Treasuries Reverse Advance as Higher-Yielding Assets Stabilize
May 21st, 2010 | Posted by stockMay 21 (Bloomberg) — Treasuries reversed a rally that pushed yields on 10-year notes to a one-year low, as a global slide in stocks stabilized and the euro gained, reducing the refuge appeal of U.S. government securities.
U.S. bonds gained for the week, with 30-year yields touching the lowest level in seven months, as European finance ministers met for talks to stem a debt crisis that sent the euro to a four-year low and spurred an exodus from riskier assets.
“Equities have spun around as stock and bond moves were too far, too fast, given the backdrop,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities, an interdealer broker. “Levels are less important today. More important is the needs of the market for fixed income. Most of those needs were met over the last 48 hours, especially this morning, so we are backing off some.”
The yield on the 10-year note rose 1 basis point, or 0.01 percentage point, to 3.23 percent at 4:18 p.m. in New York, according to BGCantor Market Data. For the week, it tumbled 23 basis points. The 3.5 percent security maturing in May 2020 fell 3/32, or 94 cents per $1,000 face amount, to 102 9/32.
Ten-year yields, a benchmark for consumer and company borrowing costs, earlier plunged to 3.10 percent, the least since May 18, 2009. The yield on the 30-year bond increased 1 basis point to 4.10 percent after touching 3.98 percent, the lowest since October. For the week, it dropped 24 basis points.
Stocks Gain
The Standard & Poor’s 500 Index rose 1.5 percent after falling earlier as much as 1.5 percent. It tumbled for the prior three days. The euro strengthened 0.7 percent to $1.2571. It touched $1.2144 on May 19, its weakest since 2006.
“We’ve had a massive flight to quality, and there is speculation that fears from the euro zone may be a bit overblown,” said Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. ‘Looking at the longer term economic impact of the problem in Europe shows that there is an increased risk of a worldwide double-dip recession.”
Europe’s sovereign-debt crisis triggered a surge in demand for the safety of U.S. government securities. A survey published by Barclays Capital Japan Ltd. showed the proportion of institutional investors favoring European bonds over U.S. Treasuries fell to the least since August 2007.
The 18 primary dealers that trade with the Federal Reserve reported the highest volume of trading in Treasuries since October 2008, after the collapse of Lehman Brothers Holdings Inc., for the week ended May 12, the latest data. The average volume was $679.7 billion.
Biggest Return
Treasuries due in 10 years and longer returned 8 percent in the past month after accounting for gains in the dollar, according to data compiled by Bloomberg. That’s the most of 174 bond indexes around the world.
Volatility in the Treasury market surged over the past week, Bank of America Merrill Lynch’s Move index shows. The gauge rose to 110.9 yesterday, approaching this year’s high of 116.7 set May 6. The index measures price swings in Treasuries based on over-the-counter options maturing in two to 30 years.
European Union finance ministers pledged today at a meeting in Brussels to stiffen sanctions on high-deficit countries and ruled out setting up a mechanism to manage state defaults, saying no euro country will be allowed to renege on its debts. It was their fifth meeting in five weeks in an effort to forge a united response to the debt crisis. They have committed almost $1 trillion to a rescue package to halt the crisis.
‘Serious Consequences’
Fed Governor Daniel Tarullo said the debt crisis may pose a threat to the world economy.
Further contraction in Europe “associated with sharp financial dislocations would have the potential to stall the recovery of the entire global economy, and this scenario would have far more serious consequences for U.S. trade and economic growth,” Tarullo said yesterday in testimony to House Financial Services subcommittees.
The flight-to-quality trade may reverse as the EU’s rescue package breaks the spiral of rising bond yields while the euro falls, Citigroup Inc. said.
“The combination of a weaker currency and lower yields is a very welcome boost to the economy and dramatically increases the likelihood that the fiscal woes can be contained within the weaker peripheral countries,” Mark Schofield, head of interest- rate strategy at Citigroup in London, wrote in an investor note dated yesterday.
Consumer Prices Fall
Traders cut bets on inflation this week after the Labor Department reported May 19 U.S. consumer price index fell 0.1 percent in April from March, the first drop in more than a year. The gap between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of traders’ outlook for inflation, touched 1.83 percentage points today, a seven-month low, before paring the decline to 1.95 percentage points.
The yield difference between 2- and 10-year notes narrowed for a fourth straight day, touching 2.41 percentage points, from 2.72 percentage points a week ago.
“There is flight to quality because of what’s going on in Europe, but with inflation prospects low and the Fed on hold for longer than expected, we’re seeing people moving out the curve and buying longer-duration Treasuries,” said Dan Mulholland, a Treasury trader in New York at Royal Bank of Canada, another primary dealer.
Treasuries returned 1.97 percent this month, the Bank of America Merrill Lynch Treasury Master index shows.
–With assistance from Ben Levisohn in New York, Shigeki Nozawa in Tokyo and Anchalee Worrachate in London. Editors: Greg Storey, Dave Liedtka
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
U.S. Stocks Advance in Rebound From Biggest Decline in a Year
May 21st, 2010 | Posted by stockMay 21 (Bloomberg) — U.S. stocks rose, rebounding from the market’s biggest drop in a year, as investors speculated equities may have fallen too much this week on concern about Europe’s debt crisis.
Compuware Corp. rallied after quarterly profit beat estimates. Freeport-McMoRan Copper & Gold Inc. helped lead materials companies higher, gaining 5.3 percent as the price of copper rose. Financial shares jumped, with JPMorgan Chase & Co. and Bank of America Corp. advancing the most in the Dow Jones Industrial Average. Dell Inc. slid the most in the Standard & Poor’s 500 Index percent after reporting first-quarter gross margins that missed some analyst estimates.
The S&P 500 rose 1.5 percent to 1,087.69 as of 4 p.m. in New York. The gauge fell 4.2 percent this week. The Dow Jones Industrial Average advanced 125.38 points, or 1.3 percent, today to 10,193.39. Five stocks gained for every two that fell on U.S. exchanges. All 10 S&P 500 industry groups lost at least 2 percent this week.
“Ultimately the underpinnings of the economy and corporate earnings are sound,” said David Katz, chief investment officer at Matrix Asset Advisors Inc. in New York, which manages $1.2 billion. “The panic and the selloff are mostly done, and we’re using days like today and yesterday to add to our equity exposure. Six months and nine months from now, you’ll be kicking yourself for not having bought more.”
Yesterday’s Drop
The S&P 500 fell 3.9 percent to 1,071.59 yesterday, the biggest drop in 13 months, after jobless claims increased and concern grew that Europe’s debt crisis is spreading. The index started the session trading at about 15.5 times the reported earnings of its companies, the lowest level since July, according to Bloomberg data.
