Business News: Retirement Looms: Time to Get Nervous

Companies in the Standard & Poor’s 500 Index that analysts loved the most rose 73 percent on average since the benchmark for U.S. equity started to recover in March 2009, while those with the fewest “buy” recommendations gained 165 percent, according to data compiled by Bloomberg. Now, banks’ favorites include retailers and restaurant chains, the industry that did best in last year’s rally and that are more expensive than the S&P 500 compared with their estimated 2011 profits.

Investors who look at the analysts as a contrary indicator are buying shares of utilities, which pay the highest dividends after telephone stocks, and banks, whose earnings are likely to grow three times as fast as the S&P 500 this year. Don Wordell, a fund manager at Atlanta-based RidgeWorth Capital Management Inc., says equities that Wall Street firms rate lowest are more likely to beat the market.

“When you have a stock that has 15 analysts covering it and it has 15 buys, I can’t imagine it has much outperformance left,” said Wordell, whose $1.64 billion RidgeWorth Mid-Cap Value Equity Fund topped 98 percent of peers in the past five years. “You’ve got a stock that has 15 sells on it, you’re set up there to have some strong outperformance.”

The S&P 500 completed the sixth straight weekly advance on Jan. 7. It has gained 88 percent to 1,271.50 since March 9, 2009, Bloomberg data show. Futures on the index slumped 0.5 percent at 6:31 a.m. New York time today.

Netflix, Cummins

The benchmark index for American stocks rallied 13 percent in 2010. Consumer shares such as Netflix Inc., the Los Gatos, California-based movie service that posted the biggest gain on the S&P 500, rising 219 percent, led the advance, along with industrial companies like Cummins Inc., the Columbus, Indiana- based engine maker that advanced 140 percent.

Analysts said health-care and technology companies would win in 2010. Instead, they had two of the three smallest rallies among 10 industries in the S&P 500, gaining less than 10 percent. The stocks analysts liked least, banks and real estate firms, rose 19 percent and 28 percent, respectively, in 2010.

S&P 500 companies with the most “buy” ratings gained 8.7 percent in 2010, while the ones with the fewest jumped 20 percent, the data show. Bloomberg assigns each analyst rating a number ranging from 1 for “sell” to 5 for “buy.” For this article, stocks with at least five ratings on Dec. 31 were divided into three groups by average rating. Only rankings from analysts who still cover the companies were counted.

Stimulus Spending

The Federal Reserve’s unprecedented stimulus, including a program to buy $600 billion in bonds, to lower unemployment and boost growth spurred stocks whose earnings are most tied to the economy, such as Cleveland-based iron producer Cliffs Natural Resources Inc., which gained 69 percent. Earnings for S&P 500 companies rose 32 percent in 2010, analysts estimate, the fastest growth since 1994.

Tony Butler, a New York-based pharmaceutical analyst for Barclays Plc, told clients to buy Pfizer Inc. and Whitehouse Station, New Jersey-based Merck & Co. last year. New York-based Pfizer, the largest U.S. drugmaker, slipped 3.7 percent in 2010, while No. 2 Merck dropped 1.4 percent.

“You scratch your head and wonder, ‘Which part of this am I missing that the market is getting right?’” Butler said. His picks generated a 13 percent return in the past year, beating the average 8.9 percent gain from analysts following the industry, according to data compiled by Bloomberg.

Health-Care Miss

Analysts recommended health-care stocks on speculation the government would fail to pass legislation overhauling the industry, according to Butler. U.S. President Barack Obama signed his health-care policy into law on March 23, imposing fees on drugmakers and mandating insurance coverage.

Banks have been among the lowest-rated stocks in the S&P 500 even as they gained 172 percent since the rally began in March 2009. Sixteen lenders in the index may report average earnings growth of 44 percent in the 2011 as business recovers from the worst financial crisis since the Great Depression, forecasts compiled by Bloomberg show.

