Monday, February 28, 2011

Time for Next Move on Yuan Liberalization

Time for Next Move on Yuan Liberalization


Last year, China made waves by letting foreign investors get their hands on more of its currency. This year, the big question for many is what China will let them do with that money.

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A Chinese bank worker counts a stack of 100-yuan notes at a bank in Hefei, east China's Anhui province on February 27, 2011.
.The first stage of a grand experiment took place last year, when China put in place measures that let people outside its borders for the first time trade in the currency of the world's second-biggest economy, creating a new market for offshore yuan and yuan-based securities.

The take-up has been swift and enthusiastic. Daily trading in offshore yuan now totals more than $600 million, according to Deutsche Bank AG. That's small by the standards of the $4-trillion-a-day foreign-exchange market but up sharply from only around $100 million in October. After helping sell about 36 billion yuan ($5.48 billion) of "dim sum bonds" last year in Hong Kong, bankers reckon this year's issuance could easily double that figure. One company is already working on launching what could be Hong Kong's first ever yuan-denominated share offering.

The reforms are having a global impact, allowing traders in London and New York to buy and sell what was until recently an isolated, walled-off currency. But the impact in Hong Kong, an offshore finance center that's nonetheless part of China, is especially powerful. Peter Pang, deputy chief executive of the Hong Kong Monetary Authority, told investors at a Goldman Sachs conference last week the ex-British territory's role as incubator of this new market is "probably the most important development in Hong Kong's evolution as an international financial center in recent decades."

Feeding this market are the piles of yuan mounting in this city's bank accounts. These totaled 314.9 billion yuan ($47.9 billion) as of Dec. 31, up fivefold from a year earlier, boosted by Beijing's efforts to promote use of yuan over dollars to settle China's overseas trade deals, as well as by expectations that the yuan's value will continue to rise over time. Economists are expecting those deposits to reach anywhere between 500 billion and 1 trillion yuan by the end of the year.

But there's a problem: What do you do with all that yuan? Pocketing 3% to 4% annual appreciation against the dollar is all fine and good, but can you put the money to work? Offshore-yuan securities help, but they're no substitute for being able to invest directly in China. And the yuan won't appreciate forever.

It's an important question for companies looking to raise funds through the offshore yuan market, as each must seek permission to bring the money they raise into China. And China gives Hong Kong banks with yuan deposits only a limited ability to invest that money in the mainland and make a return.

.Behind the reluctance to let yuan (also known as renminbi, or RMB) flow back into China is the specter of "hot money" controlled by shadowy hedge funds that some in China fear might destabilize the country's financial system. At the Goldman Sachs conference, a senior Chinese central banker acknowledged differences of opinion on this subject within China, while dismissing the fears as unfounded.

"Maybe you have noticed there is a lot of debate about hot money and international use of the RMB," said Xing Yujing, deputy director general of the monetary-policy department of the People's Bank of China, adding: "we should be aware of some false propositions."

Some policy makers apparently believe letting yuan flow back into China isn't necessary. Fang Xinghai, director general of Shanghai's financial services office, in January suggested at a public forum in Hong Kong that most funds raised here through yuan bonds should be kept offshore to promote the yuan's internationalization. Those aren't reassuring words for many wannabe bond issuers. Nothing spoils your appetite for dim-sum debt like being told you can't invest your money in China and earn a good return.

More promising are the prospects for a new investment quota that would allow foreign institutions the right to park some of their yuan in mainland Chinese stocks and bonds. Hong Kong officials say that program, long anticipated by players in the market, is under discussion.

Victor Chu, chairman of First Eastern Investment Group, predicted Beijing will soon allow more creative ways of pumping yuan back into China. One might allow private-equity firms to raise yuan offshore and invest it back onshore. That could inject a bit more long-term investment perspective into the market, since private-equity funds raise, deploy and recoup their funds over periods as long as eight to 10 years.

"Hong Kong will have a role to play because the expertise and action is here," Mr. Chu said.

To get to that point, though, China's leadership will need to accept that their goal of internationalizing the renminbi depends on giving people enough incentive to be part of the process.

Write to Peter Stein at

Sunday, February 27, 2011



文章来源: 经济观察报 于 2011-02-26 07:58:59
















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Saturday, February 26, 2011

Saudi Help Ignores the 'Gravity' of the Oil Crisis

Saudi Help Ignores the 'Gravity' of the Oil Crisis

Saudi Arabia's ride to the rescue of global oil markets may be hobbled at birth.

The kingdom may have plenty of spare production capacity, but its oil isn't as high quality as Libya's. So while Saudi willingness to ramp up output has taken the froth off headline oil prices, a full reversal of the sharp rise this week is contingent on a more settled outlook for Libya.

On paper, Saudi Arabia can replace lost Libyan supply. Its 3.5 million barrels a day of spare capacity at the end of January is far more than Libya's daily production of 1.6 million barrels. But Libya's oil is sweeter and less sulphurous than that produced by the Saudis. Refiners prefer higher-grade crude as processing it into gasoline and other products is less complex. As Libya exports the bulk of its oil output, primarily to southern Europe, refiners that can't process heavier Saudi crude will need to find replacement supplies.
Similar-quality crude can be found, notably in West Africa and the North Sea. But these areas may struggle to ramp up production; combined spare capacity in Angola and Nigeria was just 450,000 barrels a day at the end of January, according to the International Energy Agency. The relative scarcity of high-quality oil is widening the price differential between higher-grade crude and heavier oils. The spread between North Sea Brent and Russian Urals crude has widened 32% in two weeks.
Since higher-grade crude prices feed into the benchmark Brent futures price, headline oil prices likely will remain high despite the Saudi willingness to intervene. Reports of production outages in Libya also will keep markets volatile as the supply situation tightens. Near term, refiners can survive by running down inventories, while upgrades in recent years mean more European refineries can process heavier oils these days.
Still, absent a calmer situation in Libya, the 8.7% rise in Brent futures to above $111 a barrel this week likely will stick.
Write to Andrew Peaple at

External Surpluses Root Cause of China's Inflation Problem

External Surpluses Root Cause of China's Inflation Problem


BEIJING—China's large external imbalances, combined with its interventions in the foreign -exchange market, are the "root cause" of the country's current inflation problem, Yi Gang, vice governor of the People's Bank of China, said Saturday.

China should increase the flexibility of the yuan exchange rate and undertake a number of internal structural changes to reduce its trade surplus, Mr. Yi said, adding that China's focus should be on boosting imports rather than suppressing exports.

In a wide-ranging lecture at a university in Beijing, Mr. Yi also rejected many criticisms often heard in China of the central bank and its investment of foreign exchange reserves, saying it would be difficult to diversify the reserves into commodities or other alternative assets.

China's large "twin surpluses" in the current account and capital account have created massive inflows of foreign currency. The PBOC buys up those inflows by issuing newly minted yuan, thus swelling the money supply and adding to inflation pressures, Mr. Yi said.

"Why do we have so much base money? Why is the money supply relatively loose? A major reason is that our surpluses are too large," Mr. Yi said. "To maintain the basic stability of the yuan exchange rate, the central bank buys up foreign exchange inflows. If it didn't, the yuan wouldn't be so stable."

In addition to boosting the flexibility of the yuan exchange rate, China also should adjust resource prices to address imbalances, he said, as many resources are still traded in China at below their natural prices. China also should boost wages and social benefits to lift consumption, step up its enforcement of environment regulations and undertake other structural reforms to address imbalances.

After the PBOC buys up foreign exchange inflows, it attempts to "sterilize" or offset the newly created money supply by ordering banks to hold more funds in reserve and by issuing central bank bills. But Mr. Yi said such sterilization operations have costs to the central bank, as it must pay interest to banks on the bills and the reserve funds that they park with the central bank.

"We have been undertaking sterilization efforts to lock up excessive liquidity and maintain price stability," Mr. Yi said. "But all these actions have costs. We have to take into account the marginal costs and benefits if this state of affairs persists."

Many in China argue that inflows of "hot money," short-term capital that seeks to benefit from yuan appreciation and interest-rate arbitrage, are also a main factor behind China's foreign reserve accumulation and a source of imported inflation pressures.

However, estimates released last week by the State Administration of Foreign Exchange--a unit of the central bank that Mr. Yi also heads--showed such hot money inflows to be relatively limited, with just $35.5 billion of net inflows last year. Mr. Yi said the figures demonstrate that hot money inflows account for a small part of total reserve accumulation and that China's current and capital account surpluses are the main factor.