German lawmakers approved their country’s share of a $1 trillion euro-region bailout in a vote today, allaying market concern that they would balk at approving a second emergency aid package in as many weeks.
Copper advanced 4 percent today to $3.061 a pound in New York on speculation that demand will remain ample in China, the world’s biggest metal user. Aluminum, lead and zinc gained in London. Freeport rose 5.3 percent to $67.01. Southern Copper Corp. gained 6.3 percent to $27.85.
Compuware, the business software maker, posted fiscal fourth-quarter profit excluding some items that was 34 percent higher than the average of three analyst estimates in a Bloomberg survey. The shares climbed 9.6 percent to $7.97.
Marvell, Google
Marvell Technologies rose 8.3 percent to $19.32. The maker of processors for the BlackBerry phone reported first-quarter sales and profit that beat the average estimate of analysts surveyed by Bloomberg.
JPMorgan surged 5.9 percent to $40.05, while Bank of America advanced 4.5 percent to $15.99, helping lead a group financial firms and banks to the biggest rally — 3.6 percent — of 10 S&P 500 industry groups. Materials stocks gained the second-most, with a 2.5 percent advance.
The U.S. Senate, bringing congress to the brink of passing the most comprehensive regulation of the financial industry since the Great Depression, yesterday approved a bill that imposes restrictions on proprietary trading by banks and creates a consumer protection agency designed to prevent lending abuses that triggered the housing collapse and the worst unemployment in almost three decades.
MasterCard Upgrade
MasterCard Inc. climbed 4.1 percent to $213.85. Janney Montgomery Scott upgraded shares of the world’s second-biggest payments network to “buy” from “neutral.”
Diamond Offshore Drilling Inc., advancing 3.9 percent to $70.55, led deepwater oil drillers higher after Oppenheimer & Co. said recent declines in the stocks “could indicate a buying opportunity.”
The S&P 500 earlier today declined as much as 1.5 percent to 1,055.9, which took it below the intraday low on May 6, the day panic selling brought about a brief crash before stocks recovered losses. The May 6 bottom was 1,065.79. The Dow tumbled to as little as 9,918.82 today, breaking through the 10,000 level. In the final hour of trading, stocks erased their gains, with the S&P 500 turning negative briefly before climbing again.
“The market is oversold to an extreme, so you’re going to have probably some pretty sensational intraday rallies,” said Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees more than $75 billion in client assets. “The downside momentum is so powerful, you’re going to see a lot of people want to exit on the rallies. That’s what’s causing the markets to move around a lot.”
VIX Declines
The options market benchmark known as the VIX fell 12 percent to 40.10. Options are contracts that grant their buyers the right, but not the obligation, to buy or sell a security or an index’s cash value at a set price.
The decline in U.S. stocks yesterday also pushed the S&P 500 below its average closing price during the previous 200 days, a sign to some analysts that more losses are in store. While the benchmark gauge for U.S. equities traded below its 200-day moving average on May 6 and May 7, it hadn’t closed below the trend line since July 2009, four months into the rally that lifted the index as much as 80 percent from a 12-year low.
Investors withdrew some $12 billion from U.S. and European equity funds in the week to May 19, the most in almost two years, on concern Europe’s sovereign-debt crisis will slow global growth, EPFR Global said.
European Crisis
The Stoxx Europe 600 Index fell for a third day. European finance chiefs, meeting for the fifth time in five weeks in Brussels, pledged to stiffen sanctions on high-deficit countries and ruled out setting up a mechanism to manage state defaults, saying no euro country will be allowed to renege on its debts.
U.S. Treasury Secretary Timothy F. Geithner will visit Germany and the U.K. next week to discuss the European debt crisis, the Treasury said. He will meet U.K. Chancellor of the Exchequer George Osborne, European Central Bank President Jean- Claude Trichet and Germany’s Wolfgang Schaeuble.
Dell fell 6.8 percent to $13.35. Gross margin excluding some items was 17.6 percent after rising component costs eroded the benefit of a rebound in corporate demand. That was below the 17.9 percent anticipated on average by analysts, according to Maynard Um of UBS AG in New York.
Brocade Communications Systems Inc. slid 8.7 percent to $5.36 in New York. The maker of switches for data-storage networks said its second-quarter revenue was $501 million, missing the average analyst estimate in a Bloomberg survey of $503.6 million.
–With assistance from Esme E. Deprez in New York, James G. Neuger and Rainer Buergin in Brussels and Daniela Silberstein in Zurich. Editors: Joanna Ossinger, Michael P. Regan.
To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.
Senate Passes Reforms Designed to Prevent Worst U.S. Collapse
May 21st, 2010 | Posted by stockMay 21 (Bloomberg) — The U.S. Senate, bringing congress to the brink of passing the most comprehensive regulation of the financial industry since the Great Depression, approved a bill that imposes restrictions on proprietary trading by banks and creates a consumer protection agency designed to prevent lending abuses that triggered the housing collapse and the worst unemployment in almost three decades.
The legislation, approved by a 59-39 vote yesterday and requiring reconciliation with a bill passed by the House of Representatives in December, provides a mechanism for liquidating financial institutions, until recently considered too big to fail, a council of regulators monitoring threats to the economy and specific restraints on the trading of so-called derivatives, which spawned the toxic debts that seized up the credit markets in 2007 and 2008 and prompted the Federal Reserve to make trillions of dollars of loans to banks on the brink of insolvency.
“When this bill becomes law, the joyride on Wall Street will come to a screeching halt,” Senate Majority Leader Harry Reid, a Nevada Democrat, said after the vote.
Prohibiting financial institutions from trading derivatives — contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather — is especially controversial and opposed by Wall Street lobbyists and by some regulators, including Fed Chairman Ben S. Bernanke. The proposed consumer protection bureau, which the Senate has placed inside the Fed, would have powers to write and enforce rules banning lending considered abusive.
$150 Billion Fund
House Financial Services Committee Chairman Barney Frank, the Massachusetts Democrat who shepherded a financial-overhaul bill through his chamber last year, said in an interview yesterday that he intends to make sure final legislation has a free-standing Consumer Financial Protection Agency, reflecting President Barack Obama’s original proposal.
Negotiators will have to reconcile differences over a pre- paid $150 billion fund created by the House bill to cover the government’s cost of unwinding a failing financial firm. The Senate bill requires the industry to repay the government only after a company collapses. Frank said yesterday he wouldn’t push to keep the industry-financed pre-paid fund in the bill.