An improving economy and fewer write-offs for bad loans led to a surge in regional bank stocks last year, said Kevin St. Pierre, an analyst at Sanford C. Bernstein & Co. He recommended shares of Zions Bancorporation, a Salt Lake City-based lender that jumped 89 percent in 2010. The company started last year as the eighth lowest-rated stock in the S&P 500.

‘Easy and Safe’

“Throughout most of ‘09 and early 2010, it was very easy and safe to be negative on the financials,” said St. Pierre in an interview from New York. “Many analysts in different sectors said, ‘I’m not going to catch these falling knives.’ Knives were falling all over the place at the end of ‘09.”

Following St. Pierre’s recommendations in the past year would have generated a return of 17 percent, exceeding the 1 percent average increase from analysts following the industry, data compiled by Bloomberg show.

Analysts couldn’t foresee that changes to financial regulations would threaten profits at larger lenders, driving investors to smaller ones, said David A. George, a bank analyst at Robert W. Baird & Co. in St. Louis.

“A year ago today, financial regulatory reform was not even on people’s radar,” said George, ranked fourth by returns among 34 analysts who cover Wells Fargo & Co., according to data compiled by Bloomberg. “Going into 2010, a lot of investors were positioned in big banks. With the increased political and regulatory scrutiny, you saw money come out of those names and into the regionals.”

Missing Gains

At the end of 2009, George had “neutral” ratings on Zions, KeyCorp, SunTrust Banks Inc., M&T Bank Corp. and Marshall & Ilsley Corp. Each gained at least 26 percent in 2010.

Analysts are also bearish in 2011 on S&P 500 utilities, which offer a collective dividend yield of 4.32 percent, according to data compiled by Bloomberg. That’s more than twice the 1.86 percent yield of the S&P 500. Only telephone companies, at 5.17 percent, pay more.

Merchant generators, which sell power in wholesale markets, will be hurt by falling natural-gas prices, while traditional regulated utilities are expensive relative to forecast profit, said Michael S. Worms, a New York-based utilities analyst at Bank of Montreal. Southern Co., the largest U.S. electricity producer by market value, trades for 16 times estimated 2011 earnings, compared with 13.4 for the S&P 500.

‘Almost Fairly Valued’

“The bottom line is gas prices are down, and they will hurt the merchants,” said Worms, who has a “market perform” rating on 25 of the 29 companies he covers. “On the regulated side, I guess you can say they are almost fairly valued.”

Priceline.com Inc. and Darden Restaurants Inc. are among the S&P 500 companies analysts favor most, helping give so- called consumer discretionary stocks the second-highest average rating among 10 industries in the index behind health care. The stocks rallied as the economy gained momentum and U.S. retailers reported higher-than-estimated sales in November.

The measure of 79 stocks including hotel operators and restaurant owners rallied 26 percent last year, exceeding gains from the index’s nine other main industries. The group now is valued at 1.1 times sales, the highest since 2000, according to data compiled by Bloomberg.

“Our main reason for optimism is that the economy has gained its footing and spending is picking up on the corporate side,” said Matt Arnold, an analyst at Edward Jones & Co. in Des Peres, Missouri, who has 10 “buy” ratings and 6 “holds” on consumer companies. “That could yield some improvement on the employment front and in consumer spending, which will find its way down to retailers.”

Unemployment Rate

Spending is unlikely to bounce back enough to help the stocks given that the unemployment rate is within 0.7 percentage points of the 26-year high set in October 2009, said Paul Lejuez, a New York-based analyst at Nomura Holdings Inc. U.S. payrolls increased 103,000 in December, compared with the median forecast of 150,000 in a Bloomberg News survey, Labor Department figures showed Jan. 7. The jobless rate fell to 9.4 percent, partly reflecting a shrinking workforce.