Some analysts inside and outside of China said SAFE's figures likely underestimate the true level of hot money inflows, as many such inflows are deliberately disguised as ordinary current account transactions. Mr. Yi acknowledged that this takes place to a certain degree but defended the overall accuracy of SAFE's estimates. Estimates by foreign countries such as the U.S. of their deficits with China are even greater than China's estimates, he said, indicating that China's estimates can't be significantly understated.

Many Chinese critics of the central bank argue that China should diversify its foreign exchange reserves away from sovereign debt--U.S. Treasury bonds in particular--and toward other assets such as commodities or even land. Mr. Yi said it is difficult for China to diversity into such assets without having a large impact on their market price.

Write to Aaron Back at

Wednesday, February 23, 2011

Inflation:What lies ahead - PIMCO

Inflation: What Lies Ahead
  • We expect popular measures of inflation to show modest increases in price levels this year from last year.
  • Masked behind these seemingly benign near-term increases in inflation are a number of longer-term factors that we believe could actually result in undesirably high rates of inflation in the not-too-distant future.
  • Higher rates of increases in food, energy and other commodity prices are leading to a divergence between the core rate of inflation that the Fed focuses on and the headline rate that includes food and energy prices and actually affects consumers.
Mihir P. Worah
For 2011, we expect the measure of inflation of most interest to the Federal Reserve, core Consumer Price Index (CPI, not including food and energy), to average 1.0% to 1.5%, up from 0.8% in 2010. More importantly, we expect headline CPI, which includes food and energy, to average 1.7% to 2.2%, up from 1.5% in 2010.
Masked behind these seemingly benign near-term increases in inflation from what many deem as undesirably low rates to more “reasonable” rates are a number of longer-term factors that we believe could actually result in undesirably high rates of inflation in the not-too-distant future. Persistently higher rates of increases in food, energy and other commodity prices are leading to a divergence between the core rate of inflation that the Fed focuses on and the headline rate that includes food and energy prices and actually affects consumers (Figure 1).
Models used to forecast U.S. inflation can fall short, because they are generally not designed to incorporate fundamental changes occurring in the U.S. economy. Our expectation of higher headline inflation in the foreseeable future is based on our judgment as well as use of models while knowing and understanding their limitations. One of the key issues to consider going forward is that the emerging countries are transitioning from being exporters of disinflation to the developed countries to being exporters of inflation.
All things considered, investors may wish to consider adding assets typically associated with inflation-hedging strategies to their portfolios.

Near-Term Outlook
First, let’s touch upon our near-term or one-year outlook. We model core inflation using both a “top-down” Phillips curve–based model as well as a “bottom-up” one that explicitly models and predicts the individual components of CPI, like car prices, apartment rents, groceries etc. (The Phillips curve represents a historical relationship between the rate of inflation and the unemployment rate.) Both of these approaches come up with a number near 1.2% for core CPI in 2011. Much of this expected rise from last year’s 0.8% core CPI number comes from a steadying in the cost of shelter, which is 40% of core CPI and which had plummeted amid the housing crisis. The primary inputs into the cost of shelter are rents or imputed rents (since the Bureau of Labor Statistics only wants to capture the utility part of shelter and not the investment aspect of owning a home). Rents stopped going down in the middle of last year and both our model (Figure 2) and anecdotal evidence support a firming in rental prices this year.

Notwithstanding the firming in rents, the 1.2% central prediction for core CPI in 2011 is still benign, and perhaps the Fed will continue to view core CPI as too low and too close to zero or deflation.
However, it is possible that these models are underestimating future inflation. For example, we already know what these models would predict for core inflation in 2012 if the unemployment rate were still hovering around 9.0%, as PIMCO currently expects. The models would predict another year of nonexistent wage pressure, significant slack in resource utilization and hence a below trend inflation number (provided inflation expectations remained anchored). 

These models cannot incorporate what we believe are structural changes in the U.S. economy, like a higher Non-Accelerating Inflation Rate of Unemployment (NAIRU, a level of unemployment below which inflation rises) and concurrently a lower than historic trend growth rate for the U.S. economy accompanied by an unprecedented expansion of the Fed’s balance sheet. As each year goes by, the near term moves ever closer to the long term and one has to augment these cyclical models with longer-term models and secular thinking to try and catch the shifts that models just cannot catch. More important and immediate, these closed economy models for domestic inflation do not pick up the inflationary impact, both direct and indirect, of higher commodity prices resulting from strong emerging market growth.
To be sure, there could always be a downside surprise in price levels, for example if growth in the emerging economies unexpectedly falters. But that is not our expectation at this time.

Longer-Term Outlook
A common argument for ignoring commodity prices when calculating or predicting longer-term measures for inflation is that these prices “mean revert,” meaning large rises in prices are followed by equally large drops. We think this is true to the extent that we do not expect continued 80% increases in grain prices like we saw in 2010 or the 50% rise in oil prices we saw in the first half of 2008. Both those rapid increases in prices were due to special weather-related factors that exacerbated the fundamental long-term tightening in natural resources that we are living through (although they do underline the points that supply lines are generally stretched and weather patterns are becoming more volatile). We feel that although commodity prices may show tendencies to revert to a “mean,” the mean itself is not static, but rather a moving and, in our opinion, a rising target.

It is not difficult to understand the reason for our expectations of generally rising commodity prices. It is simply a result of several billion people living in emerging economies that are gaining economic clout and improving their standards of living, often in an extremely commodity-intensive way. This generational shift in global consumption patterns leading to a secular rise in commodity prices was temporarily thrown off course by the Great Recession of 2008, but the longer-term direction is clear.

Hence, as far as “mean reversion” in commodity prices goes, we would say that “history does not repeat, it rhymes.” Rapid rises are likely to be followed by modest pullbacks; however, five years from today prices are likely to be higher on average than they are today.

The inflationary impulse from emerging economies is not limited to higher longer-term commodity prices. A combination of too-loose monetary policy (imported from the U.S. via pegged or semi-pegged currencies) and significant rises in food prices (which are a large part of the consumption baskets) has led to an inflation problem in many emerging market countries already. This is likely to result in some combination of higher wages for workers and an appreciating currency, both of which could result in higher import prices in the U.S. and hence higher inflation for U.S. consumers.

Adding to these concerns for imported inflation are the impacts of U.S. monetary and fiscal policy. By now it is well known that the unprecedented expansion in the Fed’s balance sheet is not inflationary if it does not result in increases in broader money aggregates like M2 or M3, which measure money actually circulating in the economy. (M2 includes the narrower M1 as well as certain deposits and money market funds. M1 includes cash and checking account deposits. M3 includes M2 and certain large, long-term items.) Our models of the relationship between money supply and inflation show that a policy error where the Fed does not shrink its balance sheet in the face of the money multiplier returning to its pre-crisis level may result in double-digit inflation with a lag of three years (conversely, shrinking their balance sheet too soon may send us back into deflation). The fact that the emerging economies are no longer a source of disinflation like they were over the past 20 years (in fact quite the opposite) severely complicates the Fed’s job. They now have to make an explicit decision to slow down job growth if they want to fight inflation. In our opinion it is no longer possible to have robust job growth AND low inflation simultaneously.

Finally, we get to our fiscal situation. Our budget deficit is around 10% of GDP and given the current trajectory and in the absence of a surprise economic expansion or political compromise, we estimate our debt-to-GDP ratio will reach around 100% in a few years. There are three ways to solve our debt problem: Growth, Inflation or Default. The choice is clear to us; which one seems most likely to you?

Conclusion Although current inflation numbers and the near-term inflation outlook appear benign, there are a number of factors, including higher commodity prices, that lead us to expect higher inflation longer term. Assets typically associated with “real return,” such as commodities, real estate, equities (as long as inflation remains moderate), bonds from countries that offer high real yields, and even Treasury Inflation-Protected Securities (as long as the duration aspect is managed; see previous Viewpoints for suggestions) can serve as inflation hedges.

Libyans Flee As Gadhafi's Hold Over Country Weakens

Libyans Flee As Gadhafi's Hold Over Country Weakens

NPR Staff and WiresFebruary 23, 2011, 2:10 PM
E-mailTweetThe scope of Moammar Gadhafi's control in Libya was whittled away Wednesday as major cities and towns closer to the capital fell to the rebellion against his rule. In Libya's east, now all but broken away, the opposition vowed to "liberate" Tripoli, where the Libyan leader is holed up with a force of militiamen roaming the streets.

