HP’s Whitman Sticks to Strategy Begun by Apotheker to Stem 47% Stock Drop

By Aaron Ricadela - Sep 22, 2011 7:11 PM PT

Hewlett-Packard Co. (HPQ) Chief Executive Officer Meg Whitman plans to stick by strategies set in motion by her predecessor, Leo Apotheker, betting that investors prefer steady leadership to another unsettling change of course.

Whitman, in her first interview as Hewlett-Packard’s CEO, said the company stands by plans to acquire U.K. software marker Autonomy Corp. for $10.3 billion. The company also will continue to explore whether to sell or spin off the personal-computer division, she said. Those moves were announced on Aug. 18.

“It does not signal a change in the strategy,” Whitman said yesterday of her appointment. “We are behind the actions that were taken on Aug. 18. We are firmly committed to Autonomy.”

Whitman is hewing to those plans to avoid alienating shareholders who were fed up with the about-faces that characterized Apotheker’s reign. Still, Hewlett-Packard is overpaying for Autonomy and it shouldn’t have announced a possible PC unit sale without a concrete plan in place, said Chris Whitmore, an analyst at Deutsche Bank AG.

“We’re going to get more of the same from a Meg Whitman- led HP as we did from a Leo-led HP,” said Whitmore, who is based in San Francisco and has a “sell” rating on Hewlett- Packard. “The board isn’t going to change the strategy and is going to continue down this path, which frankly was the fear.”

Apotheker, CEO for less than 11 months, was ousted yesterday after cutting sales forecasts three times and making strategy shifts that blindsided investors. Palo Alto, California-based Hewlett-Packard also said Chairman Ray Lane will become executive chairman.

‘Heavily Scrutinized’

Whitman’s challenge will be boosting revenue while assuaging the investors whose dismay fueled a 47 percent plunge in Hewlett-Packard stock under Apotheker. She said the company will decide the outcome of the PC business as soon as possible.

“We’ll make a decision as fast as we possibly can,” she said in the interview. “We understand uncertainty doesn’t help the business, doesn’t help customers, doesn’t help shareholders.”

Her experience at consumer-oriented companies such as EBay Inc. (EBAY), Procter & Gamble Co. (PG) and Hasbro Inc. (HAS) may leave her ill- equipped to run Hewlett-Packard’s business-computing divisions, said Shaw Wu, an analyst at Sterne, Agee & Leach Inc. in San Francisco.

“She’s going to be heavily scrutinized,” said Wu, who has a “neutral” rating on the shares. “She doesn’t have the background to turn around HP.”

Whitman as Communicator

An estimated 25 percent of Hewlett-Packard’s sales come from consumers, Wu said. “What about the other 75 percent?”

Whitman defended her record at the helm of EBay.

“I have run a large company -- not obviously as large as HP, but I have run a very large company,” she said. “While I don’t have years of experience in an enterprise business, I bought a lot of software. I was one of the largest enterprise customers in Silicon Valley.”

“That’s like saying, ‘I’ve bought an iPhone, so I can run Apple Inc. (AAPL)” said Whitmore at Deutsche Bank.

Whitman will need to take Hewlett-Packard’s disparate operating groups -- including data-center computing gear, technology services, printers, and software -- and get them working as a team, Lane said in the interview. He also lauded Whitman’s ability to communicate company strategy.

“The market’s a little confused because we’re in so many different businesses,” he said. “This is 90 percent about leadership, communications and operating execution.”

Internet Pioneer

Lane, who considered becoming the CEO himself, said Hewlett-Packard executives weren’t working well under Apotheker. To explain why the board picked an outsider, Lane said on a conference call that internal managers “were not ready” to become CEO.

The stock jumped 6.7 percent on Sept. 21 after Bloomberg reported that Apotheker would be ousted, evidence that shareholders were relieved to see his tenure end. Hewlett- Packard fell $1.18, or 4.9 percent, to $22.80 yesterday on the New York Stock Exchange.

Whitman, 55, is credited with helping build EBay into the world’s largest Internet auctioneer, with a market value of about $40 billion. She took the company public and built an online storefront that helped thousands of small businesses peddle their wares. Yet in her final years at EBay, she couldn’t reverse a slowdown in sales growth and overpaid for Skype Technologies SA after a bidding war with Google Inc. and Yahoo! Inc. EBay later wrote down Skype’s value.