“With unemployment where it is, we are not out of the woods here,” said Lejuez, who has 11 “neutral” or “reduce” ratings out of 18 stocks and downgraded Gap Inc. to “neutral” from “buy” on Jan. 7. “There’s too much complacency out there in terms of people assuming everything is great.”

Priceline, the second-largest online travel agency, trades at 46 times reported profit, the most expensive level since 2004. The Norwalk, Connecticut-based company gained 83 percent last year. Analysts’ estimates show Orlando-based Darden, owner of the Olive Garden restaurant chain, will increase profit excluding some items by 13 percent this year, compared with the S&P 500’s projected growth of 14 percent.

“The problem with stocks that are loved by everyone is that there’s no one left to buy them,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion. “It’s hard to make money if you’re in the consensus.”

--With assistance from David Mildenberg in Charlotte, North Carolina, Shruti Singh in Chicago, Brian Womack in San Francisco, Benedikt Kammel in Berlin, Duane Stanford in Atlanta, Dina Bass and Susanna Ray in Seattle and Nikolaj Gammeltoft, Jim Polson, Jack Kaskey, Will Daley and Shannon Pettypiece in New York. Editors: Stephen Kleege, Chris Nagi

To contact the reporters on this story: Matt Walcoff in Toronto at mwalcoff1@bloomberg.net; Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net.

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

Wall Street Dumps Most Treasuries Since 2004 on Growth

Posted: 10 Jan 2011 04:30 AM PST

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By Daniel Kruger

(Updates 10-year note yields in eighth paragraph.)

Jan. 10 (Bloomberg) -- Wall Street banks are cutting their holdings of Treasuries at the fastest pace since 2004 as the world’s biggest bond firms bet that the economy will strengthen and demand for higher-yielding assets will increase.

The 18 primary dealers that trade with the Federal Reserve reported that holdings of U.S. government debt tumbled to a net $2.34 billion on Dec. 29 from $81.3 billion on Nov. 24, the most since June 2009, according to the most recent central bank data. While the stake is the lowest since February, corporate bond and mortgage securities have risen from the lows of the year.

Dealers had stocked up on U.S. debt anticipating demand from customers who wanted to sell the securities to the central bank as part of Fed Chairman Ben S. Bernanke’s plan to buy $600 billion of Treasuries. Government bonds lost their allure as stocks rose, corporate financing conditions eased, expectations for inflation increased and the dollar strengthened.

“Slowly but surely the economy’s getting on stronger footing,” said John Fath, who helps manage $2.5 billion as a principal at investment firm BTG Pactual in New York and was the former head government-bond trader at UBS Securities LLC, a primary dealer. “There are people moving or thinking of moving out of risk-free assets. This is what Bernanke wanted.”

Berkshire Hathaway Inc., the Omaha, Nebraska-based holding company controlled by billionaire Warren Buffett, and General Electric Co.’s finance unit led companies selling a record $48.5 billion of bonds in the U.S. last week as relative yields on investment-grade debt shrank to the narrowest since May.

Growth Prospects

Dealers typically pare Treasuries holdings as company debt sales accelerate, according to Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, which oversees $22 billion. This represents “the normal functioning of the market,” he said.

Prospects for faster economic growth caused Treasuries to lose 2.67 percent last quarter, including reinvested interest, trimming the annual gain to 5.88 percent for 2010, Bank of America Merrill Lynch’s U.S. Treasury Master index shows. Company bonds lost 0.57 percent in the three months ended Dec. 31, cutting their annual gain to 10.8 percent.

Yields on 10-year Treasuries, which serve as a benchmark on everything from corporate loans to mortgages, rose 3 basis points to 3.32 percent last week. Primary dealers forecast the yield will climb to 3.65 percent by the end of the fourth quarter, a Bloomberg News survey last month showed. Yields dropped as low as 2.33 percent on Oct. 8. Yields were little changed at 3.32 percent at 7:26 a.m. in New York.