In a further sign of Gadhafi's faltering hold, two air force pilots — one from the leader's own tribe — parachuted out of their warplane and let it crash into the deserts of eastern Libya, rather than follow orders to bomb a opposition-held city.

The opposition reportedly seized control of Misurata, 125 miles east of the capital Tripoli, after days of fighting. Witnesses said people were honking their horns and raising flags representing the monarchy overthrown by Gadhafi more than 40 years ago.

Misurata would be the first major city in western Libya to fall to anti-government forces, which claim — with the help of defecting security forces — to have taken control of nearly the entire eastern half of Libya's 1,000-mile Mediterranean coast, including several oil-producing areas.

Faraj al-Misrati, a local doctor in Misurata, said six residents had been killed and 200 wounded since Jan. 18, when protesters attacked offices and buildings affiliated with Gadhafi's regime

Protesters also claimed to have taken over the eastern city of Tobruk, with people taking to the streets to vent their anger at the regime. Clashes broke out over the past two days in the town of Sabratha, west of the capital, where the army and militiamen were trying to put down protesters who overwhelmed security headquarters and government buildings, a news website close to the government reported.

Independent reporting was scarce in much of Libya, but new opposition videos posted on Facebook showed scores of anti-government protesters raising the flag from the pre-Gadhafi monarchy on a building in Zawiya, on the outskirts of the capital. Another showed protesters lining up cement blocks and setting tires ablaze to fortify positions on a square inside the capital.

A provision government was being formed in the eastern city of Bayda.

"Ordinary people, doctors, lawyers, are talking about how we can coordinate with all other cities in Libya who are now under the protesters' control," said Ahmed Jibril, a former diplomat at the Libiyan mission at the U.N.

International outrage mounted after Gadhafi — in a televised address punctuated by anger and fist-pounding — exhorted his supporters to strike back at anti-government protesters as he pledged never to relinquish power.

He promised to have his supporters go "house to house" to hunt down protesters, whom he described as rats and cockroaches.

Celebratory gunfire from Gadhafi supporters rang out in Tripoli after the speech, while people in Benghazi threw shoes at a TV screen to show their contempt.

Gadhafi's address appeared to have brought out a heavy force of supporters and militiamen that largely prevented major protests in the capital Tuesday night or Wednesday. Gunfire rang out through the night, one woman who lives near downtown told The Associated Press.

"Mercenaries are everywhere with weapons. You can't open a window or door. Snipers hunt people," she said. "We are under siege, at the mercy of a man who is not a Muslim.''

During the day Wednesday, more gunfire was heard near Gadhafi's residence, but in many parts of the city of 2 million, residents were venturing out to stores, some residents said. The government sent out text messages urging people to go back to their jobs, aiming to show that life was returning to normal. The residents spoke on condition of anonymity for fear of retaliation.

Italy's Foreign Minister Franco Frattini said estimates of some 1,000 people killed in the violence in Libya were "credible," although he stressed that information about casualties was incomplete. The New York-based Human Rights Watch has put the death toll at nearly 300, according to a partial count.

As the fighting in Libya intensified, streams of people continued to flee the country. The U.N. High Commissioner for Refugees said thousands of people have crossed into Tunisia. The initial escapees consisted mostly of Tunisians who had been working in Libya, but more and more Libyans were leaving, the refugee agency said.

The Tunisian military sent extra troops to its border with Libya. U.N. officials in Tunis told NPR that the purpose of the reinforcement was mainly to provide humanitarian assistance.

"Situation is not good. It's very bad. It's very bad," said Mohammed Abdu, an Egyptian, who crossed from Libya into Tunisia. "All the night, every day, all the night, we hear, da, da, da–da, da, da. I don't sleep from three days ago."

The Tunisians who were crossing the border said they were singled out for harsh treatment by Gadhafi's police, who blamed them for starting the trouble. Two Tunisian men whipped off their shirts and showed purple bruises across their backs, where they said they were beaten.

At the Egyptian border, guards had fled, and local tribal elders formed local committees to take their place. "Welcome to the new Libya," graffiti spray-painted at the crossing proclaimed. Fawzy Ignashy, a former soldier now in civilian clothes at the border, said that early in the protests, some commanders ordered troops to fire on protesters, but then tribal leaders stepped in and ordered them to stop.

"They did because they were from here. So the officers fled," he said.

More than a dozen countries — including Russia, China, Germany and Ukraine — sent planes to help their people escape an increasingly unstable situation.

Hundreds of Americans boarded a 600-passenger ferry at Tripoli's As-shahab port Wednesday for a five-hour crossing of the Mediterranean to Malta. Others, such as Kathleen Burnett of Baltimore, Ohio, managed to get a seat on one of the few flights out of Libya. As she stepped off the airplane in Vienna, Burnett described the scene she left behind as "total chaos."

"The airport was mobbed; you wouldn't believe the number of people," Burnett said.

Britain was chartering flights and positioning a Royal Navy frigate off the Libyan coast in case it's needed to assist in the evacuations. Turkey has already pulled out thousands of its citizens by sea and air.

International alarm has risen over the crisis, pushing oil prices to a 28-month high of $100 a barrel on Wednesday.

"The violence is abhorrent, it is completely unacceptable and the bloodshed must stop," White House spokesman Jay Carney said in Washington.

U.S. Secretary of State Hillary Clinton said she's working with others in the international community to help end the bloodshed, adding everything is on the table.

"We will look at all the possible options to try to bring an end to the violence, to try to influence the government," she said.

But State Department spokesman P.J. Crowley seemed to rule out one possibility: a no-fly zone to prevent Libyan planes and helicopters from attacking civilians.

Nonessential U.S. diplomats and families of embassy workers were ordered out of the country Monday, but it took until Wednesday to put 35 of them on a ferry, along with other Americans and foreign nationals.

Crowley said the ferry was delayed, in part because Libyan authorities had to stamp the passports of everyone leaving. He said the U.S. has also had trouble getting charter flights to Libya.

British Foreign Secretary William Hague, who wouldn't rule out the possibility of sending in military flights without permission to evacuate British nationals, expressed deep concern about British oil sector workers who live in the Libyan desert.

"These camps are remote, they are isolated, they are scattered over a large distance, they are dependent for food or water on supplies from Libyan cities that have been severely disrupted by the violence and unrest and some we know have been subjected to attacks and looting," he said. "They are in a perilous and frightening situation."

The U.N. Security Council held an emergency meeting Tuesday that ended with a statement condemning the crackdown, expressing "grave concern" and calling for an "immediate end to the violence" and steps to address the legitimate demands of the Libyan people. The U.N. Development Program dropped Gadhafi's daughter, Aisha al-Gadhafi, as a goodwill ambassador Wednesday, citing the crackdown.

Yemeni Lawmakers Quit Ruling Party

Mass uprisings sparked by successful revolts in Tunisia and Egypt have ratcheted up pressure on governments across Northern Africa and the Middle East.

In Yemen, thousands of people streamed into a square in the capital, Sanaa, on Wednesday to strengthen anti-government protesters' hold on the area after club-wielding government supporters tried to drive them out. One person was killed and at least 12 injured in the clashes late Tuesday near Sanaa University, medics said. A local human rights group said two people were killed and 18 hurt.

In the port city of Aden, medics said a 19-year-old man died from injuries during clashes last week. Thirteen demonstrators have been killed since the crisis began nearly a month ago.

Seven legislators in President Ali Abdullah Saleh's ruling party resigned from the group Wednesday, citing the country's precarious political situation. Parliament member Abdul-Aziz Jabbari said they planned to form their own independent bloc. With the latest resignations, nine legislators have quit Saleh's Congress Party since protests began earlier this month.

U.S.-backed Saleh, who has held power for 32 years, has said he will step down after national elections are held in 2013. But a widening protest movement demands that he leave office now.

Kings Of Bahrain, Saudi Arabia Discuss Unrest

Across the Arabian Peninsula, in Bahrain, thousands of anti-government protesters marched in the capital Wednesday after King Hamad bin Isa Al-Khalifa freed at least 100 political prisoners, an acknowledgment of the mounting pressure being placed on him by the Shiite opposition.

Tens of thousands of protesters have flooded the tiny kingdom's capital, Manama, calling for the fall of the Sunni dynasty that rules majority-Shiite Bahrain. There are concerns that Bahrain's uprising, now in its second week, could spread to Saudi Arabia, which also has a significant Shiite population that has long complained of oppression by Sunni rulers.

Al-Khalifa was in Saudi Arabia on Wednesday to discuss the popular uprisings with his royal counterpart, King Abdullah bin Abdul-Aziz, according to state media.

