Business News: 'New Normal' Missed Cue As Stocks Rallied

Business News: 'New Normal' Missed Cue As Stocks Rallied

'New Normal' Missed Cue As Stocks Rallied

Posted: 01 Jan 2011 09:12 PM PST

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By Nikolaj Gammeltoft and Inyoung Hwang

Jan. 1 (Bloomberg) -- An improving global economy and record earnings are helping U.S. stocks defy predictions for a “new normal” of below-average returns.

The Standard & Poor’s 500 Index rose 13 percent in 2010, bringing the advance since March 2009 to 86 percent, the biggest rally for a comparable period since 1955, according to data compiled by Bloomberg and S&P. The benchmark equity index posted the largest gain for consecutive years since 1999.

“People are finally starting to say, ‘OK, maybe this growth is sustainable,’” said Mark Bronzo, who helps manage $21 billion at Irvington, New York-based Security Global Investors. “What we’re seeing at the end of the year is that earnings growth has been good and most people are conceding that it’ll probably be good in 2011.”

Pacific Investment Management Co. warned in May 2009 that returns on financial assets would trail historical averages because of government budget deficits and increased regulation. U.S. equities have returned 6.2 percent a year since 1900 before dividends, according to inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG in Zurich.

The S&P 500 rose 0.1 percent to 1,257.64 this week, extending its biggest December rally since 1991 and boosting its 2010 gain to 13 percent after a 23 percent rise in 2009, the biggest two-year advance since the Internet boom in 1998 and 1999. The Dow Jones Industrial Average climbed 4.02 points, or less than 0.1 percent, to 11,577.51 this week, extending its yearly increase to 11 percent.

Caterpillar, DuPont

Caterpillar Inc., DuPont Co. and McDonald’s Corp. jumped more than 22 percent in 2010 to lead gains in the 30-stock Dow while consumer and industrial shares drove the S&P 500 to a valuation of 15.8 times reported profit, the highest price- earnings ratio since June. Stocks rallied after the Federal Reserve pledged to buy $600 billion in Treasuries to stimulate the economy.

“I remain profoundly bearish because we’re just kicking the can down the road,” said David Tice, president of Tice Capital and creator of Federated Investors Inc.’s Prudent Bear Fund. “Printing money has never been the way to prosperity. Can the market go a little higher? Yes, because it’s a fool’s game and it’s going to end badly. It’s just a matter of when.”

U.S. gross domestic product expanded 2.8 percent in 2010, according to the median estimate of 69 economists in a Bloomberg survey. Growth will slow to 2.6 percent in 2011 and increase to 3.2 percent in 2012, the forecasts show.

‘Old Normal’

Bill Gross, co-chief investment officer of Pimco, which manages the world’s biggest bond fund, said in a Dec. 3 radio interview on “Bloomberg Surveillance” with Tom Keene that the “old normal” was growth of 6 percent to 7 percent and the “new normal” is roughly half that. Mohamed El-Erian, the other chief investment officer at Pimco, said in an e-mail on Dec. 1 that the forecast has a 55 percent to 60 percent chance of coming true.

“We are running at a half-size-paper-airplane type of economy as opposed to one with stable wings and full thrusting jet engines,” Gross said.

The S&P 500 gained 6.5 percent in December, sending the gauge above 1,251.70 for the first time since Sept. 12, 2008, the last trading day before Lehman Brothers Holdings Inc. filed the world’s biggest bankruptcy and prompted a 46 percent drop for the benchmark gauge through March 9, 2009.

May 6 Crash

The stock index fell 16 percent between April 23 and July 2 after credit downgrades for Greece, Portugal and Spain spurred concern that global economic growth would slow. Investors started withdrawing money from stocks after the May 6 crash erased $862 billion of value in 20 minutes. About $90 billion has been removed from funds that buy American stocks, according to the Washington-based Investment Company Institute.

“You had kind of a perfect storm,” Michael Nasto, senior trader at U.S. Global Investors Inc., which manages about $3 billion in San Antonio, said of the May 6 crash. “It’s a positive that since then, nothing has happened and we continue to grind higher.”

Equities started rebounding in July as better-than- estimated earnings at companies from United Parcel Service Inc. to Apple Inc. and Ford Motor Co. lifted confidence the economy is recovering. The S&P 500 has surged 20 percent since Fed Chairman Ben S. Bernanke’s Aug. 27 speech in Jackson Hole, Wyoming, where he foreshadowed the second round of quantitative easing. The central bank said in November it will buy an additional $600 billion of bonds through June, expanding on record stimulus of $1.7 trillion in asset purchases.