Pressure on Apotheker

Whitman joined Hewlett-Packard’s board in January after a failed bid to become California’s governor last year. Before EBay, Whitman worked as an executive at the toy company Hasbro, the floral service FTD Inc., footwear maker Stride Rite Corp. and Walt Disney Co. (DIS)

Hewlett-Packard had revenue of more than $126 billion in the past fiscal year, almost 14 times the size of EBay’s sales.

“It’s not clear to me that someone who spent 30 years in the consumer space is the right person for an enterprise technology company,” said Dana Stalder, a partner at venture- capital firm Matrix Partners in Palo Alto. Stalder worked under Whitman for seven years at EBay.

Pressure on Apotheker intensified when in August he announced the overhaul that included the Autonomy deal and possible spinoff. He also killed off the company’s WebOS tablets and smartphones, five months after vowing to put the operating system on a full range of the company’s computers.

Hewlett-Packard Forecasts

Hewlett-Packard Chief Financial Officer Cathie Lesjak, who served as interim CEO before Apotheker, said yesterday on a conference call that the company was no longer confident in its fourth-quarter sales guidance. Hewlett-Packard is sticking by its profit forecast, she said.

The company said in August that fourth-quarter revenue would be $32.1 billion to $32.5 billion, with earnings of $1.12 to $1.16 a share, excluding some costs. According to Bloomberg data, analysts are predicting sales of $32.2 billion and profit of $1.14 for the period.

The board weighed whether to oust Apotheker for six to eight weeks, Lane said in the interview.

Apotheker stands to receive cash severance of at least $7.2 million, a figure that could be higher if his annual bonus was set above the minimum $2.4 million laid out in the employment agreement. Including his $1.1 million in salary received for the first year, along with a $4 million cash signing bonus and a $4.6 million relocation payment, Apotheker will have earned about $34.7 million in cash and stock for less than a year’s work.

‘Investors Wound Up’

“Not bad for a short-term job, unless you’re a HP shareholder,” said Brian Foley, a compensation consultant in White Plains, New York. “This is yet another ex-CEO of Hewlett- Packard who does very well despite the circumstances.”

Apotheker joined Hewlett-Packard after Mark Hurd departed as CEO amid a scandal over a personal relationship with a company contractor. Hurd now is a co-president at Oracle.

A steady hand may be just what Hewlett-Packard needs, said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco. He has a “neutral” rating on the stock.

“The board is directionally behind the plan Apotheker’s put in place,” Noland said. “It’s just the execution of that plan that has investors wound up.”

To contact the reporter on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net.

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

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Fed’s ‘Operation Twist’ Fails to Reassure Investors

By Joshua Zumbrun and Scott Lanman - Sep 22, 2011 9:00 PM PT

The Federal Reserve’s plan to buy longer-term Treasuries has succeeded in bringing down interest rates while not convincing investors the unorthodox monetary policy will strengthen economic growth.

Stocks fell for a second day yesterday as investors sought safe assets after the Fed announced it would shift $400 billion of its Treasury securities holdings into longer-term debt. Treasury 30-year bonds rallied, sending yields to the lowest level in almost three years. The Dow Jones Industrial Average had its biggest two-day loss since December 2008.

Chairman Ben S. Bernanke and his policy-making colleagues cited “significant downside risks” to the outlook in their Sept. 21 statement and announced a program that economists say will provide at most a small boost to the recovery. The Fed has not done an adequate job explaining to investors how the program will help, said Jerry Webman, chief economist at OppenheimerFunds Inc. in New York.

“It would be helpful if someone would lay out exactly the economic mechanism that gets us from yet lower interest rates to actual economic activity,” said Webman, whose firm has $177 billion in assets under management. “Tell us why this is supposed to work because we’re missing something here. The market is obviously missing something here.”

The stock fall after the announcement of the Fed’s policy known as “Operation Twist” contrasts with the reaction to the second round of quantitative easing, when the S&P 500 rose 24 percent from the day Bernanke first signaled the policy in August 2010 to its conclusion in June. That rise in equities helped strengthen the economy, Webman said.

