Japan’s Jobless Rate Rises Unexpectedly as Strong Yen Squeezes Companies

By Andy Sharp - Jan 31, 2012 6:38 AM GMT+0700

Japan’s unemployment rate unexpectedly rose last month as the strong yen continues to squeeze manufacturers.

The jobless rate was 4.6 percent in December, the statistics bureau said in Tokyo today. The median forecast of 30 economists surveyed by Bloomberg News was for the rate to remain at 4.5 percent.

The government has approved four supplementary budgets worth about 20 trillion yen ($262 billion) to stoke demand and rebuild after the March 11 earthquake and tsunami. Those funds are helping support the labor market, offsetting planned job reductions at manufacturers including NEC Corp. (6701)

“Labor offers in the devastated areas have been quite strong, and this will continue to support the labor market.” Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. in Tokyo, said before the report. “Manufacturers have become cautious about hiring people in the context of global growth, the yen’s appreciation and uncertainty surrounding electricity supply” stemming from the shutdown of nuclear reactors since the disaster, he said.

Exporters are struggling with a yen hovering around a record high against the dollar, which caused Japan to last year post its first annual trade deficit since 1980. NEC said Jan. 26 it would eliminate 10,000 jobs, with 7,000 of those positions in Japan.

The job-to-application ratio, which Murashima said he sees as a “better” indicator given Japan’s aging population, improved to 71 positions open for every 100 candidates from 69 in November, the government said.

To contact the reporter on this story: Andy Sharp in Tokyo at asharp5@bloomberg.net

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

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Holiday Buyers Picked IPhone Over Android

By Adam Satariano - Jan 31, 2012 12:01 PM GMT+0700

Samsung Electronics Co. (005930) was the only smartphone maker partnering with Google Inc. (GOOG) that found holiday cheer competing against Apple Inc. (AAPL)’s iPhone.

Apple led the smartphone market in the fourth quarter after unveiling the iPhone 4S in October. Of the 9.4 million devices activated by AT&T Inc., the second-largest U.S. wireless carrier, 7.6 million were iPhones. Verizon Wireless, the largest provider, said 56 percent of its 7.7 million smartphones were iPhones. Samsung was No. 2 in shipments.

Apple sold a record 37 million iPhones globally in the three months ended Dec. 31, dispelling speculation that demand might be eroded by the dozens of devices using Google’s Android operating system. Instead, Apple’s dominance may serve as a signal that rivals such as HTC (2498) Corp. would do better to act like Hollywood studios, which hold back movies to avoid competing against the debut of a sure-bet blockbuster.

“For the Android smartphone vendors to come out with something, they need to be very brave,” said Ramon Llamas, a senior analyst at market-research company IDC. “It was Apple’s Christmas.”

Samsung found success with its Galaxy line of smartphones. Though the Suwon, South Korea-based company -- also one of Apple’s biggest parts suppliers -- came in just behind Apple for the quarter, it was the largest vendor for all of 2011, according to Strategy Analytics, a research company.

“They are clearly the winners,” said Nehal Chokshi, a senior analyst for Technology Insights Research LLC in New York.

Motorola, HTC, LG

As Apple and Samsung together sold more than 70 million smartphones in the fourth quarter, companies such as Motorola Mobility Holdings Inc. (MMI), HTC and LG Electronics Inc. (066570) were left to fight for the remaining customers.

The fallout for Apple and Samsung’s competitors can be seen in their financial results. On Jan. 6, HTC, maker of the Sensation and Incredible smartphones, reported its first quarterly profit decline in two years. Motorola Mobility, maker of the Razr and Droid devices, also said earlier this month that it expected to report results that were lower than forecast in part because of the challenging market. LG, scheduled to release results on Feb. 1, has reported two consecutive quarterly losses.

Some companies are taking a cue from Apple, whose iPhone is its only smartphone. HTC and Motorola have announced shifts in strategy to focus on fewer models instead of a swath of variations.

Different Approaches

Google licenses the Android operating system to multiple hardware makers, while Apple’s iOS software is available only on its own products. The rising popularity of devices running Android has been seen by investors as a long-term threat to Apple’s market-leading profit margins. Chokshi said a similar example is the difficulty Apple’s Mac personal-computer business had competing against Microsoft Corp.’s Windows operating system, which runs on PCs from various vendors.

Apple’s performance during the holiday quarter should ease those concerns, said Brian White, a former analyst at Ticonderoga Securities LLC, which closed last week. Sales in China will help the iPhone remain the leading smartphone, he said. Morgan Stanley estimates Apple could sell as many as 40 million iPhones in China by 2013.

“The biggest mobile Internet opportunity in the world is just a baby,” White said. “Just think about when that explodes and Apple’s exposure there.”

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

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

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First Starbucks Store to Open in India by August

By Anoop Agrawal and Malavika Sharma - Jan 31, 2012 11:15 AM GMT+0700

Starbucks Corp. (SBUX) and venture partner Tata Global Beverages Ltd. (TGBL) will open their first store in India by August to tap rising coffee consumption in the world’s fastest growing major economy after China.

The equal venture will open outlets in Mumbai and New Delhi this year and have 50 locations within the first 12 months, Tata Global Vice Chairman R.K. Krishna Kumar said at a press conference in Mumbai yesterday.

The Indian stores will build on the world’s largest coffee- shop chain’s expansion outside the U.S., where stores are less profitable than those in the Asia-Pacific region. Starbucks will compete with Barista Coffee Co., a unit of Italy’s Lavazza SpA (LAVA), and Cafe Coffee Day, run by Amalgamated Bean Coffee Trading Co. in India, where consumption of the drink almost doubled in the decade through 2010 to 108,000 metric tons.

“We are going to bring the Starbucks experience that is known around the world to India,” John Culver, Starbucks president for China and Asia Pacific, said in an interview. “All the coffee we serve here will be locally sourced.”

The Seattle-based restaurant operator has an agreement to source beans from Bangalore-based Tata Coffee Ltd. (TCO), a unit of Tata Global.

Asia Operating Margin

Starbucks plans to accelerate growth in the Asia-Pacific region, where revenue rose 38 percent in the quarter ended Jan. 1, Chief Financial Officer Troy Alstead said on a Jan. 26 conference call.

The company predicts an operating margin of almost 30 percent for the Asia-Pacific region this fiscal year, according to the call transcript. That compares with the Americas which is expected to rise to “slightly” more than 20 percent. The U.S. had an operating margin of 19 percent last fiscal year, according to data compiled by Bloomberg.

Starbucks rose 1.3 percent to $48.48 yesterday, boosting its gain so far this month to 5.4 percent. The stock climbed 43 percent in 2011, the third straight year of gains.

Tata Global gained as much as 6.2 percent to 104 rupees in India trading today and Tata Coffee rose as much as 1.5 percent to 878.70 rupees.

India Retail Rules

India’s government on Jan. 10 raised the ownership limit to 100 percent for foreign retailers selling a single brand, a decision benefiting companies including Starbucks. The new rules require the overseas companies to procure at least 30 percent of their products or inputs from small Indian companies if they own more than 51 percent in the venture.

The Indian economy will expand an estimated 6.5 percent this year, the fastest pace among developing Asian economies excluding China, according to January estimates from the World Bank. The Reserve Bank of India projects 7 percent growth for the 12 months ending March.

Starbucks is expanding in markets outside the U.S., whose sales contribution has fallen in the past decade to less than 70 percent in the last fiscal year, according to data compiled by Bloomberg.

The company plans to open its first store in Costa Rica in May, adding to locations in Central America including El Salvador and Guatemala.

To contact the reporters on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net; Malavika Sharma in New Delhi at msharma52@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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Asia Stocks, Oil Rise on Greek Debt Talks

By Lynn Thomasson and Saeromi Shin - Jan 31, 2012 2:13 PM GMT+0700

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Jan. 31 (Bloomberg) -- Sean Darby, global head of equity strategy at Jefferies Group Inc., talks about U.S. and emerging market stocks. He also discusses Europe's sovereign debt crisis and the U.S. economy. He speaks with Rishaad Salamat on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

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Jan. 31 (Bloomberg) -- Gao Ting, chief China strategist at UBS AG, talks about China's economy growth and stock market. He speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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Jan. 31 (Bloomberg) -- Koji Endo, an auto analyst at Advanced Research Japan, talks about the nation's auto industry. Honda Motor Co. President Takanobu Ito forecast last week that business results at Japan’s third-biggest carmaker will climb to the highest in at least five years, led by sales of Accord sedans and Civic compacts in North America. Endo speaks from Tokyo with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Asian stocks rose, heading for the first back-to-back monthly gain since October 2010, after factory output in Japan climbed the most in seven months and Greece’s Prime Minister said debt-swap talks have made progress. Oil and the euro advanced.

