Bernanke Gives Push to New Stimulus

By Scott Lanman and Caroline Salas Gage - Nov 3, 2011 11:00 AM GMT+0700

Federal Reserve Chairman Ben S. Bernanke signaled additional monetary stimulus may be needed to lower U.S. unemployment as policy makers projected little acceleration in growth after last quarter’s pickup.

Potential actions are “on the table,” including a third round of securities purchases, extending the period of record- low interest rates or being more specific about when rates would rise, Bernanke said at a press conference yesterday after officials met for two days in Washington. Stocks added to gains while the dollar weakened against the euro.

Bernanke warned that economic improvement will probably be “frustratingly slow,” with policy makers forecasting a 1 percentage-point drop in the jobless rate to about 8 percent over two years. The chairman said buying mortgage bonds is a “viable option,” comments that give the idea an “extra push” and increase already-high odds of the move, said Neal Soss, chief economist at Credit Suisse in New York.

“He repeatedly referred to his disappointment with his best judgment about the economy’s prospects,” said Soss, who was an aide to former Fed Chairman Paul Volcker. “If you’re unsatisfied, and you’ve got some tool that might help, in due course you’re supposed to use it.”

Additional easing may occur by February and could coincide with possible actions by new European Central Bank President Mario Draghi to contain fallout from the continent’s sovereign- debt crisis, Soss said.

‘Downside Risks’

Bernanke’s comments and the lowered economic projections followed a Federal Open Market Committee statement saying “significant downside risks” remain to the outlook even after third-quarter growth “strengthened somewhat.” The risks include “concerns about European fiscal and banking issues,” said Bernanke, 57.

Officials left unchanged their plans to lengthen the maturity of the Fed’s bond portfolio, known as Operation Twist, and to keep the target federal funds rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook remains “subdued.”

The Standard & Poor’s 500 Index rose 1.6 percent yesterday to 1,237.90, the first gain in three days. The dollar weakened 0.3 percent to $1.3747 against the euro. Yields on 10-year Treasuries were little changed at 1.99 percent.

The vote for yesterday’s statement was 9-1. Chicago Fed President Charles Evans opposed the decision, the first dissent in favor of easier policy since Boston Fed President Eric Rosengren in December 2007. Evans favored “additional policy accommodation,” the Fed said without elaborating.

Adding Accommodation

He said Sept. 7 that the central bank “should seriously consider actions that would add very significant amounts of policy accommodation.” Doug Tillett, a spokesman for the Chicago Fed, declined to comment yesterday on the dissent.

Fed Presidents Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia supported the statement after dissenting against the August and September decisions to ease policy.

Any new asset purchases would follow two rounds totaling $2.3 trillion that lasted from December 2008 until June 2011. The last net buying of mortgage debt occurred in March 2010, though the Fed decided in September to reinvest maturing housing debt into new mortgage-backed securities instead of Treasuries. Fed Governor Daniel Tarullo on Oct. 20 said buying mortgage bonds should be a leading option because it would help boost home-buying and consumer spending.

Back Pocket

“They want to have that option in their back pocket, should the economy remain sluggish and should they fail to make progress with their objectives, especially unemployment,” said Roberto Perli, managing director for policy research at International Strategy & Investment Group in Washington. “They did Operation Twist recently, and they might want to assess whether that is working or not before expanding the balance sheet.”

Before the committee buys more assets, it is likely to want to unveil an enhanced communication strategy, said Perli, a former Fed economist.

Fed governors and regional presidents projected that gross domestic product, adjusted for inflation, will rise by 2.5 percent to 2.9 percent next year, compared with a range of 3.3 percent to 3.7 percent from the prior forecasts in June.

Growth in 2013 will be 3 percent to 3.5 percent, lower than the prior range of 3.5 percent to 4.2 percent, based on the median range of forecasts.

Jobless Rate

The jobless rate in the fourth quarter of 2012 will range from 8.5 percent to 8.7 percent, up from the previous forecast of 7.8 percent to 8.2 percent, the Fed said in a release separate from the FOMC statement.

The old 2012 projection is now the new 2013 projection for fourth-quarter unemployment of 7.8 percent to 8.2 percent, compared with a range of 7 percent to 7.5 percent in June. By the end of 2014, the jobless rate will be 6.8 percent to 7.7 percent, officials said in their initial projections for the year.

“The medium-term outlook relative to our June projections has been downgraded” and “remains unsatisfactory,” Bernanke said yesterday. “Unemployment is far too high,” and “I fully sympathize with the notion that the economy is not performing the way we would like.”

Stocks have climbed and the economy has picked up since the last FOMC gathering Sept. 20-21. The S&P 500 Index (SPX) advanced 11 percent in October, the best since 1991, as European leaders agreed to expand their bailout fund. The rally snapped five months of losses.

Profits Climb

Profits for companies in S&P 500 climbed 18 percent on average in the third quarter, based on results reported so far. Earnings are beating analyst predictions by 5.6 percent, compared with an average rate of 3.3 percent since 2005.

Last week, the Commerce Department reported that the economy grew at a 2.5 percent annual pace in the third quarter, compared with 0.4 percent in the first quarter and 1.3 percent in the second.

Still, growth and job creation haven’t been fast enough to lower the unemployment rate.

The Labor Department will report Nov. 4 that payrolls expanded by 95,000 jobs in October, according to the median estimate of a Bloomberg survey of 65 economists. Unemployment is forecast to remain at 9.1 percent for the fourth consecutive month.

“The FOMC is inclined toward a more accommodative policy,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. “It seems very clear that is where Bernanke and other policy makers think policy is headed.”

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Caroline Salas Gage in New York at csalas1@bloomberg.net.

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

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‘Malaysia Spring’ Approaches in Anwar Vision

By Ranjeetha Pakiam - Nov 2, 2011 11:00 PM GMT+0700

Malaysia’s opposition leader, Anwar Ibrahim, said that in the nation’s next election, his People’s Alliance coalition will end five decades of rule by the National Front as a trend toward democracy strengthens across southeast Asia.

“We’re taking over the government at the rate we’re going,” Anwar said in an interview yesterday at his office in parliament in Kuala Lumpur, citing as a sign of support a July 9 rally where thousands marched and called for greater fairness in election practices. Currently on trial for sodomy -- a charge he says was influenced by the ruling party -- he predicted that the opposition would be boosted even if he is convicted.

An opposition victory would build on gains made in 2008, when Prime Minister Najib Razak’s coalition had its slimmest election win since the country became independent in 1957. In a year that has seen autocratic regimes swept from power in a Middle East upheaval known as the “Arab Spring,” neighboring Singapore saw a record vote for the opposition in May, and Myanmar released some political rivals from jail last month.

“When will the ‘Malaysia Spring’ be? The next elections,” said Anwar, 64, a former deputy prime minister, anticipating that a vote will come anytime from the end of December to March. “Hopefully, we’ll do ours in a peaceful democratic process.”

Jailed, Then Freed

Once the designated successor of Prime Minister Mahathir Mohamad, who ruled from 1981 to 2003, Anwar was removed from office and tried in 1998 for abuse of power and having sex with a man, which is an offense in Malaysia. He was imprisoned for six years before the sodomy charge was overturned. Barred from politics for four years after being released from jail, he then led the opposition to its 2008 election result.

A conviction in his second trial on sodomy charges is a “foregone conclusion,” said Anwar, who could be jailed for as long as 20 years if found guilty. Najib’s administration has said that the trial, which is scheduled to resume Nov. 23, isn’t politically motivated.

While an election isn’t due until 2013, Najib announced a budget last month that stoked speculation about an earlier vote. The plan gives cash to low-income families, raises civil servants’ pay and boosts spending on railways to spur growth at a time when global economic risks cloud the outlook for Malaysian exports.

Najib, 58, has sought to broaden the appeal of the ruling party, rolling back decades-old protectionist policies, opening up service industries to foreign investors and easing rules on ethnic-Malay ownership in companies.

Seeking to bolster his public image after July street protests in the capital led to the arrest of more than 1,600 people, Najib has also pledged to abolish a 51-year-old law allowing the government to detain citizens without trial.

Falling Poll Numbers

Support for Najib slipped to 59 percent in August from 65 percent in May, according to a survey by the Merdeka Center for Opinion Research, an independent research institute based near Kuala Lumpur.

