Partners LP in New York, said during a Bloomberg Television interview with Matt Miller and Carol Massar yesterday. The firm has $1.4 billion in assets. “We shouldn’t be because there are things that could be done to avert it, but they haven’t been done. There’s no signs that the authorities are going to do them.”

To contact the reporters on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net

To contact the editors responsible for this story: Nick Gentle at ngentle2@bloomberg.net; Nick Baker at nbaker7@bloomberg.net; Gavin Serkin at gserkin@bloomberg.net

Read more...

China’s Manufacturing May Contract for a Third Month, HSBC Survey Shows

By Bloomberg News - Sep 22, 2011 11:19 AM GMT+0700

China’s manufacturing may shrink for a third month in September, the longest contraction since 2009, after a preliminary index of purchasing managers showed measures of export orders and output declined.

The reading of 49.4 for the index released by HSBC Holdings Plc and Markit Economics compares with a final 49.9 for August and 49.3 for July. The gauge was below 50, the level that separates expansion from contraction, for eight months through March 2009, according to previously released figures.

Today’s data adds to evidence the world’s second-biggest economy is slowing after the central bank raised borrowing costs and curbed lending to cool inflation. China has joined policy makers in Asian economies from South Korea to Malaysia in limiting monetary tightening as Europe's debt crisis deepens and the risk of a renewed U.S. recession increases.

“The index points to continued moderation in manufacturing growth,” said Chang Jian, an economist at Barclays Capital in Hong Kong who formerly worked for the World Bank. “But the fact that the number is hovering around 50 should reduce concerns over a sharp slowdown and which would support the authorities in keeping their current policy stance largely in place.”

Slowdown Concern

Stocks in China extended their decline after the data were released. The benchmark Shanghai Composite Index was 1.7 percent lower at 2469.36 at the 11:30 a.m. local-time break. The gauge has slumped 12 percent this year as the government tightened policies to cool inflation and concern deepened that faltering growth in developed economies will sap export demand.

HSBC’s preliminary index, known as the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of executives in more than 400 companies. The final reading will be released on Sept. 30.

A gauge of output dropped below 50 in September after expanding the previous month, orders contracted at the same rate and a measure of new export orders contracted at a faster pace, today’s statement showed. Sub-indexes for output prices and input costs rose at a faster pace compared with August, today’s report showed, indicating inflationary pressure hasn’t abated.

The preliminary index has matched the final reading twice since HSBC began publishing the series in February. The index fell below 50 in July for the first time in a year. The official manufacturing index released by the statistics bureau and the China Federation of Logistics and Purchasing had a reading of 50.9 in August.

Hard-Landing Fears

A final reading below 50 for the third month “implies that China’s manufacturing sector will see weakening sequential growth in the coming months,” Qu Hongbin, a Hong Kong-based economist at HSBC, said. “Fears of a hard landing are unwarranted” as the nation is less dependent on overseas sales than during the last crisis and domestic investment and consumer spending are “resilient,” he said.

In contrast, Kevin Lai, a Hong Kong-based economist at Daiwa Capital Markets Ltd. said he’s “extremely concerned” about the outlook for the economy. Concerns the economy will experience a hard landing “are not unwarranted,” he said.

Downside Risks

Economists including Shen Jianguang at Mizuho Securities Asia Ltd. and Lu Ting at Bank of America Merrill Lynch have said the HSBC PMI focuses on small and medium-sized companies that have been affected more than state-owned enterprises in the government’s tightening campaign.

The official PMI, which surveys more than 800 companies in 20 industries, hasn’t dropped below the 50 line that divides expansion from contraction since February 2009.

The International Monetary Fund this week cut its forecast for global growth to 4 percent for 2011 from a June estimate of 4.3 percent, and said “downside risks are growing” as Europe’s debt crisis widens. The Washington-based lender also lowered its estimate for China’s expansion because of monetary tightening and a weaker outlook for exports.

The IMF now projects the Chinese economy will grow 9.5 percent this year, down from a forecast of 9.6 percent in June, and 9 percent in 2012.

Premier Wen Jiabao said this month the slowdown is within the government’s expectations and that stabilizing prices remains the top economic priority.

Mixed Outlook

A central bank survey last week showed inflation expectations among households rebounded in the third quarter even as August consumer-price gains eased to 6.2 percent from a three-year high in July.

Signs are mixed on the outlook for the economy. While industrial output growth moderated in August for the second straight month, exports grew more than expected and imports climbed to a record, indicating demand is holding up.