‘Tone Has Shifted’

While rising, 10-year yields remain below their average of 5.43 percent since 1990 even though the U.S. is running a budget deficit that exceeds $1 trillion, or more than 8 percent of the economy. The last time the U.S. had a surplus, from 1998 through 2001, yields averaged 5.45 percent.

“You’re not going to see a repeat of the low yields that we’ve seen in the last six months,” said Sean Simko, who oversees $8 billion as a managing director at SEI Investments Co. in Oaks, Pennsylvania. “The overall tone has shifted. The trend is higher in yield, but it won’t be in a straight line.”

Yields on 10-year notes will hold below 4 percent for a fourth consecutive year in 2011, according to the median estimate in a Bloomberg News survey of the primary dealers.

Some of the optimism over the recovery was tempered Jan. 7 when the Labor Department in Washington said U.S. payrolls increased by 103,000 in December, below the median forecast of 150,000 in a Bloomberg News survey.

Rate Hedge

Dealers usually bet against Treasuries to hedge against the risk that changes in interest rates will erode the value of their corporate and mortgage-related debt. In the five years before Lehman Brothers Holdings Inc. collapsed in September 2008, dealers had an average $107 billion net short position, compared with an average $24.2 billion bet in favor of the debt since 2008, Fed data shows.

Wall Street’s holdings of Treasuries swelled to a 17-month high of $81.3 billion on Nov. 24 from $18.4 billion on Aug. 18, just before Bernanke gave a speech in Jackson Hole, Wyoming, that bolstered speculation the Fed would resume purchases of government debt to boost the economy and avoid deflation. The official announcement came Nov. 3.

Firms dumped Treasuries as reports pointed to sustained economic growth, said Amitabh Arora, an interest-rate strategist at primary dealer Citigroup Inc. in New York. “There was a lot of capitulation of bad positions,” he said.

‘Point of Equilibrium’

While last week’s jobs report fell short of forecasts, other data from the government, Fed and private sector since December showing gains in manufacturing and industrial production have prompted economists to increase their estimates for gross domestic product.

New York-based JPMorgan Chase & Co., the second-biggest U.S. bank by assets, boosted its 2011 forecast by half a percentage point to 3.1 percent. A government report on Jan. 14 will show retail sales rose for a sixth month, economists said.

“We still have headwinds, but their strength has been somewhat offset by the increase in tailwinds,” said David Ader, head U.S. government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Maybe we’ve reached a point of equilibrium.”

In the corporate debt market, investment-grade bond yields have shrunk to within 163 basis points, or 1.63 percentage points, of Treasuries, Bank of America Merrill Lynch index data show. Spreads were 181 basis points a year ago and 574 in 2009.

“You’re not seeing a lot of pushback” from investors on new bond sales, said Timothy Cox, an executive director of debt capital markets at Mizuho Securities USA in New York.

Corporates, Mortgages

Speculative-grade companies, those rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s, can sell bonds at yield spreads averaging 523 basis points, down from 603 a year ago and 1,642 two years ago, based on Bank of America Merrill Lynch indexes.

Primary dealer holdings of corporate bonds due in more than one year totaled $85.7 billion on Dec. 29, up from last year’s low of $75.7 billion on Aug. 4. Mortgage securities totaled $58.8 billion, compared with $31.8 billion on March 10.

Gains in equities and the dollar also suggest rising confidence in the economy.

The Standard & Poor’s 500 Index rose 24 percent to 1,271.50 from last year’s low on July 2. IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners including the euro, yen and pound, advanced 2.51 percent to 81.012 last week, and has surged 7.1 percent from 2010’s low of 75.631 on Nov. 4.

Breakeven Rates

The outlook for inflation is also rising. The difference between yields on 10-year notes and Treasury Inflation-Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.43 percentage points on Jan. 5, the most since April.

