Bank of America Swaps Soar to Record

By Mary Childs - Nov 24, 2011 5:09 AM GMT+0700

The cost to protect Bank of America Corp. (BAC) debt surged to a record and a benchmark gauge of U.S. corporate credit risk climbed to a seven-week high as Europe’s sovereign fiscal crisis intensified.

The Markit CDX North America Investment Grade Index of credit default swaps, which investors use to hedge against losses on company debt or to speculate on creditworthiness, added 5.9 basis points to a mid-price of 146.4 at 4:57 p.m. in New York, the highest since Oct. 4, according to Markit Group Ltd.

Investors pushed the gauge higher on concern that Europe’s bond market turmoil, which began more than two years ago in Greece, now risks engulfing the region’s biggest economy. Germany failed to get bids for 35 percent of 10-year bonds offered for sale today, sending its borrowing costs higher and the euro lower. French and Belgian bonds fell as the cost to protect European government debt (PMI) against default rose to a record.

“If ‘the least’ riskiest of the EU has a difficult time selling its debt, that’s not a particularly encouraging sign for the rest,” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York, said in an e-mail today.

The U.S. index, which typically rises as investor confidence deteriorates and falls as it improves, has increased from a two-month low of 113.4 basis points on Oct. 27 as traders have wagered that Europe’s escalating fiscal crisis will taint bank balance sheets worldwide.

Fed Tests

Five-year credit-default swaps tied to Bank of America Corp.’s senior debt added 37.1 basis points to 479.9, according to data provider CMA, the highest closing price on record. Swaps on unit Merrill Lynch & Co. rose 35.7 to 530.8, and contracts on Goldman Sachs Group Inc. (GS) added 35.5 to 432, the data show. Contracts tied to Morgan Stanley debt climbed 22.1 to 525.

The Federal Reserve released criteria yesterday for capital tests measuring the strength of the largest 31 U.S. banks. The standards measure their wherewithal if the U.S. economy sours and major trading partners default on their debt. Lenders need to prove they have the capital to withstand a “severe” U.S. recession with 13 percent unemployment and an 8 percent decline in gross domestic product before they can increase dividends or repurchase shares.

The two-year U.S. swap spread widened 3.06 basis points to 54.5 basis points, the most since May 2009, as investors sought the relative safety of government debt. In a swap, investors exchange fixed for floating interest rates.

Europe Swaps

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings jumped 9.4 basis points to 208.8 basis points, the highest level since December 2008.

Credit-default swaps tied to PMI Group Inc.’s bonds rose after the mortgage insurer filed for bankruptcy, potentially triggering contracts totaling more than double the company’s debt. The Walnut Creek, California-based company listed assets of $225 million and debt of $736 million as of Aug. 4 in a Chapter 11 petition filed today in U.S. Bankruptcy Court in Wilmington, Delaware.

The cost to protect the company’s debt climbed 0.7 percentage point to 75.2 percentage points upfront, according to data provider CMA. That’s about twice the level in June and means investors would pay $7.52 million initially and $500,000 annually to protect $10 million of the insurer’s obligations.

Banks, hedge funds and other money managers had bought and sold credit swaps on a net $1.8 billion of PMI’s debt as of Nov. 18, according to the Depository Trust & Clearing Corp., which runs a central repository for the market. A gross total of $37.9 billion is outstanding, when counting offsetting trades between dealers, the data show.

The New York-based International Swaps & Derivatives Association is an industry group that sets standards in the credit swaps market and acts as a secretary to a committee of banks and other firms that decide if the contracts pay out.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net;

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

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Citigroup, BofA May Pare Dividend Ambitions

By Dawn Kopecki, Bradley Keoun and Dakin Campbell - Nov 24, 2011 2:12 AM GMT+0700

Citigroup Inc. (C) and Bank of America Corp. (BAC) are among lenders that may have to temper plans to raise dividends and buy back stock next year as the Federal Reserve strengthens capital tests for the biggest U.S. banks.

The Fed imposed the tougher standards on the 31 largest U.S. banks yesterday, releasing the criteria for measuring their wherewithal if the U.S. economy sours and major trading partners default on their debt. Lenders need to prove they have the capital to withstand a “severe” U.S. recession with 13 percent unemployment and an 8 percent decline in gross domestic product before they can increase dividends or repurchase shares.

The more pessimistic scenario will damp banks’ ambitions to return more capital to shareholders, whose holdings have been decimated. The KBW Bank Index of 24 U.S. lenders has plunged 31 percent this year through yesterday and was down 70 percent from its all-time high in February 2007.

“It’s going to be very difficult for any of these companies to do any major buybacks into next year,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and an analyst at FBR Capital Markets Corp. in Arlington, Virginia. Bank of America and Citigroup’s “chances of upping a dividend or buying back any stock next year are almost zilch.”

The Fed limited banks to returning 60 percent of their retained earnings to shareholders in 2011, split evenly between dividends and share repurchases. Glenn Schorr, an analyst at Nomura Holdings Inc., said some banks may be restricted even further, to about 40 percent, under the more adverse scenario.

‘That’s a Disaster’

“The tighter you stress and the more extreme you stress, the more careful you’ll be in terms of letting banks return capital,” Schorr said in a phone interview.

The Fed’s stressed scenario calls for unemployment to hit 12 percent by next year and 13 percent in 2013. It also tests banks’ performance in an economic decline that begins this quarter and bottoms in the first quarter of next year, with real gross domestic product falling 8 percent and home prices dropping 20 percent during the next two years.

“An 8 percent decline in GDP, that’s a disaster,” Miller said. “That’s not a recession.”

The so-called supervisory stress scenario used earlier this year examined how lenders would fare if U.S. unemployment climbed to 11 percent, real gross domestic product dropped 1.5 percent, house prices fell 6.2 percent and stocks plunged 28 percent by year-end. The jobless rate has remained at about 9 percent all year.

JPMorgan, Goldman Sachs

The test also subjects the trading operations of the six- biggest U.S. banks -- JPMorgan Chase & Co. (JPM), Bank of America, Citigroup, Wells Fargo & Co. (WFC), Goldman Sachs Group Inc. (GS) and Morgan Stanley -- to portfolio “shocks” based on asset price moves in the second half of 2008.

“This is similar to what we saw them do in the original stress tests in 2009,” said Andrew Marquardt, an analyst at New York-based Evercore Partners Inc. “That will be more painful for those banks. In 2009, that was a particular point of contention.”

Bank of America fell 3.7 percent to $5.17 at 2:03 p.m., the biggest drop in the Dow Jones Industrial Average. Citigroup also declined 3.7 percent to $23.55.

Citigroup, the third-biggest U.S. lender, has been touting a 2012 payout since October 2010, when CEO Vikram Pandit said shareholders could gain from a “return” of capital. Pandit, 54, introduced a 1-cent dividend in May after scrapping the payout in February 2009.

Citigroup’s Plans

Charles Peabody, an analyst at Portales Partners LLC, predicted in an Oct. 18 note that the bank would introduce an annual dividend of up to 76 cents a share next year. Citigroup may opt to buy back shares if the stock remains “depressed,” he wrote. That dividend is still “well within reason” even with the tougher test, Peabody said today in a phone interview. Citigroup had dropped 48 percent this year through yesterday.

“Our plans have not changed,” Jon Diat, a spokesman for New York-based Citigroup, said in an e-mailed statement yesterday. “Subject to regulatory approval, Citi intends to begin returning capital to shareholders next year and believes the pace of return can increase in 2013 and beyond as economic conditions improve.”

A 2012 payout also depends on the firm reducing unwanted assets in its Citi Holdings division while taking advantage of tax benefits, Diat said.

Bank of AmericaCEO Brian T. Moynihan, 52, who already backtracked on plans to raise the dividend earlier this year, may not be able to increase the payout in 2012 either, analysts including Miller and Marquardt said.