Rio Tinto Plc (RIO), the world’s second-largest mining group, said this week that “a policy-induced hard landing remains unlikely” and that the long-term outlook for demand from China is “positive.”

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

Read more...

Asia’s Millionaires Form Family Offices

By Netty Ismail - Sep 22, 2011 1:03 PM GMT+0700

Stephen Diggle, who co-founded a hedge fund that made $2.7 billion for investors in 2007 and 2008, set up a family office to manage the millions in fees he earned instead of entrusting his wealth to private bankers.

“It was fairly demonstrably clear that there was a very significant problem of alignment of interests by private banks and their customers,” said the 47-year-old founder of Vulpes Investment Management, whose Singapore-based family office has invested in hotels in Japan and farms in Uruguay. “They ceased to be custodians of people’s money and they became salesmen.”

Asia’s wealthiest investors, whose ranks are swelling as the region’s economic growth outperforms the rest of the world, are turning to family offices to maintain control of their money after the collapse of Lehman Brothers Holdings Inc. in 2008 made them more risk averse.

“Private banks try to sell you everything and not necessarily what’s best for your family office or for yourself,” said Clinton Ang, managing director of Singapore- based wine and spirits distributor Hock Tong Bee Pte, who is among those preferring to manage his family’s wealth himself. “If sophisticated investors haven’t already learnt the lessons of the past crisis, with the impending crisis that is on the horizon they’d better.”

The MSCI World (MXWO) Index has tumbled 17 percent from this year’s high in May and is trading close to a one-year low after Standard & Poor’s stripped the U.S. of its AAA credit rating in August and Europe’s debt crisis deepened.

U.S. Downgrade

“Markets go up and markets go down,” said Tan Su Shan, head of wealth management of Singapore-based DBS Group Holdings Ltd., Southeast Asia’s biggest bank. “It’s easy enough for clients to point the finger at the banker when things go wrong. What about when things go up? There are always two sides to the story.”

DBS attracted more than S$2 billion ($1.6 billion) in net new money in August, Tan said. The bank’s wealth-management unit turned bearish two months ago and “took money off the table for clients” invested in equities, Tan said.

About 90 percent of Ang’s family’s investable assets of almost S$100 million are in cash after he sold from October through March its investments in stocks, bonds and most property assets, said the 38-year-old, who describes himself a follower of Templeton Asset Management’s Mark Mobius.

Family offices are typically tailored to the families’ investment and personal needs, and often include estate planning, philanthropy and lifestyle management such as maintaining homes and yachts. Private wealth managers, who generally work for global investment banks, rely on fees and commissions from managing their clients’ money.

More Defensive

Most family offices in Asia are more defensive in their investment strategy and tend to hire a “generalist” to manage their wealth, rather than specialists such as former hedge fund managers, said William Chan, chief executive officer of Singapore-based Stamford Privee, which manages his family’s wealth and that of two others. Such managers may cost a family office between $300,000 and $400,000 a year, while specialists would be more expensive, Chan said, citing U.S. surveys.

Wealthy families tend to choose investment professionals they had previous dealings with, such as a private banker, as their office manager, said Chan. Others may select an ex- investment banker who advised them on transactions such as an initial public offering of their company, he said.

“Being the trusted adviser is key,” Chan said. “Failure to retain talent in a buoyant market will usually be the cause of the office’s failure. Right hires are managers who have a strong streak of loyalty to the family and who will not be easily swayed by other offers.”

Asian Wealth

Wealth in Asia, excluding Japan, is expected to rise at about double the global rate of almost 6 percent through the next five years, the Boston Consulting Group said in a May 31 report. Singapore will become the world’s top wealth management center by 2013, overtaking Switzerland and London, according to a PricewaterhouseCoopers LLP study published in June.

The region also is attracting overseas family offices. Tano Capital, the financial adviser of the founders of Franklin Templeton Investments, and London-based Alta Advisers Ltd., the family office of Swedish billionaire Hans Rausing, have opened units in Singapore.

“Anecdotally, we are seeing more European family offices making enquiries about setting up their Asian headquarters to participate in the Asian growth story,” said Amy Lo, head of ultra-high net worth in Asia-Pacific at UBS AG’s wealth management business.