The MSCI Asia Pacific Index (MXAP) added 0.4 percent as of 4:01 p.m. in Tokyo, bringing its January rally to 7.6 percent. Euro Stoxx 50 Index futures climbed 0.6 percent and contracts on the Standard & Poor’s 500 Index increased 0.2 percent. India’s Sensex index jumped 1.2 percent and the rupee advanced 0.3 percent, set for a record monthly gain. The euro strengthened 0.3 percent, while the dollar fell against most of its 16 major counterparts. Oil added 0.5 percent, ending a two-day drop.

“Greece is moving step by step to resolve its troubles, though the pace isn’t fast enough to give investors a big sense of relief,” said Chu Moon Sung, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees $29 billion. “Investors appear to think that their risk aversion may have been overdone.”

Greek Prime Minister Lucas Papademos said after the European Summit that he’s “strongly committed” to reaching a debt-swap pact with bondholders. European leaders left a Brussels summit late yesterday with no accord over how to plug Greece’s widening budget hole and German Chancellor Angela Merkel voiced frustration with the Athens government’s failure to carry out an economic makeover.

U.S. Earnings

Exxon Mobil Corp., United Parcel Service Inc. and Pfizer Inc. are among companies scheduled to report fourth-quarter results today. Earnings have topped analysts’ estimates at about two-thirds of the 172 companies in the S&P 500 that reported results since Jan. 9, data compiled by Bloomberg show. Ten-year Treasury yields increased one basis point to 1.86 percent today.

State Bank of India, the nation’s largest lender, rose 3.1 percent after winning $1.6 billion in government funding, ending a two-year wait. ICICI Bank Ltd., the largest private lender, jumped 3 percent before reporting earnings.

A measure of industrial companies gained 1 percent for the biggest advance among 10 industries in the MSCI Asia gauge. Japan’s factory production rose 4 percent in December as manufacturers made up for disruptions caused by Thailand’s worst floods in 70 years, according to a trade ministry report today. The median estimate of 30 economists surveyed by Bloomberg News was for a 3 percent gain.

Oil, Gold

Oil increased to $99.33 a barrel. Japan is the world’s third-largest crude consumer. Spot gold advanced 0.4 percent to $1,736.82 an ounce. The metal has climbed 11 percent this month, the best advance since August. Silver added 0.4 percent to $33.639 an ounce, bringing its January gain to 21 percent.

The euro strengthened to $1.3177. Euro-area unemployment probably rose to 10.4 percent in December, the highest since 1998, from 10.3 percent the previous month, according to the median estimate of economists surveyed by Bloomberg News. The European Union statistics office releases the data today.

Belgium is scheduled to sell 1.2 billion euros ($1.58 billion) of 168-day bills today, while Spain plans to sell bonds maturing 2015, 2016 and 2017 on Feb. 2. Fitch cut the ratings of Italy, Spain and three other euro-area countries on Jan. 27, saying they lack financing flexibility in the face of the regional debt crisis.

‘Positive Signs’

“We’ve seen some positive signs in Europe,” said Angus Gluskie, who oversees about $300 million as managing director at White Funds Management in Sydney. “We’re on a cusp of a Greek bond restructuring. They will agree on it but there will be some debate in the meantime.”

Malaysia’s ringgit strengthened 0.2 percent to 3.053 per dollar. The currency has climbed 4 percent in January, poised for the biggest monthly advance in almost two years. Bank Negara Malaysia said yesterday it would relax rules on interest-rate derivatives, debt and foreign-exchange trading. The central bank is expected to leave its benchmark overnight rate at 3 percent at a review today, according the median economist forecast compiled by Bloomberg News.

Taiwan’s Taiex index of shares rose 1.5 percent and the island’s currency gained 0.5 percent to 29.63 per dollar. Global funds bought $1.7 billion more Taiwanese stocks than they sold in January, the most in three months, exchange data show. The Indian rupee has advanced 6.9 percent for the month as foreign funds stepped up purchases of the nation’s assets.

“Funds are flowing into stocks and bonds amid some improvement in liquidity,” said Shigehisa Shiroki, chief trader on the Asian and emerging-markets team at Mizuho Corporate Bank Ltd. in Tokyo. “There’s a yield advantage as the Federal Reserve is likely to keep its rate near zero for a while.”

To contact the reporters on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net; Saeromi Shin in Seoul at sshin15@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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EU Nears Confrontation Over Greek Rescue

By James G. Neuger and Jonathan Stearns - Jan 31, 2012 2:15 PM GMT+0700

European governments moved toward a confrontation over a second rescue package for Greece, just as a dimming fiscal outlook in Portugal opened a new front in the debt crisis.

Euro leaders left a Brussels summit late yesterday with no accord over how to plug Greece’s widening budget hole and German Chancellor Angela Merkel voicing frustration with the Athens government’s failure to carry out an economic makeover.

“Greece’s debt sustainability is especially bad,” Merkel told reporters. “You have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap.”

Bargaining with Greece over a debt writedown and its economic management overshadowed efforts to point the way out of the financial crisis. EU chiefs agreed to speed the setup of a full-time 500 billion-euro ($659 billion) rescue fund and signed off on a German-inspired deficit-control treaty.

The summit was the 16th in the two years since the Greek debt emergency provoked a Europe-wide drama, leading to unprecedented aid packages for Greece, Ireland and Portugal and shattering European faith that the common currency was indestructible.

After the gathering of European leaders, EU President Herman Van Rompuy convened a smaller group, including Greek Prime Minister Lucas Papademos and European Central Bank Executive Board member Joerg Asmussen, to weigh the next steps on Greece.

‘On Track’

Van Rompuy spoke of the need “to put the current program back on track” and said finance ministers will try to hammer out the follow-up plan -- in the works since July -- by the end of the week. Greece is counting on aid to meet a 14.5 billion- euro bond payment on March 20 to escape default.

Merkel’s comments indicated that governments are loath to boost an October offer of 130 billion euros of loans in a second package, forcing investors to absorb net-present-value losses on Greek bonds that go beyond the 69 percent now on the table.

Speaking to reporters at 1:30 a.m. today, Papademos said “some difficulties” beset the debt-swap talks and hinted that donor governments may have to put up more money.

“The timeline is tight, but we are absolutely focused on the target of bringing the negotiations to a successful conclusion by the end of the week,” Papademos said.

Greek Feuds

In turn, Greece’s feuding political parties face pressure to deliver more savings and to verify in writing that the austerity program will be carried out, no matter who wins elections to replace Papademos’s interim Cabinet.

Germany’s proposal for an EU-appointed overseer of Greece’s budget prompted consternation in Athens and led to a rejection by other European governments that warned against stigmatizing Greece.

“Greece is a sovereign nation and must enact the promises it’s made,” said French President Nicolas Sarkozy. “Surveillance of Greece’s progress is normal, but there was never any question of putting Greece under guardianship.”

Investors were seized by fresh doubts about the economic health of Portugal. Concern that the EU would break a promise not to restructure Portugal’s debt pushed 10-year yields up by 2.17 percentage points to 17.39 percent yesterday as two-year yields surged to 21 percent, both euro-era records.

‘Sustainable’ Portugal

Portugal’s debt has been judged “perfectly sustainable” by the EU and International Monetary Fund, Prime Minister Pedro Passos Coelho said. Asked if there is a risk of writedowns on Portuguese bonds, he said: “No, there is not.”

The Greek standoff and Portugal’s tottering market punctured the start-of-year crisis respite that had been nourished by 489 billion euros in three-year loans infused by the ECB into the banking system.