‘Roller Coaster Ride’

“It was quite a roller coaster ride for the equity markets,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC. “Even though the economic picture got cloudy off and on, the corporate picture continued to stay sunny and warm. Not only have corporations cleaned up their balance sheets to be in wonderful financial conditions, corporate profitability remained exceedingly healthy.”

More than 70 percent of companies exceeded analysts’ profit estimates in the third quarter. It was the sixth straight period that many beat projections, the longest stretch since at least 1993, Bloomberg data show. Balance sheets are the strongest on record, according to Goldman Sachs Group Inc.’s David Kostin, who cited data showing companies hold more than $1 trillion in cash, the most ever compared with the value of their assets.

Prediction of Rally

The benchmark gauge for American equities will rise 9.3 percent from its 2010 close to 1,374 in 2011, bringing the increase since the end of 2008 to 52 percent, the best return since 1997 to 1999, according to the average of 11 strategists in a Bloomberg News survey.

“It’s been a turnabout,” Luschini said. “With the state of the consumer seemingly not deteriorating anymore, coupled with the fact that we are in an economic recovery, the most economically sensitive or cyclical sectors should perform the best.”

S&P 500 companies reliant on discretionary spending by consumers -- including movie-rental service Netflix Inc. and online travel agency Priceline.com Inc. -- surged 26 percent as a group in 2010, the most among 10 industries.

Netflix, which joined the index on Dec. 17, more than tripled to $175.70 in 2010. The Los Gatos, California-based company boosted the number of users to 16.9 million in the third quarter, up 52 percent from a year earlier. Priceline, based in Norwalk, Connecticut, surged 83 percent to $399.55, bolstered by a rebound in hotel bookings and international travel.

Beating Estimates

Caterpillar, the world’s biggest maker of construction equipment, rose the most in the Dow, climbing 64 percent to $93.66 in 2010. The Peoria, Illinois-based company has exceeded the average analyst earnings estimate for seven straight quarters. DuPont, the chemical maker based in Wilmington, Delaware, surged 48 percent to $49.88 for the second-largest Dow average gain.

McDonald’s, based in Oak Brook, Illinois, advanced 23 percent, the most in three years, to $76.76. Sales at the world’s largest restaurant chain have risen for the past four quarters as Chief Executive Officer Jim Skinner lured customers with frappes and fruit smoothies.

As concern that the economic recovery would stall eased, the benchmark measure of using S&P 500 options to hedge losses dropped. The VIX, as the Chicago Board Options Exchange Volatility Index is known, tumbled to 17.75 from 2010’s high of 45.79 in May.

“The profitability and margins of U.S. corporations are significant,” said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages $149 billion. “Corporate earnings data is providing an increasingly positive trend, while the negatives continue to be the lingering information that is already known.”

--With assistance from Jeff Kearns and Whitney Kisling in New York. Editors: Nick Baker, Chris Nagi

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

Russia Starts Oil Pipeline to China as Putin Looks to Diversify

Posted: 02 Jan 2011 04:31 AM PST

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By Stephen Bierman

Dec. 31 (Bloomberg) -- Russia will start its first oil pipeline to China at midnight, increasing crude exports to the world’s largest energy consumer.

OAO Rosneft, Russia’s largest oil producer, and state-run pipeline operator OAO Transneft will sell China 15 million metric tons (110 million barrels) a year for 20 years through the East Siberia Pacific Ocean pipeline, known as ESPO, after China provided the companies $25 billion in oil-backed loans to finance construction and development of deposits.

Russia currently supplies crude to China by rail and shipped 1.06 million tons in November, making it the Asian country’s seventh-largest supplier, according to Chinese customs statistics on Bloomberg.

Prime Minister Vladimir Putin has said the $26 billion project will diversify the delivery of Russia’s natural resources beyond Europe. Russia also hopes the pipeline will unlock millions of barrels of resources trapped in remote deposits along its path.

“Asian oil buyers clearly gained,” Ed Chow, a senior fellow at the Center for Strategic & International Studies, said by e-mail. China won’t pay a premium for the crude, and the cost of the pipe will be distributed among Russian oil producers, he said.

The ESPO pipeline when completed in 2014 will span about 4,700 kilometers (2,900 miles), longer than the distance from London to Tehran. It will carry oil from Taishet, beyond the west Siberian basin where most of Russia’s oil is produced, to Russia’s Pacific port of Kozmino.

Daqing Spur

Transneft completed construction of about half the pipe’s length, to Skovorodino in eastern Siberia in 2009. From there a 1,024 kilometer spur extends to Daqing in northeast China.