Singapore Rules

About 62 percent of U.S.-based family offices surveyed this year said they were considering increasing allocations to Asian markets outside Japan, according to Family Office Exchange. The median family office reported 12 percent annual pretax portfolio return in 2010 and families are expecting a median return of 8 percent this year, according to the Chicago-based organization, which represents 350 families worldwide.

Singapore’s central bank will require banks from Jan. 1 to advise inexperienced investors on the suitability of products they wish to buy.

“The Lehman crisis was a learning experience for most private banks and private bankers,” said DBS’s Tan. “You cannot sell products that don’t fit the clients’ risk profile and investment objectives.” The Monetary Authority of Singapore’s rules serve “as a protection from hopefully mis- selling from the bankers to the clients.”

Private Banks

Noor Quek, previously the head of business development in Southeast Asia at Citigroup’s private-banking unit who now runs Singapore-based family office adviser NQ International Pte, said family offices shouldn’t be seen as a replacement to banks.

“The whole issue is about both working together,” she said. “The bank must be able to understand the client and the client is to understand what the bank can offer. This is not something that happens overnight.”

Some investment banks are now seeking to tap the growth of family offices in the region by setting up units that cater to the independent firms. Credit Suisse Group AG (CSGN) is housing five Asian and European families in Singapore that are seeking to “incubate” their own wealth management firms, said Bernard Fung, head of family office services at the private banking unit. The Zurich-based bank also works with other families in the region seeking to set up their own family offices, he said.

Role to Play

Family offices and private banks are “not mutually exclusive,” said Fung, who previously oversaw the London-based family office of David Sainsbury, the billionaire philanthropist and former chairman of the eponymous supermarket chain. Families that are serious about managing their assets should use “proper systems to measure risk and governance processes,” he said.

“If you’ve got that, then financial institutions can have a role to play within that,” Fung said. “Trust goes both ways.” Part of the wealth of the family offices that Credit Suisse is housing is still managed by the bank, he said.

Zurich-based UBS set up in January a family services unit in Asia, where much of the wealth was created after World War II, which provides non-investment advice such as philanthropy and wealth planning to its richest clients.

“Most families prefer to set up their own family offices with a combination of their own employees and external experts, with specialist skills ranging from accountants to legal and tax advisers to investment professionals,” said Hong Kong-based Lo.

DBS built up its family office advisory business this year, offering services that include advice on private-equity investments and philanthropy. There’s a “huge movement” of family offices creating their own funds and teaming up with other independent firms to co-invest, said Terry Alan Farris, who joined DBS’s private banking unit in January as its Singapore-based head of family office.

Rockefeller’s Wealth

Market gains helped boost assets managed by private banks by 11 percent last year with the top 20 in the world overseeing a combined $11.1 trillion, according to London-based Scorpio Partnership. The rate of net new money inflows fell on average by almost 19 percent from 2009 and many banks saw margins squeezed, according to the wealth-management consultancy firm.

There are about 50 established family offices in Asia outside of Japan that are managed professionally, according to Scorpio. Worldwide, there are an estimated 2,500 to 3,500 family offices, said Joseph Reilly, president of the Greenwich, Connecticut-based Family Office Association. The first family office was established in the U.S. by oil baron John D. Rockefeller in 1882 to manage his family’s assets.

GFIA Pte, which advises investors seeking to allocate money to hedge funds and began its wealth-advisory business when it started managing Diggle’s money, is in talks with other prospective clients, said Peter Douglas, the firm’s principal.

As financial institutions curb risk after the collapse of Lehman Brothers triggered the global credit crisis, wealthy families are “stepping into the holes left by the exits of the banks” in making higher-return investments, Douglas said.

Uruguay Farms

“It’s partly the realization of the conflict between private wealth and the financial services industry, and it’s partly because now there’s a lot more opportunity out there for private wealth relative to that available for the financial services industry compared with pre-crisis,” Douglas said.

Diggle’s family office bought farms in Uruguay and Illinois, a kiwi-and-avocado orchard in New Zealand, land in Italy and Bali, boutique hotels in Japan, defensive stocks, gold and “a large portfolio of very high-end wine,” he said. Diggle set up Vulpes in April after closing in March Artradis Fund Management Pte, the hedge fund he co-founded with Richard Magides.

Diggle, who has four children, said he set up the family office with GFIA to put in place the processes and structure to preserve his fortune.

Sharing Costs

Some family offices cater to more than one family to gain economies of scale. It costs at least $1.5 million a year to run a family office that includes an investment team, and a family will need a minimum of $100 million to justify the expenses, said Chan of Stamford Privee.

