Sunday, April 03, 2011

Asian Stocks Advance on Faster U.S. Jobs Growth, Weaker Yen

Asian stocks rose, driving the regional benchmark index to a three-week high, after a report showing U.S. jobs grew faster than forecast and a weakening yen boosted optimism in an economic recovery.

Canon Inc. (7751), which receives 28 percent of its revenue from the Americas, gained 1.2 percent in Tokyo. Fast Retailing Co., Asia’s biggest apparel chain, jumped 5.7 percent after Credit Suisse Group AG and UBS AG recommended investors “buy” the Japanese stock. Woodside Petroleum Ltd. (WPL), Australia’s second- largest oil and gas producer, increased 0.8 percent after oil prices climbed to a 30-month high.

“The U.S. jobs data had recovered more than expected, so investors’ risk tolerance will increase,” said Toshiyuki Kanayama, a market analyst at Tokyo-based Monex Inc. “The yen is reacting to the jobs data, and this should be a plus for exporters.”

The MSCI Asia Pacific Index advanced 0.5 percent to 136 as of 9:45 a.m. in Tokyo, heading for its highest close since March 10, with two stocks rising for each that fell. The index has increased for two straight weeks as Japanese companies began resuming production after the nation’s worst earthquake on record on March 11 and as Chinese firms posted profits that beat analyst estimates.

Japan’s Nikkei 225 (NKY) Stock Average climbed 0.8 percent. Australia’s S&P/ASX 200 Index rose 0.6 percent and New Zealand’s NZX 50 Index gained 0.1 percent. South Korea’s Kospi Index fell 0.1 percent.

Futures on the Standard & Poor’s 500 Index were little changed today. The index rose 0.5 percent on April 1, adding to gains from the market’s biggest first-quarter rally since 1998, as faster-than-forecast jobs growth bolstered optimism and Nasdaq OMX Group Inc. started a bidding war for NYSE Euronext.

U.S. Employment

A U.S. government jobs report showed the U.S. unemployment rate dropped to a two-year low of 8.8 percent in March from 8.9 percent in February. Payrolls grew by 216,000 workers after a 194,000 gain the prior month, the Labor Department said. Economists projected a March gain of 190,000, according to the median estimate in a Bloomberg survey.

The yen depreciated to as low as 84.38 against the dollar today, compared with 83.55 at the close of stock trading in Tokyo on April 1. A drop in the yen increases the value of overseas income at Japanese companies when converted into their home currency.

Crude oil for May delivery advanced as much as 0.6 percent to $108.60 a barrel in electronic trading on the New York Mercantile Exchange.

The MSCI Asia Pacific Index lost 1.7 percent this year through April 1, compared with gains of 6 percent by the S&P 500 and 1.5 percent by the Stoxx Europe 600 Index. Stocks in the Asian benchmark are valued at 13.1 times estimated earnings on average, compared with 13.7 times for the S&P 500 and 11.2 times for the Stoxx 600.

Deutsche Boerse-NYSE Takeover Turning Table on Shareholder Value: Real M&A

Duncan Niederauer’s wish for NYSE Euronext (NYX)’s takeover by Deutsche Boerse AG (DB1) to be a merger of equals may be coming true -- at the expense of shareholders in the Frankfurt-based exchange.

Nasdaq OMX Group Inc. (NDAQ) and IntercontinentalExchange Inc. (ICE)’s unsolicited bid last week for NYSE Euronext valued the operator of the New York Stock Exchange at $42.50 a share, topping a February offer from Deutsche Boerse by almost 20 percent. Without committing any cash, the German exchange could be forced to surrender as much as 45 percent, up from about 40 percent, of the combined entity to NYSE Euronext’s owners to trump the Nasdaq OMX-ICE bid, according to data compiled by Bloomberg and Capstone Global Markets LLC.

While a bidding contest would help Niederauer, NYSE Euronext’s chief executive officer, recoup money for investors that lost more than 40 percent since the exchange went public in 2006, Deutsche Boerse’s all-stock offer has already cost the German exchange’s owners $1.4 billion since it was announced. Now, they face giving up even more equity if their managers counter Nasdaq OMX and ICE, which may push Deutsche Boerse to bid as much as $46 a share, the data show.

“If Deutsche Boerse were to engage in a bidding war, their shareholders will likely come out with the short end of the stick,” said Michael Wong, a Chicago-based analyst at Morningstar Inc. “NYSE shareholders would be the ultimate beneficiaries of the bidding war, with the acquirers being saddled with the winner’s curse.”
‘The Right Thing’

NYSE Euronext is studying the Nasdaq OMX-ICE bid, according to a letter from Niederauer, 51, to employees contained in a filing with the Securities and Exchange Commission last week.

“NYSE Euronext has always been committed to our shareholders, and our board will consider the new proposal and do the right thing for our shareholders,” he wrote. “In the meantime, we remain fully committed to our previously announced deal with Deutsche Boerse.”

Deutsche Boerse doesn’t plan to raise its bid, Die Welt reported in an advance release of a story to appear today, citing an unidentified person close to the situation.