The Moscow-based pipeline operator doesn’t now plan to accommodate a Chinese request to double delivery volumes, Transneft President Nikolai Tokarev said in September. Transneft has directed the Chinese to buy additional supplies at Kozmino, Transneft spokesman Igor Dyomin said by e-mail.

Kozmino, currently supplied by rail, loaded 15 million tons of ESPO blend oil this year as of Dec. 25, the port said in a Dec. 28 statement. Transneft plans for the port to carry the same amount next year, Dyomin said. The link’s capacity may be raised to 50 million tons in 2013 from the current 30 million tons, according to a Transneft development plan.

Russia will probably send less crude to Europe as a result of the Asia link, Transneft’s Dyomin said.

--Editors: Will Kennedy, Torrey Clark

To contact the reporter on this story: Stephen Bierman in Moscow sbierman1@bloomberg.net.

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net.

Jindal Steel May Build First Oil Refinery in Georgia

Posted: 02 Jan 2011 04:31 AM PST

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By Rajesh Kumar Singh

(Updates with share price in fifth paragraph.)

Dec. 31 (Bloomberg) -- Jindal Steel & Power Ltd., India’s second-biggest maker of the alloy by market value, plans to build its first oil refinery to expand its energy business in the domestic and overseas markets.

Unit Jindal Petroleum Ltd. may set up the refinery with a capacity of 1 million metric tons near fields it’s exploring in Georgia to “test waters,” Sushil K. Maroo, group chief financial officer, said in an interview in New Delhi yesterday.

Jindal Steel, controlled by lawmaker Naveen Jindal, joins Indian Oil Corp., the country’s largest refiner, in seeking to build a processing plant overseas to sell fuels. The group has five oil and gas blocks in Georgia and one in Bolivia and is looking for more areas in and around Kazakhstan, Maroo said.

“It will show the company’s commitment in Georgia and improve its chances of getting more oil and gas assets there,” said Niraj Shah, an analyst at Fortune Equity Brokers Ltd. in Mumbai.

Jindal Steel shares gained 0.2 percent to 722.85 rupees at 9:21 a.m. in Mumbai trading after declining as much as 0.4 percent. The stock has climbed 3 percent this year compared with a 17 percent increase in the benchmark Sensitive Index.

The five blocks in Georgia have combined estimated recoverable reserves of 141 million barrels of oil and 592 billion cubic feet of natural gas, according to Jindal Steel’s website. Current production is about 550 barrels a day from one field.

Oil Production

The East European nation produced about 1,000 barrels a day and consumed 15,000 barrels a day in 2009, according to the U.S. Energy Information Administration website. The former Soviet state had no crude oil refining capacity as of last year.

Crude oil for February delivery declined as much as 32 cents, or 0.4 percent, to $89.52 a barrel on the New York Mercantile Exchange and was at $89.75 at 10:02 a.m. Singapore time. Prices, which have increased 13 percent since Dec. 31, 2009, are poised to end the year at the highest level since 2007.

Jindal’s energy business in India includes a stake in an exploration block in Rajasthan and electricity generation. Jindal Steel’s power unit filed share-sale documents with the market regulator a year ago, proposing to raise 72 billion rupees ($1.6 billion) in the nation’s biggest initial public offering by a utility in three years.

“The share sale will happen after January,” Maroo said. “Clarity on timing will emerge only around middle of next month. The market is good for an initial public offer and we are expecting a good response.”

Power Projects

Jindal Power Ltd. will use the IPO funds for three projects in Chhattisgarh and Jharkhand states with a combined capacity of 4,380 megawatts, Maroo said. The Chhattisgarh project has yet to get environment approval for expansion to 2,400 megawatts.

“The company cannot be approaching investors with its most immediate project awaiting environmental clearance,” said Tanuj Rastogi, an analyst with Marwadi Share & Finance Ltd. in Mumbai.

An environment ministry panel recommended approval for the expansion at Chhattisgarh, where a 1,000 megawatt plant is operational, Jindal Power said Dec. 3.

The Jindal group has sought bids for the supply of generators for an additional 11,020 megawatts. It is targeting generation capacity of 15,000 megawatts in the next decade, according to its website.

“We have not yet decided on the locations for this additional capacity,” Maroo said. “The tenders have been floated only to save on time.”

The company also plans to build 6,100 megawatts of hydro power capacity at an estimated cost of 372 billion rupees. The feasibility report for the three projects, all in the northeastern state of Arunachal Pradesh, will be ready in less than two years, Maroo said.