“If the market expects the economy to strengthen, investors ratchet back expectations for Fed purchases and reduce their bid for the assets, and rates rise,” Fed Governor Elizabeth Duke said in the text of a speech in Baltimore on Jan. 7. The recent rise in yields “is due to exactly this latter circumstance -- a strengthening in market participants’ outlook for the economy and a corresponding decrease in the market’s expectation for future accommodation,” she said.

--Editors: Dave Liedtka, Robert Burgess, Dennis Fitzgerald

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Stocks Fall, Bond Risk Rises to Record Before Europe Debt Sales

Posted: 10 Jan 2011 04:27 AM PST

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By Stephen Kirkland

Jan. 10 (Bloomberg) -- Stocks fell for a fourth day and U.S. index futures slipped, while the cost of insuring sovereign debt against default rose to a record as European governments prepared to borrow at least $43 billion this week.

The MSCI World Index lost 0.5 percent at 7:20 a.m. in New York, and Standard & Poor’s 500 Index futures slid 0.5 percent. Credit-default swaps on Portugal jumped 12 basis points to a peak of 550, according to CMA. That helped push the Markit iTraxx SovX Western Europe index higher for a fourth day. The Dollar Index added 0.2 percent, its sixth day of gains, the longest run since June. Oil rose as much as 2.2 percent after a leak at an Alaskan pipeline.

Portugal, Spain and Italy are scheduled to hold their first bond auctions this year after borrowing costs increased at bill sales last week. Germany may be softening its opposition to expanding the 750 billion-euro ($966 billion) rescue facility for the region’s most-indebted countries, after Chancellor Angela Merkel’s chief spokesman, Steffen Seibert, declined to repeat the nation’s objections to restocking the fund.

“Europe’s debt woes are dominating market action,” Kathleen Brooks, research director at Gain Capital Group LLC in London, wrote in a report today. “If any of Europe’s large economies need help from the fund, that would require a completely new support system and a large injection. This could spread from a debt crisis to a currency crisis.”

The Stoxx Europe 600 Index fell 0.6 percent, as more than five companies declined for every one that gained. Portugal’s PSI-20 Index tumbled 1.9 percent, while Spain’s IBEX 35 slid 1.5 percent. Bank stocks led the selloff, with KBC Groep NV, Belgium’s biggest lender, plunging 6.4 percent and Banco Comercial Portugues SA losing 3.5 percent.

Bond Risk

Markit Group Ltd.’s index of credit-default swaps protecting the debt of 15 western European governments rose 3.5 basis points to a record 223, while contracts on Ireland jumped 29 to 684, the highest ever, according to CMA.

The extra yield investors demand to hold Belgian 10-year bonds instead of benchmark German bunds was near the most since at least 1993 as a political standoff deepened. The cost of insuring the country’s sovereign debt surged six basis points to a record 254, according to CMA. That’s more than for Italy, whose credit-default swaps fell 1 basis point to 252.

Portuguese 10-year bonds rose, reversing declines, with the yield falling seven basis points to 7.32 percent. The European Central Bank bought Portuguese government bonds, according to three traders with knowledge of the transactions, who asked not to be identified because the deals are confidential. An ECB spokesman in Frankfurt declined to comment.

Danisco, DuPont

Danisco A/S rallied 25 percent after DuPont Co. agreed to buy the world’s largest maker of food ingredients for $5.8 billion. Smith & Nephew Plc surged 12 percent after Sky News reported the U.K. maker of hip and knee replacements rejected a 7 billion-pound ($10.9 billion) takeover approach from Johnson & Johnson.

The decline in U.S. futures indicated the S&P 500 may slip for a third day. The index fell 0.2 percent on Jan. 7 after a government report showed U.S. payrolls increased by 103,000, about two-thirds of the median estimate. Federal Reserve Vice Chairman Janet Yellen said yesterday that central bank asset purchases prevented the country from slipping into deflation and will add 3 million jobs to private payrolls. The 10-year Treasury note yield was little changed at 3.33 percent.