Frank Herkenhoff, a spokesman for Deutsche Boerse, didn’t immediately respond to a message left on his mobile phone outside normal office hours. The company’s offer for NYSE Euronext is “the best possible combination for both shareholder groups and the stakeholders of the companies,” Deutsche Boerse said in a statement last week.
Nasdaq OMX Shares

Last week’s offer from Nasdaq OMX’s Robert Greifeld, 53, and ICE CEO Jeff Sprecher, 56, lifted New York-based NYSE Euronext 13 percent to $39.60 on April 1. Nasdaq OMX rose 9.3 percent to $28.23 for the biggest gain since March 2009, while Deutsche Boerse fell 1.4 percent to 52.81 euros ($75.19).

The German exchange, led by 55-year-old Reto Francioni, has declined 14 percent since Feb. 14, the day before it and NYSE Euronext announced their deal. The slump has lowered the value of its all-stock offer to $35.44, or 11 percent less than NYSE Euronext’s closing price last week.

Deutsche Boerse offered 0.47 of its own stock for each NYSE Euronext share in a deal currently valued at $9.3 billion to create the world’s largest exchange operator with venues in the U.S. and Europe.

At the time the deal was announced, Niederauer said on a conference call it was a “merger” with Deutsche Boerse, rather than an acquisition by the German exchange.
‘How Many More’

“I don’t know how many more times we can say that,” Niederauer said.

Last week, New York-based Nasdaq OMX and ICE of Atlanta made a cash-and-stock offer that valued the 219-year-old exchange operator at about $11.3 billion, Bloomberg data show.

NYSE Euronext owners will get 0.4069 Nasdaq OMX share, 0.1436 ICE share and $14.24 a share in cash, valuing the transaction at $42.50 on March 31. Currently, the offer is worth about $42.92 a share, the data show.

ICE would purchase NYSE Euronext’s Liffe futures markets, while Nasdaq OMX would keep its U.S. options markets. The deal would give Nasdaq OMX a monopoly on listing companies in the U.S., the world’s largest capital market.

Nasdaq OMX, the second-largest U.S. bourse operator, and ICE said they will eliminate about $740 million in expenses in three years. That’s 74 percent more than Deutsche Boerse predicted in its agreement.
‘One and Only’

“Deutsche Boerse has been very clear about this being the one and only deal for them,” said Ian McDonald, a Baltimore- based exchange analyst at T. Rowe Price Group Inc., which oversees $482 billion and is NYSE Euronext’s biggest shareholder. “To get it done, they have to raise their synergies and their price.”

Deutsche Boerse’s current offer gives its owners about 60 percent of the combined company, the data show.

While Deutsche Boerse could raise its bid to $54.13 and still retain a 51 percent stake, data compiled by Bloomberg show, issuing the additional shares would devalue its own stock as currency, according to Capstone Global’s Sachin Shah.

Without offering cash, retaining at least a 55 percent stake would keep Deutsche Boerse from increasing its bid above $45.86, based on last week’s closing price, the data show.

“The higher the stake they give up, the more control they’re giving up,” said Shah, a special situations and merger arbitrage strategist at Capstone Global in New York. “It becomes a little problematic not only in the context of shareholder value for their shareholders, but also the Germans are probably kind of wanting them to have significant control.”
‘The Only Game’

“At the end of the day they don’t want a U.S.-based company to be running a German exchange,” Shah said. Still, “the only game they can play is upping the offer,” he said.

Speculation of a bidding war for NYSE Euronext made it one of the stock market’s biggest winners in 2011. The shares have posted the 13th-biggest gain in the Standard & Poor’s 500 Index, rising 32 percent. The exchange is up 155 percent since the market bottomed on March 9, 2009, compared with a 97 percent advance in the S&P 500, according to data compiled by Bloomberg.

NYSE Euronext shares have still trailed the S&P 500 by more than 45 percentage points since its first trading session as a public company in March 2006. The company has fallen 64 percent from a record peak of $108.96 in November 2006. Losses in market share and pricing spurred by competition in equities trading weighed on the price, according to Morningstar’s Wong.

Overall, there have been 6,113 deals announced globally this year, totaling $603.3 billion, a 19 percent increase from the $504.9 billion in the same period in 2010.

Japan Tankan Signals Concern Confidence Will Keep Sliding

Japan’s large manufacturers signaled increased concern about business confidence in coming months after the nation’s strongest earthquake on record devastated the northeast region on March 11.

The quarterly outlook index of sentiment among big manufacturers is seen falling to minus 2 in June from 6 in March, the biggest drop since September, according to a breakdown of the Bank of Japan’s Tankan survey released in Tokyo today. A negative number means pessimists outnumber optimists.

The report underscores how last month’s disaster has worsened corporate sentiment, as damage to plants and power shortages limit production. Economists at Nomura Securities Co. and RBS Securities Japan Ltd. forecast gross domestic product will contract this quarter and stagnating sentiment may increase the case for the central bank to ease monetary policy further.