Abdullah had just returned home after three months of medical treatment to face a country that has been dramatically changed by revolutions sweeping the Middle East. More than ever before, Saudis are publicly calling for political reforms, on the Web, in Facebook groups and in political forums across the country.

Ahead of his arrival in Riyadh, Abdullah announced a hefty package of giveaways including unemployment benefits and billions to help Saudis buy homes.

Global Unrest Puts Stocks in a Dive

Global Unrest Puts Stocks in a Dive


NEW YORK—The stock market plummeted Tuesday in its biggest drop of the year as escalating tensions in the Middle East and North Africa sent oil prices soaring.

The Dow Jones Industrial Average tumbled 178.46 points, or 1.4%, to 12212.79, its biggest point and percentage drop since Nov. 16.

The Standard & Poor's 500-stock index fell 27.57, or 2.1%, to 1315.44, the measure's biggest point and percentage drop since Aug. 11, 2010.

Oil Prices Spiked and Stocks Tumbled on concerns about Libya, after that nation closed its ports blocking oil exports. Paul Vigna has details. Plus, Gadhafi speaks and how cell phone usage affects your brain.

Brent rose and U.S. crude oil reached a 2-1/2 year high on concerns the revolt in Libya could spread to other major oil producers as companies suspended operations and ports were disrupted. Video courtesy of Reuters.
.Wal-Mart Stores weighed on the Dow, sliding $1.71, or 3.1%, to $53.67, after the retailer's fiscal fourth-quarter profit rose 27%, capitalizing on strength in its international business, but its U.S. operations continued to struggle. Wal-Mart posted its seventh consecutive quarter of lower U.S. same-store sales, and fourth-quarter revenue fell short of analysts' expectations.

Bank of America fell 57 cents, or 3.9%, to 14.18, after saying its credit-card subsidiary was restating eight quarters of reports to regulators because it took a $20.3 billion write-down because of deteriorating credit and new regulations over the past two years. Alcoa was also weak, tumbling 74 cents, or 4.3%, to 16.54.

Energy components were among the measure's few stocks to gain Tuesday, as oil prices surged. Chevron gained 1.60, or 1.6%, to 100.32, while Exxon Mobil rose 94 cents, or 1.1%, to 85.44.

The Nasdaq Composite sank 77.53 points, or 2.7% to 2756.42.

Global stock markets tumbled Tuesday as violence increased in Libya, a major oil-producing state. Libyan leader Col. Moammar Gadhafi publicly defied protesters seeking to end his rule, vowing to remain in the country "until the end" in a televised speech that showed his determination to cling to power Tuesday, as reinforcements of loyal armed military units tightened their hold around the capital. Libyan traders said the country had shut all ports, which would reopen in two to three days.

U.S. markets had been closed Monday for the Presidents Day holiday. Crude-oil prices jumped as unease over the turmoil in Libya and parts of the Middle East mounted. Libya produces 1.8 million barrels of oil daily, and its 41 billion barrels of proven reserves represent more than 3% of global supplies. Nymex oil prices for March delivery surged 8.6% over Friday's close, adding $7.37 a barrel in the biggest one-day dollar gain in more than two years.

.Investors said the stock market had been ready for a correction, as major stock indexes had climbed steadily to reach 2½-year highs on Friday. The geopolitical tensions in the Middle East and North Africa gave nervous traders reason to retreat, said Liz Miller, president of Summit Place Financial Advisors.

"The unrest in the Middle East has ended up to be that trigger, but any number of things could've been that trigger," she said. She cautioned that, if oil prices do remain elevated, "that's a real concern in an economy that seemed to be gaining some strength."

But Tuesday's tumble came as a relief to some participants unnerved by the market's recent unrelenting climb, even in the face of earlier unrest in Egypt.

"When the market starts shrugging off geopolitical issues and ignoring it completely, it's cause for concern," said Jennifer Ellison, principal at Bingham, Osborn & Scarborough. "It's a positive that we're getting some sort of reality check in the market here."

Asian markets suffered sharp losses, also hurt by a major earthquake in New Zealand and a move by Moody's Investors Service to cut the outlook on Japan's "Aa2" rating to "negative" from "stable."

Oil Rises 8.6% on Libya Violence
'Fear Gauge' Shows Most Worry in Months
.Demand for Treasurys climbed, sending yield on the 10-year note down to 3.465%. The dollar strengthened against the euro but weakened against the yen. The euro was at $1.3655, down from $1.3675 late Monday.

Volatility jumped, as the CBOE Market Volatility Index surged more than 30% at its highest point in the day, its biggest one-day climb of the year.

Among stocks in focus, Home Depot slipped 39 cents, or 1%, to 38.09, even after the home-improvement chain's fourth-quarter profit climbed 72% from year-earlier levels, boosted by heavy demand for snow-removal gear. Home Depot provided 2011 guidance at or above the views it gave in December and boosted its dividend by nearly 6% while reiterating its goal to raise the payout every year.

Mentor Graphics climbed 95 cents, or 6.5%, to 15.47, after billionaire investor Carl Icahn offered to buy the chip-design software company for $1.91 billion.


World stocks fell Tuesday as a growing revolt in Libya drove oil prices to 30-month highs.
.Dynegy lost 12 cents, or 2%, to 5.89, after it announced that Chief Executive Bruce Williamson will resign and named David Biegler interim CEO.

Forest Laboratories fell 1.43, or 4.2%, to 32.90, after saying it will buy Clinical Data for at least $898.7 million, as it looks to capitalize on Clinical Data's newly approved Viibryd antidepressant drug. Shares of Clinical Data tumbled 2.69, or 7.9%, to 31.21.

In U.S. economic data, a reading of U.S. consumer confidence hit a three-year high, reaching 70.4 in February, well above the 66 expected by economists. The S&P Case-Shiller 20-city home-price index fell 2.4% year-over-year, slightly more than the 2% drop economists surveyed by Dow Jones Newswires had predicted. The Federal Reserve Bank of Richmond saw mixed economic activity.

Write to Kristina Peterson at

BNY Mellon Faces Forex Suit in New York

BNY Mellon Faces Forex Suit in New York


Bank of New York Mellon Corp., facing whistle-blower lawsuits in Virginia and Florida that it improperly charged pension funds for currency transactions, also has been sued in New York, according to New York County court records.

The New York case, filed by a plaintiff called FX Analytics in October 2009, is under seal and the specific allegations aren't public. A spokesman for the New York State Comptroller's office, which oversees the state's $141 billion Common Retirement Fund, declined to comment. A spokesman for New York attorney general said "we can't comment on potential or ongoing matters before our office."

FX Analytics is a Delaware partnership that is being used to hide the identity of the whistle-blowers, according to a person familiar with the situation. A plaintiff by the same name filed whistle-blower claims in Virginia and Florida, also in October 2009, against BNY Mellon on behalf of state and local retirement systems.

The lawsuits are part of a growing number of legal cases being brought against BNY Mellon and State Street Corp. relating to foreign-exchange transactions. A whistle-blower, or qui tam, lawsuit can be brought by an individual or group on behalf of the government, alleging fraudulent activity involving government funds. The government has an option to join the case. Documents are initially filed under seal pending the outcome of the case.

State Street and BNY Mellon, two of the nation's largest custody banks by global assets, have denied the claims and say they will fight the lawsuits. The banks act as custodians for investment firms' securities, handling a number of tasks, including currency trades and back-office work, for institutional investors.

In the suits filed in courts in Fairfax County, Va., and Leon County, Fla., FX Analytics alleges that BNY Mellon profited by pocketing the difference between its cost of currency transactions and the cost it charged to state and local pension funds.

In recent weeks, Virginia's attorney general intervened in the whistle-blower lawsuit against BNY Mellon and Florida's attorney general filed a court document to also intervene in the whistle-blower law suit against BNY Mellon. Both lawsuits allege the custody bank improperly charged for foreign exchange.

An Arkansas public pension fund sued State Street in Massachusetts federal court earlier this month in a similar claim. The cases mirror one brought by the California attorney general in 2009 against State Street.

In Virginia, the attorney general earlier this month issued a request-for-proposal to hire outside counsel to assist in the legal case against BNY Mellon. According to documents reviewed by The Wall Street Journal, the attorney general's office on Feb. 4 issued a request for proposals from law firms to assist Virginia on the case. According to the document, the firm that is hired "will be appointed as special counsel to represent the Commonwealth."