ECB loans enabled most bond markets to withstand the impact of credit rating downgrades by Standard & Poor’s. Ten-year yields in Italy, with debt estimated at 120.5 percent of gross domestic product in 2011, last week dipped below 6 percent for the first time since Dec. 6.

While Italian yields went back up to 6.09 percent yesterday, the government stockpiled cash for the year’s biggest bond redemption by selling 7.5 billion euros of debt, close to its maximum target.

Leaders completed the fiscal-discipline treaty, which speeds sanctions on high-deficit states and requires euro countries to anchor balanced-budget rules in national law. Eight countries outside the euro backed the pact, which was shunned by Britain and the Czech Republic.

French Elections

ECB President Mario Draghi said the fiscal compact “certainly will strengthen confidence in the euro area,” calling it “the first step toward the fiscal union.”

One potential hiccup emerged when Sarkozy said that ratification of the fiscal treaty in France will likely be delayed until after elections in April and May that polls show he will lose. The front-runner, Socialist Francois Hollande, has vowed to renegotiate the treaty, saying it is biased toward austerity and would put an additional squeeze on the economy.

With an eye toward Ireland, Germany pushed through provisions that only countries ratifying the fiscal compact will be eligible for aid from the permanent bailout fund, the European Stability Mechanism, now set to go into operation on July 1, a year ahead of schedule.

Bond Clauses

The permanent fund requires governments to put collective action clauses into new bond issues as of January 2013, five months later than previously planned. The clauses are common in U.S. and U.K. law, enabling a debt restructuring to go ahead by a vote of a supermajority of bondholders, denying a veto right to solitary investors.

“Collective action clauses shall be included, as of 1 January 2013, in all new euro area government securities, with maturity above one year, in a way which ensures that their legal impact is identical,” according to a final text of the statutes obtained by Bloomberg News.

While the clauses would leave the door open for future restructurings, the fund’s statutes deem write-offs “exceptional” and subject to IMF standards, the text says. It tones down language on “private sector involvement” -- code for forcing bondholders to take losses on governments that fall too deeply into debt.

Leaders sidestepped mounting pressure to raise the ceiling on rescue lending from 500 billion euros once the permanent fund goes on line, sticking with plans to handle that question at the next summit on March 1-2.

Luxembourg Prime Minister Jean-Claude Juncker, Europe’s longest-serving leader and the head of the panel of euro finance ministers, summed up two years of crisis-fighting: “If I wasn’t optimistic you could have reported about my suicide months ago.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net

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

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Australian, New Zealand Dollars Decline Versus Peers Before Europe Summit

By Kristine Aquino - Jan 30, 2012 7:50 AM GMT+0700

The Australian and New Zealand dollars weakened before European Union leaders meet to discuss the region’s debt crisis at a summit in Brussels today.

The so-called Aussie slid versus all of its 16 major counterparts amid concern Italy’s funding costs will surge at an auction today after Fitch Ratings cut the nation’s credit grade last week. New Zealand’s currency, nicknamed the kiwi, halted its longest advance in 10 months as Asian stocks fell, extending a global slump in shares.

“We’re still quite a long way from solving the issues in Europe and market cynicism can certainly raise its ugly head again,” said Thomas Averill, managing director in Sydney at Rochford Capital, a currency and interest-rate risk-management company. “Before the Aussie and kiwi get some support again, you’re going to need to see a bit of a dip.”

Australia’s dollar declined 0.4 percent to $1.0613 as of 11:40 a.m. in Sydney, and slipped 0.3 percent to 81.47 yen. New Zealand’s currency fell 0.3 percent to 82.26 U.S. cents, ending a six-day advance, the longest since March. It slid 0.2 percent to 63.16 yen.

The MSCI Asia Pacific Index lost 0.4 percent. The Standard & Poor’s 500 Index dropped 0.2 percent on Jan. 27 and the Stoxx Europe 600 Index retreated 1 percent.

Australian bonds rose, pushing the yield on benchmark 10- year securities down two basis points, or 0.02 percentage point, to 3.79 percent. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, fell 2 1/2 basis points to 2.775 percent.

EU heads of government will meet in the Belgian capital today to put the finishing touches on a German-led deficit- control treaty and endorse the statutes of a 500 billion-euro ($660 billion) rescue fund to be set up this year.

Italy is scheduled to sell debt maturing in 2016, 2017, 2021 and 2022 today. Fitch reduced the nation’s credit score two levels to A- from A+. Spain was lowered two notches to A from AA-. Ratings on Belgium, Slovenia and Cyprus were also cut, while Ireland’s was maintained.

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

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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Japanese Stocks Decline Third Day as U.S. Economic Growth Misses Forecast

By Norie Kuboyama and Masaaki Iwamoto - Jan 30, 2012 8:43 AM GMT+0700

Japanese stocks fell for a third day after the U.S. economy expanded less than forecast in the fourth quarter, dimming the earnings outlook for Asia’s exporters.

Sony Corp. (6758), which depends on the U.S. for a fifth of its sales, fell 0.9 percent. Nippon Electric Glass Co. tumbled 9.3 percent after saying profit may fall by more than half. Nippon Yusen K.K. and Mitsui O.S.K. Lines Ltd. slid after a report the shipping lines may post losses amid falling cargo rates. Mitsubishi Electric Corp., which last week said it overcharged the government on contracts, dropped the most on the Nikkei 225 Stock Average.

“The U.S. growth number was below forecast and that’s a negative,” said Toshiyuki Kanayama, a market analyst at Tokyo- based Monex Group Inc. “The market looks overheated, so investors are likely to use the report as an excuse to sell.”

The Nikkei 225 fell 0.3 percent to 8,817.21 as of 10:17 a.m. in Tokyo, headed for a one-week low. The broader Topix (TPX) lost 0.1 percent to 760.44. The 25-day Toraku (TORAKU) index, an indicator of market momentum, exceeded 120 for a third consecutive day, a level that suggests the market may be poised to fall.

The Topix (TPX) has advanced 4.4 percent this year, rebounding from last year’s 19 percent drop, amid signs the U.S. economy is improving. Shares on the index trade for an average of 0.9 times book value, compared with 2.2 times for the Standard & Poor’s 500 Index. A number less than one means that companies can be bought for less than value of their assets

U.S. GDP

Futures on the S&P 500 Index slipped 0.5 percent today. The gauge lost 0.2 percent in New York on Jan. 27 after a report showed U.S. gross domestic product, the value of all goods and services produced, expanded less than analysts forecast.

Sony lost 0.9 percent to 1,402 yen. Kyocera Corp. (6971), an electronic components maker that derives more than half of its sales outside Japan, slipped 1.5 percent to 6,400 yen.

The world’s biggest economy grew at a 2.8 percent annualized rate in the three months through December, compared with a forecast for a 3 percent increase. Growth accelerated from 1.8 percent in the previous quarter.

European Union leaders gather today in Brussels for their first summit of 2012 where they will put the finishing touches on a German-led deficit-control treaty and endorse a 500 billion-euro ($661 billion) rescue fund to be set up this year.

Greek Debt Deal

Greece and its private creditors said Jan. 28 they expect to complete a deal in coming days after bondholders signaled they would accept European government demands for a bigger cut in their debt holdings.

Glass makers declined the most among the Topix’s 33 industry groups. Nippon Electric Glass tumbled 9.3 percent to 675 yen after forecasting profit may fall by at least 54 percent to 31.5 billion yen ($410 million) for this fiscal year on slumping glass demand.

Shipping companies also declined after the Nikkei newspaper reported Japan’s three largest lines may post pretax losses for the year ending March as sluggish demand in Europe and Asia pushes down cargo fees. Nippon Yusen, the country’s biggest shipper, slipped 1.5 percent to 192 yen. Mitsui O.S.K. lost 2.1 percent to 285 yen and Kawasaki Kisen Kaisha Ltd. fell 1.4 percent to 142 yen.

Mitsubishi Electric dropped the most on the Nikkei 225 (NKY) after Japan barred it from bidding on projects until it refunds the government for overcharges. The company, which makes satellites equipment and electronics, last week said it billed the government too much on aerospace and defense contracts. The stock fell 12 percent to 670 yen.