Yields Decline

Yields on 30-year Treasuries declined to 2.8 percent yesterday in New York from 3.2 percent on Sept. 20. Stocks tumbled, with the Standard & Poor’s 500 index falling 3.2 percent in New York to 1,129.56, following a 2.9 percent drop the day before. The Dow lost 3.5 percent to 10,733.83.

The Fed should instead put more pressure on fiscal authorities to revive growth and outline a clear policy strategy, including setting a target for inflation, said Greg Hess, a former Fed researcher.

“The Fed needs to be answering questions, or providing confidence out there that answers questions, not just creating new ones,” said Hess, a professor and faculty dean at Claremont McKenna College in Claremont, California. “That’s why I think the response is negative and that’s why you’re seeing volatility rise.”

Stock Volatility

The Chicago Board Options Exchange Volatility Index, a benchmark measure of stock volatility known as the VIX, jumped 10.8 percent to 41.35 in New York yesterday, bringing its four- day increase to 33 percent.

“The downside risks stem from situations such as Europe, the tax law and so forth,” said former St. Louis Fed President William Poole. “The Fed can’t offset those. It is not within the realm of monetary policy.”

Bernanke should instead devote an entire speech to other issues that are holding back the recovery, such as tax policy and regulations, and make clear that the Fed is powerless to deal with them, Poole said.

“For the Fed to be doing these things that are extremely unlikely to have much current impact, it damages the Fed’s credibility,” Poole, a senior fellow with the Cato Institute in Washington, said in a telephone interview.

Economists in a Bloomberg News survey before the Fed’s meeting had low expectations for the action dubbed Operation Twist, with 61 percent saying the move would probably fail to reduce the 9.1 percent unemployment rate. Among those, 15 percent predicted it would be “somewhat harmful.” None of the 42 economists in the survey said the move would be “very effective.”

Home Loans

The central bank posted answers to “frequently asked questions” on its website, saying that the program should help lower costs for home loans, corporate bonds and other consumer and business lending. The plan “will provide additional stimulus to support the economic recovery but the effect is difficult to estimate precisely,” the Fed said.

The central bank purchased $2.3 trillion in debt from December 2008 through June in two rounds of so-called quantitative easing aimed at lowering borrowing costs for companies and consumers with the benchmark interest rate already at zero. The Fed lowered its target interest rate to zero, also in December 2008, and in August it pledged to hold rates there through mid-2013.

Policy Options

With “Operation Twist” the Fed stopped short of some monetary policy options such as a third round of quantitative easing, a move seen as unlikely this year by 79 percent of economists in the Sept. 14-16 Bloomberg survey. Another option for the central bank comes from Chicago Fed President Charles Evans who supports tolerating a higher rate of inflation until unemployment falls below 7.5 percent.

Separately, the Fed released a study yesterday showing that low mortgage rates in 2009 and 2010 did not lead to as much home refinancing as anticipated, underscoring the difficulty in spurring economic growth through interest-rate reductions.

The housing market remains “depressed,” in the FOMC’s words, even after three years of low mortgage rates. New-home sales fell for the third straight month in July to an annual pace of 298,000, just above the record low pace of 278,000 sales in August 2010. The national average 30-year fixed-rate mortgage is at 4.09 percent, the lowest on record in a Freddie Mac index.

The central bank probably has limited expectations for the policy, Alan Blinder, a former Fed vice chairman, said in an interview yesterday on Bloomberg Television.

‘Throwing Sticks’

Through Operation Twist, Bernanke is “throwing sticks and stones and pea-shooters and BB guns and whatever he’s got at the weak economy in the effort to make marginal improvements,” said Blinder, a professor at Princeton University. “I don’t expect any miracles from it, and frankly neither do they.”

Bernanke may have more success in spurring growth by signaling that interest rates will increase next year, which would get more people to borrow money now, said David Kelly, who helps oversee $408 billion as chief market strategist for JPMorgan Funds in New York.

“The public realizes that the Fed’s action is completely incapable of helping the economy out,” Kelly said of Operation Twist. “Ben Bernanke is at least trying to do the right thing. He just doesn’t know what the right thing is.”

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberb.net; Scott Lanman in Washington at slanman@bloomberg.net.