Proposals were due Feb. 15. A spokesman for the attorney general's office said a law firm hasn't yet been hired.

The proposal requests that the firm "have knowledge of the principles of contract, banking, and agency law, and foreign currency exchange in the context of a custodial relationship between a bank and its pension customers."

Write to Carrick Mollenkamp at and Lingling Wei at

Saturday, February 19, 2011

Silver Climbs Near 31-Year High

Silver Climbs Near 31-Year High

Silver prices neared 31-year highs on a brightening outlook for the global economy and as inflation concerns have revived.
Silver for February delivery rose 72.6 cents, or 2.3%, to settle at $32.2980 a troy ounce on the Comex division of the New York Mercantile Exchange. It was the metal's strongest close since March 1980.
Bloomberg News
The price of silver has increased 5.3% since the beginning of the year, while the price of gold has declined 2.4%.
"It's benefiting from optimism," said Ralph Preston, market analyst at Heritage West Financial.
Silver is a precious metal but unlike gold it has far more industrial applications. Because it is significantly cheaper than gold, which settled at $1,388.20 an ounce Friday, silver is becoming a popular way to hedge against rising prices, with inflation gaining in Europe and China. While inflation in the U.S. remains tame, some believe the Federal Reserve won't be able to control longer-term price pressures stemming from ultralow interest rates and Fed purchases of Treasurys to stimulate the economy.
At the same time, the economic growth that is sparking inflation fears also is prompting a resurgence in manufacturing and consumer purchases.
Silver has gained 4.5% this year and 20% from a two-month low hit Jan. 25. In 1980, the Hunt brothers of Texas attempted to corner the silver market and pushed prices above $40 a troy ounce.
"It's a much more orderly market" nowadays, said Stephen Flood, director of Dublin-based bullion dealer GoldCore.
Commercial traders, like silver miners, have been adding to their short positions in futures contracts throughout February, a sign they are locking in prices. The commercial net short has risen to 50,796 lots in the week ended Feb. 15, from 44,340 lots at the start of the month, according to the latest data from the Commodity Futures Trading Commission.
Mexican company Minera Frisco SAB is hedging production as it seeks to bring previously unprofitable silver projects online, while miners such as Sweden's Boliden AB and U.S. Silver Corp. also set hedging deals for 2011.
The practice of locking in prices at current levels for future sales went out of vogue over the past few years as investors put pressure on precious-metal producers to gain more exposure to record prices. AngloGold Ashanti Ltd. and Barrick Gold Corp. spent much of 2009 and 2010 closing gold hedges.
Minera Frisco, recently spun off by Mexican billionaire Carlos Slim's conglomerate Grupo Carso, has a 70-million ounce silver-hedging program booked out to 2013 that it announced in January in a stock-exchange filing.
Boliden has 2.23 million ounces of silver hedged for 2011 and a total 6.78 million ounces hedged for the period to 2013 as part of its Garpenberg mine expansion. It also is hedging zinc, copper, lead and gold production from that mine, it said. U.S. Silver Corp. is hedging some silver production in 2011, for 500,000 ounces, or 20% of its output, although it has no plans to hedge further production after this year.
"With the recent run-up in silver prices and the extreme volatility we have witnessed, U.S. Silver believed it would be prudent to guarantee a portion of our future cash flow," Chief Executive Tom Parker said.
—Andrea Hotter and Tatyana Shumsky contributed to this article. Write to Matt Whittaker at and Devon Maylie at

Thursday, February 17, 2011

Swiss Franc Captures Safety Bids

Swiss Franc Captures Safety Bids


NEW YORK—The dollar weakened broadly, as initial optimism from encouraging U.S. data was overshadowed by geopolitical jitters that favored such safe harbors as the Swiss franc.

Still, the U.S. currency pared its losses late as minutes of the Federal Reserve's latest policy meeting showed central bankers were getting rosier about the economy in January.

The U.K. pound briefly plunged after the Bank of England's latest quarterly report on inflation suggested that U.K. central bankers aren't ready to start raising interest rates to combat persistently high inflation. Higher rates can lift a currency's value if they aren't seen as hurting an economy.

But by late afternoon in New York, sterling had recovered to $1.6096, after touching $1.5988, though it still was down from $1.6124 late Tuesday. The euro strengthened to $1.3570 from $1.3482 and to 113.44 yen from 113.01 yen. The dollar moved to 83.58 yen from 83.82 yen. The dollar weakened to 0.9593 Swiss franc from 0.9673 franc, after hitting 0.9555 franc.

The dollar got off to a strong start after data on housing starts and producer prices painted an improving picture of the U.S. economy. But it reversed course after reports that Iranian warships were planning to head for Egypt's Suez Canal, which sparked a response from Israel. That spurred investors to seek refuge in the Swiss franc, a favored safe harbor in times of global upheaval.

The dollar recouped some of its losses in the afternoon on the upgraded Fed economic forecast for 2011, which sparked expectations that, while still far off, higher U.S. interest rates eventually could be in the cards.

"The market is starting to anticipate Fed action sooner rather than later," said Jessica Hoverson, fixed-income and foreign-exchange analyst at MF Global in Chicago.

Fed officials were becoming slightly more optimistic about the U.S. economy when they met three weeks ago, but still were unwilling to stop their $600 billion bond-buying program before the scheduled end in June. Officials expect U.S. gross domestic product to rise 3.4% to 3.9% this year.

"It has been an unusually choppy session," said Marc Chandler, a currency analyst at Brown Brothers Harriman in New York, in a note. "One signal that we have found fairly reliable are interest rate spreads, and they are moving in the U.S. direction."

Across the Atlantic, the U.K. pound plunged to below $1.60 after the Bank of England's latest inflation report, along with public comments by central bank governor Mervyn King and discouraging labor market data, threw cold water on the notion that the U.K. central bank could start raising rates in May. A day earlier, the pound rallied after data showed Britain's inflation rate had jumped to an annual 4% in January, double the central bank's medium-term target of 2%.

Inflation concerns are likely to stay front and center on Thursday, when the U.S. reports its own data on consumer prices. "Everyone is focusing on inflation and how central banks respond," says MF Global's Ms. Hoverson.

Wednesday, February 16, 2011

Earnings Call Puts Deere in the Headlights

Earnings Call Puts Deere in the Headlights

Shares of the 175-year-old machinery giant have quadrupled since bottoming nearly two years ago during the financial crisis. This year alone, they are up about 14% and have reached an all-time high.
That is largely because of the farming boom spurred by record prices for crops such as corn, soybeans and wheat.
Indeed, surging demand for farm equipment is expected to give a substantial boost to fiscal-first-quarter results due Wednesday. Analysts polled by Thomson Reuters expect earnings of 99 cents a share for the January quarter, up from 57 cents a year earlier. Revenue is seen up 33% to about $5.7 billion.
And the run could continue, for a time. Amid a global supply squeeze for many crops, farming has suddenly become one of the hottest sectors. The U.S. Department of Agriculture just raised its 2011 farm-income forecast to about $95 billion, up 20% from last year and about 40% above the past decade's average.
Like any boom, however, the longer it lasts, the greater the risks. Any pullback in crop prices as supply catches up with demand will likely affect Deere shares.
Meanwhile, there are other concerns.
Higher emission standards in the U.S. starting in 2012 and the smaller scale of farms in foreign markets will potentially turn customer demand toward Deere's smaller, less-profitable machines. That, plus rising raw-materials costs, is expected to keep a lid on the company's operating margin this year, according to Jefferies & Co.
With that in mind, Deere also may strike a cautious note in its forward guidance Wednesday. Last week, rival AGCO Corp. said its own fourth-quarter profit more than doubled but warned of margin pressure in 2011.
Deere shares aren't wildly expensive, trading at about 17 times estimated 2011 earnings, compared with an average forward multiple over the past 10 years of 15.2 times, according to FactSet.
The big concern—both for Deere investors and the global economy—is crop prices.
At some point they will turn, probably hitting Deere's shares hard. So while investors may be content to make hay while the sun shines, they should keep a sharp eye out for storm clouds.
Write to Kelly Evans at

Tuesday, February 15, 2011

How Star Investors Bet Last Quarter

How Star Investors Bet Last Quarter

Text High-profile money managers and investors zigged and zagged during the latest period, with a host of bank bets made or folded and with one investor tripling his stake in Comcast Corp. and another exiting from the cable company entirely.

Four times a year, many investors who manage more than $100 million are required to disclose holdings in certain types of securities, including stocks, within 45 days of the end of a given quarter.