To contact the reporters on this story: Norie Kuboyama in Tokyo at nkuboyama@bloomberg.net; Masaaki Iwamoto in Tokyo at miwamoto4@bloomberg.net

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

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QE3 ‘Very Good’ for Emerging Stocks: Mobius

By Jennifer Tan and Weiyi Lim - Jan 30, 2012 6:57 AM GMT+0700

Emerging market stocks would benefit from the cash injection created by a third round of U.S. asset purchases, with China, Russia and Taiwan looking “attractive,” Templeton Asset Management’s Mark Mobius said.

Federal Reserve Chairman Ben S. Bernanke laid the groundwork last week for a third round of so-called quantitative easing, or QE3, saying that the Fed is prepared for further “accommodation.” The central bank, which bought $2.3 trillion of debt as part of QE1 and QE2, also reiterated a commitment to keep rates low until at least 2014.

“QE3 is very, very good for emerging markets because it means there’s lots of cash in the system,” Mobius, who oversees about $40 billion as executive chairman of Templeton’s emerging markets group, said in a phone interview from Bangkok on Jan. 27. “I would expect more institutional flows into stocks, generally, and of course, emerging markets as well.”

Chinese stocks will “probably see a rally” this week after being closed last week for the Lunar New Year holiday, said Mobius, 75. “There’s no question” China will continue to loosen monetary policy and he recommends consumer, energy and commodity stocks in the country, he said.

The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong rose 2.7 percent on Jan. 26 and Jan. 27, after closing for the first three days of the week. The benchmark Shanghai Composite Index (SHCOMP) has climbed 5.4 percent this year on speculation slowing Chinese growth will prompt the central bank to further relax monetary policy and that the government will take measures to support stocks.

Predicted Gains

The People’s Bank of China lowered lenders’ reserve- requirement ratios in December for the first time since 2008 as inflation slowed to a 15-month low. China’s economy grew 8.9 percent last quarter, below 9 percent for the first time since the middle of 2009, official data show.

Mobius predicted gains in emerging markets in March 2009, when he told Bloomberg Television that developing-nation equities are building the base for the next “bull-market” rally. The MSCI Emerging Markets Index (MXEF) more than doubled from its lows that month to its peak in May 2011.

The measure has risen 11 percent in 2012, after tumbling 20 percent last year. Shares on the emerging-market index trade at 10.1 times estimated earnings, less than the 12 daily average over the past four years.

‘Rallies Should Continue’

Valuations in developing nation stocks are “attractive, almost globally,” Mobius said. He said “rallies should continue” as markets have “already anticipated” a global economic slowdown.

The International Monetary Fund cut its forecast for global economic growth this year on Jan. 24 to 3.3 percent from a September estimate of 4 percent, citing a European recession and slowing expansion in China and India. Growth in 2013 will be 3.9 percent, less than the previous projection of 4.5 percent, the IMF said.

Mobius joined Templeton in 1987 to help oversee emerging- market investments, according to a biography posted on the company’s website.

In addition to China, Mobius said equity markets in Taiwan and Russia are “attractive.” Templeton also likes Indonesia and smaller countries including Vietnam, including Cambodia, Laos, Nigeria and Kazakhstan, according to Mobius.

“Emerging markets, even this year, are growing at four times that of developed countries,” he said.

To contact the reporters on this story: Jennifer Tan in Singapore at jennifertan@bloomberg.net; Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editors responsible for this story: Grant Clark at gclark@bloomberg.net; Darren Boey at dboey@bloomberg.net

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Asian Stocks Swing Between Gains, Losses on Europe Summit, Japan Earnings

By Jonathan Burgos - Jan 30, 2012 8:32 AM GMT+0700
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The MSCI Asia Pacific Index decreased 0.2 percent to 122.74 as of 9:47 a.m. in Tokyo, heading for its first drop in four days. Photographer: Kiyoshi Ota/Bloomberg

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Jan. 30 (Bloomberg) -- Vasu Menon, vice-president of wealth management at Oversea-Chinese Banking Corp., talks about U.S. and Asian stocks. Menon also discusses Europe's sovereign debt crisis, the U.S. economy, and People's Bank of China monetary policy. He speaks from Singapore with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Asian stocks swung between gains and losses ahead of a European summit on the region’s debt crisis and after the U.S. economy expanded less than forecast in the fourth quarter.

James Hardie Industries SE (JHX), a building materials supplier that counts the U.S. as its biggest market, fell 1.5 percent in Sydney. Mitsubishi Electric Corp., a maker of industrial machinery and home appliances, slumped 12 percent in Tokyo after admitting it overcharged the government for some defense and aerospace contracts. Advantest Corp., a maker of memory-chip testers, jumped 9.8 percent after doubling its second-half dividend payout.

The MSCI Asia Pacific Index (MXAP) slipped 0.1 percent to 122.95 as of 10:31 a.m. in Tokyo, having swung between gains and losses at least three times. The measure has risen the past six weeks, the longest streak since a seven-week stretch that ended Oct. 15, 2010, amid bets China will ease lending curbs and signs the U.S. economy is improving and Europe is containing the region’s debts crisis.

“I don’t expect the rally to be sustainable,” said Pauline Dan, who helps oversee $480 million as chief investment officer at Samsung Asset Management in Hong Kong. “There will still be volatility. I don’t think we’ve seen the worst of the European situation.”

European Union leaders gather today for their first summit of 2012 as a deteriorating economy and struggle to complete a Greek debt writeoff risk sidetracking efforts to stamp out the financial crisis.

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

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

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ABB Nears Deal for Thomas & Betts for About $4B

By Zachary R. Mider - Jan 30, 2012 7:00 AM GMT+0700

ABB Ltd. (ABBN), the world’s largest provider of power-transmission gear, is nearing an agreement to buy Thomas & Betts Corp., a maker of electrical connectors, for about $4 billion in cash, a person with knowledge of the plan said.

ABB, based in Zurich, may announce a deal as soon as today, said the person, who spoke on condition of anonymity because the negotiations are private. The talks for Thomas & Betts, whose market value was $3.02 billion based on its Jan. 27 closing price of $57.95 a share, may still break down.

Thomas & Betts, based in Memphis, Tennessee, would be the second large acquisition for ABB under Chief Executive Officer Joe Hogan, who joined in 2008 from General Electric Co. (GE) He bolstered ABB in the U.S. with the January 2011 purchase of Baldor Electric Co. for about $3.1 billion. That deal added industrial motors and drives and gave ABB heft in automation, where it competes with Siemens AG. (SIE)

Spokespeople for ABB in Zurich didn’t respond to messages seeking comment yesterday. A phone message at the office of Tricia Bergeron, an investor relations representative for Thomas & Betts, wasn’t answered. The Wall Street Journal reported the talks yesterday, citing unidentified people familiar with the situation.

Thomas & Betts was founded in 1898 as a sales agency for electrical wires and raceways, and its products are used in the telecommunications, construction and power utility industries. Now it makes cable ties, connectors and steel boxes that house electrical wiring, generating 2010 sales of $2 billion.

Multiples

The shares of Thomas & Betts have climbed by more than half since August. They haven’t returned to the record closing high of $64 set in 1998.

At the Jan. 27 price of $57.95, Thomas & Betts traded at about 15 times analysts’ estimates for 2012 profit, data compiled by Bloomberg show, up from as little as 10 times in September. Electrical equipment makers Hubbell Inc. and Amphenol Corp. fetch multiples of about 15 times and 16 times forward earnings respectively, the data show.

Thomas & Betts is scheduled to release its fourth-quarter earnings report today. For 2010, the company said industrial and construction customers accounted for about 76 percent of its sales, with utilities making up the rest. The U.S. and Canada generated about 81 percent of its sales.

ABB was created in 1988 from the combination of Asea AB of Sweden and Switzerland’s BBC Brown Boveri. Investor AB, the Swedish Wallenberg family’s holding company, remains ABB’s largest shareholder, with a stake of about 7.2 percent, data compiled by Bloomberg show.

Hogan Builds ABB

ABB and Munich-based Siemens compete in areas such as factory automation gear and power-transmission equipment. ABB, which posts fourth-quarter earnings Feb. 16, had revenue of about $32 billion in 2010, with power products making up about 27 percent of sales.