“The two bills are very similar, and the House is ready to go to conference to work out the remaining issues,” Frank said in a statement. “I am confident that we can have a bill ready for President Obama’s signature very soon.”
Wall Street Bailout
Congressional Democrats moved to change regulation of U.S. financial companies after taxpayers provided $700 billion in emergency loans to rescue the insurer American International Group Inc., mortgage lenders Fannie Mae and Freddie Mac, and Citigroup Inc., following the forced takeover of Bear Stearns Cos. by JPMorgan Chase & Co. and the collapse of Lehman Brothers Holdings Inc., the biggest bankruptcy in U.S. history.
The unprecedented bailout of Wall Street was the culmination of the worst housing market since the 1930s, precipitated by so-called subprime mortgages, which were packaged by Wall Street derivatives specialists into toxic fixed-income securities, known as collateralized debt obligations, and sold to investors worldwide. After credit markets froze in 2007, the unemployment rate in the U.S. surged to 10.1 percent during the next two years from 5 percent before the recession began. It remains at 9.9 percent.
‘Hardly Perfect’
Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said the bill is “hardly perfect” and will be improved in the House-Senate negotiations.
Dodd said he planned to consider strengthening language to ban proprietary trading by U.S. banks. The issue was raised in an amendment offered by Democrats Jeff Merkley of Oregon and Carl Levin of Michigan that wasn’t considered during debate of the bill on the Senate floor.
Dodd said he wants to present a revised bill to the Senate before July 4.
Republicans criticized the Senate bill, saying it failed to deal with government-sponsored enterprises Fannie Mae and Freddie Mac, which were seized by the government in 2008. The Republicans also said the consumer financial protection bureau the bill would establish amounts to a massive new bureaucracy.
“We hope that we have a conference where we all are participants and that we’re dealing with trying to reconcile the bill section-by-section and come out with a good piece of legislation, but we’ll have to see about that,” Senator Richard Shelby, the banking committee’s top Republican who voted against the bill, said about the House-Senate talks.
‘Section-by-Section’
Senate Republicans largely stuck together in opposing the bill. Four voted with the Democrats, including Senator Charles Grassley, who became the first Republican to break ranks when he voted for the derivatives bill in committee.
“It was important and essential to engage in fundamental reform of financial institutions at this moment,” Senator Olympia Snowe, a Maine Republican who backed the bill, told reporters after the vote. “The American people have to have the confidence that we’re rectifying many of the issues that really contributed to putting our economy on the precipice.”
The Obama administration welcomed the vote.
“The House and Senate have now each passed strong bills that protect consumers, limit risk-taking by large institutions and address the problem of ‘too-big-to-fail,’” Treasury Secretary Timothy Geithner said in a statement.
Obama’s Outline
The Senate measure adopts priorities Obama outlined last June for strengthening financial rules. It allows the Federal Deposit Insurance Corp. to take apart failing financial firms in an orderly way if their collapse could threaten the economy.
The legislation would push most of the $615 trillion in over-the-counter derivatives to be processed, or cleared, with a third party.
The derivatives language, offered by Senate Agriculture Committee Chairman Blanche Lincoln, also contains one of the most contentious issues of the Senate debate — the measure that would require commercial banks to wall off their swaps-trading operations.
–With assistance from James Rowley in Washington. Editors: Gregory Mott, Lawrence Roberts
To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net. Phil Mattingly in Washington at pmattingly@bloomberg.net.
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.
Goldman Sachs Settlement May Hinge on How SEC Justifies Penalty
May 21st, 2010 | Posted by stockMay 21 (Bloomberg) — Analysts predict Goldman Sachs Group Inc. will pay $1 billion or more to settle a Securities and Exchange Commission fraud suit that triggered a 26 percent drop in the firm’s stock. Extracting such a record-setting penalty may be easier said than done.
When it comes to presenting a settlement for court approval, the SEC will have to “have a good explanation and justification for the number,” said Donald Langevoort, a former SEC attorney who teaches securities law at Georgetown University in Washington.
Looming over negotiations between the SEC and Wall Street’s most profitable investment bank is a reminder from Judge Jed Rakoff that courts can reject settlements — even when the SEC’s adversary is willing and able to pay. Rakoff, a U.S. district court judge in Manhattan, refused to sign off on a $33 million accord with Bank of America Corp. in September, noting that the SEC didn’t justify how it came up with the dollar amount.
A sanction in the range of $1 billion would be hard to justify based on the allegations in the Goldman Sachs complaint, according to James Coffman, a former SEC enforcement official who retired in 2007. That figure would be more than double what any Wall Street firm has agreed to pay as part of a civil settlement with authorities.
Under one formula outlined in securities laws, the SEC could impose a maximum $15 million penalty on the bank to resolve fraud allegations that it misled buyers of mortgage- backed investments. That formula has been routinely ignored in enforcement cases and the SEC will seek more from a firm depicted as an icon of Wall Street greed at congressional hearings, Coffman said.
$1 Billion ‘Goalpost’
The SEC’s April 16 complaint accused Goldman Sachs of defrauding investors in a collateralized debt obligation linked to home loans. The firm concealed the fact that Paulson & Co., a New York-based hedge fund, picked components of the CDO and bet it would collapse, the agency said. Goldman Sachs, which underwrote and marketed the product in 2007, collected about $15 million in fees and Paulson reaped a $1 billion profit. The remaining investors lost more than $1 billion, according to the complaint.
Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein, 55, has denied wrongdoing. Paulson hasn’t been accused of any impropriety and the firm’s founder, John Paulson, has said it didn’t market the transaction or have authority to select securities in the CDO.
The $1 billion loss for investors has become the minimum “goalpost” that the public expects the SEC to reach, according to James Cox, a securities law professor at Duke University in Durham, North Carolina.
‘Whatever it Takes’
A settlement would cost the firm “at least $1 billion, if not more, which they can easily pay,” Matt McCormick, an analyst at Bahl & Gaynor Inc. in Cincinnati, which manages about $2.8 billion, said in an April 30 Bloomberg Television interview. The firm “will do whatever it takes to get this away, or at least they should.”
As the agency’s first effort to punish a bank for creating and selling securities tied to subprime mortgages, the Goldman Sachs case will be dissected by the industry, in Congress and in the media, Coffman said.
“There’s been a lot of attention paid to this on Capitol Hill and in the press,” said Coffman, who predicts Goldman Sachs will pay about $100 million. The SEC will consider “how much public interest there is in sending a strong message and coming up with a settlement that shows the cops are on the beat.”
SEC spokesman John Nester and Goldman Sachs spokesman Michael Duvally declined to comment.