“The opposition will probably win more seats, but an outright victory is doubtful,” said Afif Bin Pasuni, a professor at the S. Rajaratnam School of International Studies in Singapore. “If Anwar is convicted, it’ll be difficult to hold the opposition together because they have very different political ideologies -- Anwar is adept at handling these differences.”

The People’s Alliance opposition group includes Anwar’s People’s Justice Party; the Pan-Malaysian Islamic Party, some of whose members espouse the implementation of Islamic law; and the Democratic Action Party, whose secretary-general is Penang Chief Minister Lim Guan Eng, Malaysia’s only ethnic-Chinese state leader.

Coalition Differences

Theft, illicit sex, alcohol consumption and renouncing Islam are crimes under hudud, or Islamic law, and punishment can involve whipping, stoning to death or amputation of limbs. The Pan-Malaysian Islamic Party’s support for implementing hudud has faced objections from the Democratic Action Party. Anwar said that while coalition members are free to articulate their views, they cannot compel others to agree.

If he is convicted, Anwar said, a “mechanism” has been put in place for leadership succession. He declined to identify who would take his place.

The alliance anticipates winning more than 40 percent of the vote in the states of Johor and Pahang, making gains in Negeri Sembilan and Terengganu and getting majorities in the five states it won in 2008, Anwar said.

“The trend for freedom and democracy is irreversible,” said Anwar, who tells his party leaders to read French author Alexis de Tocqueville’s 19th-century political work “Democracy in America.” “We should be able to do much better.”

To contact the reporter on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net

To contact the editor responsible for this story: Barry Porter at bporter10@bloomberg.net

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MF Global Has Customer Shortfall of $633M: CFTC

By Linda Sandler and Tiffany Kary - Nov 3, 2011 11:00 AM GMT+0700

MF Global Inc.’s commodity customer funds have a shortfall of $633 million, or about 11.6 percent, out of a segregated fund requirement of about $5.4 billion, the Commodity Futures Trading Commission said.

The shortfall may be recovered by James W. Giddens, the trustee for the bankrupt broker-dealer, lawyers for the CFTC said at a hearing yesterday in U.S. Bankruptcy Court in Manhattan

MF Global’s trustee won permission to transfer 50,000 accounts in which customers of the failed brokerage have 3 million positions and over $100 million at stake, saying the move will help avoid liquidations.

The accounts, which are at CME Group Inc., will be transferred with 60 percent collateral, leaving 40 percent with the clearing organization, said James Kobak, a lawyer for Giddens. Asking for the transfer of segregated customer positions, he said he was acting on the advice of the CFTC.

“MF Global will have rights to that 40 percent, and there may be rights the exchange itself will assert,” Kobak said. He said the trustee is also seeking other exchanges like CME to transfer customer accounts. David Neier, a lawyer for IntercontinentalExchange Inc., said his client also has MF Global accounts at stake.

Accounts that aren’t transferred will be liquidated in an orderly fashion beginning Monday, Kobak said. If MF Global customers’ accounts are transferred, they’ll be notified by the following day, and can transfer again if they’re not happy with their assignment, Kobak said.

Frozen Accounts

Giddens froze 150,000 customer accounts, including 50,000 commodities accounts, on Oct. 31 at the broker-dealer once run by former Goldman Sachs Group Inc. (GS) co-chief executive and New Jersey governor Jon Corzine.

MF Global Holdings Ltd., the brokerage’s parent, filed for bankruptcy protection in Manhattan on Oct. 31 after making bets on European sovereign debt. Giddens is in charge of liquidating MF’s broker-dealer unit for the Securities Investor Protection Corp. to protect customer assets.

More than one firm would have to be found to take over the accounts, as none of the existing 125 futures commission merchants “would be willing and able to handle the variety of accounts” at MF Global, Giddens said, citing advice from CME, which operates a derivatives exchange. The trustee is still looking for takers to accept all the accounts, his lawyer said in court yesterday.

‘Over-Collateralized’

Separately, CME said MF Global’s customer accounts on the group’s exchanges are “substantially over-collateralized” at CME Clearing. The funds CME wanted transferred to futures merchants are segregated funds held by MF Global, it said in a statement.

MF Global’s deposits of segregated customer funds at the CME totaled $2.5 billion, the trustee said. Collateral for customer segregated funds at the “clearing level” is about $1.5 billion, or about 60 percent, he said.

Referring to an “apparent shortfall” in segregated customer funds at the broker-dealer, CME said the funds may have been transferred after a CME audit of the funds, in violation of regulatory rules.

“It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection,” as the transactions weren’t reported to regulators until Oct. 31, it said.

Lehman Brothers

Stephen Harbeck, president of the Securities Investor Protection Corp., said transferring the accounts is a priority. He compared the situation with the liquidation of Lehman Brothers Holdings Inc.’s brokerage.

Barclays Plc, based in London, took over accounts from Lehman, giving 72,000 brokerage customers access to $40 billion in frozen assets. With MF Global, discrepancies in funds used to back futures trades sent Interactive Brokers Group Inc. fleeing from a potential acquisition, according to a board member at the Greenwich, Connecticut, firm.

“With Lehman, the day SIPC filed the liquidation proceeding, we executed a transfer agreement with Barclays,” Harbeck said. “This time it won’t be that fast.”

MF Global’s $325 million of 6.25 percent senior unsecured notes due August 2016, the most actively traded junk bond the past three days, climbed to 48.4 cents yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. While the New York-based firm’s shares are almost wiped out, its loans are at 62 cents on the dollar.

The bonds may reach 90 cents to 100 cents on the dollar I the customer money is located, while it may dip to the “low 60s” if it’s missing, said Scott Colyer, chief executive officer at Advisors Asset Management Inc. in Boerne, Texas, whose firm oversees $7.2 billion and which bought some of MF Global’s unsecured debt on Nov. 1.

“This is more of an art than it is a science,” Colyer said.

Updates on Giddens’s progress will appear on a website set up for the purpose, mfglobaltrustee.com, the trustee said.

The case is In re MF Global Inc., 11-ap-2790, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

-- With assistance from Matthew Leising, Sapna Maheshwari and Zeke Faux in New York. Editors: Andrew Dunn, John Pickering

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net. Tiffany Kary in New York at tkary@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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Euro Declines as European Leaders Withhold Aid Before Greece’s Referendum

By Kristine Aquino - Nov 3, 2011 12:37 PM GMT+0700

The euro declined, trading 0.8 percent from a three-week low against the dollar, as European leaders said Greece will vote next month to determine whether it will stay in the 17-nation currency.

The euro dropped for a third day versus the yen after French President Nicolas Sarkozy said Greece won’t receive a “single cent” in aid without holding to the terms of its bailout agreement. The dollar and yen gained against most of their 16 major counterparts as Asian stocks declined, boosting investor appetite for safer assets. New Zealand’s dollar fell after its unemployment rate increased.

“I can’t come up with a plan to allow Greece to leave the euro, not without experiencing intense capital flight,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “I don’t think there’s anything here to make the euro bounce. The risks certainly point in the direction of weakness.”

The euro declined 0.2 percent to $1.3714 at 1:32 p.m. in Singapore from $1.3747 yesterday in New York. It fell to $1.3609 on Nov. 1, the lowest since Oct. 12. The currency lost 0.3 percent to 107 yen. The dollar was little changed at 78.02 yen. New Zealand’s dollar slid 0.9 percent to 78.47 U.S. cents.

The MSCI Asia Pacific excluding Japan Index of stocks dropped 1.5 percent. Japanese markets are closed today for a holiday.

Surrender All Aid

Crisis talks ended in the French resort of Cannes yesterday with German Chancellor Angela Merkel and Sarkozy withholding 8 billion euros ($11 billion) of assistance to Greece and warning it will surrender all European aid if the nation votes against a bailout package agreed last week. A Group of 20 summit is also set to begin today in Cannes.

The hardball tactics open the door for the first time for a country to leave the 12-year-old currency bloc. Greek Prime Minister George Papandreou defended his decision to call a referendum, telling reporters at a separate briefing that Greece “needs a wider consensus” for the bailout terms and expressing confidence it will back staying in the euro.

More than seven in 10 voters said they favored Greece remaining in the euro, a poll last week of 1,009 people published in To Vima newspaper showed.

The euro also slid before European Central Bank President Mario Draghi chairs a policy meeting today for the first time, amid speculation the bank will lower borrowing costs to stem recession risks in the region.

‘Absolutely Essential’

“It is absolutely essential that the ECB cuts rates,” Westpac’s Rennie said. The Australian lender “is forecasting that the ECB starts that process today. Failure to do so would further undermine the outlook for the European economy and should weigh on the euro.”