Most hedge-fund managers and others wait until the last possible moment to make these filings, and the disclosures to the Securities and Exchange Commission cover the quarter ending Dec. 31.

The so-called 13F disclosures give the public a relatively fresh look inside the portfolios of major money managers such as Trian Capital's Nelson Peltz, SAC Capital Advisors' Steven Cohen and Berkshire Hathaway's Warren Buffett. They are often the investing public's first notice that closely watched figures have reversed course on a given sector or major company.

Warren Buffett
Warren Buffett's Berkshire Hathaway Inc. eliminated positions in several stocks in the fourth quarter, including Bank of America Corp., Nike Inc. and Fiserv Inc., as one of its longtime investment managers retired.

Berkshire also sold all its shares of Becton Dickinson & Co., Comcast Corp., Fiserv Inc., Lowe's Cos., Nalco Holding Co. and American depository receipts of Nestlé SA, according to a regulatory filing Monday.

Each of the positions Berkshire exited from appeared to be holdings of car insurer Geico Corp., a subsidiary whose portfolio was long managed by Louis Simpson, who retired from the company late last year. Mr. Simpson, who is in his 70s, worked at Geico for more than 30 years and had autonomy over the subsidiary's $4 billion stock portfolio.

The shares of the companies eliminated from the Berkshire portfolio in the last three months of 2010 had been worth about $1.2 billion at the end of the third quarter.

The stock sales are part of a passing of the guard to Todd Combs, a former hedge-fund manager who is taking over a portion of the investment duties at Berkshire. The 40-year-old Mr. Combs, who recently joined Berkshire as an investment manager, is expected to get $2 billion to $3 billion to invest initially.

Berkshire's $52.6 billion U.S. equity portfolio now includes just 25 companies, the fewest in several years. At the end of the third quarter, Berkshire held $48.6 billion in stocks after exiting from investments in firms including CarMax Inc., Home Depot Inc. and NRG Energy Inc., stocks that were in Geico's accounts.

The fourth-quarter increase in the size of the portfolio reflects substantial increases in the value of major holdings, including Wells Fargo & Co. and Coca-Cola Co.

Berkshire added to its holdings of Wells Fargo, its only addition to its giant portfolio in the fourth quarter. The stake rose about 1.8% to 342.6 million shares when calculated according to the Securities and Exchange Commission rules that govern the quarterly disclosure. Berkshire is the San Francisco bank's largest shareholder.

A separate filing late Monday showed that Berkshire and Mr. Buffett together owned 369.2 million shares as of Dec. 31. That figure appeared to include 10.9 million shares held by Mr. Buffett directly and stock owned by its employee benefit plans and subsidiaries not included in the other filing. Those holdings constitute 7% of Wells Fargo's outstanding shares.

Omaha, Neb.-based Berkshire reduced holdings of Bank of New York Mellon Corp. and Moody's Corp. Its Bank of New York stake fell 10% to 1.79 million shares, while Moody's declined 1.6% to 28.4 million. The sale of the Moody's shares was first disclosed in October.

Mr. Buffett's company, like other firms that control an investment portfolio of more than $100 million, is required to report its U.S. stock holdings 45 days after the end of a given quarter, giving the public its freshest possible glimpse at the investing decisions of the "Oracle of Omaha." The filing with the Securities and Exchange Commission is scrutinized by professional money managers and amateur investors alike, and Mr. Buffett's stock picks have the power to move the shares of the companies he's buying and selling.

But Mr. Buffett, Berkshire's chairman and chief executive, has long warned investors who want to piggyback on his stock picks that not all moves in the portfolio are his. While some of the company's investment decisions in past quarters have been Mr. Simpson's, now Mr. Combs will be managing a portion of the portfolio.

Mr. Combs, tapped for the job in October, was formerly a little-known hedge fund manager of a Connecticut hedge fund called Castle Point.

Berkshire's stakes in American Express Co., Coca-Cola and Kraft Foods Inc. remained unchanged. Mr. Buffett's firm appeared to remain the largest shareholder in each, though other money managers were also reporting the contents of their portfolios after the close of trading Monday, making an exact determination difficult.

—Erik Holm and Serena Ng
Steven Cohen
Investor Steven Cohen's SAC Capital Advisors LP, which has been wrestling with fallout from an insider-trading investigation, reported that it doubled its stake in Sprint Nextel Corp. in the fourth quarter and also loaded up on shares of Time Warner Inc., Comcast Corp. and DirecTV Group Inc.

SAC reported 1,843 holdings at the end of December, excluding exemptions. That is down from 1,871 at the end of September, though the portfolio gained value over the intervening months, ending December at $15 billion, up from $12.8 billion at the end of September.

Its holdings of Sprint jumped to 22.2 million shares, valued at about $101 million at Monday's closing price, from 11.8 million shares at the end of the third quarter.

In addition to Sprint, SAC substantially increased its stake in Time Warner, to 1,988,888 shares, valued at about $69.5 million at Monday's closing price, from 29,628 shares. Mr. Cohen also more than tripled his stake in Comcast, to 3.89 million shares, valued about $89.5 million, from a total of 1.04 million shares over two share classes.

He also loaded up on DirecTV, reporting 2.7 million shares, up from 11,651 at the end of September, worth about $116 million.

SAC Capital also reported a stake of 629,235 shares in Advanced Micro Devices Inc.); it had no stake in AMD at the end of the third quarter.

While adding to his positions in TV providers, he was unloading shares of BJ's Wholesale Club Inc., reducing his stake by 463,903 shares, to 1.1 million shares.

Mr. Cohen and his closely watched hedge fund have drawn scrutiny in recent months. Last week, two of SAC's former employees were ensnared in an ongoing federal probe of insider trading. A spokesman for the fund said last week the firm is "outraged" by the former employees' alleged actions and that it was cooperating in the investigation.

—Liz Moyer
David Tepper
Appaloosa Management LP, the New Jersey hedge fund run by investor David Tepper, increased its bets on the four biggest U.S. banks during the fourth quarter and now holds more than $1.23 billion combined in the banks, according to a filing with the Securities and Exchange Commission.

Among its moves, the fund more than doubled its stake in Citigroup Inc. to more than 117 million shares, a holding that at Monday's closing price would be valued at $576.9 million.

The fund also reported a new stake in J.P. Morgan Chase & Co. valued at $25.2 million. Its stake in Bank of America Corp. rose 12% to 25.1 million shares, a value of $373.3 million, while its stake in Wells Fargo & Co. rose to 7.5 million common shares from 6.4 million and 335,482 preferred shares from 292,019. The common stake in Wells Fargo would be valued at $252.7 million at Monday's close.

The fund also boosted its stake in SunTrust Banks Inc. by 8.9% to 4.2 million, valued at $135.6 million and slightly raised its holdings in American Depositary Receipts of Spain's Banco Santander SA.

The fund trimmed its holdings in Fifth Third Bancorp by 8.4% to 9.5 million shares valued at $146.8 million. It also cut its stake in Capital One Financial Corp. common shares to 1.03 million, or $54.1 million, from 1.43 million shares.

Mr. Tepper specializes in distressed-debt investing and manages around $16 billion. He had a strong year in 2010 after turning optimistic about U.S. stocks before many hedge-fund rivals. According to a Wall Street Journal report, he made between $2 billion and $3 billion personally last year.

Mr. Tepper correctly anticipated the Federal Reserve's recent efforts to boost the economy, steps that have helped the market rally. The increased stake in Citi follows a highly publicized Citi investment by John Paulson of Paulson & Co., who took an early bet on Citi.

Among his other big moves for Appaloosa's quarter were increasing to the holdings in various airline carriers, as well as an already reported increase to Goodyear Tire & Rubber Co.

Many investors who manage more than $100 million are required to disclose most securities holdings within a month and a half of the end of a quarter. The filings give the public a relatively fresh look at the portfolios of well-known investors.

—David Benoit
Nelson Peltz
Investor Nelson Peltz's Trian Capital Corp. took on 2.8 million shares of Kellogg Co. during the fourth quarter while dumping shares of Bank of America Corp., J.P. Morgan Chase & Co. and U.S. Bancorp, according to securities filings Monday.

Mr. Peltz, who is well-known for his investments in the food and beverage sector, also sold his holdings of Dr Pepper Snapple Group Inc. In the third quarter, he held 1.4 million shares of the beverage maker, spread out over two of his funds.