Softening Its Tone
Public statements from Goldman Sachs have softened in the month since the SEC announced its case as the firm’s image and stock price have taken a beating.
In an April 16 press release, Goldman Sachs called the suit “completely unfounded” and pledged to “vigorously” defend its reputation. Four days later, co-General Counsel Greg Palm broached the idea of resolving the case, saying on a conference call with investors that “you always have the option” of settling if both sides forge an agreement.
In the days following an April 27 Senate hearing where Goldman Sachs managers were accused of putting the firm’s interest ahead of clients, two executives at the firm who spoke on condition of anonymity said the company was eager to settle the SEC case in an attempt to contain the reputational damage.
Ramifications of Accord
The subject of how much money the firm may pay hasn’t been discussed during early discussions between the SEC and Goldman Sachs, according to a person briefed on the matter, speaking anonymously because the talks were private.
Negotiations are more likely to stall over the terms of a settlement than the size of any fine, said two people familiar with Goldman Sachs’s thinking. Goldman Sachs would resist agreeing to an accord that said it committed fraud because doing so could affect the firm’s business, they said.
Settling a fraud case would restrict Goldman Sachs and its employees from managing investment companies registered with the SEC, unless the bank got an exemption from the agency.
Goldman Sachs’s asset management unit currently oversees mutual funds, money-market funds and bond funds, according to its website. Goldman Sachs would also risk losing its ability to raise money quickly through securities sales without meeting certain regulatory burdens.
The SEC and New York-based Goldman Sachs will have to litigate if they can’t agree on an accord.
‘Pecuniary Gain’
The SEC suit cites the Securities Act of 1933 and the Securities Exchange Act of 1934. Both laws limit their most severe fines to either $650,000 per violation or the “pecuniary gain” reaped by the defendant.
SEC investigators don’t have to follow those limitations if they can persuade companies to pay more, a majority of agency commissioners vote to approve the settlement and a judge signs off on the accord, said former SEC Commissioner Paul Atkins.
“It’s basically what the two sides hammer out,” he said.
Goldman Sachs argues the $15 million in commissions it received for putting the CDO together were offset by more than $90 million the firm lost on its own stake in the transaction.
ABN Amro Bank NV lost more than $840 million and Dusseldorf, Germany-based IKB Deutsche Industriebank AG lost most of its $150 million investment, according to the SEC.
The SEC typically requires defendants in a settlement to pay a fine and return ill-gotten profits to victims.
Citigroup’s 2003 Settlement
Citigroup Inc. paid $400 million in 2003 to settle SEC and state allegations that its analysts hyped telecommunications stocks that its researchers privately thought were underperformers.
The SEC said in its complaint that Citigroup made $790 million in revenue from underwriting telecom securities from 1999 through 2001, relying on analysts to “generate substantial profits” for the company’s investment bankers.
Citigroup agreed to a $150 million fine, returned $150 million of ill-gotten gains, and paid $100 million to provide clients with independent research and investor education.
Bank of America, in the second-biggest agreement between the SEC and a bank in the past decade, paid $375 million in 2004 to settle claims the company didn’t disclose that some of its mutual funds allowed clients to make trades detrimental to other investors.
Charlotte, North Carolina-based Bank of America paid a $125 million fine and $250 million in disgorgement. Its fine was 10 times the $12.5 million in revenue the SEC said it received from one of the hedge funds making improper trades.
Prudential’s Choice
Prudential Securities Inc. agreed in a 1993 settlement with the SEC and state regulators to pay $371 million in restitution and fines, and to fully compensate all investors who lost money in oil, gas and real estate partnerships it sold without disclosing the risks. Over time the company paid more than $1 billion to resolve claims dating back to the 1980s.
Goldman Sachs remains the most profitable firm in Wall Street history. It earned $13.4 billion in 2009 and an additional $3.5 billion in the first three months of 2010.
“Money hurts but limitations on business can hurt in a lot more ways and that can be the hurt that keeps on giving,” Coffman said.
LBO Debt Tumbles Revealing ‘Leveraged Fantasy’: Credit Markets
May 21st, 2010 | Posted by stockMay 21 (Bloomberg) — First Data Corp. and Energy Future Holdings Corp., among the biggest leveraged buyouts in history, are leading junk bonds to their worst performance since 2008 as the sovereign debt crisis sweeping Europe makes it harder for the neediest borrowers to refinance.
First Data notes have lost 15 percent this month and securities of Energy Future, the largest ever buyout, have declined 9.9 percent. Sales of high-yield notes this week dropped to the lowest this year, amid signs the global economic recovery is being derailed.
“LBO’s need growth to de-lever. They also need access to capital markets to continue pushing out maturities,” said Jason Rosiak, the head fund manager overseeing $2.7 billion at Pacific Asset Management, an affiliate of Pacific Life Insurance Co. in Newport Beach, California.
Investors around the world are ditching corporate bonds at the fastest pace in 19 months and turning to the safety of Treasuries. High-yield debt has lost 3.5 percent, on pace for the first monthly drop since February 2009, after gaining 7.2 percent this year through April, according to Bank of America Merrill Lynch Index data.
Interbank lending rates are the highest since July, new bond sales worldwide have plunged 61 percent this month and a weeklong rout in stocks deepened, with U.S. benchmark indexes losing the most in more than a year.
First Data Notes
First Data’s $2.4 billion of 11.25 percent notes due in 2016 have fallen 17.75 cents this month to 66.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The credit card processor, based in Atlanta, which KKR & Co. paid $27.5 billion for in 2007, lost $240 million last quarter and failed to improve profitability, said Stan Manoukian, an analyst at Independent Credit Research in Los Angeles. “Assumptions on revenue and earnings growth made during the LBO purchase by KKR have proven to be a leveraged fantasy.”
Elsewhere in credit markets, the cost to protect against losses on corporate bonds using credit-default swaps rose on investor concern Europe will struggle to contain its debt crisis and the U.S. economic recovery is faltering.
The Markit CDX North America Investment Grade Index, a benchmark indicator of credit risk tied to 125 companies in the U.S. and Canada, rose 12.25 basis points to a mid-price of 125.5 basis points as of 6:07 p.m. in New York, according to prices from Markit Group Ltd. The index has climbed 33.6 basis points this month and is on pace for the largest monthly increase since November 2008, CMA DataVision prices show.
Bond Risk
In London, the Markit iTraxx Europe Index of contracts linked to the debt of 125 companies climbed 7 basis points to a mid-price of 127.25, after earlier advancing to the highest level in more than a week, Markit data show.