The euro region’s central bank will keep its key rate at 1.5 percent, according to 49 of 55 economists surveyed by Bloomberg News. Four predict a 25-basis-point cut, or 0.25 percentage point, and two are forecasting a reduction of 50 basis points.

“In the immediate term, it’s going to be a risk-on, risk- off type of environment,” said Emmanuel Ng, a currency strategist at Oversea-Chinese Banking in Singapore. “The dollar remains a key safe haven.”

The dollar tends to strengthen in periods of financial turmoil because it is the world’s reserve currency. The yen benefits as its current-account surplus makes Japan less reliant on foreign capital.

Fed Stimulus

The greenback declined against most of its major peers yesterday after Federal Reserve Chairman Ben S. Bernanke said the prospect of additional stimulus “remains on the table,” boosting speculation the bank is heading towards a third round of asset purchases, or quantitative easing.

Bernanke spoke at a press conference yesterday after members of the Federal Open Market Committee kept policy unchanged, saying they would lengthen the maturity of the central bank’s bond portfolio and hold the benchmark interest rate near zero through at least mid-2013.

The committee also cut its 2012 growth forecasts and said unemployment will average 8.5 percent to 8.7 percent in the final three months of next year, up from a prior range of 7.8 percent to 8.2 percent.

The Fed hasn’t ruled out further quantitative easing, said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world’s largest interdealer broker. “You’ve got to be, in any period, bearish on the U.S. dollar.”

N.Z. Jobless

New Zealand’s currency weakened after a statistics bureau report showed the unemployment rate unexpectedly rose to 6.6 percent in the third quarter from 6.5 percent in the previous period. Economists surveyed by Bloomberg had forecast a rate of 6.4 percent.

“The headline number looks very weak and that’s pushed the kiwi lower,” said Mike Burrowes, a currency strategist at Bank of New Zealand Ltd. in Wellington. “Things are probably going to remain more volatile, more fickle and less focused on domestic fundamentals and more about what’s going to happen with the European debt crisis and global growth.”

In Christchurch and the surrounding Canterbury region, where the earthquakes struck, employment fell 26,800, or 8 percent, from the year-earlier quarter, led by retailing, the statistics agency said.

To contact the reporter on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Nate Hosoda at nhosoda@bloomberg.net

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Euro, Asia Stocks Fall as EU Leaders Withhold Aid

By Bloomberg News - Nov 3, 2011 12:25 PM GMT+0700
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The euro weakened to near a three-week low against the dollar. Photographer: Hannelore Foerster/Bloomberg

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Nov. 3 (Bloomberg) -- Lorraine Tan, director of Asia equity research at Standard & Poor's, talks about the implications of Europe's debt crisis for Asian stock markets and her investment strategy. Tan also discusses the outlook for China's economy. She speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

The euro sank to near a three-week low against the dollar, Asian stocks and U.S. equity futures sank, while bond risk rose after European leaders cut off aid payments to Greece before a referendum on a bailout deal. New Zealand’s dollar fell after the nation’s jobless rate gained.

The 17-nation euro lost 0.4 percent to $1.3699 as of 1:23 p.m. in Hong Kong, while the so-called kiwi weakened 0.9 percent. The MSCI Asia Pacific excluding Japan Index slid 0.8 percent and Standard & Poor’s 500 Index futures fell 1.1 percent. Treasury 10-year futures contracts climbed a fifth day. The Markit iTraxx Asia index of debt-default risk gained nine basis points. Oil and silver dropped at least 1 percent.

German and French leaders holding emergency talks on the eve of a Group of 20 summit in Cannes, France, withheld 8 billion euros ($11 billion) of assistance. They warned Greece will surrender all European aid if it votes against a bailout package agreed last week to contain the crisis. European Central Bank President Mario Draghi will chair later today a meeting of the bank’s governing council for the first time.

“The market is eventually going to send Greece an incremental message about the jeopardy and hazards of going it alone and punching out of Europe,” Erik Ristuben, the New York- based chief investment officer at Russell Investments, told Bloomberg Television. “It will be a very negative event in our minds, economically, for Greece even more so than the austerity measures that core Europe is pushing on them.”

The euro weakened 0.4 percent to 106.91 yen after European leaders said a referendum in five weeks will determine whether Greece becomes the first to exit the 17-nation currency bloc.

‘Wider Consensus’

Greek Prime Minister George Papandreou, who faces a confidence vote tomorrow, defended his decision to call a referendum, telling reporters at a separate press briefing that the country “needs a wider consensus” for the bailout terms and expressing confidence it will back staying in the euro.

The kiwi depreciated to 78.41 U.S. cents after Statistics New Zealand said the jobless rate rose to 6.6 percent in the third quarter from 6.5 percent in the prior three months. Australia’s dollar declined 1 percent to $1.0248 and South Korea’s won retreated 0.8 percent to 1,130.90 per dollar, a fourth day of losses.

The yuan advanced 0.14 percent to 6.3482 Shanghai, the biggest increase in a week, as China’s central bank set a record daily reference rate and signaled before the G-20 summit it will increase moves in the exchange rate. The government remains open to increased flexibility of the yuan, Zhang Tao, director general of the international department of the People’s Bank of China, said yesterday.

Bank Earnings

More than two shares declined for each one that gained in the MSCI Asia Pacific ex-Japan Index. Japanese financial markets are closed for a holiday. Hong Kong’s Hang Seng Index declined 1 percent, South Korea’s Kospi Index sank 1.2 percent, and Taiwan’s Taiex dropped 1.7 percent.

Australia & New Zealand Banking Group Ltd. (ANZ) decreased 2 percent in Sydney after second-half profit missed analyst forecasts. United Overseas Bank Ltd. (UOB) dropped 3.5 percent in Singapore after the bank’s third-quarter net income fell more than analysts had predicted. LG Electronics Inc. (066570) tumbled 11 percent as South Korea’s exchange asked the company to address speculation that the company may sell shares.

S&P 500 futures signal the gauge may snap yesterday’s 1.6 percent advance. Shares rose after Federal Reserve Chairman Ben S. Bernanke said yesterday unemployment is still “far too high” and the Fed may take more steps to boost growth. Figures tomorrow may show non-farm payrolls increased 95,000 in October, less than the 103,000 jobs added the previous month, economists surveyed by Bloomberg News said.

European ‘Hijinks’

Ten-year Treasury futures contracts for December delivery rose 16/32, or $5 per $1,000 face amount, to 130 26/32 in electronic trading at the Chicago Board of Trade. Yields on 10- year notes were little changed at 1.99 percent yesterday.

“We’ve become more bearish on the economy because of the hijinks going on in Europe,” said Marc Fovinci, who helps oversee $2.7 billion as head of fixed income at Ferguson Wellman Capital Management Inc. in Portland, Oregon. “We took risk off the table by reducing our equity position and bringing our bond allocations up.”

The cost of protecting Asia-Pacific corporate and sovereign bonds from default increased, with the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan climbing nine basis points to 207.5 basis points, Royal Bank of Scotland Group Plc prices show. The index is headed for its highest close since Oct. 20, after closing down 0.3 basis points yesterday, according to data provider CMA.

Oil for December delivery sank 1.1 percent to $91.51 a barrel in New York. U.S. crude supplies rose 1.83 million barrels in the week ended Oct. 28, the Energy Department said yesterday, more than the 1 million barrels forecast by analysts in a Bloomberg News survey. Immediate-delivery silver sank 1.3 percent to $33.82 an ounce.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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Obama May Have Limited Leverage to Influence Europe Crisis Debate at G-20

By Mike Dorning - Nov 3, 2011 6:30 AM GMT+0700

The leader of the world’s largest economy may have limited influence on the biggest current threat to the global recovery, the main topic for a two-day Group of 20 summit in France.

President Barack Obama arrives today in the resort city of Cannes for discussions on Europe’s financial rescue plan with U.S. standing diminished on the international economic stage.

Obama, who enjoyed greater appeal in many European nations than at home even at the height of his popularity and who as a presidential candidate attracted an estimated 200,000 people to a speech in Berlin, is hampered in shaping the continent’s response by lingering resentments over the U.S. origins of the 2008 financial crisis, a sluggish domestic economy and political gridlock in Washington.