‘Darn Well Sure’

“We will ask for a dividend when we’re darn well sure that we’ll get approval, and we’re not going to ask for it a minute before,” Moynihan said during an Aug. 10 conference call with investors. “This is one that I’ve had no success on so far” in predicting, he said. The firm had a 64-cent quarterly payout until 2008. Jerry Dubrowski, a Bank of America spokesman, declined to comment on the Fed announcement.

Healthier U.S. banks including Wells Fargo, JPMorgan, Goldman Sachs and Morgan Stanley (MS) may be allowed to buy back some stock and moderately boost dividends next year, Miller said.

“This is further confirmation that we will have a growing divergence among the bank group, between those with good fundamentals able to deploy capital versus those who are not there yet,” Marquardt said, citing Citigroup and Charlotte, North Carolina-based Bank of America as lenders whose plans to return capital may be curtailed.

‘Pull the Reins’

While the Fed probably won’t “pull the reins on the current pace of capital returns among banks, we think the bar has been raised for incremental requests,” Schorr told clients in a research note today. “Any banks that were likely close to receiving approval last year will need to wait a bit longer.”

The test will be “more onerous” for large banks with significant ties to Europe, posing the biggest burden on JPMorgan, Bank of America, Citigroup and Morgan Stanley, according to a research note today by Goldman Sachs analysts led by Richard Ramsden. Lenders including Wells Fargo and American Express Co. will perform well under the new parameters and are the best-positioned among banks to increase dividends or buy back more shares next year, the analysts said.

JPMorgan, led by CEO Jamie Dimon, quintupled its dividend to 25 cents earlier this year and received the go-ahead to repurchase $8 billion of shares in 2011 out of a total $15 billion approved by the Fed.

‘Hard to Tell’

“It’s hard to tell what we’re supposed to do and how we’re supposed to do it,” Dimon, 55, told analysts during an Oct. 13 conference call. “We’ll be figuring it out, having conversations with regulators.” Joe Evangelisti, a JPMorgan spokesman, declined to comment on the new test criteria.

Wells Fargo CEO John Stumpf boosted the quarterly payout at the San Francisco-based bank from 5 cents to 12 cents earlier this year, and the company announced it would repurchase 200 million shares. Chief Financial Officer Timothy J. Sloan told investors Nov. 3 that he was “optimistic” the Fed would let the firm boost the payout and repurchase more shares next year.

“We look forward to the process, we’ve got a great story to tell,” Sloan said. Ancel Martinez, a Wells Fargo spokesman, declined to comment on yesterday’s announcement.

The Federal Reserve expanded its capital test to companies with at least $50 billion in assets, adding 12 banks to its list for 2012. The stress tests, officially called the Comprehensive Capital Analysis and Review, or CCAR, have become a centerpiece of the central bank’s oversight of the largest financial firms.

Capital Buffer

Lenders must show that their capital -- the buffer between a bank’s assets and liabilities that helps shield depositors from losses -- would remain above 5 percent of assets even if the dire economic scenario materializes. On that basis, most of the largest banks will pass the tests, Edward Najarian, head of bank research at International Strategy & Investment Group Inc., wrote today in a note to clients.

The Fed rejected MetLife Inc.’s request to raise its dividend earlier this year, telling the New York-based insurer it had to wait until its portfolio was tested against a “revised adverse macroeconomic scenario” being developed for the 2012 tests, the company said in an Oct. 25 statement. The biggest U.S. life insurer may speed plans to shed its bank subsidiary, which subjects it to Fed oversight.

“At the end of the day, a stress test is to demonstrate to investors and the marketplace that the banks are strong and can withstand problems in their portfolios,” said Fred Cannon, a bank analyst with KBW Inc. in New York. “It’s all about credibility.”

To contact the reporters on this story: Dawn Kopecki in New York at dkopecki@bloomberg.com; Bradley Keoun in New York at bkeoun@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net.

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

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Apple Working With Sharp on TV Debut: Jefferies

By Sarah Frier - Nov 24, 2011 8:18 AM GMT+0700

Apple Inc. (AAPL) is shifting production of iPhone and iPad displays to Sharp (6753) Corp. in Japan and may introduce a television with screens from the same partner as early as the middle of 2012, Jefferies & Co. said.

Apple is moving its business to Sharp in Japan largely at the expense of Samsung Electronics Co., a growing rival in smartphones and tablets, said Peter Misek, a New York-based analyst at Jefferies. He wrote the research note based on a visit to Japan and conversations with manufacturing executives.

“It’s a huge deal for Sharp because they spent significant amounts of capital to try and expand capacity and upgrade their facilities,” Misek said in an interview. “It gives Apple a partner that they can control manufacturing and secure supply at a lower price.”

Television manufacturers, including Samsung (005930), are scrambling to figure out what Apple’s TV will look like and do, Misek said. He said Apple will take a production line at Sharp’s Sakai facility to make a modified version of what are known as amorphous TFT displays and will likely begin commercial production of what he called iTV in February.

Rival TV makers are likely at least 6 to 12 months behind, Misek said. Many lack the software and cloud-computing expertise to compete with Cupertino, California-based Apple, he said.

Apple has purchased between $500 million and $1 billion in equipment for manufacturing and has taken exclusive hold of one Sharp facility, for iPhone and iPad displays, he said.

Steve Dowling, a spokesman for Apple, declined to comment, as did Miyuki Nakayama, a Sharp spokeswoman, and James Chung, a Seoul-based spokesman for Samsung.

Samsung Relationship

Apple fell 2.5 percent to $366.99 on the Nasdaq Stock Market yesterday and gained 14 percent this year. Sharp was unchanged at 772 yen at 10:14 a.m. in Tokyo while Samsung rose 0.2 percent to 937,000 won in Seoul.

Apple’s relationship with Samsung is deteriorating, Misek said. Besides diversifying away from Samsung for displays, Apple has shifted some purchases of flash memory from Samsung to Toshiba Corp. (6502), he said. The deal with Sharp gives Apple more control over manufacturing.

“Apple likes to go right to the factory floor, redesign the process, monitor it,” Misek said. “Except with Sharp it looks like they’re taking that one step further where they will actually own the intellectual property and physically own the equipment.”

Apple is boosting spending to buy equipment and materials, becoming more involved in the manufacturing process, said David Eiswert, manager of the Baltimore-based T. Rowe Price Global Technology Fund.

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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Russia Prepares to ‘Destroy’ U.S. Shield

By Ilya Arkhipov and Henry Meyer - Nov 24, 2011 2:51 AM GMT+0700

Russian President Dmitry Medvedev ordered the military to prepare the capability to “destroy” the command structure of the planned U.S. missile-defense system in Europe.

Russia may also station strike missiles on its southern and western flanks, including Iskander rockets in the Kaliningrad exclave between Poland and Lithuania, both members of the North Atlantic Treaty Organization and the European Union, Medvedev said on state television today.

“I have ordered the armed forces to develop measures to ensure, if necessary, that we can destroy the command and control systems” of the U.S. shield, Medvedev said. “These measures are appropriate, effective and low-cost.”

Russia has warned the U.S.-led plan may provoke a new arms race and upset a strategic balance in the region by threatening its nuclear deterrent capability. The U.S. is ignoring Russia’s concerns about positioning parts of the shield in eastern Europe and “accelerating” its development, the president said.

Spain last month became the fourth European nation agreeing to participate directly in the missile defense program, intended to protect against attacks from adversaries such as Iran. President Barack Obama pursued plans for the Europe-wide system in 2009, and the administration has also obtained agreements with Poland, Romania and Turkey to host elements of the shield.

‘Forced to Adopt’

“Russia’s political leadership has repeatedly said that unless we resolve the situation Russia will be forced to adopt a military-technical response,” Dmitry Rogozin, the country’s NATO ambassador, told reporters in Moscow today in comments broadcast on state television. “We can’t afford to barter away our citizens’ security.”