The Kellogg stake was spread over three of his funds, according to the securities filings on Monday, which report holdings as of Dec. 31. Mr. Peltz said in the filings that confidential information was filed separately with the Securities and Exchange Commission; such confidential treatment allows him to withhold information about some investments.

His stakes in Wendys Arbys Group Inc. and H.J. Heinz Co. stayed the same. He increased his holding of Family Dollar Stores Inc. in the fourth quarter by 113,400 shares.

Mr. Peltz reported holding 2.9 million shares of Bank of America at the end of the third quarter, but reported no holdings of the stock at the end of December. Likewise, a previous 550,000-share stake in J.P. Morgan wasn't reported in the December-end filing. He also reported no holdings of U.S. Bancorp, in which he held 1.68 million shares at the end of the third quarter.

—Liz Moyer
FrontPoint Partners
FrontPoint Partners, which late last year got caught up in an insider-trading probe related to a clinical drug trial, bought new stakes in Seagate Technology Inc. and J.P. Morgan Chase & Co. and dumped some health-care stocks, according to a securities filing Monday.

FrontPoint reported new stakes of 1.1 million shares of Seagate and about half a million shares of J.P. Morgan during the fourth quarter. Its new stakes in Seagate Technology and J.P. Morgan are valued at about $15.2 million and more than $24 million, respectively, as of Friday's close.

The Greenwich, Conn.-based hedge-fund firm, which is owned by Morgan Stanley, has been wrestling with fallout from the insider-trading probe for the past several months. The firm is also facing the possible departure of high-profile hedge-fund manager Steve Eisman, whose profitable 2007 bet that the housing market would collapse was chronicled in the book "The Big Short." The Wall Street Journal last month reported that Mr. Eisman was considering leaving.

In early November, prosecutors accused a French doctor of illegally alerting a fund manager with insider information about a clinical drug trial. FrontPoint has laid off the manager, Joseph F. Skowron III, and the rest of the health-care team. Morgan Stanley and FrontPoint have said they are cooperating with authorities and that they haven't been accused of wrongdoing.

Because of the probe, FrontPoint shed stakes in health-care stocks during the fourth quarter as it liquidated its health-care funds. Among the health-care positions eliminated were 1.9 million shares of GlaxoSmithKline PLC and 1.3 million shares of Aetna Inc.

It also disclosed it eliminated its positions in MasterCard Inc. and Visa Inc.

Morgan Stanley said in October that it planned to spin off FrontPoint. As part of the agreement, which was expected to close in the fourth quarter, FrontPoint's senior management and portfolio managers would own a majority equity stake. The insider-trading probe sent the plan into disarray.

—Corrie Driebusch

Monday, February 14, 2011

Threat Builds on the Margins

Threat Builds on the Margins


This earnings season has seen a much-welcomed return to revenue growth, giving investors another reason to push stocks to two-year highs.

But beneath the surface lurks a fresh worry: For many companies, the cost of raw materials is rising at a faster pace than revenue. Blame it on soaring prices of everything from cotton to copper and corn. That has squeezed profit margins more markedly than many analysts anticipated—and is serving as a worrying sign for future earnings.

Bloomberg News

Harvested corn is loaded onto a truck in Ines Indart, Agentina, on Monday, April 5, 2010. Before April 20, corn declined 14 percent this year on forecasts for production to rise in Brazil and Argentina, the biggest exporters behind the U.S. Photographer: Diego Giudice/Bloomberg
.Procter & Gamble, Ford Motor and Kraft Foods are among dozens of companies that reported lower profit margins for the fourth quarter of 2010 compared with the third quarter. Their stocks were punished by investors, even as the companies' profit and revenue exceeded analyst forecasts. The cool reception stood in contrast to the general optimism among investors that has helped the Dow Jones Industrial Average to gain about 6% this year.

About three-quarters of the companies in the Standard & Poor's 500-stock index have reported their earnings so far. Some 25% of those companies have posted lower margins in the latest quarter, according to Morgan Stanley. S&P says operating margins for S&P 500 companies in the latest quarter have come in at 8.69%, down from margins of 8.95% for the S&P 500 in the third quarter.

"I think this quarter was a wake-up call. We're seeing these stocks get hit on margins and sell off dramatically," said Erin Browne, director of global macro trading at Citigroup. "It's definitely picking up steam and becoming much more on the tops of investors' minds, and it's only going to continue as we move through 2011."

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.While some of these costs can be passed on to customers, many companies have been unable to increase their own prices. The economic recovery is just gaining steam, unemployment remains high, and consumers are keeping a tight rein on spending.

Some worry that many analysts aren't taking the lower margins into account and are overestimating future profit margins. Adam Parker, Morgan Stanley's chief U.S. equity strategist, says consensus earnings estimates for the rest of the year imply that analysts continue to see margins expanding. That leaves plenty of room for disappointment if rising commodity prices bite deeply into companies' margins.

"Some analysts may be guilty of 'over-extrapolating' the recent margin improvements into their forward outlooks," and companies that fail to meet these heightened expectations may find themselves punished by the market, Mr. Parker warned in a recent note to clients.

Kraft reported a 30% rise in revenue on Thursday. But the company said higher costs for meat, packaging and other raw materials sliced $500 million from net income, which the company reported at $540 million. The shares fell about 2% after the earnings were released. Procter & Gamble blamed higher commodity prices for crimping margins and said higher costs will lower annual earnings by about $1 billion. Since its earnings on Jan. 27, the shares are down 2.1%, compared with a gain in the S&P 500 of 2.5%. Ford shares are down 13% since Jan. 28, when the auto maker reported that rising costs of commodities such as steel and oil helped drag down its fourth-quarter profit.

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Getty Images

Ford Motor is among dozens of companies that reported lower profit margins for the fourth quarter of 2010.
.Companies that are dependent on raw materials to produce their goods are going to feel the biggest pinch, like Procter & Gamble and Ford, said Charles Blood, market strategist at Brown Brothers Harriman. But energy and materials companies are benefiting.

Citigroup's Ms. Browne recommends investors buy energy and agricultural stocks that benefit from higher commodity prices. Among her recommendations are Exxon Mobil, Peabody Energy and Monsanto. She says investors should avoid—or even bet against—consumer staples and consumer discretionary stocks that have to absorb or can't pass along these higher input costs in slack consumer times. On her list: General Mills, Kimberly-Clark and Kraft. Ms. Browne said that while the theme began to emerge in third-quarter earnings, "concern regarding input costs picked up materially during fourth-quarter earnings" as more and more companies reported lower margins.

The pinched margins put a damper on an earnings season that has finally delivered on revenues, which have come in much stronger than analysts have expected, in part because demand picked up faster than anticipated.

During the downturn, U.S. companies aggressively cut costs and improved productivity, allowing many of them to churn out profits even as the weak economy kept sales muted. But investors were worried that the cost-cutting would have its limits, and that longer-term growth could really only be sustained by revenue growth.

According to Brown Brothers Harriman, 71% of S&P 500 companies reporting so far have beaten revenue expectations this earnings season, compared with the usual rate of about 60%. Revenue has grown an average of 9.8% in the fourth quarter, significantly outpacing estimates of 3.8% growth.

"It tells me that end demand is stronger than what analysts had expected, and that's a very healthy sign that there's more to the profits recovery than just cost-cutting," says Priya Hariani, U.S. equity strategist with Bank of America Merrill Lynch. Ms. Hariani says she is unfazed by the shrinking margins, adding that worries are being stoked by "a handful of companies making headlines." She says current margins are sustainable. Interest rates are low, as are corporate borrowings and corporate-tax rates, she says.

While wages have started rising—up 0.4% in January, according to the Labor Department—they remain low, she notes. And large swaths of the S&P 500 are commodity producers, which benefit as commodity prices rise.

"There are some pockets of the S&P 500 that get pressured, including retailers and food-product companies, but net-net, S&P 500 commodity input costs are low," she says. "What I think this will do is, you won't see the same rapid pace of margin expansion, but it doesn't mean we'll see any meaningful margin contraction."

Goodyear Tire & Rubber still managed to please investors worried about profit margins. The tire-maker posted a loss, but saw its stock jump 14% after the company said it would ramp up production and is ready for 25% to 30% increases in raw-material costs, including for natural rubber.

"Higher raw-material prices are the most significant challenge facing our industry today," Goodyear Chief Executive Richard Kramer said. "Commodity prices that were already high continue to increase." While Goodyear sold the same number of tires in North America in the fourth quarter as in the year-earlier quarter, sales were up 17% as consumers continued to buy Goodyear's more expensive tires.