“U.S. leadership, which in the past might have been helpful in sort of pulling the Europeans together, has eroded,” said Sebastian Mallaby, a senior fellow at the Council on Foreign Relations in Washington. “You’ve got a world where the natural postwar leader has kind of got its hands tied behind its back, and the world ain’t doing too well as a result.”

Stocks around the world plunged after Greek Prime Minister George Papandreou’s Oct. 31 call for a referendum on a European Union bailout plan provoked concern the agreement would unravel and push Greece into a disorderly default that could spread to other nations.

Market Rebound

Markets rebounded yesterday, with the Standard & Poor’s 500 Index climbing 1.6 percent to 1,237.90 in New York after dropping 5.2 percent over the previous two days. The Stoxx Europe 600 Index ended up 0.9 percent.

The yield on the 10-year note was little changed at 1.99 percent after jumping 9 points earlier. The yield on the 30-year bond gained as much as 10 basis points before trading one basis point higher at 3.01 percent.

Treasuries have returned 8.8 percent this year, the most since U.S. government debt returned 14 percent in 2008 in the midst of the financial crisis, according to Bank of America Merrill Lynch index data.

A cascade of defaults that spread from Greece to other nations such as Portugal, Ireland, Spain and Italy would risk a financial panic and freeze in U.S. credit markets, as well as a surge in the dollar’s value that would raise the cost of U.S. exports, said Nariman Behravesh, chief economist for IHS Inc. (IHS), a forecasting firm in Englewood, Colorado.

Spread of Risk

He projects a 25 percent risk of a U.S. decline sparked by European defaults that sends the unemployment rate as high as 11 percent by the 2012 election.

MF Global Holdings Ltd. (MF)’s bankruptcy filing on Oct. 31 underscored the potential for contagion to spread across the Atlantic. The brokerage wagered $6.3 billion on European sovereign debt.

“It is amazing: There’s this huge thing going on and we have virtually no influence on it,” said Phillip Swagel, a professor at the University of Maryland in College Park and an assistant Treasury secretary under President George W. Bush.

The meeting of leaders of the 20 largest industrial and developing nations in Cannes comes a week after European leaders developed a broad plan to use leverage to increase a bailout fund to 1 trillion euros ($1.4 trillion), reduce Greece’s debt and boost bank reserves to head off the threat of a wave of defaults.

‘Stronger Position’

U.S. presidents possessed greater capacity to persuade foreign leaders to overcome differences during the late 1990s, when U.S. economic growth averaged more than 4 percent, or even in the middle of the past decade, when growth rates were in the 3 percent range, Swagel said. “You speak from a stronger position.”

American leadership is further undercut by blame some foreign leaders cast on the U.S. for the global recession that followed the bankruptcy of Lehman Brothers Holdings Inc. in September 2008 and by the political standoff that brought the U.S. to the brink of a default on its debt just months ago. The tensions between Obama and congressional Republicans over taxes and spending are now standing in the way of meeting a $1.5 trillion debt reduction goal.

Political Parallels

The political difficulties European leaders have in overcoming domestic pressures to come together to meet the economic threat have a parallel in the U.S. partisan gridlock over debt reduction, Swagel said.

“In a sense, the president’s message to the Europeans is you guys know how to deal with the problems, you just have to act,” Swagel said. “They can turn around and say to him the same words in response.”

White House press secretary Jay Carney disputed the notion of diminished U.S. influence and said the administration brings to the meeting its experience in dealing with the 2008 crisis.

While the debt crisis is a “European problem that requires a European solution,” Carney said yesterday, “The United States is still the largest economy in the world.”

Obama and Treasury Secretary Timothy Geithner have pressed European leaders for months to move rapidly to address the debt crisis with decisive action.

In an essay published in the Financial Times the day after the European leaders’ deal was announced, Obama welcomed it as a “critical foundation on which to build” and urged them to include “a credible firewall that prevents the crisis from spreading.”

Financial Contributions

European leaders have been seeking financial contributions from foreign governments including China, Japan and Brazil to invest in the European Financial Stability Facility.

With Congress seeking to cut government spending and the bailout of banks in the U.S. still unpopular, Obama administration officials avoided questions about a potential U.S. financial commitment at a briefing for reporters Oct. 31. They said the International Monetary Fund, in which the U.S. is the largest shareholder, may assist.

“Fortunately, Europe has the resources and capacity to overcome these risks,” said Lael Brainard, undersecretary of Treasury for international affairs. “We’ll continue to support our Europe allies in their efforts to address this crisis, alongside the IMF and our G-20 partners.”

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

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

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Qualcomm Forecasts Top Estimates on Surging Smartphone Sales

By Ian King - Nov 3, 2011 6:24 AM GMT+0700

Qualcomm Inc. (QCOM), the biggest maker of mobile-phone chips, forecast higher fiscal 2012 sales than analysts had predicted, adding to evidence of robust demand for smartphones. The shares jumped 9.7 percent in late trading.

Sales for the year ending in September 2012 will be $18 billion to $19 billion, the San Diego-based company said today in a statement. That compares with an average analyst estimate of $17.3 billion, according to Bloomberg data.

Qualcomm, which gets most of its profit from licenses on technology used in so-called 3G phones, is benefiting as more consumers switch to the technology -- especially in developing countries. Widening use of smartphones fuels growth in royalty revenue and sales of cellular radio chips and processors.

“They are a market-share leader in a growing market,” said Daniel Berenbaum, an analyst at MKM Partners LLC in New York. He recommends buying Qualcomm shares, which he doesn’t own. “Anything in wireless that grows is good for Qualcomm. It’s a dominant position.”

Qualcomm shares rose as much as $5.06 to $57.24 in extended trading after the report. The stock, up 5.4 percent this year, had closed at $52.18 in New York.

‘Not a Luxury’

While the forecasts topped analysts’ predictions, they’re not as high as Qualcomm initially set internally, Chief Executive Officer Paul Jacobs said in an interview. The company revisited projections amid signs of global economic weakness, he said.

“In a time of macroeconomic uncertainty, we’ve got a lot of different customers and geographies to balance that out,” Jacobs said. At the same time, “it does seem to me that the phone is not a luxury item -- it’s a staple.”

Qualcomm, whose customers include Samsung Electronics Co. and Apple Inc. (AAPL), licenses a technology called code division multiple access, or CDMA, to handset makers and wireless carriers.

Fourth-quarter net income rose to $1.06 billion, or 62 cents a share, from $865 million, or 53 cents, a year earlier. Revenue climbed 39 percent to $4.12 billion in the period, which ended Sept. 25. Analysts on average projected that the company would report profit of 66 cents on sales of $4 billion.

Profit in fiscal 2012 will range from $3.42 to $3.62 a share, excluding some items, Qualcomm said. In the current quarter, the company expects sales of $4.35 billion to $4.75 billion and a profit of 86 cents to 92 cents a share. Analysts are estimating revenue of $4.25 billion and profit of 84 cents.

Qualcomm aims to expand the reach of its chips with a microprocessor called Snapdragon. That chip is now running smartphones based on Google Inc.’s Android operating system. The company is also trying to sell Snapdragon to tablet makers.

The processor will be used in tablets and computers that run future versions of Microsoft Corp.’s Windows software, putting Qualcomm in more direct competition with Intel Corp. (INTC), the world’s largest chipmaker.

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net;

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

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EU Bank Recapitalization Plan Has ’Problems’: IIF

By Rebecca Christie and Aaron Kirchfeld - Nov 3, 2011 12:30 AM GMT+0700

The European Union’s plan for recapitalizing banks has “serious problems” that will hurt economic growth and make it harder for some nations to borrow, the Institute of International Finance said.

There is a “clear need” to restore confidence in Europe’s banks, IIF Managing Director Charles Dallara said today in a letter to the Group of 20 nations on the eve of a summit in Cannes, France. Yet the extra capital requirements at the center of the EU’s strategy will come with “considerable cost” because of a flawed scope and approach, he said.

European leaders are gathering today before the Nov. 3-4 summit to prevent their crisis-fighting plans from unraveling less than a week after they were hammered out. The euro area’s debt crisis will likely take center stage at the G-20, raising the stakes for banks poised to play a greater role in Greece’s next bailout.

The EU plan calls for Greece to adopt further austerity measures in exchange for a new infusion of official funds and a subsidized bond exchange. It also increases the firepower of the EU’s main rescue fund in a bid to limit contagion to Spain, Italy and other euro-area nations.

Banks would not consider providing debt relief to other countries such as Portugal caught up in the crisis, Dallara said on a conference call with reporters today. Greece’s circumstances justify a “unique approach” that should not apply to other sovereigns.