“Given the earthquake, the economy will likely contract both in the first quarter and the second quarter, putting off an escape from the economic lull,” Takahide Kiuchi, chief economist at Nomura in Tokyo, said before the report. “The BOJ may expand the size of its asset purchase program” this month.

The yen traded at 84.17 per dollar as of 9 a.m. in Tokyo. The Nikkei 225 (NKY) Stock Average rose 0.7 percent.
Car Sales Plunge

A report last week including all responses gathered from Feb. 24 to March 31 showed sentiment improving to 6 from 5 in December. Confidence among large manufacturers after the earthquake was little changed from a reading of 7 based on responses collected before the temblor.

Data so far for March have shown that manufacturing fell at the fastest pace in at least nine years, while new car sales in Japan decreased 37 percent, the biggest drop for the month ever. The earthquake and tsunami crippled Tokyo Electric Power Co.’s Fukushima Dai-Ichi atomic plant, causing the world’s worst nuclear crisis since Chernobyl in 1986.

Companies from Honda Motor Co. and Sony Corp. have halted production after the disaster.
Shortage of Parts

Toyota Motor Corp., the world’s largest automaker, has said it lost 140,000 units of production from March 14 to March 26, citing a shortage of electronic parts, rubber and plastics. Scarce parts and electricity may prompt it to delay making at least 500,000 vehicles in Japan, according to Koji Endo, an auto analyst at Advanced Research Japan. Honda Motor Co. has seen a production loss of 46,600 cars and trucks and 5,000 motorcycles.

March reports have overshadowed February data that showed industrial production rose for a fourth month and the unemployment rate dropped to a two-year low, data that indicated the economy’s resilience would cushion the effect of the natural disaster this quarter.

The overall sentiment index among large manufacturers climbed to 6 in March from 5 in December, the central bank said on April 1. The survey was conducted from Feb. 24 to March 31 and 72 percent of responses came by March 11, the day of the quake, the bank said.
Currency Intervention

The disaster, which has claimed more than 11,000 lives, has also caused a plunge in Japanese stocks and sent the yen to a post-World War II high against the dollar, prompting the first coordinated currency intervention by Group of Seven nations in more than a decade. Damage from the quake and tsunami is estimated by the government to swell to as much as 25 trillion yen ($300 billion). Prime Minister Naoto Kan is preparing an extra budget to pay for reconstruction efforts.

The BOJ doubled its asset-purchase program to 10 trillion yen on March 14, increasing the funds injections into the financial system. Nomura’s Kiuchi said the bank may increase the size of the asset buying program by between 3 trillion yen and 5 trillion yen at its meeting on April 28. The central bank will next meet on April 6-7.

The central bank is also considering offering temporary loans to banks to encourage lending to companies with cash-flow shortages in the wake of the quake, according to three people familiar with the matter.

Friday, April 01, 2011

Foreign Banks Tapped Fed’s Secret Lifeline Most at Crisis Peak

U.S. Federal Reserve Chairman Ben S. Bernanke’s two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.

Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $33.5 billion through its New York branch from the Fed’s “discount window” lending program, according to Fed documents released yesterday in response to a Freedom of Information Act request. Dublin-based Depfa Bank Plc, taken over in 2007 by a German real-estate lender later seized by the German government, drew $24.5 billion.

The biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record. The disclosures may stoke a reexamination of the risks posed to U.S. taxpayers by the central bank’s role in global financial markets.

“The caricature of the Fed is that it was shoveling money to big New York banks and a bunch of foreigners, and that is not conducive to its long-run reputation,” said Vincent Reinhart, the Fed’s director of monetary affairs from 2001 to 2007.

Separate data disclosed in December on temporary emergency- lending programs set up by the Fed also showed big foreign banks as borrowers. Six European banks were among the top 11 companies that sold the most debt overall -- a combined $274.1 billion -- to the Commercial Paper Funding Facility.
Bank of America

Those programs also loaned tens of billions of dollars to each of the biggest U.S. banks, including JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc. and Morgan Stanley.

The discount window, which began lending in 1914, is the Fed’s primary program for providing cash to banks to help them avert a liquidity squeeze. In an April 2009 speech, Bernanke said that revealing the names of discount-window borrowers “might lead market participants to infer weakness.”

The Fed released the documents after court orders upheld FOIA requests filed by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC. In all, the Fed was ordered to release more than 29,000 pages of documents, covering the discount window and several Fed emergency-lending programs established during the crisis from August 2007 to March 2010.
Public Outrage

“The American people are going to be outraged when they understand what has been going on,” U.S. Representative Ron Paul, a Texas Republican who is chairman of the House subcommittee that oversees the Fed, said in a Bloomberg Television interview.

“What in the world are we doing thinking we can pass out tens of billions of dollars to banks that are overseas?” said Paul, who has advocated abolishing the Fed. “We have problems here at home with people not being able to pay their mortgages, and they’re losing their homes.”

The Monetary Control Act of 1980 says that a U.S. branch or agency of a foreign bank that maintains reserves at a Fed bank may receive discount window credit.

David Skidmore, a Fed spokesman, declined to comment.

Wachovia Corp. was the only U.S. bank among the top five discount-window borrowers as the crisis peaked.