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan jumped 16 basis points to 155.5 as of 2:00 p.m. in Singapore, according to Royal Bank of Scotland Group Plc and CMA. The Markit iTraxx Australia index rose 14 basis points to 136 as of 4:04 p.m. in Sydney, on course for its highest close since Sept. 7, according to Nomura Holdings Inc and CMA prices.
“This correction is only the start of the end-game,” said Mark Bayley, a Sydney-based credit strategist with advisory firm Aquasia Ltd. “Markets are only slowly grasping that we cannot continue to finance deficits with more debt. At some stage governments, and consumers, need to stop spending, re-jig finances and plot a more austere and cautious future path.”
Investor Confidence
Credit-default 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. The indexes typically rise as investor confidence deteriorates and fall as it improves.
The extra yield investors demand to own corporate debt instead of government securities rose 7 basis points to 184 basis points, or 1.84 percentage point, the highest in five months, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. It’s up from as low as 142 on April 21. Spreads have climbed 35 basis points this month, the most since they rose 108 basis points in October 2008. Average yields fell to 3.931 percent, tracking benchmark government bonds, the index shows.
“Rising spreads can become a self-fulfilling prophecy that makes it harder to price new debt, which can translate into higher levels of default,” said Arthur Tetyevsky, chief U.S. credit strategist at Gleacher & Co. in New York.
Corporate borrowers have sold $44.7 billion of debt worldwide this month, compared with $113.6 billion in the same period of April, according to data compiled by Bloomberg. Monthly sales this year have averaged $237.8 billion.
Commercial Paper
Seasonally adjusted commercial paper outstanding declined $27 billion in the week ended May 19, the biggest drop since Jan. 6, to $1.08 trillion, Bloomberg data show. The top-ranked dealer-placed commercial paper due in 30 days yielded 0.29 percent May 19, the highest rate since Sept. 11, 2009. The market for the short-term corporate IOUs, without seasonal adjustment, declined $23 billion to $1.06 trillion, the lowest level since June 1998.
“You have a ton of stress in short-term money markets right now,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “If you don’t think it’s necessary to continue to expand capacity, given what may be a slowdown in demand, then you’re going to slow down your funding.”
Money markets are showing rising levels of mistrust between Europe’s banks on concern an almost $1 trillion bailout package won’t prevent a sovereign debt default by Greece and other debt-laden nations in the region.
Libor-OIS
The rate banks say they charge each other for three-month loans in dollars rose for the eighth consecutive day to the highest level since July 29. The three-month London interbank offered rate in dollars, or Libor, climbed almost one basis point to 0.484 percent yesterday and from 0.252 at the end of February, according to the British Bankers’ Association.
The spread between the three-month Libor rate and the overnight indexed swap rate, a barometer of the reluctance of banks to lend that’s known as the Libor-OIS spread, increased to 25.2 basis points from 24.7, the most since Aug. 13.
The spread, which compares three-month dollar Libor and the overnight indexed swap rate, surged to 364 basis points, or 3.64 percentage points, after the 2008 collapse of Lehman Brothers Holdings Inc.
Loan Market
In the loan market, prices on the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, fell 0.7 cent to 89.59 cents on the dollar, the lowest level since March. The index is down from this year’s high of 92.90 cents on April 26.
National Vision Inc. an optical retailer owned by buyout firm Berkshire Partners LLC, postponed a six-year, $220 million term loan because of volatility, according to people familiar with the decision. JPMorgan Chase & Co. was arranging the financing for the Lawrenceville, Georgia-based company.
In a sign that some parts of the credit markets are functioning, Bank of America Corp. is marketing bonds backed by high-risk U.K. mortgages in the first public deal of its kind since August 2007.
The largest U.S. lender by assets, based in Charlotte, North Carolina, plans to issue 744 million pounds ($1.1 billion) of notes through Moorgate Funding 2010-1, a company set up to package home loans into securities, according to three people familiar with the matter.
‘Encouraging News’
Barclays Plc may sell dollar-denominated bonds backed by U.K. credit-card payments, according to Standard & Poor’s. The top-rated bonds, to be issued through Gracechurch Card Program Funding, a special purpose company set up to package card payments into securities, will have an expected maturity of May 2013, S&P said.
“That issuers decide to go ahead with new deals is encouraging news,” said Paolo Binarelli, a Rome-based money manager at P&G SRL. “The prices of existing bonds have shown some resilience to the bad news.”
The extra yield investors demand to own emerging-market bonds instead of Treasuries rose 31 basis points to 346 basis points, the widest spread since September, according to JPMorgan’s Emerging Market Bond index.
Argentine relative borrowing costs surged to the highest level since September after the country’s debt restructuring attracted fewer investors than analysts expected. The spread on the country’s bonds swelled 72 basis points to 854 basis points as of 5:09 p.m. in New York, according to JPMorgan.
Junk Bonds
The loss in junk bonds this month is on pace to exceed the 3.47 percent drop in February 2009, which was last year’s worst. It is on course to be the biggest drop in the market since the debt tumbled 8.43 percent in November 2008.
Spreads on high-yield bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P, soared 33 basis points yesterday to 692 basis points, according to Bank of America Merrill Lynch index data.
Companies bought by private-equity firms during the LBO boom that ended in 2007 are among the biggest issuers in speculative-grade markets, have the most actively traded bonds and typically are the first to be sold when markets deteriorate, Rosiak said.
First Data has $14.3 billion of loans and bonds coming due by 2014, according to Bloomberg data. Patrick Shannon, the company’s chief financial officer told investors on May 14 the company has “a four-year runway before significant maturities are due.” Chip Swearngan, a First Data spokesman, and Kristi Huller of New York-based KKR declined to comment.
Fund Managers
The selling is being exacerbated because fund managers are holding relatively low levels of cash, prompting them to raise more on concern investors will seek to redeem funds, Rosiak said.
The cost to protect the debt of Energy Future, which was taken private by KKR and TPG Capital for $43 billion in October 2007, has soared 3.4 percentage points this month to 18.1 percentage points annually, according to CMA prices. The company’s $2.94 billion of 11.25 percent bonds due in 2017 fell 3 cents to 64 cents on the dollar yesterday, according to Trace. The bonds have declined 7.25 cents this month after rising from 52 cents on the dollar in May 2009.
Lisa Singleton, a spokeswoman for Energy Future, the Dallas-based electricity provider formerly known as TXU Corp., declined to comment on the bond price movements.
Clear Channel
Clear Channel Communications Inc. bonds fell by the most in 18 months yesterday, Trace data show. The company’s 5.5 percent notes due in 2014 dropped 3.5 cents to 56.5 cents on the dollar, Trace data show.