Medvedev renewed a threat to quit a strategic arms- reduction treaty with the U.S. that took effect in 2011 if the two sides can’t reach an agreement on missile defense. The U.S. has refused Russia’s request for legally binding guarantees that it won’t be targeted by the proposed missile shield.

“The West has been listening to Russian concerns, but it’s true that the Russians are disappointed with the dialogue,” Roman Kuzniar, an adviser to Polish President Bronislaw Komorowski, said by phone today. “I don’t think they’ll station missiles in Kaliningrad though. I’m more worried about the Russian threats to withdraw from the arms control treaty.”

Worsening Atmosphere

The warnings reflects a worsening atmosphere between the U.S. and Russia, said Lilit Gevorgyan, a London-based analyst at IHS Global Insight. Russia holds parliamentary elections in December, followed by a presidential vote in March. Prime Minister Vladimir Putin, known for his anti-U.S. rhetoric, has said he intends to return as president next year, swapping places with Medvedev.

“This is a Cold War-style issue that can be damaging for Russia-U.S. relations,” Gevorgyan said by phone. “Unfortunately, it’s going to stay for a while and during an election period it is an issue that can attract a lot of attention.”

At the U.S. State Department in Washington, spokesman Mark Toner said the U.S. has been “open and transparent” with Russia about the missile system.

“We’ve been clear all along that this system is not directed against Russia,” Toner said at a briefing. “We’re going to try to continue to engage with them constructively on missile defense.”

‘Narrow’ Questions

Issues of strategic national security shouldn’t be “packaged” together with “narrow pre-election questions,” Rogozin said. Medvedev’s statement is intended to bring the U.S. and NATO back to the negotiating table, he said.

Russia and the U.S. launched a “reset” of their relationship in 2009 after Obama came to office, yielding an agreement on the strategic arms-reduction treaty that took effect in 2011. Russia also agreed to the transit of NATO supplies through its territory to Afghanistan and backed sanctions against Iran.

In another sign of tension, the U.S. yesterday announced that it will no longer share data with Russia on conventional weapons, in what the State Department said was an expression of frustration over Russia’s refusal to comply with the data- sharing and inspection provisions in the Conventional Armed Forces in Europe Treaty.

Still, Russia and the U.S. are not likely to engage in any serious confrontation, said Alexander Sharavin, director of the Institute for Political Military Analysis.

“These steps are mainly for propaganda purposes,” he said of the U.S. missile shield plan and the Russian counter- measures. ‘Neither Russia nor the U.S. have real capabilities in the anti-missile sphere.’’

To contact the reporters on this story: Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net; Henry Meyer in Moscow at hmeyer4@bloomberg.net

To contact the editor responsible for this story: Brad Cook at bcook7@bloomberg.net

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Asia Stocks Fall for Second Day as Europe Crisis Deepens With German Sale

By Yoshiaki Nohara - Nov 24, 2011 8:22 AM GMT+0700

Asian stocks fell for a second day after Germany failed to receive sufficient bids at a debt sale, adding to concern Europe’s crisis is worsening and driving investors away from risky assets.

Sony Corp., Japan’s No. 1 exporter of consumer electronics that gets 21 percent of its sales in Europe, fell 1.2 percent. Komatsu Ltd. led declines among machinery makers after a U.S. report showed orders for durable goods fell last month. Mitsubishi Gas Chemical Co. slid 6.1 percent after Global Markets Japan Inc. cut the investment rating on the producer of chemical products to “neutral” from “buy.”.

The MSCI Asia Pacific Index dropped 0.4 percent to 109.91 as of 10:11 a.m. in Tokyo. More than two stocks fell for each that rose on the index, with all 10 industry groups dropping.

“The market has finally realized that Germany has a high level of public debt,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “Germany looks to be losing its safe-haven status, and it highlights the extent to which the European debt crisis has deteriorated. It can be only bad news for risky assets like equities.”

Futures on the Standard & Poor’s 500 Index (SPXL1) were little changed today. The index dropped 2.2 percent in New York yesterday after Germany failed to get bids for 35 percent of the 10-year bonds offered at a sale. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments rose to an all-time high yesterday, stoking concern the region’s debt crisis that began more than two years ago in Greece now risks engulfing Germany.

Thanksgiving Holiday

About $1 trillion has been erased from U.S. market value since Nov. 15 amid concern that Europe’s debt crisis will hamper the global economy. The U.S. market will close today for Thanksgiving and trading will end at 1 p.m. tomorrow.

Sony declined 1.2 percent to 1,290 yen. Kia Motors Co. (000270), South Korea’s second-largest carmaker by market value that generates 12 percent of its revenue in Europe, dropped 0.4 percent to 71,200 won.

Machinery makers fell after the Commerce Department reported yesterday that U.S. bookings for equipment meant to last at least three years declined 0.7 percent last month as demand for aircraft and business equipment cooled.

Komatsu dropped 3.8 percent to 1,823 yen. Kawasaki Heavy Industries Ltd. fell 2.6 percent to 188 yen.

The MSCI Asia Pacific Index declined 20 percent this year through yesterday, compared with a 7.6 percent drop by the S&P 500 and a 20 percent slump by the Stoxx Europe 600 Index. Stocks (MXAP) in the Asian benchmark are valued at 12.1 times estimated earnings on average, compared with 11.7 times for the S&P 500 and 9.6 times for the Stoxx 600.

Biggest Winner

Gree Inc., Japan’s social-networking service, has been the biggest winner on the Asian index this year, rising 146 percent. The worst performer has been Tokyo Electric Power Co., the owner of the crippled Fukushima Dai-Ichi nuclear power plant, losing 86 percent.

Mitsubishi Gas Chemical sank 6.1 percent to 431 yen today after Citigroup Global Markets Japan Inc. cut the investment rating on the company to “neutral” from “buy,” saying sluggish demand, increasing competition and the stronger yen are weighing on the earnings.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

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

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U.S. Stocks Decline as Europe Bond Risk Climbs

By Rita Nazareth - Nov 24, 2011 4:41 AM GMT+0700

U.S. stocks slumped, sending the Standard & Poor’s 500 Index down for a sixth straight day, as the cost of insuring European government debt against default rose to a record on concern the region’s crisis is worsening.

About nine stocks fell for each that rose on U.S. exchanges. Alcoa Inc. (AA) and Halliburton Co. (HAL) tumbled at least 4.1 percent as data indicated China manufacturing will shrink, sparking concern about slower demand for commodities. Bank of America (BAC) Corp. dropped 4.3 percent to the lowest since March 2009. Groupon Inc., the largest Internet daily-deal site, plunged 16 percent to below its initial public offering price.

The S&P 500 slid 2.2 percent to 1,161.79 at 4 p.m. New York time, the lowest since Oct. 7. It lost 7.6 percent in six days, the most since Aug. 10. The Dow Jones Industrial Average fell 236.17 points, or 2.1 percent, to 11,257.55. About 6.9 billion shares changed hands on U.S. exchanges, 16 percent below the three-month average, ahead of Thanksgiving. The market will close tomorrow and trading will end at 1 p.m. on Nov. 25.

“It’s the unknown in capital letters,” David Sowerby, a Bloomfield Hills, Michigan-based portfolio manager at Loomis Sayles & Co., which oversees $150 billion, said in a telephone interview. “It’s about Europe’s likely recession, the unknown of what’s the contagion, slower China. That’s winning a tug-of- war against U.S. stock valuations.”

About $1 trillion was erased from U.S. market value since Nov. 15 amid concern that Europe’s debt crisis will hamper the global economy. The S&P 500 is trading for 12.2 times reported earnings, compared with its average since 1954 (SPX) of 16.4 times, according to data compiled by Bloomberg.

Engulfing Germany

The crisis that began more than two years ago now risks engulfing Germany. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments rose to an all-time high today as Germany failed to find buyers for 35 percent of the bonds offered at an auction. German Finance Minister Wolfgang Schaeuble said market turbulence sparked by the euro region’s sovereign-debt crisis will last for “a few months.”