Write to Jonathan Cheng at

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Friday, February 11, 2011

Mubarak Leaves Legacy of Egypt in Turmoil While Region at Peace

Mubarak Leaves Legacy of Egypt in Turmoil While Region at Peace

By Alaa Shahine and Cam Simpson

Feb. 11 (Bloomberg) -- It took 18 days of pressure from Cairo protesters as the U.S. and the European Union called for change to end the 30-year presidency of Hosni Mubarak, who kept peace with Israel, battled Islamic militants and preserved American interests in the Middle East.

His departure came after violence killed more than 300 people, according to the United Nations, with police sometimes firing on demonstrators and pro-Mubarak forces attacking as well. Egypt is the most populous country in the Arab world, which holds more than 50 percent of all known oil reserves.

The replacement for Mubarak -- who said just yesterday that he would stay until September elections while handing powers to his vice-president -- must have democratic legitimacy, former U.S. National Security Adviser Zbigniew Brzezinski said in a telephone interview before Mubarak said he would leave.

“Egypt is now at a stage of development in which it is reasonable and expected by the population,” Brzezinski said of the need for a leader popularly elected in free and fair elections.

In its final days, Mubarak’s regime also faced tough criticism from its most powerful ally, the U.S. Since the protests began, officials in the administration of President Barack Obama have been condemning violence wielded against demonstrators, calling for a faster transition and saying emergency laws, which had been used to justify harsh security tactics, should be lifted.

Facebook Opponents

Mubarak was brought down by an unexpected coalition of opposition politicians, members of the banned Muslim Brotherhood group and, most important, tens of thousands of young people who planned and organized the demonstrations on Facebook and Twitter.

Chief among them: Wael Ghonim, a 30-year-old Google Inc. executive whose social media expertise helped trigger and propel the demonstrations. He was arrested and held in secret detention for more than a week as Mubarak’s government shut down the Internet and mobile services, the tools he used to help make the protests possible.

Two days after his Feb. 7 release, Ghonim told those gathered in Tahrir Square, “I’m not a hero. You’re all heroes, the martyrs who have died in the struggle are the real heroes.” Pictures of those killed were posted around the square.

Mubarak, a former air-force general who as president was commander of the largest military force in the Arab world, was the nation’s longest-serving ruler in more than 150 years. He controlled a government that was the linchpin of U.S. policy in the Middle East for three decades, Brzezinski said.

Peace With Israel

Mubarak kept peace with Israel, with which Egypt had had formal peace for only two years when he took office, supported U.S. counterterrorism efforts, backed Iranian sanctions over its nuclear program and helped broker Palestinian-Israeli negotiations.

At the same time, Mubarak, an 82-year-old with jet-black hair, controlled a regime condemned by the U.S. government for its lack of basic freedoms at home, for its widespread suppression of political opposition and for the torture of Egyptian citizens, which was often carried out with impunity, according to the State Department.

“If you are prepared to reconcile those two realities, then it seems to me that, on balance, Mubarak has been a partner and a friend to the U.S. and the region,” said former U.S. Middle East peace negotiator Aaron David Miller.

Still, Miller said, the cost was steep.

‘Anger and Animosity’

“His increasing authoritarianism and repression generated enormous anger and animosity, not just towards him, but also toward the United States,” said Miller, who served as a State Department official under six U.S. secretaries of state and was a peace negotiator in the Clinton Administration. He is now a public policy scholar at the Washington-based Woodrow Wilson International Center for Scholars.

Mubarak was propelled to power by the 1981 assassination of Anwar Sadat, the leader who made peace with Israel two years earlier. Only Mohammed Ali, who ruled Egypt from 1805 to 1849, governed longer in the past 200 years.

Miller said three decades of stability in the region for the U.S. and Israel helped Mubarak buy a pass from Washington when he failed to follow through on pledges to open the country’s political system to competition that would have posed a challenge to his own rule.

Egypt’s benchmark stock index has risen more than seven- fold in the past 10 years. The MSCI Emerging Markets Index has almost tripled in the same period. Egypt’s stock market is the second-biggest in North Africa by market value after Morocco according to data compiled by Bloomberg.

Protected Ruling Elite

Since the global financial crisis, though, Egypt’s economic growth rate has dropped below the 7 percent that the government estimates is necessary to create enough jobs for a growing working-age population -- such as the young people who camped out in Cairo’s Tahrir Square.

Suppression of a wide array of perceived rivals under an emergency law promulgated in 1981 marked Mubarak’s reign. Some analysts and opposition groups, including the Muslim Brotherhood, said his policies protected the ruling elite while leaving the poor grappling with an inflation rate that reached more than 20 percent in 2008.

Mubarak’s governments blamed population growth and the economic mismanagement of past administrations for the poverty that plagued the nation of 80 million.

Egypt’s per-capita gross domestic product more than quadrupled from 1981 to 2009, when it stood at $6,000, lower than countries such as Namibia and Gabon, according to the CIA World Factbook.

Funeral Visit

Mubarak never put in doubt the policy of diplomatic rapprochement with Israel, though his only visit to the Jewish state was for the funeral of assassinated Israeli Prime Minister Yitzhak Rabin in 1995.

He renewed ties with Arab states, which had almost universally rejected Cairo’s separate peace accord with Israel under Sadat. They showed their anger by breaking diplomatic relations with Egypt, suspending its membership in the Arab League and moving the group’s headquarters from Cairo to Tunis.

Addressing Arab leaders in Cairo in 1996, Mubarak stressed his commitment to regional peace, which he maintained until the end of his regime.

“There isn’t among us anyone who wants to take the region back to the destruction of war or to the phase of no war and no peace,” he said. “We are sincerely determined to struggle for peace until the end.”

Brzezinski, who was national security adviser to President Jimmy Carter when the U.S. helped forge the Egypt-Israel accord, said that was Mubarak’s most important legacy.

Avoiding Legacy

“I think avoiding war in the region is of importance to the United States,” Brzezinski said. “The moment Egypt signed a separate peace treaty with Israel the possibility of an encircling attack on Israel, like in 1973, faded.”

Mubarak also retained Egypt’s alliance with the U.S., which began with Sadat’s break with the then-Soviet Union. Egypt now receives about $1.3 billion a year in U.S. military aid. U.S. non-military aid last year was $250 million, according to the State Department.

Critics, including the group Human Rights Watch, said he went too far, arguing that the alleged torture of terrorism suspects created more danger than it quelled.

The government’s “foul record on torture” played an important part in fueling the anger that brought Mubarak down, said Sarah Leah Whitson, the Middle East director at the New York-based Human Rights Watch.

Five Times President

She called on the new government to end torture and prosecute perpetrators.

Mubarak was elected president five times. Four were by referendum in which he was the only candidate, and one, in 2005, was an election against an array of weak candidates. Throughout his reign, he retained the state-of-emergency rules that restricted political activity and free speech.

Like Egypt’s three other presidents since the revolution of 1952, Mubarak came from the military. Almost three decades after he assumed power, that same military would announce that it recognized “the legitimacy of the people’s demands” and promise not to fire on peaceful demonstrators.

Until the crisis that began with demonstrations Jan. 25, Mubarak had never appointed a vice president or officially designated anyone as his likely successor. The rise of his son, Gamal, up the ranks of the ruling National Democratic Party led Egyptians to conjecture that he would succeed his father. Both men repeatedly denied this.

Brotherhood Opponents

His most visible political opponents were members of the Muslim Brotherhood, an Islamic group that had renounced violence in the 1970s. Dissatisfaction among Egyptians over corruption and economic inequality fueled its growth.

In 2005, Mubarak opened presidential elections to multiple candidates. The regulations were so restrictive that no strong challengers emerged; the runner-up, lawyer Ayman Nour, won only 7 percent of the vote to Mubarak’s 88 percent. After the election, Nour was jailed for four years on fraud charges that human-rights groups say were trumped up.

In elections later in 2005, the Muslim Brotherhood won 88 seats in the 454-member parliament -- a surprise result that prompted a crackdown on Islamic activists and on anti-Mubarak secular politicians, judges, newspaper editors, bloggers and street demonstrators. Hundreds of Brotherhood activists were rounded up and some put on trial in closed-door military courts.

In 2007, a constitutional amendment forbade parties with religious ties, eliminating the Muslim Brotherhood from fielding a presidential candidate. Rules on running as an independent were also tightened, making a Brotherhood-affiliated nominee unlikely.

To contact the reporters on this story: Alaa Shahine in Cairo at asalha@bloomberg.netCam Simpson in London at