The Charlotte, North Carolina-based bank borrowed $29 billion from the discount window on Oct. 6, in the week after it nearly collapsed, the data show. Wachovia agreed in principle to sell itself to Citigroup Inc. on Sept. 29, before announcing a definitive agreement to sell itself to Wells Fargo & Co. (WFC) on Oct. 3. The Wells Fargo deal closed at the end of 2008.

Wells Fargo spokeswoman Mary Eshet declined to comment on Wachovia’s discount-window borrowing.
Bank of Scotland

Bank of Scotland Plc, which had $11 billion outstanding from the discount window on Oct. 29, 2008, was a unit of Edinburgh-based HBOS Plc, which announced its takeover by London-based Lloyds TSB Group Plc in September 2008.

The borrowings in 2008 didn’t involve Lloyds, which hadn’t completed its acquisition of HBOS at the time, said Sara Evans, a spokeswoman for the company, which is now called Lloyds Banking Group Plc. (LLOY)

“This is historic usage and on each occasion the borrowing was repaid at maturity,” Evans said. “The discount window has not been accessed by the group since.”

Other foreign discount-window borrowers on Oct. 29, 2008, included Societe Generale (GLE) SA, France’s second-biggest bank; and Norinchukin Bank, which finances and provides services to Japanese agricultural, fishing and forestry cooperatives. Paris- based Societe Generale borrowed $5 billion that day, and Tokyo- based Norinchukin borrowed $6 billion.

Bank of China

“We used it in concert with Japanese and U.S. authorities in the purpose of contributing to the stabilization of the market,” said Fumiaki Tanaka, a spokesman at Norinchukin.

Bank of China, the country’s oldest bank, was the second- largest borrower from the Fed’s discount window during a nine- day period in August 2007 as subprime-mortgage defaults first roiled broader markets. The Chinese bank’s New York branch borrowed $198 million on Aug. 17 of that month, while two Deutsche Bank AG divisions borrowed $1 billion each, according to a document released yesterday.

Arab Banking Corp., then 29 percent-owned by the Libyan central bank, used its New York branch to borrow at least $1.1 billion from the discount window in October 2008.

The foreign banks took advantage of Fed lending programs even as their host countries moved to prop them up or orchestrate takeovers.

Dexia received billions of euros in capital and funding guarantees from France, Belgium and Luxembourg during the credit crunch.

Dexia’s outstanding balance at the Fed has been reduced to zero, Ulrike Pommee, a spokeswoman for the company, said in an e-mail.

“This information is backward-looking,” she said. “We experienced a great deal of tension concerning the liquidity of the dollar at the time of the crisis. The Fed played its role as central banker, providing liquidity to banks that needed it.”

Depfa was taken over in October 2007 by Hypo Real Estate Holding AG, which in turn was seized by the German government in 2009. Oliver Gruss, a spokesman for Depfa’s parent company, didn’t respond to requests for comment.

Many foreign banks own large pools of dollar assets --bonds, securities and loans -- funded by short-term borrowings in money markets. The system works when markets are calm, said Dino Kos, former executive vice president at the New York Fed in charge of open-market operations. In times of stress, banks can be subject to sudden liquidity squeezes, he said.
‘Playing With Fire’

“They are playing with fire,” said Kos, a managing director at Hamiltonian Associates Ltd. in New York, an economic research firm. “When the market dries up, and they can’t roll over their funding -- bingo, you have a liquidity crisis.”

The potential for dollar shortages remains. As the Greek fiscal crisis roiled financial markets last year, the Fed had to open swap lines with the European Central Bank, the Swiss National Bank, the Bank of England and two other central banks to make more dollars available around the world. That move was partially the result of U.S. money market funds shrinking their exposure to European bank commercial paper.

Sunday, January 23, 2011

Bank Valuations Stuck at 2009 Lows Showing No Crisis Recovery

Valuations for U.S. financial stocks have fallen so far, it’s like the rebound from the worst crisis since the 1930s never happened.

Banks, insurers and asset managers in the Standard & Poor’s 500 Index trade at 12.3 times estimated earnings, close to the lowest level since the bull market began in March 2009, according to data compiled by Bloomberg. The group is the second-cheapest among 10 industries in the gauge even as analysts say profits will rise 18 percent this year, exceeding the S&P 500, data compiled by Bloomberg show.

While the biggest equity rally in more than five decades has lifted the S&P 500 above its level when Lehman Brothers Holdings Inc. collapsed in September 2008, the failure of price- earnings ratios to widen is a sign to Pioneer Investments and Gamco Investors Inc. that gains in banks may end when government stimulus ends. Bulls such as OppenheimerFunds Inc. say forecasts for a three-year economic expansion mean the stocks will prove bargains as earnings and dividends increase.

“It may be awhile before investors feel comfortable paying above-average multiples for financial companies,” said John Carey, a Boston-based money manager at Pioneer Investments, which oversees about $250 billion. “What everyone is waiting for is a sign that the companies are really back, that they’re really on their feet again and can survive without continued government support and subsidy.”