Blue Ocean Capital Partners, a unit of Singapore-based private-equity firm Tembusu Partners Pte, plans to set up an office with a U.K.-based family firm this year, said Director Daniel Lin.

Lin, 28, said he and his 54-year-old father, who founded Tembusu Partners, will start by managing the wealth of their family with the help of a chief executive officer. At least two other families have agreed to partner with them later, he said.

“For private banks, because they have certain targets, they need to find something that will give them a financial return pretty quickly,” Lin said. “For us, we’re not in a hurry to make money out of this; we have time to build on the intangibles such as family values and governance.”

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net.

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

Read more...

European Stocks Slide as Fed Sees Risks to Economy; Rio Sinks

By Corinne Gretler - Sep 22, 2011 6:21 PM GMT+0700

European stocks tumbled the most in a month as the Federal Reserve signaled “significant downside risks” to the world’s largest economy and Moody’s Investors Service downgraded three U.S. banks. Asian shares and U.S. index futures fell.

Logitech International SA (LOGN), the world’s biggest maker of computer mice, plunged 13 percent after cutting its forecasts for the second time in two months. Rio Tinto Group, the world’s second-largest mining company, sank the most in more than two years as China’s manufacturing shrunk. LVMH Moet Hennessy Louis Vuitton SA and Burberry Group Plc led luxury stocks lower.

The benchmark Stoxx Europe 600 Index sank 4.4 percent to 215.42 at 12:19 p.m. in London, the biggest drop since Aug. 18. The gauge has declined 26 percent from this year’s high on Feb. 17 amid concern the global economic recovery is stalling and the region’s debt crisis is spreading. The MSCI Asia Pacific Index retreated 4.1 percent today and S&P 500 Index futures decreased 2.6 percent after the benchmark gauge for U.S. equities plunged 2.9 percent yesterday.

“To have a chance to resolve the European debt situation, we need world growth to remain robust,” said Jean-Paul Jeckelmann, chief investment officer at Banque Bonhote & Cie. in Neuchatel, Switzerland, who helps manage $1.4 billion in equities. “Any sign that this growth is at risk will shake markets. The word ‘significant’ used by the Fed is pretty strong and is contrasting with previous declarations that were much more constructive.”

Fed Plan

The Fed said it will replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further amid “significant downside risks to the economic outlook, including strains in global financial markets.”

The central bank will buy securities with maturities of 6 to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said late yesterday after a two-day meeting. The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said.

The Fed’s “downbeat outlook for the economy left traders fleeing from risky assets,” Jonathan Sudaria, a trader at London Capital Group, said in e-mailed comments.

Moody’s downgraded the long-term credit ratings of Bank of America Corp. and Wells Fargo & Co., along with Citigroup Inc.’s short-term rating, saying U.S. support has become less likely if lenders get into financial trouble.

Greek Cuts

Greek Prime Minister George Papandreou’s government said it will accelerate budget cuts, targeting civil servants’ wages and pensioners to keep emergency loans flowing and avoid default, following two rounds of talks with the European Union and the International Monetary Fund. The policies were demanded by international lenders to ensure Greece reaches deficit-reduction targets in a 110 billion-euro ($151 billion) bailout and receive a payment due next month.

“A promise of accelerating budget cuts is another attempt at buying more time,” said Manish Singh, London-based head of investment at Crossbridge Capital, which has more than $2 billion under management. “More austerity will pile on that pain and be deeply unpopular. I wonder if a quick Greek default is not a better option than long, drawn-out uncertainty and then a default.”

Economic Data

China’s manufacturing may shrink for a third month in September, the longest contraction since 2009, after a preliminary index of purchasing managers showed measures of export orders and output declined. A report in Brussels showed that European services and manufacturing growth contracted for the first time in more than two years in September.

U.S. Labor Department data at 8:30 a.m. in Washington may show that initial jobless claims dropped to 420,000 from 428,000 a week ago, according to 43 economists surveyed by Bloomberg. Separately, the index of U.S. leading economic indicators probably climbed 0.1 percent in August after a 0.5 percent gain in July, according to the survey median.

Logitech fell 13 percent to 6.82 Swiss francs, the biggest decline since April. The company cut its sales and operating profit forecasts for the second time in two months after reassessing its business under Chairman Guerrino De Luca acting as chief executive officer.