“We are also planning to set up 100 megawatts of wind power capacity,” he said. “We are evaluating the idea.”

--Editors: John Chacko, Ryan Woo.

To contact the reporter on this story: Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net.

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net.

GDF Said to Study IPO for Oil, Gas Production Unit

Posted: 02 Jan 2011 04:31 AM PST

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By Nicholas Comfort, Brett Foley and Tara Patel

(Updates with closing share price in fifth paragraph.)

Dec. 31 (Bloomberg) -- GDF Suez SA, operator of Europe’s largest natural-gas network, is studying a plan to sell shares or a minority stake in its oil and gas production business, according to three people with knowledge of the matter.

GDF Suez may soon hire an investment bank to manage an initial public offering or help find a buyer for the stake, said one of the people, who declined to be identified because the plans are private. The shares may be sold in London or Paris, one of the people said.

Armelle Dillar, a spokeswoman for Paris-based GDF Suez, declined to comment.

The former French gas monopoly led by Gerard Mestrallet plans to sell between 4 billion euros ($5.3 billion) and 5 billion euros of assets over two years following this year’s deal to take control of International Power Plc. The combination will create the world’s second-biggest power producer and follows the 2008 merger between Gaz de France SA and Suez SA.

GDF Suez fell 39 cents to close at 26.85 euros in Paris trading. The shares have dropped 11 percent this year, giving the utility a market capitalization of about 60 billion euros.

GDF Suez has said it is seeking to raise crude oil and gas reserves to 1.5 billion barrels of oil equivalent, mainly through external growth. The stake sale could be a way to raise cash to reduce debt and for investment in exploration and production projects, one of the people said.

GDF Suez is operator of the North Sea Gjoea field, estimated to hold 82 million barrels of oil and condensate and 40 billion cubic meters of gas. GDF holds a 30 percent stake, Statoil ASA 20 percent, Petoro AS 30 percent, Royal Dutch Shell Plc 12 percent and RWE AG 8 percent.

Greenland Exploration

The French utility is in a consortium with Shell and Statoil for gas and oil exploration licenses in Greenland waters as well as having projects in Australia, Algeria, the Caspian Sea, Egypt, Qatar and a shale gas exploration permit in southern France. GDF Suez wants to develop technical expertise in so- called unconventional and tight gas in Europe, including Germany and eastern Europe, vice-chairman Jean-Francois Cirelli said in May.

GDF Suez paid $200 million for a 60 percent stake in three offshore Australian gas fields as part of the Bonaparte LNG project with Santos Ltd.

Production Drop

The French utility said in November exploration and production sales were “practically stable” with a drop in total hydrocarbon production to 24.6 million barrels of oil equivalent at the end of September compared with 26.1 million barrels of oil equivalent the previous year.

Mestrallet earlier this year cut his forecast for 2011 earnings growth because demand for natural gas may not recover as quickly as expected following the economic slump and a “historic” drop in demand.

In August, GDF Suez agreed to join its units outside Europe and assets in the U.K. and Turkey with those of U.K.-based International Power, creating a London-listed electricity producer that’s majority owned by GDF Suez.

GDF Suez’s net debt was 31.8 billion euros at the end of September, down by 1.7 billion euros from three months earlier, the company said last month.

--Editors: Will Kennedy, Jeff St.Onge.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net; Brett Foley in London at bfoley8@bloomberg.net; Tara Patel in Paris at tpatel2@bloomberg.net.

To contact the editors responsible for this story: Jeff St.Onge at jstonge@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net

Porsche Wins Dismissal of Fund Lawsuits Over $2 Billion Losses

Posted: 02 Jan 2011 04:30 AM PST

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By Joel Rosenblatt

Dec. 31 (Bloomberg) -- Porsche Automobil Holding SE persuaded a judge to dismiss two lawsuits claiming the carmaker cost hedge funds more than $2 billion by misleading short- sellers in its acquisition of Volkswagen AG shares in 2008.

U.S. District Judge Harold Baer in Manhattan yesterday dismissed the complaints filed by hedge funds Elliott Associates LP and Black Diamond Offshore and representing a total of 39 U.S. and foreign-based funds. The suits accused Stuttgart, Germany-based Porsche of secretly cornering the market in Volkswagen shares.

The short sellers claimed that Porsche misled investors by denying through much of 2008 that it intended to acquire Volkswagen and by using manipulative trades to hide its stock positions. Porsche said on Oct. 26, 2008, that it controlled most of Volkswagen’s common stock, causing the shares to surge as short sellers raced to cover their positions.