Hogan has vowed to pursue “disciplined” acquisition opportunities across all business areas and geographies, and he has proven that he is willing to abandon a deal. In 2010, he walked away from a planned purchase of Chloride Group Ltd. after being outbid for the U.K. company by Emerson Electric Co. (EMR)

Hogan has made the Americas one of his main regions in which to pursue growth in power systems, discrete automation and low-voltage products. By 2015, ABB wants to generate as much as 30 percent of revenue from the region, compared with 19 percent in 2010. The company has said that it will continue to focus on power and automation and doesn’t intend to divest assets.

ABB has said purchases may boost annual sales growth by as much as 4 percent until 2015.

A purchase of Thomas & Betts would mark the second major deal announced by a Swiss company in less than a week. Roche Holding AG offered $5.7 billion on Jan. 25 in a hostile bid for Illumina Inc. to bolster sales of gene-mapping equipment.

To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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Strong Florida Finish Needed: Gingrich

By Michael C. Bender - Jan 30, 2012 2:07 AM GMT+0700

Republican presidential candidate Newt Gingrich said only a strong finish in Florida’s primary election will save his “totally unique” campaign.

With his campaign down to about $600,000 after his South Carolina primary victory, Gingrich said he trailed Mitt Romney among Florida voters who cast ballots early and he needs a large vote on election day to win the Jan. 31 primary.

“As fast as we’ve raised it, we’re spending it,” Gingrich said in an interview. Later on ABC’s “This Week” program, he predicted the contest for the Republican presidential nomination would continue until the party’s national convention in August, saying that conservatives will decide they don’t want a “Massachusetts liberal” to be the nominee.

Romney, a former Massachusetts governor who has estimated his personal fortune at between $150 million and $200 million, has “unending amounts of money,” Gingrich said, while questioning the enthusiasm voters have shown for his rival.

“He always relied on just sheer machinery,” Gingrich said of Romney. “He has no message. There is no reason for a Romney presidency.”

Romney Poll Lead

Romney led Gingrich, a former U.S. House speaker, by 42 percent to 27 percent among likely Republican primary voters, according to an NBC News-Marist poll released today. The survey of 682 likely Republican voters was conducted Jan. 25-27 and had a margin of error of 3.8 percent.

Gingrich’s 12 percentage point victory in South Carolina Jan. 21 initially translated into large audiences for the candidate in Florida. Those audiences have dwindled, including a group of about 70 at an Orlando town hall that was planned in a theater with triple the capacity.

Gingrich said he needs to carry about 52 percent of the vote on election day to compensate for Romney’s edge in early voting and absentee ballots.

“We’re like Apple as compared to Microsoft,” Gingrich said of his and Romney’s campaign. “We’re very agile, we’re very organic, we’re very innovative,” Gingrich said. “And every once in a while we fray at the edges.”

Romney told voters in Naples today that Gingrich’s sinking fortunes in Florida stemmed from the fact that he worked for Freddie Mac, the federally tied home mortgage company, unpopular in a state that has been the site of one-quarter of the nation’s foreclosures.

Florida Housing Market

“The people of Florida have had enough of Freddie Mac and Fannie Mae and government interference” in the housing market, Romney said at a rally at a square in the city’s upscale downtown, surrounded by boutiques, restaurants and palm trees.

“Mr. Speaker, your problem in Florida is not that the audience is too quiet or too loud,” Romney said in a reference to lackluster debate performances by Gingrich last week, which the former speaker later attributed in part to the responses of attendees. “Your problem in Florida is you worked for Freddie Mac at a time that Freddie Mac was not doing the right thing for the American people.”

Santorum’s Daughter

As Gingrich and Romney fanned out across the state, former U.S. Senator Rick Santorum, who is running third in recent polls, was at home in Pennsylvania, where his daughter Isabella’s admission to a hospital in Philadelphia forced the cancellation of his Sunday morning events. Santorum’s campaign said in a statement he would “resume the campaign schedule as soon as possible.”

U.S. Representative Ron Paul of Texas isn’t campaigning in Florida, instead focusing on Maine, which will caucus in late February. Paul said today on CNN’s “State of the Union” program the state is “a real good place for us to break through” and that the ups and downs of the nominating contest so far show the race remains up for grabs.

“The rough road is competing with, you know, establishment money, the big money,” Paul said. “It’s a money game. And I think that’s one of the things that frustrates a lot of people.”

Asked to name the best-run national campaigns he’d seen or been a part of, Gingrich first named President Barack Obama’s primary campaign in 2008. He added Richard Nixon’s in 1972, with the exception of the Watergate scandal, Ronald Reagan’s in 1984 and George H.W. Bush’s in 1988.

Gingrich refused to compare his campaign with those.

‘Unique’ Campaign

“I’m totally unique,” Gingrich said. “My campaign resembles nothing that has ever been run. It’s a very idea- oriented, Internet-based, constantly-evolving,” he said. “It’s organic.”

“Every week we absorb new energy, new people and we figure out five new things,” he said. “It’s the most exciting thing I’ve ever done.”

Gingrich offered an explanation for his performance in two nationally televised debates during the week leading to Florida’s primary vote.

“I went into those two debates with one big goal: I didn’t want to get mad enough to lose my poise,” Gingrich said. “I felt that the Romney people had a very deliberate strategy. They’d all been talking about my temperament and they were looking for an excuse.”

Gingrich’s Discipline

“So I just wanted to be very calm no matter what,” he said. “I spent a lot of my energy just staying disciplined.”

If he appeared tired, he said, he was simply “staring in amazement” at Romney in debate.

“I’m standing there thinking to myself, ‘You think you can lie your way to the presidency? You think it’s possible in America today, even to be this dishonest?’” Gingrich said.

Gingrich said he held a conference call with his campaign team at 11:15 p.m. after the second debate on Jan. 26.

“By the next morning we had an ad up that begins to demonstrate and you’re going to see more stuff like this,” Gingrich said. “We’re going to demonstrate again and again this is not a man who can be honest, because if he is honest his campaign is over.”

To contact the reporter on this story: Michael Bender in Tampa, Florida, at mbender10@bloomberg.net

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

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Sarkozy: Euro Crisis Stabilizing After Response

By Helene Fouquet and Mark Deen - Jan 30, 2012 2:50 AM GMT+0700

French President Nicolas Sarkozy said the euro-region’s financial crisis is stabilizing thanks to measures taken by European leaders.

“We can say -- with caution -- that we see elements of financial stability in France, in Europe and in the world,” Sarkozy said in a nationally televised interview in Paris today. “Europe is no longer at the edge of the cliff.”

The comments came on the eve of a European Union summit in Brussels where where leaders are set to put the finishing touches on a German-led deficit-control treaty and endorse the statutes of a 500 billion-euro ($661 billion) rescue fund to be set up this year.

Greece and its private creditors said Jan. 28 they expect to complete a deal in coming days after bondholders signaled they would accept European government demands for a bigger cut in debt holdings.

Efforts to hold the 17-member euro area together come against a deteriorating economic outlook, with the euro economy set to contract by 0.5 percent this year, according to the median of 19 economist forecasts compiled by Bloomberg.

To contact the reporters on this story: Helene Fouquet in Paris at hfouquet1@bloomberg.net; Mark Deen in Paris at markdeen@bloomberg.net

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

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Greek Debt Talks Risk Derailing EU Summit Plan

By Patrick Donahue - Jan 30, 2012 6:01 AM GMT+0700

European Union leaders gather for their first summit of 2012 as a deteriorating economy and struggle to complete a Greek debt writeoff risk sidetracking efforts to stamp out the financial crisis.

EU chiefs arrive in Brussels about 2 p.m. today to put the finishing touches on a German-led deficit-control treaty and endorse the statutes of a 500 billion-euro ($661 billion) rescue fund to be set up this year. Greece and its private creditors said Jan. 28 they expect to complete a deal in coming days after bondholders signaled they would accept European government demands for a bigger cut in their debt holdings.

Efforts to hold the 17-member euro area together with bolstered fiscal rules and a stronger firewall are colliding with stalled progress in Greece, where the crisis began in 2009. To prevent a financial collapse, Greek bondholders have been pushed to cede more ground after agreeing in October to take a 50 percent cut in the face value of more than 200 billion euros ($263 billion) of debt.