San Antonio-based Clear Channel Communications, the largest radio station owner in the U.S., was taken private by Bain Capital Partners LLC and Thomas H. Lee Partners LP in a $17.9 billion buyout in July 2008.
Credit-default swaps protecting against a default by First Data for five years have climbed 3.9 percentage points since April 30 to 12.1 percentage points, according to CMA.
Swaps on Freescale Semiconductor Inc., the Austin, Texas- based computer chipmaker bought in 2006 for $19 billion by a group led by Blackstone Group LP, climbed to the highest since November. Five-year contracts have jumped the equivalent of 4.4 percentage points to 12.7 percentage points this month, the highest since November, CMA prices show.
–With assistance from Tim Catts, John Detrixhe, Whitney Kisling in New York, Abigail Moses and Caroline Hyde in London, Drew Benson in Buenos Aires and Esteban Duarte in Madrid, Katrina Nicholas in Singapore and Ed Johnson in Sydney. Editors: Alan Goldstein, Richard Bedard
To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net
To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net;
Asian Stocks Fall to Nine-Month Low on U.S., Europe Concerns
May 21st, 2010 | Posted by stockMay 21 (Bloomberg) — Asian stocks fell, dragging the MSCI Asia Pacific Index to a nine-month low, after U.S. jobless claims rose and concern grew European leaders will fail to contain the spread of the region’s debt crisis.
Honda Motor Co., which gets about 81 percent of its sales from overseas, declined 2.5 percent in Tokyo as an index of U.S. leading economic indicators declined. PetroChina Corp., China’s largest oil producer, sank 1.6 percent on lower crude prices. Sonic Healthcare Ltd., which provides medical tests, tumbled 20 percent in Sydney after saying earnings will be less than forecast.
The MSCI Asia Pacific Index slumped 1.4 percent to 111.83 as of 3:42 p.m. in Tokyo, the lowest level since Aug. 21. The gauge has tumbled 13 percent from its high this year on April 15 on concern Europe’s mounting government deficits will derail the economic recovery. Germany this week introduced a ban on naked short selling to calm the region’s financial markets.
“A combination of events has made investors reassess the outlook for the global economy,” said Stephen Halmarick, Sydney-based head of investment-markets research at Colonial First State Global Asset Management, which holds about $138 billion. “There’s clearly been a major reduction in risk appetite globally and it’s difficult to see the situation stabilizing in the near term.”
Japan’s Nikkei 225 Stock Average dropped 2.5 percent and Australia’s S&P/ASX 200 Index slipped 0.3 percent after falling as much as 3.3 percent. Taiwan’s Taiex decreased 2.5 percent, while China’s Shanghai Composite Index advanced 0.6 percent after shedding as much as 2.9 percent. Stock markets in South Korea and Hong Kong are closed today for holidays.
Taiwan, Singapore Slump
The sell-off in stocks dragged benchmark indexes in Taiwan, Singapore, Vietnam and Indonesia to more than 10 percent from their recent peaks. Singapore’s Straits Times Index slumped 1.7 percent, taking its tumble from this year’s high on April 14 to 10 percent.
Futures on the Standard & Poor’s 500 Index gained 0.6 percent. The index plunged 3.9 percent yesterday as the leading indicators and jobless claims reports raised concern about the strength of growth in the world’s largest economy.
The Stoxx Europe 600 Index slumped 2.2 percent yesterday, as uncoordinated attempts by policy makers to resolve the region’s debt crisis unnerved investors. France, the Netherlands and Finland said they have no plans to follow German Chancellor Angela Merkel’s effort to control what she called “destructive” markets by restricting short selling.
Honda, Toyota
German regulators banned investors from naked short sales of 10 banks and insurers, as well as naked credit-default swaps on euro-area government bonds this week, triggering a global flight from equities. Declines this month have wiped $5.3 trillion from the value of global equities.
Honda sank 2.5 percent to 2,823 yen in Tokyo. Toyota Motor Corp., the world’s largest automaker, slid 1.9 percent to 3,355 yen and was the biggest drag on the MSCI Asia Pacific Index. Canon Inc., a camera maker that counts Europe as its biggest market by revenue, dropped 2.6 percent to 3,725 yen.
Commodity companies declined after oil and metal prices fell. Rio Tinto Group, the world’s third largest mining company, fell 0.7 percent to A$61.80.
Jiangxi Copper Co., China’s biggest producer of the metal, lost 1.3 percent to 27.83 yuan in Shanghai. PetroChina dropped 1.6 percent to 10.70 yuan. Noble Group Ltd., the commodities supplier partly owned by China Investment Corp., sank 4.1 percent to S$1.63 in Singapore.
2010’s Gain Erased
Crude oil for June delivery fell 2.3 percent in New York yesterday as doubts about the strength of the economic recovery prompted investors to sell commodities.
The MSCI Asia Pacific Index’s slump since April has erased its gains for the year, leaving it down 7.2 percent for 2010. Stocks in the measure trade at an average 14 times estimated earnings, the lowest level since January 2009. The gauge has fallen 6.9 percent this week, set for the sharpest weekly decline since February last year.
“Investors appear to have thrown in the towel,” said Prasad Patkar, who helps manage about $1.7 billion in Sydney at Platypus Asset Management Ltd. “This does feel like capitulation. Still, the base case is that macro worries will settle down and investors will be able to refocus on fundamentals.”
Leading Indicators
The MSCI Asia Pacific Index had rallied 11 percent from the start of February through to its high in April on signs of a global recovery. Japan’s gross domestic product grew 4.9 percent in the three months ended March, the government announced yesterday, the quickest pace in three quarters.
That missed the 5.5 percent increase projected by economists. The U.S. Conference Board reported yesterday that its index of leading economic indicators declined in April, a sign the economic expansion may cool in the second half of the year. Labor Department figures showed that Americans filing applications for unemployment benefits last week rose by 25,000 to 471,000, more than economists estimated.
“With no exit in sight for Europe’s problem, people are afraid a global financial crisis will erupt,” said Juichi Wako, a senior strategist at Tokyo-based Nomura Holdings Inc.
Sonic Healthcare plunged 20 percent to A$10.07 in Sydney, the biggest decline in the MSCI Asia Pacific Index. The company said earnings will be less than forecast after the Australian government cut subsidies on medical tests. JPMorgan Chase & Co. and Morgan Stanley cut their recommendations on the stock.
–With assistance from Kotaro Tsunetomi and Masaki Kondo in Tokyo. Editors: Darren Boey, Nicolas Johnson.