In his opinion, Baer said he relied on a recent U.S. Supreme Court ruling that fraud claims such as those in the suits against Porsche apply only to securities listed on domestic exchanges and domestic transactions in other securities. Baer said his ruling yesterday applies to other similar complaints against Porsche.

‘Functional Equivalent’

The swaps at issue in the case “were the functional equivalent of trading the underlying VW shares on a German exchange,” Baer wrote. “Accordingly, the economic reality is that plaintiffs’ swap agreements are essentially transactions conducted upon foreign exchanges and markets and not domestic transactions.”

Porsche took another step toward its planned merger with Volkswagen, based in Wolfsburg, Germany, and Europe’s largest carmaker, after the company’s shareholders on Nov. 30 backed a 5 billion-euro stock sale to lower debt. The sports-car maker agreed to combine with VW in August 2009 after a failed attempt by Porsche to gain control of VW.

The court also dismissed claims against Porsche SE’s former chief executive officer, Wendelin Wiedeking, and its former chief financial officer, Holger Harter. Porsche announced the ruling in an e-mailed statement yesterday without commenting on it.

David Parker, a lawyer representing Elliott Associates, didn’t immediately return a call seeking comment after business hours.

The case is Elliot Associates, Black Diamond Offshore, Ltd. v. Porsche Automobil Holding SE, 10-0532, U.S. District Court, Southern District of New York.

--With assistance from Thom Weidlich in New York and Ben Livesey in San Francisco. Editors: Peter Blumberg, Fred Strasser

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

S. African Bonds Top Stocks; 1st Time Since Apartheid

Posted: 02 Jan 2011 04:07 AM PST

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By Garth Theunissen

(Updates with closing returns in ninth paragraph.)

Dec. 31 (Bloomberg) -- South African bonds lured more foreign inflows in 2010 than shares for the first time after the fall of apartheid in 1994 as yields more than double those of 10-year U.S. Treasuries boosted the appeal of the debt.

Net foreign purchases of local-currency government bonds surged to 61 billion rand ($9.2 billion) from 26.5 billion rand in 2009, according to the JSE Ltd., which operates South Africa’s exchanges. That compares with 35.6 billion rand of net equity purchases by international investors, down from a record 75.4 billion rand, according to the data.

“South African bonds offer some of the highest yields around,” said Leon Myburgh, a fixed-income strategist for sub- Saharan Africa at Citigroup Inc.’s Johannesburg-based unit. “Slowing inflation and declining interest rates made them a very attractive investment.”

The debt-buying spree will continue through 2011, said Jacques Theron, a portfolio manager at Johannesburg-based Absa Asset Management Private Clients, a unit of the nation’s largest retail bank. With its benchmark interest rate at 5.5 percent and inflation near a five-year low, South Africa’s central bank is among a few worldwide that have room to cut rates, he said.

Local-currency, emerging-market debt has rallied from Indonesia to Brazil as interest rates at near-zero levels in industrialized nations encouraged investors to seek out better returns in developing markets. The spread, or yield difference, between 10-year South African bonds and U.S. debt of similar maturity was last at 480 basis points, from almost 535 at the start of the year, according to data compiled by Bloomberg.

Prudent Fiscal Management

Inflation in Africa’s biggest economy averaged 3.5 percent in the five months through November as the rand’s surge to best- performing emerging-market currency versus the dollar since the start of 2009 reduced the cost of imports. That enabled the central bank to lower its main lending rate on Nov. 18 for the ninth time since December 2008 to the lowest level since 1999.

“The country’s prudent debt metrics have also been a factor,” said Trevor Barsdorf, an analyst at Econometrix Treasury Management, a Johannesburg-based bond and foreign- exchange adviser.

Finance Minister Pravin Gordhan said on Oct. 27 that South Africa will trim its budget deficit to 5.3 percent of gross domestic product, down from a February estimate of 6.2 percent, in line with aims to cut it to 3.2 percent in fiscal 2014. South Africa’s deficit compares with shortfalls as high as 15.4 percent of GDP in Greece and 14.4 percent in Ireland in 2009.

Company Takeovers

The combination of slowing inflation and falling rates, helped South African bonds return more than 26 percent in 2010 in dollar terms, the third-best performers after Colombia and Indonesia, based on available index data from JPMorgan Chase & Co. South Africa’s FTSE/JSE Africa All Share Index returned more than 29 percent in 2010, when measured in U.S. currency.

Investors also preferred bonds over stocks due to concerns that the global economy may stall, Citigroup’s Myburgh said.