“The fact we’re still at the beginning of 2012 talking about Greece is a sign this problem hasn’t been dealt with,” U.K. Chancellor of the Exchequer George Osborne said at the World Economic Forum in Davos, Switzerland.

The summit follows warnings at the gathering that ended yesterday in Davos that it’s time to end the region’s debt crisis and that measures aimed at simply containing the turmoil are no longer enough. The euro economy is set to contract by 0.5 percent this year, according to the median of 19 economist forecasts compiled by Bloomberg.

ECB Loans

The European Central Bank’s unlimited three-year loans to banks have helped buoy sentiment among investors in the euro area. Italian 10-year bonds gained for a third week, while Spanish two-year yields dropped to the lowest since November 2010. The euro gained against the U.S. dollar every day last week, climbing 2.2 percent to $1.322.

“We can say -- with caution -- that we see elements of financial stability in France, in Europe and in the world,” French President Nicolas Sarkozy said in a nationally televised interview in Paris yesterday. “Europe is no longer at the edge of the cliff.”

Attention before the Brussels summit turned to negotiations between the interim government of Greek Prime Minister Lucas Papademos and creditors. The two sides were “close” to an agreement outlined by Luxembourg Prime Minister Jean-Claude Juncker, the Institute of International Finance, negotiating on behalf of private creditors, said in a Jan. 28 statement after three days of talks in Athens.

Debt Swap

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet. As recently as Jan. 23, creditors wanted an average coupon of about 4.25 percent, two people familiar with the talks said then. That offer equated to a loss of about 69 percent on the net-present value of Greek debt.

The initial debt-swap agreement with creditors three months ago sought to scale back Greece’s debt to 120 percent of gross domestic product by 2020. The anticipated agreement on private sector involvement, or PSI, will open the way to a 130 billion- euro second bailout from Greece’s European partners and the International Monetary Fund for the country, which faces a 14.5 billion-euro bond payment March 20.

‘Last Minute’

“A deal on PSI will be reached at the last minute,” Niall Ferguson, a professor of economic history at Harvard University, said in a Davos interview. “The trouble for Europe is the crisis won’t be over as the Greek position remains unsustainable. Any PSI deal will bring only temporary respite.”

Greece now requires 145 billion euros for the second bailout, 15 billion euros more than was agreed in October, Der Spiegel reported Jan. 28, citing an unidentified official from the troika in Greece.

As a possible condition of the bailout, European policy makers are discussing plans to directly intervene in Greek budget decisions as the country struggles to cut its deficit, according to two euro-region government officials.

Patience with Greece “is really coming close to the limit,” Philipp Roesler, chief of Germany’s Free Democratic Party, the junior coalition partner. “Time is running out. There can only be additional help if the Greek government carries out the necessary reforms.”

U.K. Refusal

Another objective at the summit will be to complete a fiscal compact, which was negotiated in December in talks that exposed a rift in the EU after the U.K. refused to participate. The rules aim to provide stricter sanctions and closer cooperation on national budgets.

A call by Poland, the biggest country with aspirations to joint the single currency, to take part in euro-area decision- making looms as the main obstacle to the deal, two officials said. Poland’s plea to take part in euro summits is opposed by a group led by France, which aims to turn the 17-nation monetary union into an exclusive policymaking club.

“We’re willing to put our signature to the pact, but on the understanding that we’re taking part in it only if we have a voice in deciding about future action, including of the euro group,” Polish Prime Minister Donald Tusk said on Jan. 27.

Over the weekend, senior officials worked to clear away lesser snags to the treaty, including the role of national parliaments and the ratification threshold. A draft last week foresaw the treaty taking effect after ratification by 12 of the 17 euro countries.

EU leaders plan to endorse the statutes of the permanent bailout fund, the European Stability Mechanism, to be signed in early February and sent to national parliaments to ratify. The ESM is scheduled to go into operation this year.

Leaders are unlikely to address mounting pressure to raise the ceiling on rescue lending from 500 billion euros once the permanent goes online, the officials said.

To contact the reporter on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net

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

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Pentagon’s Asia Shift Favors Subs, Tankers

By Tony Capaccio - Jan 27, 2012 6:40 AM GMT+0700

The Pentagon’s shift to forces focused on Asia and the Middle East in a budget outlined today may protect from deep cuts U.S. makers of aircraft carriers, submarines, surface-combat vessels, electronic-warfare sensors, drones, long-range bombers and tankers.

While the plan would slow the pace of shipbuilding, its emphasis on naval forces in an era of budget-cutting may help vessel-makers Huntington Ingalls Industries Inc., General Dynamics Corp. (GD), Lockheed Martin Corp. (LMT) and Austal Ltd. It also may provide opportunities for aircraft companies Northrop Grumman Corp. (NOC) and Boeing Co. (BA) and missile maker Raytheon Co. (RTN)

“This budget protects, and in some cases increases, investments that are critical to our ability to project power in Asia and the Middle East,” Defense Secretary Leon Panetta said at a news conference at the Pentagon today disclosing elements of a $613 billion defense proposal for fiscal 2013. That includes $88.4 billion for continuing combat, led by the war in Afghanistan.

Panetta and Joint Chiefs of Staff Chairman General Martin Dempsey presented the budget proposal as part of an effort to cut $487 billion, or 8.5 percent, from $5.62 trillion in spending that had been planned for 2012 to 2021. Of that, $259 billion in reductions would occur by 2017.

The fiscal 2013 budget proposes to save about $45 billion, increasing to $53 billion in fiscal 2014 and $54 billion by 2017, according to Pentagon figures.

‘Far More Lethal’

The biggest initiative other than military hardware is a reduction of the Army -- “gradually,” according to Panetta -- to 490,000 personnel from about 565,000 today. The Army numbered about 480,000 in February 2002, one year before the Iraq invasion. The budget also calls for reducing the Marines to 182,000 from about 202,000 today.

“They will be fundamentally shaped by a decade of war, far more lethal, battle-hardened and ready,” Panetta said of U.S. forces. The Army was increased by as much as 95,000 and the Marines by 30,000, largely because of the Iraq war.

Representative Howard “Buck” McKeon, a California Republican who is chairman of the House Armed Services Committee, said President Barack Obama “has abandoned the defense spending structure that has protected America for two generations, turning 100,000 soldiers and Marines out of the force.

‘‘Unmanned assets’’ and special forces that Panetta is relying on ‘‘are a vital component in defending America, but they are insufficient to meet the challenges America faces,’’ McKeon said.

Base Closings

Panetta said the troop reduction will be accompanied by a request to Congress for a new round of domestic base closings ‘‘with a goal of identifying additional savings and implementing them as soon as possible.’’ He provided no specifics about what bases might be at risk.

The Pentagon’s Asia and Middle East emphasis reinforces the need for a long-range, stealthy bomber, and sustaining the Navy’s 11-carrier force with 10 air wings and big-deck amphibious vessels, Panetta said.

Huntington Ingalls of Newport News, Virginia, is building the three-ship, $40 billion Gerald R. Ford class of carriers to be equipped with a new electromagnetic catapult system built by closely held General Atomics Aeronautical Systems Inc.

‘‘Modernizing our submarine fleet will be critical to our efforts to maintain maritime access in these vital regions,” Panetta said.

‘Strike Option’

The plan calls for increasing the size of the Navy’s current Virginia-class attack submarines to carry more Tomahawk cruise missiles and to develop an undersea, non-nuclear “strike option” similar to an intercontinental ballistic missile. Raytheon of Waltham, Massachusetts makes the Tomahawk. Huntington Ingalls and General Dynamics make the submarine.

The “strike option” concept was first proposed by the Bush administration and resurrected in fiscal 2011 under Obama.

The Littoral Combat vessels, made for operating close to shore by Lockheed Martin of Bethesda, Maryland, and Austal of Henderson, Australia, get an expanded role in the plan. Panetta said the Navy intends to base some of them in Singapore and other patrol craft in Bahrain. Still, two vessels are being cut from plans for 2013 to 2017, which had called for buying during that period at least 15 of the 55 ships planned.