To contact the reporters for this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.
To contact the editor responsible for this story: Darren Boey in Tokyo at dboey@bloomberg.net.
BOJ to Provide One-Year Loans to Tackle Deflation (Update2)
May 21st, 2010 | Posted by stock5-21-2010 (Updates with economist’s comment in seventh paragraph.)
By Mayumi Otsuma
May 21 (Bloomberg) — The Bank of Japan said it will provide one-year loans to banks to encourage lending and defeat deflation, and raised its assessment of the export-led recovery.
The central bank will offer the loans at the same rate as the key overnight rate, which Governor Masaaki Shirakawa’s board left at 0.1 percent today. The economy is “starting to recover moderately, induced by improvement in overseas economic conditions,” it said in a statement, adding that it’s watching how Europe’s fiscal woes might affect the global recovery.
The decision came as Japanese stocks had their worst weekly drop in more than a year on concern that the worldwide recovery will stall. Prime Minister Yukio Hatoyama’s government, seeking to tame record public debt, may step up pressure on the bank to support the economy ahead of a July election.
“The new loan program, an extraordinary step for a central bank, seems to be Shirakawa’s response to political calls on the bank to ease policy,” Mari Iwashita, chief market economist at Nikko Cordial Securities Inc. in Tokyo, said before the announcement.
The Nikkei 225 Stock Average slid 2.5 percent to 9,784.54 at the close in Tokyo today, capping off the biggest weekly drop since January 2009. The yen fell 1.2 percent to 113.38 per euro after reaching an eight-year high yesterday. Japan’s currency also slid 0.7 percent to 90.28 against the dollar.
Tackle Deflation
Shirakawa last month instructed BOJ staff to hammer out details of the lending plan, his latest attempt to tackle deflation that he says has been prolonged by stagnating economic growth as the population ages and productivity drops. He has said the credit would seek to spur lending in areas such as energy, the environment and technology.
“The most important message from this lending program is that the BOJ wants the government to seriously step up efforts to spur the nation’s growth prospects,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo. “The facility’s impact on the economy will probably be small and the BOJ is aware of that.”
To be eligible for financing, commercial lenders would report to the BOJ on loans they have already made to companies and explain how the projects can bolster economic growth.
“The bank will provide loans to each counterparty based on its actual amount of lending and investment that were carried out under the plan,” it said.
Backed by Collateral
The number and size of rollovers on the one-year loans, which will be backed by collateral, will be decided when the bank implements the facility. It will also determine the application period.
A government report yesterday showed gross domestic product grew at an annual 4.9 percent rate last quarter, slower than economists forecast. More than half of the expansion came from trade as consumer spending growth cooled, underscoring Japan’s vulnerability to any global slowdown.
The policy board said in the statement that it is watching the development of the fiscal situation in Europe and how it might affect the global economy. Earlier today the bank pumped 1 trillion yen ($11 billion) of same-day funds into the banking system to boost liquidity, the third such addition since May 7.
Japan’s export recovery has prompted companies from Nissan Motor Co. to Tokyo Electron Ltd. to forecast higher profits and spending. At home, deflation lingers even after the GDP report showed a gauge of domestic price declines eased last quarter.
Pressure From Kan
Finance Minister Naoto Kan said yesterday he expects the central bank to support an economy that’s not yet in a self- sustained recovery.
“With the fiscal situation being as severe as it is, the government will put a lot of hope in monetary policy” to ease deflation, said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo.
The International Monetary Fund?said this week that fiscal adjustment is “critical,” while the BOJ should consider further measures to combat deflation. The fund has calculated Japan’s public debt exceeded twice the size of GDP last year.
The European Central Bank’s decision this month to start buying government bonds may spur political pressure on the BOJ to increase its monthly purchases of the country’s debt from 1.8 trillion yen, said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.
“Politicians would raise calls on the BOJ to buy more bonds should long-term interest rates start to surge,” he said.
The yield on Japan’s 10-year bond fell two basis points to 1.235 percent at 3:48 p.m. in Tokyo.
The BOJ cut the key rate to 0.1 percent in December 2008, and in March doubled to 20 trillion yen a credit facility that provides three-month loans to commercial banks at that rate.
“The latest program will probably have only a limited impact on the economy, but the step would be less harmful than increasing sovereign bond purchases,” Teizo Taya, a former BOJ board member who is now an adviser at the Daiwa Institute of Research, said before the decision. “The BOJ will probably continue to examine policy measures that have a minimal adverse effect.”
–With assistance from Masahiro Hidaka, Aki Ito and Keiko Ujikane in Tokyo. Editors: Russell Ward, Lily Nonomiya
%JPY BOJDTR <Index>
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net
Stock Funds See Biggest Exit in Two Years, EPFR Says (Update3)
May 21st, 2010 | Posted by stock5-21-2010 (Adds comment on German trading curbs in fifth paragraph, China, Taiwan flows in eighth paragraph.)
By Jonathan Burgos and Garfield Reynolds
May 21 (Bloomberg) — Investors withdrew some $12 billion from U.S. and European equity funds in the week to May 19, the most in almost two years, on concern Europe’s sovereign-debt crisis will slow global growth, EPFR Global said in an e-mail.
“A combination of events has made investors reassess the outlook for the global economy,” said Stephen Halmarick, Sydney-based head of investment-markets research at Colonial First State Global Asset Management, which oversees about $138 billion. “There’s clearly been a major reduction in risk appetite globally and it’s difficult to see the situation stabilizing in the near term.”
Euro-area ministers and the International Monetary Fund agreed on May 2 to an aid package for Greece worth 110 billion euro ($138 billion). The debt-stricken nation then pledged to implement austerity measures of almost 14 percent of gross domestic product in exchange for the rescue funds EU officials hoped would stem declines in the euro.
The initial bailout failed to slow the slide in the euro and end the decline in bonds of other high-deficit nations such as Spain and Portugal. EU leaders a week later agreed to a financial lifeline of almost $1 trillion to stop contagion.
The euro fell to as low as $1.2144 on May 19, the weakest level since April 2006, after Germany unilaterally banned some speculative short sales. France, the Netherlands and Finland said they have no plans to follow German Chancellor Angela Merkel’s effort to control what she called “destructive” markets by restricting short selling.
Trading Curbs
Germany’s trading curbs added pressure on European equity funds as investors withdrew $4.8 billion during the week ended May 19, EPFR said. Investors also redeemed $7 billion from U.S. equity funds and $284 million from Japanese equity funds during the week, it added.