South African stocks were boosted by takeovers, including Wal-Mart Stores Inc.’s acquisition of a controlling stake in Massmart Holdings Ltd., and Nippon Telegraph & Telephone Corp.’s purchase of Dimension Data Plc. Massmart was the second-best performer on the FTSE/JSE Africa TOP40 Index in 2010, advancing more than 64 percent.

Net foreign inflows into South African bonds in 2010, which exceeded the cumulative purchases of the 15 previous years, helped the rand extend gains versus the dollar since the start of 2009 to 42 percent.

Facing Headwinds

Not everyone expects money to continue pouring into the country’s bond market.

“There are some headwinds,” said Manik Narain, an emerging-markets strategist at UBS AG in London. “Inflation has bottomed and will begin to pick up.”

UBS expects South Africa to raise rates by 50 basis points in 2011, causing foreign purchases of bonds to slow, which will help weaken the rand to an estimated 7.60 per dollar by the end of next year.

“The best of the inflows into South African bonds is behind us,” Narain said.

Much of what happens in South Africa’s bond market will hinge on the performance of the rand.

‘No Sell-Off’

The rand will probably strengthen to 6 per dollar over the next 12 months, with the risk of the currency appreciating to as strong as 5.5, said ETM’s Barsdorf. That would push inflation to below the central bank’s 3 percent lower limit, enabling policy makers to cut rates by 50 to 100 basis points during 2011.

Investors can “pencil in” the likelihood of another $4 billion of foreign inflows into South African bonds in 2011 from dedicated local-currency emerging-market debt funds alone, said Werner Gey van Pittius, who helps manage about $70 billion as a portfolio manager at Investec Asset Management in London.

“I can’t see too many reasons not to be bullish on South African bonds,” he said. “We can’t see an aggressive sell-off on the horizon unless there’s a massive risk-aversion event.”

--With assistance from Sikonathi Mantshantsha and Ana Monteiro in Johannesburg. Editors: Vernon Wessels, Philip Sanders.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

Corporate Bonds Signal Recovery as Junk Leads: Credit Markets

Posted: 02 Jan 2011 04:07 AM PST

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By John Detrixhe

Dec. 31 (Bloomberg) -- Corporate bonds capped their best two-year global performance ever as signs of an accelerating U.S. recovery outweighed concern the European Union will fail to contain its fiscal crisis.

Company debt returned 7.1 percent this year, following a record 16.3 percent in 2009, according to Bank of America Merrill Lynch index data. Bonds issued by the neediest borrowers led the rally, with junk-rated debt in the U.S. gaining 15 percent in 2010.

The Federal Reserve’s unprecedented efforts to tamp down interest rates spurred record junk-bond sales and coaxed yields for investment-grade corporate bonds to the lowest on record. Pacific Investment Management Co. boosted its U.S. economic growth forecast 1 percentage point to as much as 3.5 percent after President Barack Obama agreed to extend Bush-era tax cuts.

“Corporate balance sheets are exceptionally strong,” said Mark Kiesel, the global head of corporate bond portfolio management at Newport Beach, California-based Pimco, manager of the world’s biggest bond fund. “That’s been the story of 2009 and 2010, the amazing deleveraging of corporate America and the free-cash-flow generation.”

The extra-yield investors demand to own speculative-grade debt instead of Treasuries narrowed 107 basis points this year to 532 basis points, following a record 11.73 percentage points of tightening in 2009, Bank of America Merrill Lynch data show.

Substantial Compression

“You’ve had a pretty substantial spread compression that’s gone on now for two years,” said Jason Pride, director of investment strategy at Philadelphia-based Glenmede, which oversees $19 billion in assets. “I think it was a justified spread compression and now they’ve come in to what I consider more reasonable territory.”

Elsewhere in credit markets, Bill Gross, manager of the world’s largest mutual fund, said investors should avoid dollar- denominated debt; the cost of protecting U.S. corporate debt against default was unchanged; and a third bank withdrew from a lawsuit against MBIA Inc.

Gross, co-chief investment officer of the Newport Beach, California-based Pacific Investment Management, said, “It’s a critical strategy going forward to get out of the dollar and into some currency that holds its value” in an interview with Tom Keene on a Bloomberg Television “Surveillance Midday” program that was taped on Dec. 22 and first broadcast today. “I’d suggest Mexico, Brazil or Canada as three examples of countries with good fiscal balance sheets.”

Pimco’s $250.2 billion Total Return Fund, managed by Gross, has handed investors a gain of about 8.4 percent this year, beating about 75 percent of its peers, according to data compiled by Bloomberg.

Swaps Prices

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, was unchanged at a mid-price of 85.1 basis points as of 12:02 a.m. in New York, according to index administrator Markit Group Ltd.