“They are running out of time in Europe,” David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., said in a telephone interview. His firm oversees $600 billion. “There’s real pressure in the bond markets. The best remedy is growth, and the tone of the economic data, at least internationally, is toward more weakening.”

European services and manufacturing output shrank for a third month, while a preliminary gauge indicated China’s manufacturing contracted by the most since March 2009. Americans pulled back on spending in October and manufacturers received fewer orders for durable goods.

Commodity, Financial

All 10 groups (SPXL1) in the S&P 500 fell as commodity and financial shares had the biggest declines. The Morgan Stanley Cyclical Index of companies most-dependent on economic growth lost 2.7 percent, while the Dow Jones Transportation Average sank 2.4 percent. The KBW Bank Index (BKX) retreated 3.4 percent.

A gauge of financial stocks in the S&P 500 fell for a third straight day. Goldman Sachs Group Inc. (GS) sank 1.7 percent to $87.89, the lowest level since March 2009. American International Group Inc. (AIG) dropped 4.3 percent to $20.10.

Bank of America declined 4.3 percent, the most in the Dow, to $5.14, while Citigroup Inc. (C) decreased 3.9 percent to $23.51. Both are among lenders that may have to temper plans to raise dividends and buy back stock next year as the Federal Reserve toughens capital tests for the biggest U.S. banks.

The Fed imposed a tougher capital test on the 31 largest U.S. banks yesterday, releasing the criteria for measuring their wherewithal if the U.S. economy sours and major trading partners default on their debt.

‘Underweight’

Commodity shares in the S&P 500 fell at least 2.7 percent. JPMorgan Chase & Co. downgraded commodities to “underweight,” citing policy failures in the U.S. and Europe. Alcoa sank 4.1 percent to $8.88. Halliburton dropped 4.5 percent to $32.20. U.S. Steel Corp. erased 7.6 percent to $22.41.

Groupon tumbled 16 percent to $16.96. The stock was dragged down on concern that profit margins will be squeezed by surging marketing costs and competition from rivals such as LivingSocial.com, backed by Amazon.com Inc. Signs that Europe’s credit crisis may be worsening also fueled speculation that Groupon’s international operations will suffer.

Walgreen Co. (WAG) rose 4.4 percent, the most in the S&P 500, to $32.09, on speculation it resolved a dispute with Express Scripts Inc. that could preserve more than $5 billion in annual drug sales for the retailer. Walgreen’s contract to provide prescriptions for Express Scripts’ customers expires at the end of the year.

‘Another Hack Attack’

Jefferies Group Inc. (JEF) jumped 4.5 percent to $10.51. Egan- Jones Ratings Co.’s analysis of Jefferies, including estimates of tumbling revenue, was “flat out wrong by a country mile,” Chris Kotowski, an Oppenheimer & Co. analyst, said in a report entitled “Another Hack Attack.”

Egan-Jones said yesterday Jefferies should raise $1 billion in equity and reduce leverage as MF Global Holdings Ltd.’s bankruptcy increases scrutiny of its balance sheet. Without “major deleveraging,” Egan-Jones said it may cut Jefferies’s credit grade. “We stand by our analysis,” Sean Egan, president and founding principal at Egan-Jones, said today in an e-mail.

Deere & Co. (DE) rallied 3.9 percent to $74.72. The largest farm-equipment maker reported fiscal fourth-quarter profit and forecast 2012 earnings that topped analysts’ estimates as U.S. farmers flush with cash buy more tractors and combines.

Optimism about U.S. stocks among newsletter writers remained at the highest since July, a bearish signal to analysts who track investor sentiment as a contrarian indicator of equity performance. The share of bullish publications among those tracked by Investors Intelligence was at 47.4 percent yesterday, unchanged from a week earlier.

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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German Auction ‘Disaster’ Stirs Crisis Contagion Concern; Bonds, Euro Fall

By Paul Dobson - Nov 24, 2011 12:11 AM GMT+0700

Germany failed to get bids for 35 percent of the 10-year bonds offered for sale today, propelling borrowing costs in Europe higher and the euro lower on concern the region’s debt crisis is driving away investors.

“This auction is nothing short of a disaster for Germany,” Mark Grant, a managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, said by e-mail. “If the strongest nation in Europe has this kind of difficulty raising capital, one shudders concerning the upcoming auctions in other European nations.”

Turmoil that began more than two years ago in Greece and snared Ireland, Portugal, Italy and Spain has closed in on France and now risks engulfing Germany, the region’s biggest economy. Political leaders are struggling to find a fix for the crisis, with German Chancellor Angela Merkelrejecting proposals for common currency-area bonds, while the European Central Bank resists calls to boost sovereign-debt purchases.

The yield on Germany’s 2.25 percent securities maturing in September 2021 climbed 15 basis points to 2.06 percent at 4:46 p.m. London time. The price of the bonds slid 1.370, or 13.70 euros per 1,000-euro ($1,335) face amount, to 101.550. The cost of credit default swaps on German debt rose seven basis points to 108, according to CMA prices. The euro weakened as much as 1.3 percent to $1.3327.

Belgian 10-year yields surged 41 basis points to 5.48 percent, after reaching 5.53 percent, the highest since November 2000. French 10-year bond yields climbed 16 basis points to 3.69 percent. The yield on Greek two-year notes jumped to more than 120 percent for the first time, before slipping back to 116.59 percent.

Bids Shortfall

Total bids at the auction of securities due in January 2022 amounted to 3.889 billion euros, out of a maximum target for the sale of 6 billion euros, according to Bundesbank data.

Six of the last eight bond sales by Germany have been “technically uncovered,” with fewer bids than the maximum amount on offer, Norbert Aul, a rates strategist at RBC Capital Markets in London, said in an e-mailed note.

Under the German auction system, the central bank retains securities at sales for the secondary market. In today’s offering, the debt agency allotted 3.644 billion euros of the securities, leaving the Bundesbank to retain 2.356 billion euros, or 39 percent of the supply. That’s the highest proportion of unsold debt at a 10-year sale since 1995, according to Bloomberg data. The securities were sold at an average yield of 1.98 percent. In the secondary market, the rate rose to 2.13 percent.

‘Miserable Welcome’

The new 10-year bund received a “truly miserable welcome,” said John Davies, a fixed-income strategist at WestLB AG in London. “It may now be that Germany is seen at risk either from a general flight out of euro-assets or from extreme burden-carrying.”

Banks and investors are reducing holdings of European government bonds as the debt crisis spreads. Kokusai Asset Management Co.’s Global Sovereign Open, Japan’s biggest mutual fund, sold its entire holdings of Italian government bonds by Nov. 10, a report from the fund showed. BNP Paribas SA and Commerzbank AG said in earnings reports this month they’re unloading sovereign bonds at a loss.

“If investors do not wish to buy bunds, they do not wish to buy Europe,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London.

The 10-year bund yield climbed to 21 basis points more than similar-maturity Treasuries, the most since May 2009. The new benchmark bund yield exceeded that of the 10-year gilt for the first time since March 2009.

Bunds ‘Not Immune’

“This auction result makes it all too clear that German bonds are not immune from the crisis but are being drawn into the debt swamp,” said Frank Schaeffler, a lawmaker from the Free Democratic Party, Merkel’s coalition partner. “If this doesn’t wake up the country to the current risks then I’ll be very surprised.”

The rate on the 30-year German bond climbed as much as 14 basis points to 2.75 percent, the highest since Nov. 4. Volatility on German sovereign debt was the second-highest among developed-country markets today, according to measures of 10- year bonds, credit-default swaps, and the spread between two-and 10-year securities. The cumulative change was 7.1 times the 90- day average, the Bloomberg gauge showed. Belgian debt was the most volatile, with changes at 12.5 times the 90-day average.