The plan calls for retiring some existing ships, including seven cruisers that aren’t capable of defending against ballistic missiles.

Amphibious Vessel Delay

The largest shipbuilding reduction would eliminate, through 2017 eight of nine planned Austal Joint High Speed Vessels designed to carry Army personnel. There was no indication the vessels would be purchased later.

The budget proposal delays by one year the start of construction for the LHA-8 large-deck amphibious vessel to be built by Huntington Ingalls.

The budget doesn’t slow the Navy’s plan to buy additional Arleigh Burke-class DDG-51 destroyers from General Dynamics and Huntington.

F-35 Plans

Panetta said the Pentagon was making “substantial reductions to programs that are experiencing schedule, cost or performance issues.”

They include Lockheed Martin’s Joint Strike Fighter, the F-35, and the Army Ground Combat Vehicle that’s in competition between General Dynamics and a team of BAE Systems Plc (BA/) and Northrop Grumman.

The Pentagon remains committed to the F-35 “but in this budget we have slowed procurement to complete more testing and allow for developmental changes before buying significant quantities,” he said.

The Defense Department will propose spending about $9.2 billion to buy 29 F-35 jets in its fiscal 2013 budget, 13 fewer than previously planned.

Beyond the next budget year, the Pentagon’s previous plan to purchase 62 F-35s in fiscal 2014 is being reduced to 29, according to budget data. The request for 2015 is dropping to 44 from 81, and the planned purchase for 2016 will decline to 66 from 108.

The Pentagon plans to postpone 179 aircraft beyond 2017, according to officials who spoke on condition of anonymity before today’s announcement.

Global Hawk Curtailed

The Pentagon is canceling the final 10 of one version of Northrop Grumman’s Global Hawk drones it was to buy, stopping at 21 of the Block 30 model because of rising costs. Dollars will be shifted instead into maintaining U-2 manned aircraft made by Lockheed Martin.

Experience with the Block 30 version “will help other Global Hawk programs,” including the advanced Block 40 and maritime and NATO versions, according to the budget document.

The Pentagon reversed a decision to cancel the $6.8 billion Joint Air-to-Ground Missile, pitting Lockheed against Raytheon, “significantly reducing” the program instead, and continuing to buy Hellfire missiles from several contractors including Lockheed.

The Pentagon also is delaying by as much as five years an Army helicopter modernization program and terminating a multi- billion dollar program to upgrade its fleet of Humvee all- terrain vehicles.

Northrop Grumman’s Defense Weather Satellite System program also was canceled.

The fiscal 2013 budget proposal is 1 percent less, unadjusted for inflation, than this year’s $531 billion plan. The numbers include spending on military construction.

The defense number, not including combat, grows to $534 billion in fiscal 2014, $546 billion in fiscal 2015, $556 billion in fiscal 2016 and $567 billion in 2017.

Adjusted for inflation, the Pentagon projects a 1.6 percent reduction in real spending power between 2013 and 2017.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

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

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‘Extreme’ S&P 500 Momentum, VIX Signal Drop: Technical Analysis

By Lu Wang - Jan 27, 2012 12:00 AM GMT+0700

The Standard & Poor’s 500 Index’s best January rally since 1997 has pushed a pair of momentum and sentiment gauges to levels seen only 6 percent of the time since 1993, a sign the market is due for a pullback, BTIG LLC said.

The benchmark index’s 14-day relative strength index, which measures the degree that gains and losses outpace each other, rose above 70 yesterday for the first time since Feb. 18, according to data compiled by Bloomberg. Some technical analysts consider RSI readings above 70 a sign that stocks have risen too far, too fast. The Chicago Board Options Exchange Volatility Index (VIX), a gauge known as the VIX, fell below 20 for the first time since July on Jan. 19.

The last time RSI exceeded 70 while the VIX stayed below 20, 11 months ago, the S&P 500 reached a 32-month high before dropping 6.4 percent over the next month, data compiled by Bloomberg show. The VIX is the benchmark gauge of S&P 500 options prices.

“We’re definitely in a rare spot,” Josh Dollinger, Chief quantitative and technical strategist at BTIG in New York, said in a telephone interview. “These are extreme readings. They more often than not prove to be exhaustion tops.”

The S&P 500 rose 5.4 percent this year through yesterday, poised for the best January since it rose 6.1 percent during the first month of 1997, according to data compiled by Bloomberg. Stocks are extending the measure’s 11 percent rally in the October-December period, its best fourth-quarter increase since 2003 as improvements in hiring, manufacturing and home sales bolstered confidence in the world’s largest economy.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net

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‘Stop-Newt’ Republicans Confront New Base

By Julie Hirschfeld Davis - Jan 27, 2012 3:28 AM GMT+0700

Two days after Newt Gingrich defeated Mitt Romney in the South Carolina presidential primary one of Romney’s big-name backers offered a grim prediction for his fellow Republicans.

“The possibility of Newt Gingrich being our nominee against Barack Obama I think is essentially handing the election over to Obama,” former Minnesota Governor Tim Pawlenty told reporters on a Jan. 23 conference call. “I think that’s shared by a lot of folks in the Republican Party.”

Pawlenty’s comments echoed those being uttered publicly and behind the scenes by elected Republicans, party activists, fundraisers and pundits, who represent a portion of the party establishment -- a “stop-Newt” caucus -- populated largely by people who have known the former U.S. House speaker for decades.

The question is: Can they?

For two decades, the Republican Party has seen an erosion of its traditional, top-down hierarchy, a decline aided by Gingrich himself in 1990 when he led a House revolt against a budget agreement negotiated by President George H.W. Bush that raised taxes. The rise of the anti-tax Tea Party wing in 2009 splintered the internal levers of power further, making it even harder to impose a choice on the rank and file.

“There really is no Republican establishment left that can control anything,” said Matthew Dowd, a onetime aide to President George W. Bush and now a Bloomberg Television contributor. “Some try to act like they are in charge, but the fraternity is now running the campus.”

South Carolina Dynamics

Those dynamics were on display in South Carolina. Romney, a former Massachusetts governor, lost by 12 percentage points even after campaigning throughout the state with Governor Nikki Haley and just a day after receiving the endorsement of Virginia Governor Bob McDonnell, the chairman of the Republican Governors Association. Haley, who rose to power with Tea Party backing, didn’t deliver either her state or its grassroots activists.

Meanwhile, Gingrich’s campaign gained momentum after Sarah Palin, the former Alaska governor who also has support from the Tea Party faction, said she’d vote for Gingrich in South Carolina if only to extend the length of the primary.

Similar signs of an insurgence came to light in the 2010 midterm elections, when Nevada voters tapped Sharron Angle -- a Tea Party-endorsed politician opposed by many of the state’s prominent Republicans -- to challenge Senate Majority Leader Harry Reid. And Delaware Republicans chose Christine O’Donnell over former governor and nine-term U.S. House Representative Mike Castle to seek an open Senate seat. Both Angle and O’Donnell lost.

Voters ‘in Charge’

“The voters are now in charge, and Republican leaders need to come to terms with that,” Dowd said. “The media needs to drop the myth that there is a Republican establishment capable of orchestrating anything more than a one-float GOP parade.”

Romney’s campaign, backed by well-known party strategists and fundraisers, has kept up a steady rollout of endorsement announcements from Republican elected leaders that demonstrate his broad support among the insiders. As of Jan. 20, he had the nods of five governors, 14 senators and 59 U.S. House members. That compares with two governors and a dozen congressmen who have endorsed Gingrich, according to Democracy in Action, a political web site that tracks endorsements.

‘Terrified About Newt’

“There are a lot of major players in the Republican Party who are terrified about Newt,” said Gary Gerstle, a specialist on social and political movements a Vanderbilt University in Nashville, Tennessee. “At a more conventional moment in American politics, the establishment would count for a lot more, but this is not a conventional moment. There are now big segments of the Republican Party that will not bow down to the establishment.”

Gingrich -- who served 20 years in Congress, four of them as speaker, and then began a lucrative career in Washington consulting on federal policy -- has been working to turn party leaders’ angst about his candidacy to his advantage, portraying himself as a candidate feared by the ruling class.