The index, which typically rises as investor confidence deteriorates and falls as it improves, has declined from 99.4 basis points on Nov. 30.

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

MBIA Suit

Royal Bank of Canada is withdrawing from a lawsuit against MBIA Inc. over MBIA’s restructuring in 2009, according to a filing today in New York State Supreme Court. Yesterday, JPMorgan Chase & Co. and Barclays Plc withdrew from the suit, which challenged MBIA’s plan to separate its municipal bond insurance business from its structured-finance guarantees.

An end to the suit, brought by 18 financial companies, may allow MBIA to resume guaranteeing state and local debt.

The Standard & Poor’s/LSTA US Leveraged Loan 100 Index yesterday rose 0.08 cent to 92.84 cents on the dollar. The index tracks the 100 largest dollar-denominated first-lien leveraged loans, which are rated below Baa3 at Moody’s Investors Service or less than BBB- at S&P. The index returned 5.89 percent for the year.

In emerging markets, relative yields fell 6 basis points to 236, according to JPMorgan Chase & Co. index data. They’ve declined 41 basis points since the end of 2009.

Investment-grade U.S. corporate bonds returned 9 percent this year, beating the global result, Bank of America Merrill Lynch index data show. Airline company bonds returned 15.4 percent globally, making that the best-performing industry in debt markets. Bonds of textile and apparel makers trailed the rest, gaining 0.66 percent.

Improving Fundamentals

“Our view on credit spreads is that fundamentals continue to grind along and improve,” said David Tiberii, a money manager who helps oversee $20 billion of investment-grade corporate debt at T. Rowe Price Group Inc. in Baltimore. “Credit spreads should continue to tighten in.”

Financial company bonds worldwide climbed 6.75 percent compared with a 7.73 percent rise for industrial businesses.

The year “was a story of very strong appreciation in price for a lot of bond investments,” said Rob Williams, director of fixed-income for Charles Schwab Corp., which oversees $1.5 trillion in client assets. “In 2011 we don’t expect that to continue, certainly not at the same pace we saw in 2010.”

Spreads Narrow

While global corporate bond spreads narrowed for the year, they widened from 142 basis points in April as the burgeoning European deficit crisis prompted investors to demand more yield for buying some euro-denominated government debt.

Moody’s cut Ireland’s credit rating five levels to Baa1 on Dec. 17 and has said it may downgrade Spain and Greece.

Junk-rated securities returned 15.1 percent worldwide in 2010 after gaining a record 61 percent the previous year, Bank of America Merrill Lynch index data show.

Even as the U.S. and other developed economies are forecast to grow “below potential,” junk-rated debt may return about 10 percent next year as spreads contract as much as 150 basis points on “favorable liquidity conditions,” Bank of America Merrill Lynch strategists Oleg Melentyev, Jeffrey Rosenberg and Mike Cho wrote in a report.

Near-Zero Rates

Near-zero benchmark interest rates in the U.S. forced debt investors who wanted higher returns to take on more risk, bolstering demand for junk-rated securities.

“Certainly the Fed instigated or promoted this risk- assuming behavior,” said Noel Hebert, credit strategist at Mitsubishi UFJ Securities USA in New York. “You had kind of an idealized environment for fixed-income, where the Fed was determined to hold rates down.”

Debt issued in January by the finance unit of Dearborn, Michigan-based Ford Motor Co. was the best performing actively traded U.S. corporate issue in 2010, according to data compiled by Bloomberg and Trace.

The $500 million of notes sold at par on Jan. 15 in a reopening of 8.125 percent securities due in January 2020, Bloomberg data show. The debt has risen to 115.5 cents on the dollar, Trace data show.

Ford is rated Ba2 by Moody’s, two steps below investment grade, and B+, two levels lower, by S&P, Bloomberg data show.

“Ford has been a big home run,” said Kathleen Gaffney, a money manager at Boston-based Loomis Sayles & Co., which has $150 billion in assets including Ford debt. “While it’s a very good entry point for equity, I think on a risk-adjusted basis, high-yield is more attractive.”

San Diego Gas

Bonds due in 30 years issued by San Diego Gas & Electric on Aug. 23 were the worst-performing actively traded benchmark- sized issue this year, followed by Barclays Plc’s 10-year issue on Oct. 6, Bloomberg and Trace data show. The London-based lender’s 5.14 percent securities due in October 2020 have fallen from 99.93 cents on the dollar to 89.74 cents on the dollar.