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

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Apple Falling Behind Store Target in China May Be Opportunity for Android

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

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Capita Buys Police Outsourcing Company Cedar From Advanced for $23 Million

By Katie Linsell - Sep 23, 2011 1:16 AM PT

Capita Group Plc (CPI), the provider of a criminal-records service for the U.K. Home Office, agreed to buy Cedar HR Software Ltd. from Advanced Computer Software Group for 15 million pounds ($23.1 million).

Cedar HR Software, which became part of Advanced in February 2010, provides duty management software to 30 police forces in the U.K., had sales of 6.2 million pounds in the 12 months through February, Capita said in a statement. Advanced Computer Software said in a separate statement it will use the cash to reduce its net debt.

Cedar is Capita’s third recent acquisition of a company providing outsourcing services to police authorities after buying SunGard Public Sector Ltd. last year and Beat Systems Ltd. this year.

“This acquisition adds both innovation and breadth to our solutions for police forces,” said Andy Parker, joint chief operating officer of London-based Capita, whose biggest clients include Greater Manchester, North Yorkshire and Thames Valley police.

Capita rose 0.3 percent to 715 pence in London trading as of 9.11 a.m.

To contact the reporter on this story: Katie Linsell in London at Klinsell@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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Commodities Poised for Biggest Weekly Loss in Four Months on Growth Risks

By Sharon Lindores - Sep 23, 2011 2:35 AM PT
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Immediate-delivery gold was 0.2 percent higher at $1,743.18 an ounce after yesterday dropping to a four-week low. Photographer: Paul Taggart/Bloomberg

Commodities were set for their worst week in more than four months as copper and tin tumbled on deepening concern that policy makers are running out of tools to avert another global recession, hurting demand for metals, fuel and food. Soybeans dropped.

The Standard & Poor’s GSCI Index of 24 commodities is down 6.7 percent for this week, the most since May 6. The index was up 0.3 percent at 10:34 a.m. in London. Silver dropped 6.9 percent today, copper was down 3.3 percent and nickel slumped 3.6 percent. The London Metal Exchange index of six industrial, or base, metals fell yesterday the most since Aug. 31, 2010.

Central bankers and finance ministers will discuss the economic outlook today at the annual meetings of the International Monetary Fund and World Bank in Washington. The Federal Reserve on Sept. 21 said it will replace $400 billion of short-term debt with longer-term Treasuries, saying it sees “significant downside risks” to growth.

“There is no doubt still plenty of room for base metal prices to fall,” William Adams, head of research at the London- based BullionDesk.com, wrote in a report today. “Given the extent of the drop in the past 36 hours and in the weeks before, there may well be some consolidation and potential for a rebound.”

Slowing Growth

The world economy will expand 4 percent this year and next, the International Monetary Fund said on Sept. 20, cutting forecasts made in June for a 4.3 percent expansion and 4.5 percent in 2012.

Three-month copper on the London Metal Exchange fell as much as 7.3 percent to $7,115.75 a metric ton, the lowest price since August last year. Prices declined for a sixth day and have slumped 26 percent from the record $10,190 on Feb. 15. Tin plunged as much as 14 percent to $17,000 a ton.

Manufacturing in China, the world’s largest metals user, may shrink for a third month in September, according to a preliminary index of purchasing managers from HSBC Holdings Plc and Markit Economics released yesterday. The initial reading for this month was 49.4, compared with a final 49.9 for August and 49.3 for July. Figures below 50 signal a contraction.

“It’s all about a lack of confidence,” Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney, said by telephone today. “It’s going to get a little bit darker before the dawn.”

The GSCI index has fallen 8.6 percent so far in the third quarter, heading for the biggest quarterly drop since the fourth quarter of 2008.

Oil, Gold

November-delivery oil lost as much as 1 percent to $79.70 a barrel on the New York Mercantile Exchange, before rebounding 0.7 percent. The price is still down 8 percent this week, set for the biggest loss since Aug. 5. Soybeans for November delivery dropped as much as 2.3 percent to $12.50 a bushel on the Chicago Board of Trade.

Immediate-delivery gold dropped as much as 1.1 percent to $1,720.53 an ounce, the lowest price since Aug. 25, and last traded at $1,733.35. Spot silver tumbled as much as 4.5 percent to $34.27 an ounce. Gold for December delivery decreased 1.1 percent to $1,722.30 an ounce on the Comex in New York.