German Pipe Dream

“The notion some people had that Germany could be insulated against market developments was a pipe dream,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said in a telephone interview. “The systemic crisis in the euro zone is eating its way into countries that are solvent and have competitive economies, like Germany. But because they are in the euro zone the crisis is spreading to them.”

Germany’s Finance Agency sees no risk in financing the government’s budget after demand was weak at the debt auction today, Joerg Mueller, a Frankfurt-based spokesman, said in an interview.

The Berlin-based Finance Ministry, of which the agency is a unit, has cut planned fourth-quarter debt sales twice this year as tax revenue surged.

‘Buyers’ Strike’

At an auction of 10-year bonds last week, Spain’s borrowing costs climbed to 6.975 percent, more than Portugal and Ireland paid at their final sales of similar-maturity debt before they sought international aid.

“What we have at the moment is strong buyer reluctance -- you could almost call it a buyers’ strike -- for sovereign bonds, for European sovereign bonds of a lot of countries,” Commerzbank Chief Executive Officer Martin Blessing said yesterday during a panel discussion in Berlin.

Belgium is due to auction securities, including 10-year debt, on Nov. 28. Italy and France will also sell bonds next week.

Italian bonds fell today, even after the ECB was said by four people with knowledge of the transactions to have bought the securities. The five-year note yield jumped 31 basis points to 7.23 percent. Rates on five-year Belgian debt increased 46 basis points to 5.04 percent.

Yields on AAA rated Austrian five-year notes jumped 34 basis points to 3.23 percent, with the rate on similar-maturity French securities climbing 19 basis points to 2.84 percent. Irish five-year yields surged 97 basis points to 9.15 percent.

Economic Shocks

France will have difficulty absorbing further large economic shocks without putting its top credit rating at risk, Fitch Ratings said today.

“Similar to the situation of other major AAA sovereigns, the increase in government debt has largely exhausted the fiscal space to absorb further adverse shocks without undermining their AAA status,” Fitch said in a report. “The principal concern with respect to France is that the intensification of the euro zone crisis will generate contingent liabilities that will be crystallized onto the sovereign balance sheet.”

German bonds have returned 8.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds have gained 0.9 percent and Belgian securities have dropped 3.3 percent, the indexes show.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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Black Friday IPod Deals Show Stores Bowing to Buyers Amid 2% GDP: Retail

By Ashley Lutz - Nov 23, 2011 12:00 PM GMT+0700

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Nov. 23 (Bloomberg) -- Michelle Clark, retail analyst at Morgan Stanley, talks about Black Friday, the outlook for holiday retail sales and performance of Macy's Inc. Clark speaks with Stephanie Ruhle on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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Nov. 23 (Bloomberg) -- Michael McNamara, vice president of research and analysis at MasterCard Advisors' SpendingPulse, talks about the outlook for holiday season shopping and the U.S. consumer. He speaks on Bloomberg Television's "InBusiness with Margaret Brennan." (Source: Bloomberg)

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Shoppers look for bargains at Toys"R"Us on Thanksgiving Day, November 25, 2010, in New York City. Photographer: Michael Nagle/Getty Images

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Shoppers Jeri Hull, left, and Karen Brashear, right, wait in line while shopping at Toys'R'Us during the Black Friday sales event in Fort Worth. Photographer: Tom Pennington/Getty Images

Every Black Friday, there’s a staring contest between retailers and shoppers over price. This year, the stores may have blinked first.

Chains such as Toys “R” Us Inc. and Gap Inc. (GPS) are opening earlier and offering more markdowns than ever on the day after Thanksgiving, said Mary Delk, a director at Deloitte Consulting. The result may be higher sales and lower profits for retailers over the holiday season.

“Consumer anxiety has resulted in a frenzy among retailers to compete for market share,” said Delk, who is based in Charlotte, North Carolina. “The inducements and deals are bigger and bolder.”

Wal-Mart Stores Inc. (WMT) is promoting a two-piece boys’ sleep set featuring Disney characters for $4.47. J.C. Penney Co. (JCP) will sell $18.88 digital music players and $30 kids’ camcorders. Black Friday shoppers who visit a Sears Holdings Corp. (SHLD) store will receive a coupon book with more than $3,000 in discounts.

Retailers are pouring on the deals to attract consumers grappling with 9 percent unemployment and a slower U.S. economic expansion than previously estimated. Third-quarter gross domestic product climbed at a 2 percent annual rate, down from a prior estimate of 2.5 percent growth, the Commerce Department reported yesterday in Washington.

Consumer spending, which accounts for about 70 percent of the economy, grew at a 2.3 percent annual rate, little changed from the 2.4 percent initial estimate.

On Oct. 30, the Bloomberg Consumer Comfort Index reached the second-lowest level in 26 years of data. Amid slumping confidence, customers at Best Buy Co., Gap and Toys “R” Us all said they would spend less this holiday season than last, according to a poll conducted last month by BIGresearch, a Worthington, Ohio-based researcher.

Industry Weakness

In another sign of industry weakness, October same-store sales at Limited Brands Inc. (LTD) and Target Corp. (TGT) trailed analysts’ projections for the first time this year.

Black Friday, so named because many retailers become profitable then, serves as the unofficial start to the holiday shopping season. Holiday sales may rise 2.8 percent this year, or about half of last year’s 5.2 percent gain, according to the National Retail Federation. The Washington-based NRF will release Thanksgiving weekend sales numbers on Nov. 27.

Toys “R” Us will open at 9 p.m. on Thanksgiving, an hour earlier than last year. The chain began bombarding shoppers with marketing emails and circulars a month ago -- the soonest ever, according to Chief Executive Officer Gerald Storch. Among the deals: a $50 giftcard with the purchase of a $199 Apple Inc. iPod Touch and such board games as Candy Land and Ants in My Pants for $4.99, or 50 percent off.

Shoppers who bought every item listed in a recent Toys “R” Us circular would save $12,500, compared with $11,000 last year, Storch said.

Very Aggressive

“We were very aggressive and needed to take it up a notch this year and offer products that weren’t just cheap but had value,” Storch said in a telephone interview from the chain’s Wayne, New Jersey, headquarters. “There is incredible pent-up demand from shoppers and we have to make sure that they don’t do their shopping without seizing some of our bargains.”

Mall of America, which can usually rely on its amusement park to attract shoppers, is ladling out more freebies this year. The largest U.S. mall will give away 300 prizes ranging in value from $25 to $1,000, said Julie Hansen, a spokeswoman.

The Bloomington, Minnesota-based mall, which typically attracts 300,000 people on Black Friday, is opening at midnight on Thanksgiving, the earliest in its 19-year history. Last year Mall of America waited until 4 a.m. before letting in deal- hunters.

3-D Goggles

Gap, which will have about 1,000 stores open on Black Friday, is distributing 3-D goggles at its Old Navy chain that allow shoppers to find “secret” discounts marked on certain merchandise. Some will get a free Eastman Kodak Co. (EK) digital camera with a purchase of $40 or more. Its namesake chain will offer $19 women’s jeans, while Banana Republic will offer 40 percent off all purchases.

As many as 152 million people will hit the stores on Black Friday, up 10 percent from last year, according to the NRF.

Still, retail executives are less optimistic about Black Friday sales than they were a year ago, according to a survey by BDO USA, a consulting firm based in Chicago. Sales may rise 1.6 percent, the average estimate of 100 executives in BDO’s survey conducted last month. That compares with a 3.8 percent increase in the survey last year.

The whole point of all the Black Friday discounts and door- busters is to get shoppers into the stores and entice them to buy full-price merchandise.

Making that happen is getting harder because more Americans have become mission shoppers, according to Bill Martin, the chief executive officer of the Chicago-based research firm Shoppertrak. Many consumers research what they want online, buy it and then leave, Martin said last month.

“Retailers won’t make much money” on Black Friday “if shoppers don’t pick up additional merchandise,” Delk said.