That’s the biggest equity fund redemption globally since the week ended June 25, 2008, when investors withdrew $27.7 billion from equity funds, Brad Durham, managing director at the Massachusetts-based research firm, wrote in an e-mail. Stocks worldwide tumbled that week as crude oil rose to a record amid a slowing U.S. economy and mounting credit-market writedowns.
Commodities funds, along with those for U.S. bonds, emerging-market debt and Asia ex-Japan equities received inflows as investors sought assets that may offer shelter amid the slide in European stocks and bonds, EPFR said. Investments into China equity funds climbed to a four-week high, while Taiwan equity funds posted their biggest inflow since February, it added.
–With assistance from Shani Raja in Sydney. Editor: Nick Gentle.
To contact the reporters on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net Jonathan Burgos in Singapore at jburgos4@bloomberg.net.
To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net.
Seeking Bargains in Battered Europe
May 21st, 2010 | Posted by stock
5-21-2010 Not all investors are taking the Continent-wide crisis as a reason to flee Europe. Some money managers see it as a chance to go bargain hunting. One theory: The euro’s slump, to a 4-year low against the U.S. dollar, will boost exporters and lift economies.
David G. Herro of Harris Associates, named the international fund manager of the decade this year by Morningstar (MORN), bought shares of Spain’s Banco Santander (STD) in the past month. He added to his stake in Paris-based yogurt maker Groupe Danone (GDNNY), which posted its fastest quarterly sales growth in two years on Apr. 15. Howard F. Ward of the Gabelli funds, boosted his investment in Munich-based Siemens (SI).
“Global blue chips based in Europe are probably the most attractively valued equities today,” says Herro, chief investment officer of international equities at Harris Associates, parent of the Oakmark mutual funds. Herro says he’s scooping up shares that have fallen too far, too fast, and 8 of the top 10 holdings in his $5.3 billion Oakmark International Fund (OAKIX) were European stocks at the end of March. The fund returned 5.5 percent annually in the past five years, beating 86 percent of peers, Bloomberg data show. “Other people say, ‘It’s messy. I’m not going to go in there,’ ” Herro says. “But this is when you should go in.”
The currency’s fall should boost exporters, says David Darst, chief investment strategist at Morgan Stanley Smith 
Barney: “European stocks are a buying opportunity.” Analysts lifted profit estimates for the next year for companies in the Euro Stoxx 50 index by 2.5 percent in April, the most since 2006. The index traded at 9.7 times forecast income on May 7. That was the cheapest since April 2009, before the index began a rally that sent it 35 percent higher in a year.
Credit Suisse (CS) earlier this month advised investors to favor European stocks in global holdings, citing low valuations and a weakening euro. Goldman Sachs (GS) strategists wrote in a report that European stocks are “down but not out” as profits increase in the region. UBS (UBS) and Deutsche Bank (DB) issued recommendations to increase investments in Germany, Europe’s largest market, because shares in the country are more geared to global growth than to Europe’s most-indebted economies.
Amid all that enthusiasm, some sounded a more cautious note. “I wouldn’t jump in,” says Robert Doll, vice-chairman and chief equity strategist at BlackRock (BLK), which manages more than $3 trillion. “I’d still rather invest in the U.S., where the recovery is stronger.” Yet buying into uncertainty can be more profitable. “Europe has become very cheap, and the fall of the euro has made it more attractive,” says Max King, a London-based investment strategist at Investec Asset Management, which oversees about $55 billion. “If you wait until all the concerns are resolved, then you’ll always be buying at the peak.”
The bottom line: Investing in Europe now is a bet that the debt crisis will be contained and that the weaker euro will help big exporters improve sales.
Thomasson is a reporter for Bloomberg News. Nazareth is a reporter for Bloomberg News .
How Big a Hit Will Goldman Take?
May 20th, 2010 | Posted by stock
5-20-2010 As the U.S. Securities & Exchange Commission wrestles with Goldman Sachs (GS) to settle fraud charges, it will be under pressure from lawmakers and the public to punish the Wall Street giant with a fine that some legal analysts predict could be $1 billion or more. “There’s been a lot of attention paid to this on Capitol Hill and in the press,” says James Coffman, a former SEC attorney who negotiated a $300 million settlement with Time Warner (TMX) in 2005. Coffman predicts Goldman Sachs will pay “about $100 million or more” in any accord it reaches with the SEC. Others think the tab will be higher. “The goalpost is $1 billion, minimum,” says James Cox, a securities law professor at Duke University. That would be the biggest settlement ever by a financial company.
In preliminary settlement talks between the SEC and Goldman Sachs, the subject of how much money the firm may pay hasn’t been discussed, according to a person familiar with the matter. SEC spokesman John Nester and Goldman Sachs spokesman Michael DuVally declined to comment.
The SEC’s Apr. 16 lawsuit accused Goldman Sachs of fraud for not disclosing that Paulson & Co. picked the underlying securities in a collateralized debt obligation that the hedge fund planned to bet against. Goldman Sachs received about $15 million in fees while investors in the CDO lost more than $1 billion, the agency said. Goldman Sachs has denied any wrongdoing in the deal.
The SEC suit cites the Securities Act of 1933 and the Securities Exchange Act of 1934. Both laws limit their most severe fines to either $650,000 per violation or the “pecuniary gain” reaped by the defendant. According to former SEC Commissioner Paul Atkins, SEC investigators don’t have to follow those limitations if they: persuade companies to pay more; a majority of agency commissioners vote to approve a settlement; and a judge signs off on the pact. “It’s basically what the two sides hammer out,” Atkins says.
Negotiations are more likely to stall over the terms of a settlement than the size of any fine, said two people familiar with Goldman Sachs’s thinking. Goldman Sachs would resist agreeing to an accord that said it committed fraud because doing so could affect the firm’s business, the people said. Such a settlement likely would restrict Goldman Sachs and its employees from managing investment companies registered with the SEC. Goldman Sachs’ asset management unit oversees mutual funds, money-market funds, and bonds funds. “Money hurts, but limitations on business can hurt in a lot more ways and that can be the hurt that keeps on giving,” said Coffman, who retired as an assistant director of enforcement at the SEC in 2007.
The SEC may press Goldman Sachs to agree in future transactions to improve its disclosures to sophisticated clients like the firms that invested in the CDO, says Elizabeth Nowicki, who teaches securities law at Boston University. “That would actually be a far bigger win for the SEC” than a one-time penalty because it would likely lead to industrywide reform, she says.
The bottom line: Even a big fine won’t dent a powerhouse like Goldman. Admitting fraud, however, could damage its reputation and drive away clients.
Westbrook is a reporter for Bloomberg News. Scheer is a reporter for Bloomberg News.
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