To contact the reporter on this story: Sharon Lindores in London at slindores@bloomberg.net

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

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Whitman Will Stick to Apotheker’s HP Strategies

By Aaron Ricadela - Sep 22, 2011 7:11 PM PT
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Meg Whitman’s challenge will be to boost revenue while allaying the concerns of investors whose dismay left Hewlett-Packard stock 47 percent lower under Leo Apotheker. Photographer: Axel Schmidt/AFP/Getty Images

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Sept. 22 (Bloomberg) -- Meg Whitman, chief executive officer of Hewlett-Packard Co., and Ray Lane, executive chairman, talk with Bloomberg's Aaron Ricadela about management changes at the company and business outlook. Hewlett-Packard replaced CEO Leo Apotheker with Whitman, asking the former head of an e-commerce company to turn around a computer maker plagued by slowing growth and management missteps. (Source: Bloomberg)

Hewlett-Packard Co. (HPQ) Chief Executive Officer Meg Whitman plans to stick by strategies set in motion by her predecessor, Leo Apotheker, betting that investors prefer steady leadership to another unsettling change of course.

Whitman, in her first interview as Hewlett-Packard’s CEO, said the company stands by plans to acquire U.K. software marker Autonomy Corp. for $10.3 billion. The company also will continue to explore whether to sell or spin off the personal-computer division, she said. Those moves were announced on Aug. 18.

“It does not signal a change in the strategy,” Whitman said yesterday of her appointment. “We are behind the actions that were taken on Aug. 18. We are firmly committed to Autonomy.”

Whitman is hewing to those plans to avoid alienating shareholders who were fed up with the about-faces that characterized Apotheker’s reign. Still, Hewlett-Packard is overpaying for Autonomy and it shouldn’t have announced a possible PC unit sale without a concrete plan in place, said Chris Whitmore, an analyst at Deutsche Bank AG.

“We’re going to get more of the same from a Meg Whitman- led HP as we did from a Leo-led HP,” said Whitmore, who is based in San Francisco and has a “sell” rating on Hewlett- Packard. “The board isn’t going to change the strategy and is going to continue down this path, which frankly was the fear.”

Apotheker, CEO for less than 11 months, was ousted yesterday after cutting sales forecasts three times and making strategy shifts that blindsided investors. Palo Alto, California-based Hewlett-Packard also said Chairman Ray Lane will become executive chairman.

‘Heavily Scrutinized’

Whitman’s challenge will be boosting revenue while assuaging the investors whose dismay fueled a 47 percent plunge in Hewlett-Packard stock under Apotheker. She said the company will decide the outcome of the PC business as soon as possible.

“We’ll make a decision as fast as we possibly can,” she said in the interview. “We understand uncertainty doesn’t help the business, doesn’t help customers, doesn’t help shareholders.”

Her experience at consumer-oriented companies such as EBay Inc. (EBAY), Procter & Gamble Co. (PG) and Hasbro Inc. (HAS) may leave her ill- equipped to run Hewlett-Packard’s business-computing divisions, said Shaw Wu, an analyst at Sterne, Agee & Leach Inc. in San Francisco.

“She’s going to be heavily scrutinized,” said Wu, who has a “neutral” rating on the shares. “She doesn’t have the background to turn around HP.”

Whitman as Communicator

An estimated 25 percent of Hewlett-Packard’s sales come from consumers, Wu said. “What about the other 75 percent?”

Whitman defended her record at the helm of EBay.

“I have run a large company -- not obviously as large as HP, but I have run a very large company,” she said. “While I don’t have years of experience in an enterprise business, I bought a lot of software. I was one of the largest enterprise customers in Silicon Valley.”

“That’s like saying, ‘I’ve bought an iPhone, so I can run Apple Inc. (AAPL)” said Whitmore at Deutsche Bank.

Whitman will need to take Hewlett-Packard’s disparate operating groups -- including data-center computing gear, technology services, printers, and software -- and get them working as a team, Lane said in the interview. He also lauded Whitman’s ability to communicate company strategy.

“The market’s a little confused because we’re in so many different businesses,” he said. “This is 90 percent about leadership, communications and operating execution.”

Internet Pioneer

Lane, who considered becoming the CEO himself, said Hewlett-Packard executives weren’t working well under Apotheker. To explain why the board picked an outsider, Lane said on a conference call that internal managers “were not ready” to become CEO.