No Need

“We do not see the need, nor would we be willing to be involved in or engaged in, discussions of debt reduction for other countries,” Dallara said, speaking from Washington. He said the debt swap and official rescue program for Greece is needed to give Greece a chance to adjust its economy more gradually and ease the hardships on Greek citizens.

Portugal is on a “path of adjustment” and making changes that will lead to renewed growth and investment, he said. Dallara also was optimistic that Spain’s new government “will be able to build on the progress that has been made, particularly over the last year” after the Nov. 20 elections.

The People’s Party, which has pledged deeper austerity measures without specifying where it will axe spending, is set to win the largest majority any Spanish government has secured since 1982, a poll in El Mundo showed yesterday. Prime Minister Jose Luis Rodriguez Zapatero isn’t seeking re-election.

‘Grim’ Outlook

Dallara called on the G-20 to look for ways to promote economic growth, noting a “grim” unemployment outlook in the U.S. and Europe. He also urged the European Central Bank and others to provide more liquidity support for Greek banks, who he said have helped to finance Greece’s economy through bond purchases and private-sector lending.

The bank-recapitalization accord sets a June 30, 2012, deadline for lenders to reach core capital reserves of 9 percent after writing down their sovereign-debt holdings. Banks below that target would face “constraints” on paying dividends and awarding bonuses.

Banks are likely to decide that the costs of raising capital are “prohibitive,” Dallara said in his letter to the G-20. Rather than accept forced injections, banks are more likely to sell risky assets and cut back on lending, which will make it harder for countries on Europe’s periphery to access capital markets.

“The market value of the debt of the countries most under scrutiny is likely to decline further as banks unload sovereign bonds,” Dallara said. “This is contrary to the goal of stabilizing and underpinning the outlook for sovereign debt in Europe.”

New Requirements

If banks acted to meet the new requirements relying only on retained earnings and a reduction in credit supply, “overall credit exposure to the euro-area private sector would need to decline by at least 5 percent,” he said. “It is essential that the higher European capital requirements are a temporary measure as intended, not sustained over time and not seen as a new standard to be imposed more widely.”

BusinessEurope, a federation of European employers, today endorsed last week’s bank plan as well as the EU’s overall crisis-fighting strategy. The group also said the plan is the “best opportunity” for Greece to right its economy.

“We continue to believe the agreements regarding bank recapitalisation, extending the EFSF and improving the sustainability of Greek borrowing alongside commitments from all member states to implement recommendations regarding budgetary policy and structural reform, represent essential steps,” wrote Jürgen Thumann, president of the employers’ group, in a joint letter with Laurence Parisot, president of the business lobby Medef.

‘New Investment Capital’

The IIF renewed its call to continue work on the debt swap, even as Greek Prime Minister George Papandreou seeks to put the new rescue program to a parliamentary vote and a popular referendum. The debt swap, combined with Greece’s budget reforms and more EU and International Monetary Fund money, would help Greece return to a more sustainable and independent debt path.

“This would also help bring in new investment capital and unlock market access -- possibly as early as 2015,” Dallara said. “This would greatly reduce the burden on the official sector and the European taxpayer of providing perpetual support for Greece.”

The outline of the bond exchange calls for banks and other investors to exchange their holdings at 50 percent of their face value. The new bonds would be partially backed by collateral guaranteed by the European Financial Stability Facility or another AAA rated lender. Details on timing, eligible maturities and coupon rates haven’t been decided.

‘Significant’ Risk

As Europe proceeds with its crisis-fighting efforts, the European Central Bank needs to continue its secondary-market purchases of government bonds so markets and the economy can recover , Dallara said. The IIF said the ECB should consider lower interest rates as Europe faces a “significant” risk of recession that could spill over to the world economy.

“It is essential that all parties come together behind the continued active role of the ECB in the secondary government bond market,” Dallara said. “We would also emphasize that lower ECB policy rates at this point would enhance market stability as well as help bolster faltering regional economic growth.”

The U.S. budget debate is an area of “significant concern,” and some major emerging-market nations face slower growth and more inflation, the IIF said. The G-20 will need to coordinate its economic and regulatory policy objectives to put the world on sounder economic footing.

“It is essential for the official sector to begin viewing the banking system as an indispensible partner in fostering recovery, rather than an adversary on which it is necessary to impose ever more punitive measures,” Dallara said.

To contact the reporter on this story: Rebecca Christie in Cannes at rchristie4@bloomberg.net Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Keystone Pipeline Shouldn’t Risk Nebraska Water, Obama Says

By Jim Efstathiou Jr. - Nov 3, 2011 1:41 AM GMT+0700

President Barack Obama said jobs created by TransCanada Corp. (TRP)’s planned Keystone XL oil pipeline wouldn’t be worth the health and safety consequences if a spill contaminated water supplies.

Obama commented on the $7 billion project that would carry oil from Alberta to the U.S. Gulf Coast in an interview with an Omaha television station yesterday, as Nebraska’s state legislature opened a special session considering ways to force a rerouting of the pipeline away from the state’s largest aquifer.

“Folks in Nebraska like all across the country aren’t going to say to themselves, ‘We’ll take a few thousand jobs if it means our kids are potentially drinking water that would damage their health,’” Obama said in an interview from the White House with KETV. “We don’t want, for example, aquifers to be adversely affected. Folks in Nebraska obviously would be directly impacted.”

The 1,661-mile (2,673-kilometer) Keystone XL would deliver 700,000 barrels a day of crude to refineries on the Gulf of Mexico through Montana, South Dakota, Nebraska, Kansas, Oklahoma and Texas. State leaders haven’t opposed the project’s route except in Nebraska

The State Department, which has jurisdiction over the pipeline because it crosses an international border, has said it expects to make its decision by the end of the year. Obama indicated yesterday that he will have the final say.

“We need to encourage domestic natural gas and oil production,” Obama said in the interview. “We need to make sure that we have energy security and that we aren’t just relying on Middle East sources. But there’s a way of doing that and making sure that the health and safety of the American people and folks in Nebraska are protected.”

Ogallala Aquifer

The pipeline would cross the Sandhills region of the Ogallala aquifer, which serves 1.5 million people. The area has a shallow water table and porous sand that make it susceptible to water contamination, according to John Gates, assistant professor of earth and atmospheric sciences at the University of Nebraska in Lincoln.

The state legislature’s session was called by Republican Governor Dave Heineman especially to consider legislation aimed at forcing Calgary-based TransCanada to move Keystone XL. State Senator Annette Dubas introduced a bill that would require state permits for pipelines, giving Nebraskans a voice in the approval process.

“This particular route is the most problematic, and if there are ways to change that it would be good,” Dubas said in an interview in Lincoln, the state capital.

Fatal Delays

Delays resulting from such efforts may kill the pipeline, TransCanada Chief Executive Officer Russ Girling said. Canadian oil producers, or “shippers,” and U.S. refiners may make other arrangements if TransCanada can’t begin delivering crude as scheduled,

“Those shippers will only wait so long, and then they will start looking for alternate markets,” Girling said on a conference call yesterday after TransCanada released third- quarter results. “Similarly, the refiners can only wait so long for Canadian crude oil to come into their marketplace.”

While celebrity activists such as actor Daryl Hannah have been arrested in Washington protesting Keystone XL as a contributor to global warming, Nebraskans just want to protect their drinking water, state Senator Greg Adams said.

Respect for Water

“We are a very practical people and though we are cognizant of those arguments, I don’t think that most Nebraskans are swayed a great deal by them,” Adams said in an interview yesterday. “What you will find in Nebraskans is a genuine respect for the Sandhills and a real respect for water.”

National environmental groups such as the League of Conservation Voters and the Natural Resources Defense Council agree that the project should be rerouted to protect the Sandhills. They also say any pipeline promoting the development of Alberta’s oil will worsen global warming and slow the transition to renewable fuels.

Sit-down protests outside the White House in August led to arrests of environmental figures from James Hansen, the head of NASA’s Goddard Institute for Space Studies, to Hannah, who starred in the 1984 mermaid movie “Splash.” Protesters say they will return this weekend, encircling the White House in a demonstration on Nov. 6.

In Alberta, oil is separated from sand and clay with intense heat in a process that releases more greenhouse gases than pumping conventional crude. Representative Henry Waxman, a California Democrat, has said the pipeline will carry “the dirtiest source of transportation fuel” available.