To contact the reporter on this story: Ashley Lutz in New York at alutz8@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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Orders for U.S. Durable Goods Fall

By Alex Kowalski - Nov 23, 2011 8:42 PM GMT+0700

Orders for durable goods fell in October as demand for aircraft and business equipment cooled, indicating a slowing global economy may temper purchases of U.S. manufactured goods.

Bookings for equipment meant to last at least three years declined 0.7 percent, less than forecast, after a 1.5 percent drop the prior month that was more than twice as large as originally reported, data from the Commerce Department showed today in Washington. Excluding defense and aircraft, demand for computers and other business equipment decreased by the most since January.

The risk the global economy is losing steam as Europe deals with its debt crisis may lead overseas companies, which have supported U.S. factories, to scale back. Even so, a government tax break targeted at stimulating business investment may sustain capital investment while a weaker dollar keeps American- made goods attractive to foreign buyers.

“Businesses are investing but they are still trying to stay cautious,” Omair Sharif, an economist at RBS Securities Inc. in Stamford, Connecticut, said before the report. “If things should start to turn down, they wouldn’t want to be caught with too many goods.”

Stock-index futures held earlier losses after the reports as the cost of insuring European government debt against default rose to a record on concern the region’s crisis is worsening. The contract on the Standard & Poor’s 500 Index maturing next month fell 0.7 percent to 1,174.5 at 8:36 a.m. in New York. Treasury securities were little changed.

Economists’ Forecasts

The median forecast of 79 economists surveyed by Bloomberg News projected a 1.2 percent decrease in orders following an initially reported 0.6 percent decline in September. Estimates ranged from a drop of 3.5 percent to a gain of 1.8 percent.

Consumer spending rose less than forecast in October as Americans used the biggest gain in incomes in seven months to rebuild savings, indicating the biggest part of the economy may contribute less to the recovery, another report from the Commerce Department showed today.

Purchases increased 0.1 percent, after a 0.7 percent gain the prior month. The median estimate of 82 economists surveyed by Bloomberg called for a 0.3 percent advance. Incomes rose 0.4 percent, and the savings rate climbed from a four-year low.

Orders excluding transportation equipment, like commercial aircraft, rose 0.7 percent after a 0.6 percent gain, the report on durable goods showed. Boeing Co. (BA), the largest U.S. aircraft maker, said it received 7 airplane orders in October, down from 59 the prior month and the smallest amount since April. Industry data, nonetheless, may not correlate with the government statistics on a month-to-month basis.

Business Investment

Orders for non-defense capital goods excluding aircraft, a proxy for business investment in items such as computers, engines and communications gear, dropped 1.8 percent after a 0.9 percent gain the prior month that was smaller than previously estimated.

Last month’s decrease extends a pattern of declines early in a quarter. Demand for non-military capital goods like computers, engines and communications gear, have dropped in the first month of a quarter in all but three instances since the end of 2005.

Shipments of non-defense capital goods excluding aircraft, used in calculating gross domestic product, decreased 1.1 percent after decreasing 1 percent.

The Federal Reserve’s gauge of factory output expanded for a fourth month in October on growing demand for automobiles and computers, according to the central bank’s figures.

Fed Minutes

Some Fed policy makers said the central bank should consider easing policy further, according to minutes of their Nov. 1-2 meeting issued yesterday.

Further support for factory production may come from businesses rushing to qualify for a government credit aimed at spurring investment. A tax break allowing companies to depreciate 100 percent of investment in capital outlays in 2011 falls to 50 percent in 2012.

“We are certainly seeing some uncertainty and some concern here and there, but on the broad nature we are not pessimistic, and that vantage point coming directly from a lot of our customers,” Oscar Munoz, chief financial officer of railroad CSX Corp. (CSX), said at a Nov. 9 investor conference. “A majority of customers are telling us sit tight, don’t pull back on resources, I’ve got enough business that I can keep working.”

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

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

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U.S. Stock-Index Futures Decline on Germany

By Rita Nazareth - Nov 23, 2011 8:46 PM GMT+0700

U.S. stock futures fell, indicating the Standard & Poor’s 500 Index will drop a sixth day, as the cost of insuring European government debt against default rose to a record on concern the region’s crisis is worsening.

Bank of America Corp. (BAC) and Citigroup Inc. (C) slumped at least 1.5 percent. Mosaic Co. (MOS) and Halliburton Co. (HAL) slid more than 1.1 percent, pacing losses in commodity producers. Deere & Co. (DE) rallied 6.2 percent as the world’s largest farm-equipment maker reported profit that topped analysts’ estimates.

S&P 500 futures expiring in December retreated 0.8 percent to 1,173.80 at 8:45 a.m. New York time. The benchmark gauge for American equities tumbled 5.6 percent over the previous five days. Dow Jones Industrial Average futures declined 77 points, or 0.7 percent, to 11,370 today.

“There’s a lot of negativity,” Uri Landesman, who helps oversee more than $1 billion as managing general partner of New York-based hedge fund Platinum Partners LLP, said in a telephone interview. The rise in bond yields in Europe shows that “everybody thinks they are going bust. I’m hoping this is a sign that everybody is so negative that the odds are the next move is going to be positive. When everybody thinks the world is coming to an end, that’s the time you buy the market.”

The debt crisis that began more than two years ago now risks engulfing Germany. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments rose to an all- time high as Germany failed to find buyers for 35 percent of the bonds offered at an auction. European services and manufacturing output contracted and a preliminary gauge indicated China’s manufacturing shrank by the most since March 2009.

U.S. Economy

Equity futures maintained losses after reports indicated more signs of a slowing economy. Consumer spending in the U.S. rose less than forecast in October. Orders for durable goods fell in October as demand for aircraft and business equipment cooled, while more Americans than forecast filed for unemployment benefits last week.

Stocks tumbled yesterday, driving the S&P 500 to its longest slump in almost four months, as slower-than-estimated economic growth overshadowed signs the Federal Reserve may provide more stimulus.

Concern about a global financial crisis sent financial stocks lower. Bank of America lost 1.7 percent to $5.28, while Citigroup decreased 1.5 percent to $24.09. Both are among lenders that may have to temper plans to raise dividends and buy back stock next year as the Federal Reserve toughens capital tests for the biggest U.S. banks.

‘Severe’ Recession

The Fed imposed a tougher capital test on the 31 largest U.S. banks yesterday, releasing the criteria for measuring their wherewithal if the U.S. economy sours and major trading partners default on their debt. Lenders need to prove they have the capital to withstand a “severe” U.S. recession with 13 percent unemployment and an 8 percent decline in gross domestic product before they can increase dividends or repurchase shares.

The more pessimistic scenario will damp banks’ ambitions to return more capital to shareholders, whose holdings have been decimated. The KBW Bank Index (BKX) of 24 U.S. lenders has plunged 31 percent this year and is down 70 percent from its all-time high in February 2007.

“It’s going to be very difficult for any of these companies to do any major buybacks into next year,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and an analyst at FBR Capital Markets Corp. in Arlington, Virginia. Bank of America and Citigroup’s “chances of upping a dividend or buying back any stock next year are almost zilch.”

Commodity Shares

Some energy and raw materials producers sank as the dollar rose, reducing the appeal of commodities as alternative investments. Mosaic retreated 1.1 percent to $51.30. Halliburton fell 1.3 percent to $33.25.

Deere rallied 6.2 percent to $76.35 as it also forecast 2012 earnings that topped projections. The company, led by Chief Executive Officer Sam Allen, has benefited as U.S. farmers used cash from rising corn and soybean prices to buy high-horsepower equipment. U.S. farm income will jump 31 percent this year to a record $103.6 billion, the U.S. Department of Agriculture said in August. In fiscal 2010, 65 percent of Deere’s sales came from the U.S. and Canada.