Industrial Production

The biggest yearly increase in U.S. retail sales since 1999 and higher-than-estimated industrial production show the U.S. expansion is gaining momentum. The Commerce Department may say Jan. 28 that gross domestic product rose at an annual rate of 3.5 percent in the fourth quarter, based on the median estimate from 67 economists surveyed by Bloomberg.

That may not be enough to boost bank shares because investors are still trying to gauge how much profits will be reduced by last year’s financial reform law, Carey said. The last time the industry was this cheap, in March 2009, the economy had been in a recession for about 14 months, the S&P 500 was at a 12-year low and regulators were conducting stress tests to determine how much capital lenders needed to cover losses.

Earnings for S&P 500 companies rose 30 percent in 2010, the fastest growth since 1995, according to analyst estimates. Profits for financial companies almost doubled, aided by the Federal Reserve’s decision to keep benchmark interest rates near zero. The U.S. government and Fed have pledged about $12.8 trillion since 2008 to fix the financial system and prevent deflation, and policy makers committed $600 billion to buy Treasuries to stimulate economic growth, data compiled by Bloomberg show.

Weekly Retreat

The S&P 500 fell 0.8 percent to 1,283.35 last week, halting the longest streak of increases since May 2007. Among the 25 financial institutions in the U.S. equity benchmark to report results since Jan. 10, the average company beat analyst estimates by 2.2 percent, data compiled by Bloomberg show. Banks topped forecasts by an average 17 percent in the previous earnings season and 24 percent in the period that began in July, data compiled by Bloomberg show.

Investors will get more information on profits this week, with at least 128 companies in the S&P 500 scheduled to report results, according to Bloomberg data. Peoria, Illinois-based Caterpillar Inc., the world’s largest maker of construction and mining equipment, and Procter & Gamble Co. in Cincinnati, the maker of Tide detergent, are scheduled for Jan. 27.

Goldman, Citigroup

Goldman Sachs Group Inc. fell 5 percent and Citigroup Inc. lost 4.7 percent last week as earnings from the New York-based companies failed to exceed analysts’ estimates. New York-based American Express Co., the world’s biggest credit-card issuer by purchases, lost 0.5 percent after reporting lower-than-estimated profit and cutting 550 jobs.

Bank of America Corp. in Charlotte, North Carolina, fell 2 percent on Jan. 21 and 6.6 percent for the week. The largest U.S. bank by assets reported a $1.24 billion fourth-quarter loss as costs mounted for refunds, writedowns and litigation tied to faulty mortgages. The S&P 500 Financials Index declined 1.7 percent, the biggest weekly retreat in almost two months.

“Banks have lost the revenue stream from mortgage lending, and M&A activities and capital markets activities have been muted,” said Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset management Inc., which oversees about $51.4 billion. “All these things just add up to basically speculating on banking stocks as opposed to feeling really secure about the future.”

Estimated Profit

Goldman Sachs, JPMorgan Chase & Co. and Bank of America trade for less than 10 times estimated 2011 profit, making them among the 50 cheapest companies in the S&P 500, data compiled by Bloomberg show. Valuations have held steady even as the S&P 500 Financials Index gained 165 percent since March 9, 2009, leading the broader gauge’s 90 percent advance.

Financial institutions in the benchmark measure of U.S. equities are cheaper using estimated income than utilities, whose earnings are forecast to drop 0.9 percent in 2011 and 1.2 percent in 2012, according to data compiled by Bloomberg.

Banks and brokerages trade at 1.2 times book value, or assets minus liabilities, compared with the 18-year average multiple of 2. Still, that marks a recovery from right after Lehman Brothers collapsed in September 2008. Two months later, Goldman Sachs was valued as low as 0.5 times book, while Citigroup’s fell to 0.1 in March 2009 and the bank required a $45 billion taxpayer-funded bailout. The companies are now valued at multiples of 1.3 and 0.9.

Valuing Paper

For industrial companies, book value represents the liquidation value of plants and equipment. Financial firms’ valuations depend on prices for paper assets such as stocks, bonds, loans and contracts.

Starting in 2007, record declines in property values and rising mortgage defaults made it impossible for banks to value securities whose prices were derived from home loans, sparking the credit crisis that led to $1.98 trillion in losses and writedowns for financial institutions worldwide, according to data compiled by Bloomberg.

Even after the Fed took steps to reduce soured credit, financial companies in the U.S. have $378 billion in loans and leases that are 90 days or more past due, data from the Federal Deposit Insurance Corp. show. The ratio of so-called noncurrent assets and other foreclosed properties to total assets was 3.25 percent at the end of the third quarter, compared with 0.7 percent three years ago.

Book Value Calculations

“The issue here is how trustworthy are the book value calculations given all the asset quality issues banks have had the last couple of years,” said Howard Ward, a money manager at Mario Gabelli’s Gamco, which oversees about $30 billion in Rye, New York. “This is not an industry that is poised for a sharp return.”

The Dodd-Frank Act, passed in July, created the Consumer Financial Protection Bureau and requires most swap trades in the $583 trillion over-the-counter derivatives market to be processed by clearinghouses. The top five U.S. commercial banks generated an estimated $28 billion in revenue from privately negotiated swaps in 2009, according to company reports collected by the Fed and people familiar with banks’ income sources.