‘Significant Opposition’

Even if Nebraska won a rerouting of the pipeline, “there will still be a significant opposition to expanded production of tar sands,” Anthony Swift, a policy analyst in Washington with the Natural Resources Defense Council, said in an interview.

The State Department is “working towards a decision by the end of the year” on the pipeline, “but our foremost commitment is to make the best decision possible based on the best available data and analysis that we have,” spokeswoman Beth Gosselin said in an interview yesterday.

“The State Department is in charge of analyzing this because it’s a pipeline coming in from Canada,” Obama said yesterday. “They’ll be giving me a report over the next several months.”

Reflecting Obama’s Views

While the State Department is handling the review, the decision “will reflect the president’s views” as “this is the Obama administration,” White House press secretary Jay Carney said at a briefing today.

The State Department already found in an environmental assessment that the Keystone project poses “no significant impacts to most resources” along its route provided TransCanada complies with U.S. law and follows recommended safeguards.

The U.S. Environmental Protection Agency, which is readying comments on those findings, has said previously that the State Department needed to do more work on the impact of groundwater and air pollution, pipeline safety and effects on wetlands and migratory birds.

Responding to critics who say the pipeline would add to greenhouse-gas emissions, Kerri-Ann Jones, assistant secretary in the State Department’s Bureau of Oceans and International Environmental and Scientific Affairs, said in August that the oil sands would be developed “whether or not this pipeline or any other pipeline were put forward.”

To contact the reporter on this story: Jim Efstathiou Jr. in Lincoln, Nebraska, at jefstathiou@bloomberg.net

To contact the editor responsible for this story: Larry Liebert at lliebert@bloomberg.net

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MF Transferred Customer Money After Audit: CME

By Matthew Leising - Nov 3, 2011 3:20 AM GMT+0700

MF Global Holdings Ltd. (MF) may have transferred customer money last week following an audit by CME Group Inc. (CME), which has regulatory authority over the futures broker.

The transfer “may have been designed to avoid detection in so far as MF Global did not disclose or report such transfers” to the Commodity Futures Trading Commission or CME Group, the Chicago-based exchange owner said today an e-mailed statement.

The day it filed the eighth-largest U.S. bankruptcy on Oct. 31, New York-based MF Global disclosed a shortfall in customer accounts that people with knowledge of the matter said may be about $700 million. CME Group, which monitored MF Global’s positions as its designated self-regulatory organization, said yesterday it didn’t know how much client money was missing.

All MF Global customer positions held at CME Group, and not third-party custodians such as banks, are accounted for, the company said in the statement. “MF Global’s customer positions on CME Group exchanges were and continue to be substantially over-collateralized,” CME Group said. The “apparent shortfall” was in accounts held by MF Global, CME Group said.

‘Segregation Violations’

After CME Group identified “apparent segregation violations” and suspended clearing privileges for MF Global customers this week, 150,000 client accounts “essentially were frozen,” James Giddens, the trustee assigned to liquidate MF Global Inc., said in a filing today.

Chief Executive Officer Jon Corzine, 64, steered MF Global into bankruptcy after increasing risk-taking at the firm, including investments in European sovereign debt that roiled markets. Discrepancies over the missing funds that were used to back futures trades sent Interactive Brokers Group Inc. (IBKR) fleeing from a potential acquisition that may have averted the filing, according to a board member at the Greenwich, Connecticut, firm.

“The board certainly considered that purchase and stepped away from it at a point where it became clear there were lots of uncertainties about the accounts and segregated funds,” Hans Stoll, an Interactive Brokers director and a professor of finance at Vanderbilt University in Nashville, Tennessee, said yesterday in a telephone interview.

The proprietary positions of MF Global have been liquidated as of today “with no adverse market impact,” CME Group said in the statement.

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; Donal Griffin in New York at dgriffin10@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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U.S. Stocks Advance as Fed Says It May Act to Safeguard Recovery

By Rita Nazareth - Nov 3, 2011 3:42 AM GMT+0700

U.S. stocks advanced, rebounding from a two-day drop in the Standard & Poor’s 500 Index, as the Federal Reserve said economic growth strengthened and it is prepared to take action if needed to safeguard the recovery.

Gauges of commodity and financial shares had the biggest gains in the S&P 500 among 10 industries, rising at least 2.2 percent. Bank of America Corp. (BAC), Chevron Corp. (CVX) and Alcoa Inc. (AA) rallied more than 2.4 percent. MasterCard Inc. (MA) jumped 7 percent as profit beat analysts’ estimates. MF Global Holdings Ltd. tumbled 79 percent in its first day of over-the-counter trading after the futures brokerage filed for bankruptcy, prompting the New York Stock Exchange to delist the shares.

The S&P 500 increased 1.6 percent to 1,237.90 as of 4 p.m. New York time. The benchmark gauge for American equities fell 5.2 percent over the previous two days. The Dow Jones Industrial Average added 178.08 points, or 1.5 percent, to 11,836.04 today.

“People are focused on two comments -- the economy has firmed and the Fed stands ready to take action,” Mark Bronzo, who helps manage $24 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “In addition, the fact that they are not taking action now makes you more comfortable that the economy is doing OK.”

The Federal Open Market Committee said “economic growth strengthened somewhat in the third quarter,” while also saying “significant downside risks” remain to the outlook. Stocks extended gains as Fed Chairman Ben S. Bernanke said additional purchases of mortgage-backed securities are a “viable option” if the state of the economy warrants further easing.

Economic Forecast

Fed officials lowered their outlook for U.S. economic growth in 2012 and forecast that unemployment will average from 8.5 percent to 8.7 percent in the final three months of next year. Forecasts for 2012 growth in U.S. gross domestic product from the five Fed Board members and 12 reserve bank presidents centered around 2.5 percent to 2.9 percent, measured from the fourth quarter of this year to the fourth quarter of next year. For this year, the central tendency forecast for U.S. growth was 1.6 percent to 1.7 percent.

“They are going with no rocking of the boat as long as the improvement continues,” Bruce McCain, who helps oversee about $20 billion as chief investment strategist at the private- banking unit of KeyCorp in Cleveland, said in a telephone interview. “There’s a lot more concern at this point that the Fed would try too hard to juice up things and perhaps complicate an inflation picture that clearly is becoming better. The Fed wants to have as much powder dry as they can simply because if Europe blows up they want to have something in reserve.”

European Debt Crisis

Benchmark gauges rebounded after the biggest two-day drop in almost a month on concern Europe’s crisis was worsening. Greek Prime Minister George Papandreou triggered the latest upheaval in the two-year-long crisis by abruptly announcing on Oct. 31 a parliamentary confidence vote and his desire to hold a referendum on the rescue pact.

Papandreou, his hold on power weakening, was summoned to Cannes, France, for emergency talks on the eve of a Group of 20 summit where he will hear from French President Nicolas Sarkozy that the “only way to resolve Greek debt problems” is through a deal hammered out in a six-day crisis-management marathon. German Chancellor Angela Merkel said today that policy makers “must bring calm to the euro.”

The Morgan Stanley Cyclical Index climbed 1.8 percent on expectations the economy will be able to avoid a recession. The Dow Jones Transportation Average gained 1.3 percent. The KBW Bank Index increased 3.3 percent. Bank of America added 5 percent to $6.72. Alcoa jumped 3.2 percent to $10.70. Chevron rose 2.4 percent to $104.54.

MasterCard Rallies

MasterCard gained 7 percent to $357.66. Chief Executive Officer Ajay Banga, 51, is pushing to wrest market share from larger rival Visa Inc. New U.S. regulations on transaction fees charged to merchants for debit-card purchases also give retailers more say on how those transactions are routed, which may erode Visa’s dominance.

Phone stocks gained after the U.S. House voted to bar new state and local taxes on wireless services. Sprint Nextel Corp. (S) climbed 9.2 percent to $2.72. AT&T Inc. (T) increased 1.3 percent to $29.08.

AOL Inc. (AOL) rallied 13 percent to $15.02. The Internet company that’s struggling to halt a sales slide reported third-quarter earnings that exceeded analysts’ estimates by 65 percent.

MF Global, quoted under the symbol “MFGLQ,” tumbled 79 percent to 25 cents, in its first day of over-the-counter trading after the futures brokerage filed for bankruptcy, prompting the New York Stock Exchange to delist the shares.