Rio, BHP Billiton

Mining companies declined as copper fell to the lowest in almost a year. Rio Tinto and larger rival BHP Billiton Ltd. (BHP) sank 9.3 percent to 3,075 pence and 6.7 percent to 1,762 pence, respectively. Kenmare Resources Plc (KMR) decreased 8.9 percent to 45.90 euro cents while Kazakhmys Plc (KAZ), the biggest copper producer in Kazakhstan, dropped 9.4 percent to 875.50 pence. Antofagasta Plc (ANTO) fell 9.2 percent to 1,012 pence.

LVMH, the maker of Celine handbags and TAG Heuer watches, tumbled 6.7 percent to 7.60 euros. Burberry, the U.K.’s largest luxury-goods maker, retreated 9.5 percent to 1,366 pence, the biggest drop since April 2009.

Societe Generale SA, France’s second-largest bank by assets, slid 8 percent to 15.57 euros ands Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, lost 7.9 percent to 33.32 pence.

Michel Barnier, the European Union’s financial-services commissioner, told Le Figaro in an interview that he can’t rule out the possibility that some European banks will need state aid. Barnier said in the interview that he doesn’t share the view of the International Monetary Fund on the capital needs of European banks. Any necessary refinancing should preferably be carried out with private money, he added.

EADS Slides

European Aeronautic Defence and Space Co. slumped 6.3 percent to 21.25 euros. BNP Paribas SA and Societe Generale (GLE) have stopped lending to aircraft purchasers because of difficulties in obtaining dollar refinancing, Les Echos reported, without citing anyone. Airbus SAS may be affected more than Boeing Co., which has easier access to credit in the U.S., according to the newspaper.

Bourbon SA (GBB), owner of the second-biggest fleet of supply and crew ships for the oil industry, slumped 7.8 percent to 17.94 euros as Bank of America Corp. said the growing liquidity concern around French banks “raises question marks” around financing for part of the European oil industry, adding that Bourboun is “heavily reliant on French banks financing for their fleet expansion program.”

Stada Arzneimittel AG (SAZ) plunged 11 percent to 16.75 euros, extending yesterday’s 19 percent plunge, after Sebastian Frericks, an analyst at Bankhaus Metzler, cut the shares to “sell” from “buy.” The company said yesterday it will have a one-time charge of about 97 million euros in the third quarter because of unpaid bills from Serbian drug wholesalers.

EasyJet Plc (EZJ), Europe’s second-biggest discount airline, rallied 7.1 percent to 334 pence as the company said it will pay a dividend of 9 pence a share for the fiscal year ending in September after raising its annual profit forecast.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

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

Read more...

Fed Sees ‘Significant’ Risks to U.S. Economy

By Joshua Zumbrun and Scott Lanman - Sep 22, 2011 4:08 PM GMT+0700

Federal Reserve policy makers indicated they are willing to do more to keep the economy from sliding into another recession as they made their second move in as many months to reduce borrowing costs.

The central bank will extend the average maturities of the Treasuries in its portfolio by purchasing $400 billion of long- term debt while selling an equal amount of shorter-term securities, the Federal Open Market Committee said in Washington after ending a two-day meeting yesterday.

“It’s a modest step,” said Dean Maki, chief U.S. economist at Barclays Capital and a former Fed economist. “This is a way to start down the path of further easing, but they would become more aggressive if they were convinced growth was not going to improve.”

Treasury 30-year bonds surged in anticipation of central bank purchases of longer-term debt. Stocks fell, pushing the Standard & Poor’s 500 Index down the most in a month, on the Fed’s assessment that market turmoil caused by Europe’s sovereign-debt crisis is taking a toll on the U.S. economy.

“There are significant downside risks to the economic outlook, including strains in global financial markets,” the FOMC said. “The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.”

Global Stocks Tumble

Stocks and commodities fell, Treasury 10-year yields dropped to a record and the Dollar Index climbed to a seven- month high.

The MSCI Asia Pacific Index plunged as much as 3.8 percent in Tokyo and Europe’s benchmark Stoxx 600 Index slumped 3.4 percent at 10:03 a.m. in London. U.S. stock futures dropped, signaling the world’s largest equity market may slide for a fourth straight day. The S&P 500 Index (SPX) tumbled 2.9 percent yesterday.

The Fed’s move, known as “Operation Twist” after a similar action in 1961, drew three dissents for the second meeting in a row, as Chairman Ben S. Bernanke struggled to find consensus to help an economy beset by 9.1 percent unemployment and prices that are 3.8 percent higher than a year ago, as measured by the Consumer Price Index.