“Revenue growth is certainly an issue,” said Michael Levine, a money manager at OppenheimerFunds, which oversees about $180 billion. Levine remains bullish, with financial stocks representing the biggest share of the Oppenheimer Equity Income Fund, which has beaten 97 percent of its rivals in the past five years, according to data from the New York-based firm’s website and Bloomberg.

Dividend Increase

JPMorgan, the fund’s top holding, will quadruple its quarterly dividend to 20 cents a share in March, according to Bloomberg estimates that factor in criteria such as earnings and options prices. The New York-based bank, Wells Fargo & Co., Bank of America and Morgan Stanley are among at least 10 financial stocks in the S&P 500 likely to increase payouts by twofold or more this year, the data show.

The 19 biggest U.S. banks must show regulators they can withstand losses before boosting dividends or buying back shares, the Fed said in a Nov. 17 report. More companies may lift their payout in February than any other month, Howard Silverblatt, a New York-based analyst at S&P, wrote in an e-mail this month.

“The banks think they’re going to be allowed to start returning capital to shareholders sometime this year,” said David Honold, a fund manager and financial stock analyst for Turner Investment Partners Inc., which oversees about $18 billion in Berwyn, Pennsylvania. “That’s a very important inflection point.”

TARP Payments

Fifth Third Bancorp, Ohio’s largest lender, raised $2.7 billion through debt and equity sales last week to pay back borrowings under the Treasury Department’s Troubled Asset Relief Program, created in 2008 to prevent a collapse of the U.S. financial system. The Treasury has $118.5 billion of TARP borrowings outstanding, a 64 percent decline from $328.9 billion of funds received, according to data compiled by Bloomberg.

While companies may boost payouts in 2011, the biggest U.S. banks said the profitability of loans narrowed in the fourth quarter. JPMorgan’s net interest margin, the difference between what the bank pays for funds and what it charges borrowers, dropped to 2.88 percent from 3.01 percent in the third quarter. Citigroup’s fell to 2.97 percent from 3.09 percent, and San Francisco-based Wells Fargo’s narrowed to 4.16 percent from 4.25 percent.

“It’s going to take a return to significant profitability and resumption of meaningful dividends before people breathe a sigh of relief and think it’s safe to go back in the water here,” said Pioneer’s Carey. “It’s still a mixed picture. We’re still careful and cautious about the group, but getting more involved as the quarters go by.”

Euro's Slide Meets Resistance as Analysts Draw Line at $1.30

Traders are starting to believe German Chancellor Angela Merkel when she says Europe’s biggest economy will do whatever it takes to save the region’s currency.

Demand for contracts used to hedge against a decline in the euro is disappearing at the fastest pace since September as speculators slash bets that the currency will fall, a pattern that preceded a 13 percent gain over about two months. Strategists have stopped cutting their estimates for the euro against the dollar, with their fourth-quarter predictions at $1.30 since Jan. 10, according to data compiled by Bloomberg.

Since then, the euro climbed 5.9 percent to $1.3621 from a four-month low of $1.2867 as Germany joined euro-region finance ministers for the first time in saying it’s contemplating expanding a financial backstop that Economic and Monetary Affairs Commissioner Olli Rehn predicts will repel the most aggressive speculators. A bigger safety net would free European Central Bank President Jean-Claude Trichet to fight an emerging inflation threat as Germany fuels regional growth.

“Euro-zone policy makers are finally moving ahead of the curve,” said Thomas Stolper, a global markets economist at Goldman Sachs Group Inc. in London. “We are near a breaking point in terms of the pressure. It’s getting more difficult for the skeptics to find a crack in the euro.”

Attractive Yields

For all the focus on Europe’s debt crisis, the region’s economy is showing signs of improvement. The Munich-based Ifo institute said Jan. 21 that its index of German business confidence increased to 110.3 in January from 109.8 in December, the highest since records for a reunified Germany began in 1991. French business sentiment also rose.

The euro and the region’s fiscal crisis will be discussed at the “Bloomberg European Debt Briefing” conference in New York tomorrow.

Traders are buying the currency for returns of as much as three times the equivalent American assets amid signs the region’s debt crisis may not get any worse. German two-year notes yield 68 basis points more than Treasuries, the most since January 2009. As recently as July they were the same. The three- month euro interbank offered rate is 1.03 percent, compared with 0.30 percent for the London interbank offered rate in dollars.

The euro rose 1.7 percent versus the dollar last week, and climbed 1.4 percent to 112.48 yen. It has strengthened 2 percent this year in a basket of 10 developed-nation currencies including the Australian and Canadian dollars, after tumbling 10 percent in 2010, its worst year since the successor to the deutsche mark and the French franc was introduced in 1999. It appreciated almost 15 percent against the dollar from a four- year low on June 7.

Bonds, Swaps, Stocks

“Markets are clearly buying into the view that the European debt crisis is being resolved with modest pain,” Steven Englander, the head of currency strategy for the group of 10 nations at Citigroup Inc. in New York, wrote in a Jan. 21 research note.