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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European Stocks, U.S. Index Futures Retreat as German Bund Auction Fails

By Adria Cimino - Nov 23, 2011 8:38 PM GMT+0700

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Nov. 23 (Bloomberg) -- Paul Robinson, global head of foreign exchange research at Barclays Capital, talks about a survey of the bank's clients on the economic outlook and asset allocation. He speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

European stocks declined, with the benchmark Stoxx Europe 600 Index posting its longest losing streak since August, as Germany failed to meet a bond sale target. U.S. index futures and Asian shares also retreated.

Rio Tinto Group, the world’s second-largest mining company (RIO), dropped 1.7 percent as Australia pushed a law in parliament introducing a tax on coal and iron-ore profits. Logica (LOG) Plc, an Anglo-Dutch computer services provider, slid 3.6 percent after Jefferies Group Inc. cut its recommendation on the shares. Dexia SA (DEXB) jumped 6.7 percent.

The Stoxx 600 slipped 0.3 percent to 222.72 at 1:36 p.m. in London, for a fifth day of losses. Futures on the Standard & Poor’s 500 Index expiring in December fell 0.7 percent, while the MSCI Asia Pacific Index excluding Japan lost 1.6 percent.

Germany failed to reach its maximum sales target of 6 billion euros ($8 billion) at an auction of securities due in January 2022. Total bids amounted to 3.889 billion euros, falling short by 35 percent, according to data from the Bundesbank. The securities were sold at a yield of 1.98 percent.

“This is another drip of negative news into the cup,” said David Finch, head of cross-sector research at Exane BNP Paribas in Paris. “It’s an extension of the contagion we’ve seen into more of the stable eurozone countries. It’s kind of an acceleration of risk aversion.”

In Asia, a preliminary purchasing managers’ index indicated that Chinese manufacturing will contract in November by the most since March 2009 as home sales slide, adding to evidence the world’s second-biggest economy is slowing. The reading of 48 reported by HSBC Holdings Plc and Markit Economics for November compares with a final number of 51 for October. A number below 50 indicates contraction.

Government Bonds

The European Central Bank bought Italian government bonds, according to three people with knowledge of the transactions, who declined to be identified because the trades are confidential. A spokesman for the ECB in Frankfurt declined to comment today on asset purchases.

“Volatility is something we have to live with,” said Franz Wenzel, chief investment strategist at AXA Investment Managers in Paris, which oversees $19 billion in assets. “Fears are growing that even emerging markets could face headwinds. Systemic risk still is overshadowing the eurozone. The crisis hasn’t yet been addressed properly and will continue to weigh on stocks.”

A preliminary reading of a euro-area composite index from a survey of purchasing managers in manufacturing and services rose to 47.2 in November from 46.5 in October, London-based Markit Economics said today.

U.S. Durable Goods

In the U.S., a Commerce Department report showed durable goods orders fell in 0.7 percent in October, less than forecast. Consumer spending rose less than forecast during that month as Americans used the biggest gain in incomes in seven months to rebuild savings, indicating the biggest part of the economy may contribute less to the recovery, another report from the Commerce Department showed today.

The Stoxx 600 tumbled 5.8 percent over four trading days through yesterday as Italian, Spanish and French bond yields soared, adding to concern that the debt crisis is spreading to the euro area’s larger economies.

BHP Billiton Ltd. (BHP) declined 1.1 percent to 1,746 pence. The world’s largest mining company (BLT) and other commodity producers face A$11 billion ($10.7 billion) of extra charges in the first three years of Australia’s tax on iron-ore and coal profits. Rio Tinto slipped 1.7 percent to 3,003 pence.

Logica fell 3.6 percent to 68 pence after the stock was cut to “underperform” from “hold” at Jefferies and Co.

Halfords Group Plc (HFD) dropped 3.6 percent to 319.1 pence. The shares were cut to “sell” from “neutral” at UBS, which cited the company’s limited strategic options for growth.

Dexia Shares Rally

Dexia jumped 6.7 percent to 25.5 euro cents. Luxembourg’s Finance Minister Luc Frieden said that talks about the government-backed funding of the remaining assets do not face “insurmountable difficulties.”

“I am sure that within the next days or so this deal can be concluded in a satisfactory manner,” Frieden said in an interview today in Luxembourg, referring to talks to sell Dexia Banque Internationale a Luxembourg SA to a group of investors including members of Qatar’s royal family.

Axa SA (CS) added 3.1 percent to 8.89 euros. Chief Executive Officer Henri de Castries said the company’s margins are satisfactory in most areas and it will continue to buy French government debt, in an interview on BFM Radio.

Nokia Oyj (NOK1V) climbed 1.7 percent to 4.26 euros. Nokia Siemens Networks said it plans to cut 17,000 jobs worldwide by the end of 2013 as it restructures around mobile broadband.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net

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

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"Disastrous" bond sale shakes confidence in Germany

BERLIN | Wed Nov 23, 2011 8:30am EST
By Stephen Brown and Noah Barkin

(Reuters) - A "disastrous" German bond sale on Wednesday sparked fears that Europe's debt crisis was even beginning to threaten Berlin, with the leaders of the euro zone's two strongest economies still firmly at odds over a longer-term structural solution.

Financial markets were also unnerved by newspaper reports that Belgium may be pressing France for an expansion of a 90 billion euro ($120 billion) bailout of failed bank Dexia.

On top of this, a special report by Fitch Ratings suggested France had limited room left to absorb shocks to its finances like a new downturn in growth or support for banks without endangering its cherished AAA credit status.

After one of the least successful debt sales by Europe's powerhouse economy since the launch of the single currency, the euro fell and European shares sank to 7-week lows.

The Bundesbank was forced to retain almost half of a sale of 6 billion euros due to a shortage of bids by investors. The result pushed the cost of borrowing over 10 years for the bloc's paymaster above those for the United States for the first time since October.

"It is a complete and utter disaster," said Marc Ostwald, strategist at Monument Securities in London.

One senior ratings agency official said the rise in its own borrowing costs could even give Germany a pause to re-examine its refusal to embrace a broader solution to resolve the debt crisis.

"It's quite telling that there has been upward pressure on yields in Germany - it might begin to change perceptions in Germany," David Beers of Standard & Poor's told an economic conference in Dublin.

The new bond promised to pay out a 2.0 percent interest rate -- the lowest ever on an issue of German 10-year Bunds. The average yield at the auction was 1.98 percent, down from 2.09 percent at the last sale of the previous benchmark in October.

Signs that European banks are increasingly shut out of credit markets and reliant on the European Central Bank for funding have added to pressure for the bloc's leaders to find a broad and lasting solution to the crisis.

But Germany and France clashed again over whether the ECB should take bolder steps to ease the pressure on debt markets in Italy, Spain and others which is now at the heart of the crisis.

ECB MANDATE "CANNOT BE CHANGED"

In a forceful speech to the Bundestag lower house of parliament, Chancellor Angela Merkel issued one of her starkest warnings yet against fiddling with the central bank's strict inflation-fighting mandate. She also hit back at proposals from the European Commission on joint euro zone bond issuance, calling them "extraordinarily inappropriate."

"The European currency union is based, and this was a precondition for the creation of the union, on a central bank that has sole responsibility for monetary policy. This is its mandate. It is pursuing this. And we all need to be very careful about criticizing the European Central Bank," Merkel said.

"I am firmly convinced that the mandate of the European Central Bank cannot, absolutely cannot, be changed."

Shortly before she began speaking, French Finance Minister Francois Baroin offered a polar opposite view on the ECB's role, telling a conference in Paris that it was the central bank's responsibility to sustain activity in the currency bloc.

"The best response to avoid contagion in countries like Spain and Italy is, from the French viewpoint, an intervention (or) the possibility of intervention or announcement of intervention by a lender of last resort, which would be the European Central Bank," Baroin said.

"EXTRAORDINARILY INAPPROPRIATE"

The very public jousting underscores just how divided European leaders are on how to resolve the turmoil which has accelerated to engulf big countries like Italy and Spain, and pushed out leaders in Rome and Athens.