“The British banks have a ton of exposure to Ireland and some of the periphery countries,” Mitsubishi’s Hebert said in a telephone interview. “You have the austerity measures that are taking hold over there that may curb loan demand.”

In 2011, spreads on investment-grade bonds will tighten about 60 basis points as the debt returns about 2.5 percent, Bank of America Merrill Lynch’s Rosenberg wrote in a report.

“We maintain our outlook that favorable liquidity conditions will drive high grade credit spreads tighter,” Bank of America Merrill Lynch said.

--With assistance from Mary Childs, Sapna Maheshwari, John Detrixhe, Christine Idzelis, Prashant Gopal and Cordell Eddings, in New York. Editors: Mitchell Martin, Richard Bedard

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

Transocean Challenges Agency Authority to Probe Blast

Posted: 02 Jan 2011 04:06 AM PST

add to Business Exchange

By Joe Carroll

(Updates with board’s comment in seventh paragraph.)

Dec. 31 (Bloomberg) -- A federal panel that investigated the fatal 2005 Texas refinery blast that resulted in a $50 million fine for BP Plc hasn’t got the authority to probe the company’s April deep-water drilling disaster, according to rig owner Transocean Ltd.

Under federal law, floating rigs are exempt from oversight by the U.S. Chemical Safety and Hazard Investigation Board, Rachel G. Clingman, an attorney for Transocean, said in a letter to the agency obtained by Bloomberg. Transocean owned the Deepwater Horizon that burned and sank after BP’s Macondo well erupted April 20, triggering the worst U.S. offshore oil spill.

The chemical board’s power to investigate accidents aboard permanently moored offshore installations such as oil-production platforms doesn’t extend to rigs, which move from site to site, Clingman, from Sutherland Asbill & Brennan LLP in Houston, said in the letter. While Transocean plans to continue answering questions and providing documents to the chemical board on a voluntary basis, the company won’t respond to subpoenas from the agency, she said.

“Transocean always has sought cooperation over confrontation in responding to reasonable government inquiries,” Clingman wrote to Donald Holmstrom, a chemical board investigator, in the letter dated yesterday. “Please also advise if CSB would like to accept Transocean’s many offers to meet and confer.”

Blowout Preventer

The chemical board is one of several federal agencies and Congressional panels looking into what went wrong when a plume of gas and crude from BP’s well off the Louisiana coast engulfed Transocean’s rig, killing 11 workers, injuring 17 and bringing offshore energy exploration in U.S. waters to a standstill.

In the letter, Vernier, Switzerland-based Transocean also asked the chemical panel to turn over correspondence with U.S. Representatives Henry Waxman and Bart Stupak regarding the rig catastrophe, along with internal board procedures for conducting investigations and interviews. Waxman and Stupak, Democrats from California and Michigan, respectively, helped lead Congressional probes of the disaster.

Daniel Horowitz, a spokesman for the Washington-based chemical board, said the agency has jurisdiction to investigate the incident.

“The source of the flammable gas was the fixed well installation on the seabed, and the Deepwater Horizon itself was also functioning as a fixed facility during the drilling operation,” he said in e-mailed comments.

‘Disappointed’ at Transocean

The board also has broad authority to conduct studies of actual or potential safety issues under its statute. Most companies are cooperating with the board in its investigation, which is non regulatory and is aimed at preventing future accidents, he said.

“We are therefore disappointed with Transocean’s statements and have asked the Justice Department to enforce the CSB’s subpoenas so the investigation can move forward without interference,” Horowitz said.

Last week, the chemical panel criticized a joint U.S. Coast Guard-Interior Department board for allowing employees of Transocean and Cameron International Corp., maker of the blowout preventer installed on the well, to participate in inspections of the device. The preventer, a 50-foot (15-meter) stack of valves, failed to halt the surge of gas and oil when workers attempted to activate it from the bridge of the burning rig.

Public Trust

The chemical board said the involvement of Transocean and Cameron employees created a conflict of interest that “diminishes the credibility of the entire process and jeopardizes the public’s trust in the examination results,” Rafael Moure-Eraso, chairman of the Chemical Safety Board, said in a Dec. 23 letter to Michael Bromwich, who oversees the Interior Department’s Bureau of Ocean Energy Management, Regulation and Enforcement.

In 2005, an explosion occurred at BP’s Texas City, Texas, refinery when an octane-boosting unit overflowed as it was being restarted. The blast killed 15, injured thousands and was powerful enough to shatter windows five miles away. The Chemical Safety Board found numerous safety lapses that created “a catastrophe waiting to happen,” according to John Bresland, the board’s chairman.

--Editors: John Viljoen, Clyde Russell.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net.

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net