Campaigning today in Mount Dora, Florida, Gingrich called Romney’s campaign attacks against him “the desperate last stand of the old order throwing the kitchen sink, hoping something sticks.” He added that when he speaks out about it, “the entire establishment jumps up and says, ‘That’s cheating. How can you tell the truth? Don’t you know that’s politically incorrect?’”

Internal Power Struggle

The Romney-Gingrich face-off is bringing the simmering power struggle between the Republican grassroots and the party establishment to the fore, said Richard Viguerie, a veteran Republican direct-mail strategist and the chairman of ConservativeHQ.com.

“There is a war going on here between the grassroots and the establishment,” said Viguerie, who is backing former Pennsylvania Senator Rick Santorum. “People in the grassroots see the Republican establishment as part of the problem, not part of the solution, and Gingrich has the ability to go over the heads of the Republican leaders.”

Some political analysts and Gingrich backers argue he has harnessed a transformed landscape of presidential politics, in which technology and social media -- decentralized means of communication with voters -- are powerful forces, and campaign money flows more freely from outside traditional party channels.

Social Media

Gingrich has capitalized on the social media networks Facebook and Twitter to trumpet his message, and his campaign has benefited from the super-PAC Winning Our Future, largely funded by casino magnate Sheldon Adelson, that is raising and spending unlimited sums on his behalf. The Supreme Court legalized such groups in the 2010 ruling Citizens United v. Federal Election Commission.

“It’s a different communications beast, a different communications infrastructure and vehicle out there today” than in years past, former Oklahoma Congressman J.C. Watts told reporters Jan. 23. “Newt tapped into something that I think Republicans like. I think there is a backlash.”

At the root of the concern about Gingrich is whether he will be able to appeal to the broader U.S. electorate. Polls indicate that he has high unfavorable ratings and wouldn’t fare well in a head-to-head matchup against Obama. A January Gallup study found that all national political figures are viewed negatively.

‘Intensely Negative’

Still, “Americans have become more intensely negative in their evaluations of Newt Gingrich -- who now has the lowest score overall,” the study concluded.

Some prominent Republicans say there isn’t yet enough of a consensus that Gingrich is unelectable to give rise to a concerted effort among party operatives to thwart his ascent.

“I haven’t seen that there’s an all-hands-on-deck movement to try to block any candidate -- Newt or anyone else,” said Frank Donatelli, the chairman of GOPAC, a training organization for state and local Republican candidates once headed by Gingrich, and a former top party official.

The last time there was such an effort was in 1996, he added, after Pat Buchanan won the New Hampshire primary and prominent Republicans quickly coalesced around Bob Dole, who ultimately claimed the nomination.

“I haven’t heard that kind of alarm emanating about Newt,” Donatelli said.

Other prominent Republicans are sounding just such a warning. Dole endorsed Romney today, writing in a letter that the party should nominate the former governor “if we want to avoid an Obama landslide in November.”

Former Pennsylvania Congressman Bob Walker, a senior adviser to Gingrich’s campaign, said that rationale is backfiring on Romney with voters.

“It took them a little bit of time to realize that Newt Gingrich is capable of beating Obama, but now, I don’t think that they’re going to listen to party bosses anymore,” Walker said. “Newt is basically channeling the people’s anger.”

To contact the reporter on this story: Julie Hirschfeld Davis in Washington at jdavis159@bloomberg.net

To contact the editor responsible for this story: Jeanne Cummings at jcummings21@bloomberg.net

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BofA Said to Limit Bonuses for Investment Bankers, Traders

By Dawn Kopecki and Hugh Son - Jan 27, 2012 4:10 AM GMT+0700

Bank of America Corp., the U.S. lender seeking to preserve capital, will freeze base salary levels and limit cash bonuses to $150,000 for some investment bankers, said two people with knowledge of the plans.

The cap on cash payments applies to those getting as much as $1 million in total year-end bonuses, with the rest coming in shares of the Charlotte, North Carolina-based lender, said the people, who asked for anonymity because the matter is private. Employees are being told of their payments today and can sell some of the stock starting on Feb. 15, the people said.

“I can’t think of one banker who doesn’t have two or three times that in expenses,” said Gustavo Dolfino, a former UBS AG banker and now president of Whiterock Group LLC, a New York- based executive search firm, referring to the $150,000 limit. “They are probably making exceptions for their superstars. You haven’t seen the end of this, there will be musical chairs.”

Wall Street firms are getting bolder in curbing pay and shifting compensation methods as companies move to limit expenses. Bank of America Chief Executive Officer Brian T. Moynihan, 52, has said he may target as much as $3 billion in cost cuts in units including the investment bank as part of his plan to revive profit.

Cuts Are Coming

Earlier this month, Bank of America told investment bankers to expect compensation that averages 25 percent less than last year, people said this week. Employees in some departments were told packages were 30 percent smaller, and some managing directors will get no bonuses, said one of the people.

Awards include a combination of cash and shares, some of which can’t be sold for as long as three years. The firm’s decision to leave salaries unchanged comes after companies boosted them in 2009 to de-emphasize bonuses, which lawmakers said encouraged unwarranted risks that fueled the financial crisis. The bank uses a tiered system based on the size of the bonus when determining the percentage to pay in cash.

At Bank of America, a typical vice president’s base salary is about $175,000, while a director may make $250,000 and managing directors may earn $400,000, the people said. Bonuses, especially for senior workers, can be several times base pay.

Who Gets Cash

The restricted part of bonuses typically rises with the size of the total payout. For instance, bonuses less than $100,000 will be paid all in cash, the people said. Awards above that amount are a combination of cash and stock that vests over three years and unrestricted shares that can be sold immediately.

Bank of America said last week that it would issue about $1 billion in new stock to replace some cash incentives. The bonuses are called “special equity awards,” the people said. Jessica Oppenheim, a spokeswoman for the company, said she couldn’t comment. Reuters reported last week that the bank plans to give investment bankers more of their bonuses in stock.

Traders and investment bankers getting from $100,000 to $249,999 were told they will get 20 percent of that in cash, 20 percent in restricted stock and 60 percent in the new unrestricted shares, the people said. Employees (BAC) in this level typically received about 70 percent of awards in cash and 30 percent in restricted shares.

Bonus Allocations

Payouts between $250,000 and $499,999 will be split among 18.75 percent in cash, 25 percent in restricted stock and 56.25 percent in unrestricted stock. Historically, bonuses of that size would be split between 60 percent cash and 40 percent restricted stock.

Bonuses between $500,000 and $999,999 will be paid 15 percent in cash, 40 percent in restricted stock and the rest in unrestricted shares. That breakdown is more closely aligned with the historical practice of paying out 60 percent of awards in cash and 40 percent in restricted shares. Senior managers will get about 70 percent of their packages in restricted shares with the rest in cash or unrestricted shares.

The division, run by co-chief operating officer Thomas K. Montag, posted annual profit that plunged by half to $2.97 billion in 2011 as the European sovereign-debt crisis roiled markets. Montag, 55, told employees on Jan. 19 that the investment bank was rebounding after credit-rating downgrades last year sparked concern among clients.

Fees from investment banking, which includes advising clients on mergers and acquisitions as well as managing sales of shares and bonds, declined 35 percent in the fourth quarter to $1.1 billion, the bank said. The market was “challenging” because of Europe and the fallout from Standard & Poor’s downgrade of the U.S. credit rating, the lender said.

Cash Bonus

Compensation declines at Bank of America mirror actions by other firms. Morgan Stanley (MS) is reducing pay for senior investment bankers and traders by an average of 20 percent to 30 percent for 2011, people with knowledge of the move said. The firm is also capping immediate cash bonuses at $125,000 as it seeks to defer the pay of senior executives.

Credit Suisse Group AG, the second-biggest bank in Switzerland, told senior investment bankers that compensation for 2011 will be 30 percent lower on average than the previous year, four people briefed on the discussions said. Goldman Sachs Group Inc. (GS) Chief Financial Officer David Viniar said last week that discretionary compensation declined “significantly more” than the firm’s 26 percent drop in revenue.

To contact the reporters on this story: Dawn Kopecki in New York at dkopecki@bloomberg.net; Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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