Baroin pointed to market intervention by the U.S. Federal Reserve, Swiss National Bank and Bank of England as a model for the ECB. But Merkel said it was impossible to compare the role of the ECB, which sets monetary policy for 17 countries, with those of national central banks.

With time running out for politicians to forge a crisis plan that is seen as credible by the markets, the European Commission presented a study on Wednesday of joint euro zone bonds as a way to stabilize debt markets.

Some leading European politicians, including Luxembourg Prime Minister Jean-Claude Juncker, support the bonds. But Berlin has rejected them outright as a near-term solution to the crisis, saying they would raise Germany's borrowing costs and reduce incentives for other euro zone countries to get their fiscal houses in order.

In her speech, Merkel pointed to repeated violations of the EU's Stability and Growth Pact in the currency area's first decade, saying they had damaged market faith in the bloc's ability and willingness to crack down on fiscal rule-breakers.

"And this is why I find it extraordinarily inappropriate that the European Commission is suggesting various options for euro bonds today -- as if they were saying we can overcome the shortcomings of the currency union's structure by collectivizing debt. This is precisely what will not work," Merkel said.

MERKEL WARNS GREECE

The German leader also sent a clear warning to Antonis Samaras, the leader of conservative New Democracy in Greece, who has resisted pressure to join other political parties and make a written commitment to painful austerity measures.

Merkel said Greece would not receive an 8 billion euro aid tranche it needs to avert a default next month unless Samaras signed the pledge.

Merkel raised pressure on the bloc to finalize plans for a "leveraging" of its rescue fund and a recapitalization of vulnerable banks, saying guidelines were needed by the time European finance ministers meet on November 29-30.

"The fact that we have been talking about (bank recapitalizations) for weeks but still have no clarity is not very reassuring, and yesterday we saw with the example of one German bank how fragile the banks themselves are," Merkel said.

Shares in Germany's second-biggest lender, Commerzbank, tumbled on Tuesday after people close to the bank told Reuters it needs considerably more capital than previously expected to meet the core capital targets demanded by the EU by mid-2012.

(Reporting by Stephen Brown, Noah Barkin, Natalia Drozdiak, Veronica Ek, Eva Kuehnen; editing by Patrick Graham and Peter Millership)

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Fed to test six big banks for Euro stress

Wed Nov 23, 2011 7:54am EST
By Karey Wutkowski and Dave Clarke

(Reuters) - The Federal Reserve plans to stress test six large U.S. banks against a hypothetical market shock, including a deterioration of the European debt crisis, as part of an annual review of bank health.

The Fed said it will publish next year the results of the tests for six banks that have large trading operations: Bank of America (BAC.N), Citigroup (C.N), Goldman Sachs (GS.N), JPMorgan Chase (JPM.N), Morgan Stanley (MS.N) and Wells Fargo (WFC.N).

"They are clearly worried about the issue of Europe," said Nancy Bush, a longtime bank analyst and contributing editor at SNL Financial. "In a time of risk aversion and concern, you need transparency."

The Fed said its global market shock test for those banks will be generally based on price and rate movements that occurred in the second half of 2008, and also on "potential sharp market price movements in European sovereign and financial sectors."

In the Fed's hypothetical stress scenario, unemployment would spike as high as 13 percent while U.S. gross domestic product would fall by as much as 8 percent.

The heightened stress tests are part of a larger supervisory test the Fed will conduct on the capital plans of 31 firms with at least $50 billion in assets.

The tests will apply to 19 banks who have previously been through the process and 12 more financial firms considered less complex. The test each bank faces will be based on its size and complexity.

The banks must submit their capital plans to the Fed by January 9, 2012. The Fed said that it plans to respond to banks by March 15. It was not clear when the results would be published.

The Fed will use the stress tests to determine whether banks are robust enough to raise dividends or repurchase stock, or whether they need to obtain additional capital.

The Fed plans to release more information than it did last year about the tests' results. The regulator said it is doing so to "foster market discipline."

The Fed will disclose the estimate of revenues, losses and capital ratios of the 19 biggest banks if they were to suffer a market shock.

This type of disclosure could give investors and markets more certainty about the strength of U.S. banks at a time when there are deep concerns about their European counterparts.

"Eventually, this will be viewed as a positive, and a lot of people will focus on this as a way to verify the viability of these companies," said Matt McCormick, portfolio manager at Bahl & Gaynor investment counsel in Cincinnati.

CONTAGION FEARS

Fitch Ratings earlier this month expressed concern that U.S. banks could take a hit from the debt crisis in Europe.

Analysts at the credit rater said their concerns are based, in part, on U.S. banks having increased trading operations in Europe in the past several years.

"Our concern is with counterparty risk, the impact of Europe on global economic growth and how that weighs on the economic recovery in the U.S.," said analyst Joseph Scott in the November 16 note.

Fears over U.S. firms' European exposure grew after brokerage MF Global filed for bankruptcy on October 31. MF Global collapsed after disclosures about its massive bets on European debt spooked investors and counterparties.

U.S. bank stocks in general have taken a beating over the last year with investors concerned about the sluggish economy, European debt, and the impact of more intense regulation.

The KBW Bank Index .BKX of stocks has fallen more than 30 percent this year.

DIVIDENDS

Banks have been eager to boost dividends and buy back stock, but the Fed has indicated it will take a tough stance, particularly if a bank is not far along in meeting new international Basel capital standards.

In a November 9 speech, Fed Governor Daniel Tarullo said the central bank would be "comfortable with proposed capital distributions" only when it is "convinced" a bank is on a path to easily meet the new standards.

"I don't think anyone could say that this is anything but an extremely stringent stress test," said Karen Petrou, managing partner of Federal Financial Analytics. "It will really put the burden on the affected bank holding companies to prove they can make a capital distribution, not on the Fed to block it."

The Fed is putting in place a broad stress testing regime in the wake of the 2007-2009 financial crisis when taxpayers were forced to extend a $700 billion bailout to the financial system.

This will be the second round of Fed tests of banks' capital plans.

Earlier this year, the Fed rejected Bank of America's plan to boost its dividend in the second half of 2011, while allowing other big banks to move ahead with dividend hikes.

Under the 2010 Dodd-Frank financial oversight law, the Fed is required to conduct stress tests on banks with more than $50 billion in assets.

The latest capital tests are separate from this requirement but the Fed said on Tuesday it would try to harmonize the different testing regimes facing banks.

The expansion of the capital tests beyond the 19 who have been scrutinized in the past will likely not be welcomed by those being added to the list.

"It's another layer of Fed oversight on their capital, and they've fought tooth and nail not to be included in this," said Paul Miller, analyst at FBR Capital Markets. "So I don't think any of those banks are particularly happy right now."

(Reporting by Karey Wutkowski, Dave Clarke and Alexandra Alper in Washington, Joe Rauch and Rick Rothacker in Charlotte, and Lauren Tara LaCapra and David Henry in New York; Editing by Bernard Orr and Tim Dobbyn)

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US Mortgage Purchase Demand Rises; Refies Sag

Published: Wednesday, 23 Nov 2011 | 7:04 AM ET
By: Reuters

Purchase applications for U.S. home mortgages rebounded last week, but demand for refinancing sagged for a second week in a row, an industry group said on Wednesday.

Eric Audras | Photoalto | Getty Images Couple looking at properties in window of real estate agency.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, slipped 1.2 percent in the week ended November 18, after a 10 percent drop the week before.

The gauge of loan requests for home purchases provided a bright spot, rising 8.2 percent.

Even so, purchase activity remains almost 5 percent below last year's level, Michael Fratantoni, MBA's vice president of research and economics, said in a statement.

The index of refinancing applications fell 4.0 percent and the refinance share of total mortgage activity dropped to 75.9 percent of applications from 77.3 percent. It was the lowest level since September. Fixed 30-year mortgage rates were unchanged at an average 4.23 percent.

The survey covers over 75 percent of U.S. retail residential mortgage applications, according to MBA.

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