No Trade

The stock hasn’t changed hands during a regular trading session since Oct. 28. NYSE Euronext suspended the stock before the New York Stock Exchange opened on Oct. 31. MF Global filed the eighth-largest U.S. bankruptcy this week after failing to find a buyer over the weekend. The futures broker suffered a ratings downgrade and loss of customers after revealing it had investments related to $6.3 billion in European sovereign debt.

Whether the U.S. economy falls into a recession or expands more slowly matters little when it comes to stock-market strategy, according to Richard Bernstein, chief executive officer of Richard Bernstein Advisors LLC.

Playing defense has been more rewarding in the past six months than investing in shares of cyclical companies, which are more susceptible to changes in the pace of economic expansion. Makers of food, beverages, tobacco and other consumer staples are in the defensive category, along with health-care, telephone and utility stocks.

“Investors seem to spend too much time trying to ascertain the probability of a recession occurring,” Bernstein wrote in a report two days ago. A slowdown is enough to justify defensive strategies, favoring shares of companies whose sales and earnings growth is relatively stable, the report said.

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

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

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Bernanke Says Mortgage-Backed Securities Purchases Are ‘a Viable Option’

By Caroline Salas Gage and Scott Lanman - Nov 3, 2011 2:53 AM GMT+0700

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Nov. 2 (Bloomberg) -- Former Federal Reserve Governor Susan Phillips talks about Fed Chairman Ben S. Bernanke's news conference today and the central bank's monetary policy. Phillips speaks with Lisa Murphy on Bloomberg Television's "Street Smart." Bloomberg's Peter Cook and Michael McKee also speak. (Source: Bloomberg)

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Ben S. Bernanke, chairman of the U.S. Federal Reserve, speaks during a news conference at the Federal Reserve in Washington, D.C. on Nov. 2, 2011. Photographer: Andrew Harrer/Bloomberg

Federal Reserve Chairman Ben S. Bernanke said additional purchases of mortgage-backed securities are a “viable option” if the state of the economy warrants further easing.

“The housing sector is a very important sector,” Bernanke said today at a press conference in Washington after a meeting of the Federal Open Market Committee. Adding to mortgage-bond holdings is “certainly something we would consider if conditions” are appropriate.

The policy-setting FOMC today said “economic growth strengthened somewhat in the third quarter,” while also saying “significant downside risks” remain to the outlook. Officials left unchanged their plans to lengthen the maturity of the Fed’s bond portfolio and to keep the target federal funds rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook remains “subdued.”

Bernanke and his colleagues on the panel cut their growth forecasts for 2012 and said unemployment will average 8.5 percent to 8.7 percent in the final three months of next year, up from a prior range of 7.8 percent to 8.2 percent.

“The medium-term outlook relative to our June projections has been downgraded” and “remains unsatisfactory,” Bernanke said. Additional stimulus “remains on the table,” he added, while declining to specify conditions that would trigger further action.

Stocks, Dollar

U.S. stocks rebounded from a two-day slump, the dollar fell and Treasuries pared losses after Bernanke’s comments.

The Standard & Poor’s 500 Index climbed 1.3 percent to 1,234.04 at 3:48 p.m. in New York. The Dollar Index slipped 0.2 percent, trimming an earlier drop of 0.7 percent. Treasury 10- year yields were unchanged at 1.99 percent, after jumping nine basis points earlier.

“I’m dissatisfied with the state of the economy,” Bernanke said. “Unemployment is far too high,” and “I fully sympathize with the notion that the economy is not performing the way we would like.”

Policy makers voted in September to swap $400 billion of short-term debt in the Fed portfolio for longer-term securities to reduce interest rates in a strategy dubbed Operation Twist. They said they would reinvest proceeds from maturing housing debt into mortgage-backed securities, switching from Treasuries.

Sixty-nine percent of economists in a Bloomberg News survey expect the Fed to embark on a third round of bond buying, with a plurality of 36 percent of respondents seeing purchases beginning in the first quarter of 2012, according to an Oct. 26- 31 survey of 42 economists.

Top of List

Fed Governor Daniel Tarullo said on Oct. 20 that buying additional mortgage bonds should “move back up toward the top of the list of options” because “the aggregate demand effect should be felt not just in new home purchases, but also in the added purchasing power of existing homeowners who are able to refinance.” The following day, Vice Chairman Janet Yellen said a third round of asset purchases “might become appropriate” if economic conditions warranted more stimulus.

“The MBS purchases and Treasury securities purchases are one set of tools that we have” along with communications, Bernanke said. “The committee will have to look at the outlook and if it judges we are falling sufficiently short of our objectives,” and “we believe monetary stimulus would be beneficial,” then the FOMC would take “corrective action.”

Home Prices

Reduced home prices and tightened lending standards have slowed the pace of replacement home loans. The Mortgage Bankers Association forecast on Oct. 11 that refinancing this year would total $783 billion, down from $1.1 trillion last year, even amid lower interest rates. Refinancing peaked at a record $2.5 trillion in 2003.

The average rate on a typical 30-year fixed mortgage fell to a record low 3.94 percent in October, from this year’s high of 5.05 percent, before climbing to 4.10 percent last week, according to Freddie Mac survey data. In September, the FOMC voted to reinvest proceeds from maturing housing debt into mortgage-backed securities, switching from Treasuries.

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 vote for today’s statement was 9-1. Chicago Fed President Charles Evans voted against the decision, the first dissent in favor of easier policy since Boston Fed President Eric Rosengren in December 2007. Evans favored “additional policy accommodation.”

At the last two meetings, Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia’s Charles Plosser dissented against decisions to ease policy. They supported today’s statement.

“The committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability,” the statement said.

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net

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

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Fed Cuts Outlook for 2012, Sees 8.6% Jobless

By Craig Torres - Nov 3, 2011 1:32 AM GMT+0700

Federal Reserve officials lowered their outlook for U.S. economic growth in 2012 and forecast that unemployment will average from 8.5 percent to 8.7 percent in the final three months of next year.

The forecasts were released after the Federal Open Market Committee today acknowledged economic growth “strengthened somewhat” in the third quarter while also citing “continuing weakness” in labor markets and “significant downside risks” to the economic outlook. The committee left unchanged its plans to lengthen the maturity of its bond portfolio and maintain its mortgage-backed securities investments, and keep the federal funds rate in a range of zero to 0.25 percent until mid-2013.

Chicago Fed President Charles Evans dissented in favor of “additional policy accommodation.”

Forecasts for 2012 growth in U.S. gross domestic product from the five Fed Board members and 12 reserve bank presidents centered around 2.5 percent to 2.9 percent, measured from the fourth quarter of this year to the fourth quarter of next year. For this year, the central tendency forecast for U.S. growth was 1.6 percent to 1.7 percent.

At a press conference today, Fed Chairman Ben S. Bernanke said “the pace of progress is likely to be frustratingly slow,” with concerns about Europe contributing to “strains” in financial markets.

The Fed marked down the forecasts as the weak U.S. housing market, unemployment persisting around 9 percent and Europe’s debt crisis sap consumer and investor confidence. The Bloomberg Consumer Comfort Index for the week ended Oct. 23 fell to the lowest in a month, and 95 percent of survey respondents had a negative opinion about the economy, the worst since April 2009.

Economy Grew

Some reports in October indicate the recovery strengthened in recent months. The economy grew in the third quarter by 2.5 percent, the fastest pace in a year, as Americans reduced savings to boost purchases and companies increased investment in equipment and software, the Commerce Department reported last week. Growth rose from a 0.4 percent annual rate in the first quarter and 1.3 percent in the second quarter.

FOMC participants said inflation, measured by the personal consumption expenditures price index, would rise at a 1.4 percent to 2 percent rate in 2012, according to the central tendency outlook, which excludes the three highest and three lowest projections. They kept their longer-run inflation goal in a range of 1.7 percent to 2 percent.

Fed officials in June forecast growth of 2.7 percent to 2.9 percent for 2011. Today’s lower central tendency outlook for this year represents the third consecutive downward revision by Fed officials to the 2011 outlook. They also cut their 2012 outlook from a previous forecast of 3.3 percent to 3.7 percent in June.

Shaved Estimate

Fed officials also shaved their estimate for the economy’s long run potential growth rate to 2.4 percent to 2.7 percent versus a previous forecast of 2.5 percent to 2.8 percent in June.

The unemployment forecast for next year was higher than participants’ June forecast of 7.8 percent to 8.2 percent. For 2013, participants forecast unemployment of 7.8 percent to 8.2 percent, a higher range than their June central tendency outlook of 7 percent to 7.5 percent.