Portuguese 10-year yields fell last week to the lowest this month relative to benchmark German bunds, and demand increased at a Spanish debt auction Jan. 13. The cost to protect European sovereign securities fell the most on record the past two weeks, based on the Markit iTraxx SovX Western Europe Index of credit- default swaps. The Euro Stoxx 50 Index rose to 2,970.56 last week, the highest level since April.

“We support whatever is needed to support the euro, also with respect to the rescue fund,” Merkel told reporters in Berlin on Jan. 12.

‘Comprehensive’ Plan

Merkel was responding to remarks by Rehn, who called for a “comprehensive” plan to contain Europe’s debt crisis. His proposals included an expansion of the European Union’s 440 billion-euro ($599 billion) rescue fund, the European Financial Stability Facility.

The EU has already agreed to bail out Greece and Ireland, and bond investors are concerned Portugal, and possibly Belgium and Spain may be next. Portugal 10-year yields have reached the 7 percent mark that preceded Ireland and Greece’s aid requests.

Bonds yields are still sending danger signals to some of the most-accurate forecasters, who say the rebound won’t last.

Wells Fargo & Co., the best foreign-exchange predictor in the 18 months ended Dec. 31, expects a drop to $1.25 by year- end. John Taylor, chairman of the world’s largest currency hedge-fund firm, FX Concepts LLC, said on Jan. 5 the euro may fall below parity with the dollar this year.

“There’s a very significant risk of restructuring in the not too distant future in one of those peripheral economies, which we think should drive the euro quite a bit lower,” said Shaun Osborne, chief currency strategist at TD Securities in Toronto, who sees a decline to $1.05 by the third quarter.

China’s Support

Finance ministers from Europe’s top-rated countries, Germany, France, Austria, the Netherlands, Finland and Luxembourg, met on Jan. 17 to discuss strengthening the rescue fund. A “comprehensive package” will be assembled by March, Finance Minister Wolfgang Schaeuble said Jan. 13.

China, which has the world’s largest foreign-currency reserves, said this month it plans to buy securities from the region’s most-indebted countries. Japan said on Jan. 11 it will purchase bonds issued by one of Europe’s bailout funds, while Russia, holder of almost $500 billion of reserves, said it may do the same on Jan. 18.

“You have to take the broadening of the safety net as a good development for the euro zone,” said Paul Mackel, director of currency strategy at HSBC Holdings Plc in London. “There’s going to be this realization that what Europe has done has been the right thing, and that’s going to put the spotlight on the dollar in a very negative way.”


Euro-dollar three-month risk reversals, which measure demand for options to sell the single currency relative to those that allow for purchases, declined to 1.325 on Jan. 13 from 2.150 on Jan. 7, the fastest drop since the three days ended Sept. 16, according to data compiled by Bloomberg. The euro rallied from $1.2644 on Sept. 10 to about a 10-month high of $1.4282 on Nov. 4.

Futures traders reversed bets the euro will weaken against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a gain compared with those on a drop, so-called net longs, was 4,109 on Jan. 18, compared with net shorts of 45,182 a week earlier, the biggest increase since June.

“The fast-acting speculative community has probably closed out most of their shorts,” said Goldman Sachs’s Stolper. Further improvement in the euro-region economy “will probably imply quite a bit more euro buying,” he said.

‘Muddle Through’

A Citigroup gauge of data surprises, which measures how often and by how much economic indicators surpass Bloomberg median estimates, was at 73 last week for the euro region and 39 for the U.S.

Europe is ahead of the U.S. in tackling deficits from the global financial crisis and recession. U.S. federal government debt will climb to 99 percent of gross domestic product this year from 93 percent in 2010, while the euro region will total 87 percent, according to International Monetary Fund forecasts.

“As there is more evidence of progress being made in Europe on that front it will heighten the attention on the fact the U.S. has made next to no progress in reigning in their deficit,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “The euro-zone will muddle through the crisis.”

Chinese Corporate Bond Sales Have Busiest Start on Record

Chinese companies raised four times more from bonds than from equities this year in a record start for the debt market as government efforts to curb inflation curbed access to loans and the stock market.

Corporate bond sales totaled 100 billion yuan ($15.2 billion) since Jan. 1, up 68 percent from a year earlier and the most since Bloomberg started tracking the data in 1999. Domestic currency share sales in 2011 total 23.5 billion yuan, down from 34 billion yuan a year earlier, data compiled by Bloomberg show.

“Regulators have strengthened their control over the amount of loans,” said Chen Jianbo, a Beijing-based fixed- income analyst at BOC International, a unit of Bank of China Ltd. “This has put an obstacle in the way of companies getting loans. On the other hand the regulators are encouraging direct financing, especially debt financing.”

Slumping equity prices and restrictions on loan growth mean that bonds have become the only option for many companies to raise funds. The Shanghai Composite Index slumped 13 percent in the past year, the worst performer among benchmark measures in the 10 biggest equity markets tracked by Bloomberg. Fixed-income fund managers avoided losses as yuan corporate bonds returned 3.1 percent in the same period, according to the Bank of America Merrill Lynch China Corporate Index.