The Fed will probably increase the bond-buying program announced yesterday in coming months, said companies including ING Groep NV, Mitsubishi UFJ Asset Management Co. and Wells Fargo LLC.

Rate Pledge

The Fed maintained its pledge made in August to hold its benchmark interest rate near zero through the middle of 2013 so long as unemployment stays high and the inflation outlook is “subdued.” The target rate has been in a range of zero to 0.25 percent since December 2008.

The central bank also announced a measure “to help support conditions in the mortgage market” by reinvesting maturing housing debt into mortgage-backed securities instead of Treasuries.

Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates tumbled the most in more than two years relative to Treasuries after the announcement.

“The Fed is trying to drive down mortgage rates to the lowest possible level, to get people to refinance, get more disposable income in people’s pockets,” said Michael Dueker, chief economist for Russell Investments North America in Seattle, with $161 billion in assets under management.

Inflation Outlook

The amount of Treasury debt to be sold represents about three-fourths of Fed holdings of between three months and three years. The program will extend the average maturity of the Fed’s Treasury holdings to 100 months, or 8 1/3 years, by the end of 2012, from 75 months.

Inflation “appears to have moderated since earlier in the year,” the Fed said, without citing a specific measure. The Fed’s preferred price gauge, which excludes food and energy costs, rose 1.6 percent in July from a year earlier, accelerating from a 1 percent gain in March. At the same time, retail gasoline prices have declined to an average of $3.57 a gallon from $3.99 in May.

Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Charles Plosser of the Philadelphia Fed voted against the FOMC decision for a second consecutive meeting. They “did not support additional policy accommodation at this time,” the Fed statement said.

Republican Backlash

The Fed’s efforts to spur growth, including purchases of $2.3 trillion in securities from December 2008 through June in two rounds of so-called quantitative easing, have sparked a backlash from Republican lawmakers.

House Speaker John Boehner of Ohio and Senate Minority Leader Mitch McConnell of Kentucky urged Bernanke in a letter this week to refrain from additional monetary easing to avoid “further harm” to the economy.

The criticism has extended to the Republican campaign for the 2012 presidential nomination, with Texas Governor Rick Perry saying Aug. 15 that Bernanke would be treated “pretty ugly down in Texas” if he printed more money before the election.

The Fed’s System Open Market Account held $2.64 trillion in securities as of Sept. 14, which included $1.65 trillion in Treasury notes, bills and inflation-protected bonds and $995 billion of mortgage debt.

Economists surveyed by Bloomberg anticipated a Fed program to extend the duration of its Treasuries. Of 42 analysts surveyed, 71 percent forecast such a move, even as 61 percent said it would probably fail to reduce unemployment.

‘Noticeable Impact’

“We saw a noticeable impact on longer-term securities,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania, who estimates the lower borrowing costs may add 0.1 percentage point to gross domestic product in the fourth quarter. “The Fed has to take strides to restore confidence. The economy is really being held back by a crisis of confidence.”

The Operation Twist from 1961, conducted with the Treasury Department, got its name from Chubby Checker’s hit song, “The Twist,” according to a report published March 14 by Eric Swanson, an economist at the Federal Reserve Bank of San Francisco. That move lowered long-term Treasury yields by about 15 basis points, or 0.15 percentage point, according to Swanson.

Some borrowing costs were already nearing record lows before yesterday’s action.

Yields on 10-year Treasuries have been falling on concerns global growth is flagging and Europe’s sovereign-debt crisis will intensify. The rate fell to 1.86 percent yesterday from this year’s high of 3.74 percent in February. The average rate for a 30-year fixed mortgage fell to 4.09 percent last week, its lowest level on record in a Freddie Mac index dating to 1972.

Joe Carson, director of global economic research at AllianceBernstein LP in New York, said consumers are likely to see little relief in the form of lower costs to pay interest on their debts, which are already at a 15-year low after falling by $250 billion since the middle of 2007.

“It will have a very minor impact on activity because our economy is not being hurt by high interest rates,” Carson said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

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

Read more...

King Moves Closer to Joining Fed in Global Stimulus Push

By Jennifer Ryan - Sep 22, 2011 2:57 PM GMT+0700

Bank of England Governor Mervyn King has moved closer toward joining the Federal Reserve in a global push to add stimulus and stave off renewed recessions.