The FOMC eased policy in August and September without providing investors with new details about their economic outlook.

Before making policy decisions, Fed officials review a staff forecast that isn’t made public. Today’s forecasts show the central bank is realigning its outlook with a series of downgrades already made by private forecasters focusing on weak levels of job creation and shocks to consumer wealth and confidence from financial volatility.

In a survey published Oct. 10 by Blue Chip Economic Indicators, for example, economists expected GDP to rise 1.4 percent this year. JPMorgan Chase & Co. (JPM) economists expect the economy to grow 1.7 percent in the fourth quarter from the same quarter a year earlier. The firm also expects 1.7 percent growth in 2012 on a fourth-quarter to fourth-quarter basis, partly due to “significant fiscal headwind,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.

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

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Fed Says Economy Has Picked Up While Still Detecting ‘Significant’ Risks

By Joshua Zumbrun - Nov 3, 2011 1:46 AM GMT+0700

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Nov. 2 (Bloomberg) -- Christina Romer, former head of President Barack Obama's Council of Economic Advisers and a Bloomberg contributing editor, talks about Federal Reserve monetary policy and the U.S. economy. Bruce Kasman, chief economist at JPMorgan Chase & Co., also speaks. They talk with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

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Nov. 2 (Bloomberg) -- Ira Jersey, an interest-rate strategist at Credit Suisse Group AG, and Bruce Kasman, chief economist at JPMorgan Chase & Co., talk about the Federal Reserve's policy statement released today. They speak with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

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Nov. 2 (Bloomberg) -- Federal Reserve policy makers raised their assessment of the economy while saying “significant downside risks” remain and refrained from taking any additional steps to ease monetary policy. The Fed left unchanged its pledge to keep the benchmark interest rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook stays “subdued.” Peter Cook reports on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

Federal Reserve policy makers said the economy has picked up while “significant downside risks” remain, and they refrained from taking any additional steps to ease monetary policy.

Fed officials also lowered their economic-growth projections compared with June and said the unemployment rate will decline at a slower pace. Fed Chairman Ben S. Bernanke, in a press briefing, said the pace of improvement is likely to be “frustratingly slow” and that the central bank made no decisions about giving more information on its policies through public communications.

Policy makers led by Bernanke may be waiting to see if unconventional policy steps from their last two meetings help the expansion gain strength before embarking on new initiatives. While the economy grew last quarter at the fastest pace in a year, that is still insufficient to push down the unemployment rate, and officials have said the U.S. remains vulnerable to shocks from the European debt crisis.

“Economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year,” the Federal Open Market Committee said today in Washington after a two-day meeting. At the same time, “recent indicators point to continuing weakness in overall labor market conditions.”

Treasuries erased losses after the statement, leaving the 10-year yield at 1.99 percent at 2:41 p.m. in New York, unchanged from late yesterday. The Standard & Poor’s 500 Index rose 1.1 percent to 1,232.21.

Benchmark Rate

The Fed left unchanged its pledge to keep the benchmark interest rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook stays “subdued.” The central bank has kept the target federal funds rate in a range of zero to 0.25 percent since December 2008.

The vote for the statement was 9-1. Chicago Fed President Charles Evans voted against the decision, the first dissent in favor of easier policy since Boston Fed President Eric Rosengren in December 2007. Evans favored “additional policy accommodation.”

At the last two meetings, Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia’s Charles Plosser dissented against decisions to ease policy. They supported today’s statement.

“The committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability,” the statement said.

Operation Twist

The central bank also said it would continue its plan to purchase $400 billion of longer-term U.S. bonds by June 2012 while selling the same amount of short-term debt, a program known as Operation Twist. It also will continue reinvesting proceeds from housing debt into mortgage-backed securities.

Inflation “appears to have moderated since earlier in the year,” the statement said, repeating earlier language. The Fed’s preferred price gauge, which excludes food and energy costs, rose 1.6 percent in September from a year earlier, compared with a 1 percent gain in March. Including all items, prices rose 2.9 percent in September from a year earlier, the quickest pace since October 2008.

“Household spending has increased at a somewhat faster pace in recent months,” the Fed said. “The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.”

Laying Groundwork

Economists in a Bloomberg News survey predicted Fed officials would lay the groundwork for further large-scale asset purchases while refraining from making such a decision at today’s meeting. A plurality of 36 percent saw purchases beginning in the first quarter of 2012.

“The central bank is grappling to use tools in an environment in which it clearly feels somewhat limited in its ability to impact the mortgage market and impact the economy,” Bruce Kasman, chief economist for JPMorgan Chase & Co. (JPM) in New York, said today in an interview with Bloomberg Television.

Evans’s dissent probably reflects the concerns of at least three or four other members on the committee, Kasman said. That camp believes “the Fed needs to work towards getting growth solid enough to get the unemployment rate down materially,” Kasman said.

Ira Jersey, the New York-based director of U.S. rates strategy at Credit Suisse Group AG, said the change in dissents from the last meeting “means we could get more accommodation in the future since you have some of the hawks perhaps backing off from their opposition to accommodation.”

Growth Forecasts

Gross domestic product, adjusted for inflation, will rise by 2.5 percent to 2.9 percent next year, compared with a range of 3.3 percent to 3.7 percent from the prior projections in June, according to the median range of economic projections from the 17 governors and regional Fed presidents. Growth in 2013 will be 3 percent to 3.5 percent, lower than the prior range of 3.5 percent to 4.2 percent.

The jobless rate in the fourth quarter of 2012 will range from 8.5 percent to 8.7 percent, up from the previous forecast of 7.8 percent to 8.2 percent, the Fed said in a release separate from the FOMC statement.

The old 2012 projection is now the new 2013 projection for fourth-quarter unemployment of 7.8 percent to 8.2 percent, compared with a range of 7 percent to 7.5 percent in June. By the end of 2014, the jobless rate will be 6.8 percent to 7.7 percent, officials said in their initial projections for the year.

Price Outlook

Inflation forecasts were little changed for 2012 and 2013, with officials projecting price increases close to long-run goals of 1.7 percent to 2 percent. U.S. central bankers revise their forecasts four times a year according to a predetermined schedule.

With the benchmark interest rate already at zero, the central bank bought $2.3 trillion in debt from December 2008 through June of this year in two rounds of so-called quantitative easing aimed at lowering borrowing costs for companies and consumers.

Some officials in September wanted to keep further asset purchases as an option to boost the economy as policy makers saw “considerable uncertainty” that U.S. growth will pick up, according to minutes of the meeting, released on Oct. 12.

Stocks have climbed and the economy has picked up since the Sept. 20-21 gathering. The Standard & Poor’s 500 Index advanced 11 percent in October, the best since 1991, as European leaders agreed to expand their bailout fund. The rally snapped five months of losses.

Construction Equipment

Caterpillar Inc., the world’s largest construction and mining-equipment maker, is among firms reporting continued growth. The Peoria, Illinois-based manufacturer added 4,800 jobs in the third quarter, 2,000 of them in the U.S., and said its revenue in 2012 will rise 10 percent to 20 percent.

“Although there is a good deal of economic and political uncertainty in the world, we are not seeing it much in our business at this point,” Chief Executive Officer Doug Oberhelman said in an Oct. 24 statement.

Still, growth and job creation haven’t been fast enough to lower the unemployment rate.

The Labor Department will report Nov. 4 that the payrolls expanded by 95,000 jobs in October, according to the median estimate of a Bloomberg survey of 65 economists. Unemployment is forecast to remain at 9.1 percent for the fourth consecutive month.

Housing Slump

Housing, the industry at the heart of the financial crisis, has also held back the recovery. Sales of previously owned homes fell 3 percent in September to a 4.91 million annual rate, according to the National Association of Realtors. The median price dropped 3.5 percent from a year earlier, and about one in five real-estate agents polled said contracts had been canceled, the group said.

“Housing continues to hang like an albatross around the necks of homeowners and the economy as a whole,” Fed Governor Daniel Tarullo said in an Oct. 20 speech, urging his fellow policy makers to consider further purchases of housing debt to lower mortgage costs and help homeowners refinance.

Policy makers have also been considering communications tools to help shape public expectations for the future path of interest rates.

A subcommittee led by Fed Board Vice Chairman Janet Yellen has looked into publishing more precise information about the FOMC’s goals for prices and employment, and more guidance about how policy changes are linked to those goals, according to minutes of the September meeting.

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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

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