Debt sales have been led this year by companies such as China National Petroleum Corp., the country’s biggest oil and gas producer, which has issued 30 billion yuan of notes through four sales, and Beijing-based Huaneng Power International Inc., a unit of China’s biggest electricity producer, which has completed one sale of 5 billion yuan, according to data compiled by Bloomberg.

Beating Rate Rises

Chinese firms may be selling bonds on expectations that interest rate rises in the coming months will boost their borrowing costs, according to Wu Tianshu, a Beijing-based fixed- income analyst at China Galaxy Securities Co. “As long as the economy keeps growing there will be more demand for debt financing,” he said.

Yields on 10-year AAA corporate bonds have climbed 1.05 percentage points from last year’s low on Aug. 20 to 5.19 percent, according to data compiled by Bloomberg. Similar- maturity government yields climbed 72 basis points in that period to 4 percent, a spread of 119 basis points.

The yield on the 2.68 percent government bond due November 2013 rose two basis point, or 0.02 percentage point, to 3.40 percent on Jan. 21, Chinabond prices show. The yield on India’s three-year bonds is 8.31 percent, while similar-maturity bonds yielded 7.03 percent in Russia and 12.77 percent in Brazil.

China’s benchmark money-market rate has surged to the highest since October 2007 as lenders ran short of cash after the central bank’s four increases in their reserve requirements in the past three months.

Cash Crunch

The seven-day repurchase rate, which measures money availability between banks, climbed 127 basis points to 7.3 percent, according to the daily fixing rate of the National Interbank Funding Center in Shanghai on Jan. 21, after reaching 8.8 percent earlier that day. China reported Jan. 20 its economy grew at a faster-than-expected 9.8 percent in the fourth quarter from a year earlier, and inflation averaged 3.3 percent in 2010, breaching the government’s goal.

The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repo rate, jumped 37 basis points last week to 3.64 percent.

Chinese new bank loans fell for three straight months to 480.7 billion yuan at the end of December, down from 563.97 billion yuan a month earlier, and a year-high of 1.39 trillion yuan last January, government data show. Regulators set a 7.5 trillion yuan annual limit on bank lending last year following the record 9.59 trillion yuan of new lending in 2009.

‘Abnormal’ Loan Growth

Premier Wen Jiabao pledged last week to prevent “abnormal” loan growth. The People’s Bank of China raised reserve ratios for lenders effective Jan. 20 to slow inflation that reached a 28-month high in November. The central bank also raised the benchmark one-year lending rate by 25 basis points to 5.81 percent Dec. 25.

The government may raise interest rates by another 25 basis points, as early as next month, Wensheng Peng, a China International Capital Corp. economist, wrote in a Jan. 21 report. This may be followed by another increase in the second quarter, Peng wrote.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, has fallen 3.3 percent this year after plunging 14 percent in 2010.

Stock Markets

“Valuation for IPOs needs to be lower to reflect weak market sentiment,” said Wang Yang, director of fixed-income research at the China unit of UBS AG in Beijing, referring to initial public offerings on nation’s stock markets. “Regulators may also consider slowing down new issuance to ease supply pressure in such a weak market.”

Five-year credit-default swaps on the nation’s bonds have risen nine basis points this year to 77 basis points on concern economic growth that’s averaged more than 10 percent over the past five years will be derailed on anti-inflation measures. The swaps protect debt against default and traders use them to speculate on credit quality. An increase in price suggests deteriorating perceptions of creditworthiness.

Yuan Strength

The yuan traded near a 17-year high on Jan. 21 after the U.S. stepped up pressure for faster appreciation while President Hu Jintao is in the country on a state visit. The yuan rose 0.1 percent last week to 6.5833 per dollar, according to China Foreign Exchange Trade System data. Non-deliverable forwards show traders are betting on a 2 percent increase in the coming 12 months.

Demand for yuan-denominated assets on expectations of currency appreciation helped Hong Kong sales of yuan bonds increase 10-fold since 2008 to 35.7 billion yuan last year, Bloomberg data show. Sales in the so-called dim sum bond market, total 4.5 billion yuan this year, the data show.

Companies may sell around 1 trillion yuan in China’s bond market this year, according to Guo Qinmiao, a Beijing-based analyst at Citic Securities Co., China’s largest brokerage by market value, in an e-mail interview.

Investment companies linked to local governments set up to fund infrastructure projects will drive bond sales this year, said Tan Weisi, who oversees about 400 million yuan as head of Fortune SGAM Fund Management Co.’s fixed-income arm in Shanghai.

Chongqing City Construction Investment Corp. sold 2.5 billion yuan of 10-year bonds on Jan. 10, according to data compiled by Bloomberg. Guiyang City Construction Investment Group Co. issued 2 billion yuan of bonds due January 2018 the following day, the data show.

“They have no options,” Tan said. “They can’t get loans easily from the bank. If the project is already underway the only option is to issue bonds. They can’t issue equity.”