The stock jumped 6.7 percent on Sept. 21 after Bloomberg reported that Apotheker would be ousted, evidence that shareholders were relieved to see his tenure end. Hewlett- Packard fell $1.18, or 4.9 percent, to $22.80 yesterday on the New York Stock Exchange.

Whitman, 55, is credited with helping build EBay into the world’s largest Internet auctioneer, with a market value of about $40 billion. She took the company public and built an online storefront that helped thousands of small businesses peddle their wares. Yet in her final years at EBay, she couldn’t reverse a slowdown in sales growth and overpaid for Skype Technologies SA after a bidding war with Google Inc. and Yahoo! Inc. EBay later wrote down Skype’s value.

Pressure on Apotheker

Whitman joined Hewlett-Packard’s board in January after a failed bid to become California’s governor last year. Before EBay, Whitman worked as an executive at the toy company Hasbro, the floral service FTD Inc., footwear maker Stride Rite Corp. and Walt Disney Co. (DIS)

Hewlett-Packard had revenue of more than $126 billion in the past fiscal year, almost 14 times the size of EBay’s sales.

“It’s not clear to me that someone who spent 30 years in the consumer space is the right person for an enterprise technology company,” said Dana Stalder, a partner at venture- capital firm Matrix Partners in Palo Alto. Stalder worked under Whitman for seven years at EBay.

Pressure on Apotheker intensified when in August he announced the overhaul that included the Autonomy deal and possible spinoff. He also killed off the company’s WebOS tablets and smartphones, five months after vowing to put the operating system on a full range of the company’s computers.

Hewlett-Packard Forecasts

Hewlett-Packard Chief Financial Officer Cathie Lesjak, who served as interim CEO before Apotheker, said yesterday on a conference call that the company was no longer confident in its fourth-quarter sales guidance. Hewlett-Packard is sticking by its profit forecast, she said.

The company said in August that fourth-quarter revenue would be $32.1 billion to $32.5 billion, with earnings of $1.12 to $1.16 a share, excluding some costs. According to Bloomberg data, analysts are predicting sales of $32.2 billion and profit of $1.14 for the period.

The board weighed whether to oust Apotheker for six to eight weeks, Lane said in the interview.

Apotheker stands to receive cash severance of at least $7.2 million, a figure that could be higher if his annual bonus was set above the minimum $2.4 million laid out in the employment agreement. Including his $1.1 million in salary received for the first year, along with a $4 million cash signing bonus and a $4.6 million relocation payment, Apotheker will have earned about $34.7 million in cash and stock for less than a year’s work.

‘Investors Wound Up’

“Not bad for a short-term job, unless you’re a HP shareholder,” said Brian Foley, a compensation consultant in White Plains, New York. “This is yet another ex-CEO of Hewlett- Packard who does very well despite the circumstances.”

Apotheker joined Hewlett-Packard after Mark Hurd departed as CEO amid a scandal over a personal relationship with a company contractor. Hurd now is a co-president at Oracle.

A steady hand may be just what Hewlett-Packard needs, said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco. He has a “neutral” rating on the stock.

“The board is directionally behind the plan Apotheker’s put in place,” Noland said. “It’s just the execution of that plan that has investors wound up.”

To contact the reporter on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net.

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

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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

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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

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G-20 Vows to Tackle ‘Renewed’ Global Risks

By Scott Rose and Cheyenne Hopkins - Sep 22, 2011 11:03 PM PT
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Nicolas Sarkozy, president of France. Photographer: Jock Fistick/Bloomberg

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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

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Europe Mulls Increasing Rescue Fund Firepower

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

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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)

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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

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China, Japan Say Europe Must Fix Own Crisis

By Sho Chandra, Sara Eisen and Aki Ito - Sep 22, 2011 8:58 PM PT
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Yi Gang, deputy governor of the People's Bank of China. Photographer: Qilai Shen/Bloomberg

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(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

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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

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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

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Global Stocks Drop 20% Into Bear Market

By Lynn Thomasson and Michael Patterson - Sep 22, 2011 10:35 PM PT
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The Dow plunged 500 points on the grim global economic outlook. Photographer: Michael Nagle/Getty Images

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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

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