Economists at JPMorgan Chase and Co. and RBC Capital Markets see the U.K. central bank starting to buy 50 billion pounds ($77 billion) of assets by November after most of its policy makers said more so-called quantitative easing is “increasingly probable.” JPMorgan economist Malcolm Barr in London said weak survey data could prompt a move in October.

A cooling global economy and the threat from Europe’s debt crisis have refocused policy makers’ attention away from inflation risks to avoiding a slide back into recession. The Fed late yesterday said it will rebalance its Treasury holdings to cut longer-term borrowing costs, Sweden’s Riksbank said slowing growth may warrant a rate cut, while the Swiss National Bank lowered its benchmark to zero earlier this month.

“Concerns about inflation carry much less weight now that the focus has shifted to growth,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “They’ve given a clear steer that they’ll announce more asset purchases in the coming months, if not October then November is quite likely.”

The pound fell as much as 0.3 percent against the dollar today, dropping to an eight-month low. It traded at $1.5465 as of 8:55 a.m. in London, from $1.55 yesterday. Government bonds rose, with the yield on the 10-year gilt falling 6 basis points to 2.36 percent.

‘Materially Weaker’

Minutes of the central bank’s Sept. 7-8 meeting published yesterday showed that officials now see second-half growth being “materially weaker” than previously projected. They will announce their next policy decision on Oct. 6.

The International Monetary Fund cut its 2011 and 2012 U.K. economic growth forecasts this week to 1.1 percent and 1.6 percent. The Washington-based IMF previously projected expansion of 1.5 percent and 2.3 percent respectively.

While most of the Monetary Policy Committee sees more QE as likely, Bank of England Chief Economist Spencer Dale indicated yesterday he may not be among that group. Dale, who ended a push for a rate increase in August, said any decision on stimulus needs to be “weighed against the backdrop of continuing high inflation.”

The bank has forecast that consumer-price growth will accelerate to 5 percent in the coming months, more than twice its target. At the same time, economic expansion slowed to 0.2 percent in the second quarter, consumer confidence is declining and manufacturing and services gauges fell in August.

Recession Risk

“With the risk of recession, everything possible has to be done,” Mario Blejer, who was an adviser to King from 2003 to 2008, said in an interview. “U.K. inflation is already too high and there are issues about the bank meeting its target. But in the current context, the damage from a second recession overwhelms all the other issues.”

The Fed said yesterday it would replace much of the short- term debt in its portfolio with longer-term Treasuries in a move dubbed “Operation Twist.” The central bank will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less.

Barclays Capital said Sept. 20 that the European Central Bank will cut its benchmark interest rate by a quarter point to 1.25 percent next month, reversing one of its increases earlier this year, in an attempt to ease tensions on money markets.

Government Pressure

Pressure on the Bank of England to aid the recovery is growing as Chancellor of the Exchequer George Osborne vows to stick to his spending-cut plan to reduce the deficit, a move that opposition politicians say is undermining the recovery. Business Secretary Vince Cable repeated a call yesterday for the central bank to expand beyond its government bond purchases.

Britain is facing the fifth-largest fiscal squeeze among advanced economies, according to IMF data analyzed by the London-based Institute for Fiscal Studies. Only Greece, Ireland, Portugal and Iceland are on course to see deeper cuts to 2015.

The MPC minutes showed officials voted 8-1 to keep the bond program unchanged and were unanimous in holding the key interest rate at a record-low 0.5 percent. Still, the decision to maintain the current stimulus was “finely balanced.”

Morgan Stanley currency strategist Tim Davis said yesterday that the pound, which has fallen 6 percent against the dollar in the last month, may weaken further as the Bank of England moves closer to policy loosening.

‘Bearish’

“The pound had been supported by safe haven flows attracted by the U.K.’s stable monetary and fiscal policy, but the increased prospect of QE may have significantly removed this pillar of support,” Davis said in a note, adding he sees the currency at $1.53 by the end of the year. “We remain fundamentally bearish.”

Adam Posen, who has been voting for a 50 billion-pound expansion of the bond program since November, stepped up his push this month, saying the bank may need to buy as much as 100 billion pounds within three months and that officials’ delay in acting has made economic prospects “worse.”

“Additional QE may not be far away,” said Jamie Dannhauser, an economist at Lombard Street Research in London. “Unless there is an improvement in financial-market conditions, the MPC may be minded to ease policy as soon as next month, at the latest in November.”

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

Read more...