Duke, Alcoa

Duke Energy Corp. said it agreed to buy Progress Energy Inc. for about $13.7 billion, creating the largest U.S. utility. Progress Energy gained 1.8 percent in pre-market trading.

Alcoa Inc., the largest U.S. aluminum producer, unofficially kicks off the fourth-quarter earnings season when it reports results after the close of trading in New York today. The stock rose 0.7 percent in pre-market trading.

Emerging-market stocks fell for a fourth day, led by Indonesia and India, amid concern accelerating inflation will drive interest rates higher. The Jakarta Composite Index sank 4.2 percent, the most in two years, while India’s Sensex slid 2.4 percent. Benchmark gauges in China, Thailand, Poland, Turkey and the Czech Republic lost more than 1 percent. The MSCI Emerging Markets Index retreated 1 percent. The Thai bhat led currencies lower, weakening 1.2 percent per dollar.

The euro weakened 0.2 percent against the Swiss franc. The Australian dollar weakened 0.7 percent versus the U.S. currency, depreciating against all but one of its 16 most-traded peers, amid the worst flooding in Queensland in 50 years.

Oil climbed as high as $89.98 a barrel before trading at $88.66. The Trans-Alaska Pipeline System was closed Jan. 8, forcing companies including BP Plc to suspend 95 percent of production from the North Slope area. BP shares fell 2 percent.

Copper fell for a fifth day, losing 0.8 percent in London as longest losing streak since June, as sliding equity lower imports of metal into China cool the demand outlook.

--With assistance from Chris Kay, David Merritt, Abigail Moses, Daniel Tilles in London. Editors: Stephen Kirkland, Justin Carrigan

To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.

Dollar Rises Sixth Day on U.S. Growth; Euro Snaps Five-Day Drop

Posted: 10 Jan 2011 04:26 AM PST

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By Paul Dobson

Jan. 10 (Bloomberg) -- The Dollar Index strengthened for a sixth day before data this week that may show U.S. retail sales climbed for six months in a row and consumer prices advanced.

Norway’s krone and the Swedish krona strengthened as data pointed to economic expansion in the Nordic region. Australia’s dollar fell to a three-week low as floods worsened in Queensland and China’s trade surplus missed economists’ estimates. The euro was little changed versus the dollar as Portuguese bonds advanced amid speculation the European Central Bank bought government securities before debt auctions this week.

“The dollar seems to be benefiting at long last from increasing optimism about the U.S. economy,” Sue Trinh, a senior currency strategist at Royal Bank of Canada, said in a telephone interview from London. “Scandinavian currencies are outperforming.”

The Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners including the euro and the yen, rose 0.2 percent to 81.189 as of 7:08 a.m. in New York, after trading at 81.273, the strongest level since Dec. 1. Its six-day advance is the longest winning run since the seven-day advance through June 7.

The euro traded at $1.2899, from $1.2907 on Jan. 7. It earlier fell to $1.2867, the weakest since Sept. 14. The European currency was at 107.35 yen, from 107.32 on Jan. 7, when it fell to 106.95, also the lowest level since Sept. 14. The yen was at 83.19 per dollar, from 83.15.

Retail Sales

U.S. retail sales climbed 0.8 percent last month, according to the median of 58 estimates in a Bloomberg News survey before the Commerce Department publishes the figures on Jan. 14. That would match the previous month’s increase. A Labor Department report due the same day may show consumer prices advanced 0.4 percent in December after rising 0.1 percent the previous month, according to a separate Bloomberg survey.

Portuguese 10-year bonds rose, sending the yield down 11 basis points to 7.27 percent. The ECB bought Portuguese securities today, according to three traders with knowledge of the transactions. The nation will sell 2014 and 2020 bonds on Jan. 12, while Italy is due to auction securities maturing in 2015 and 2026 and Spain is scheduled to offer 2016 debt on Jan. 13, according to data compiled by Bloomberg.

“There’s talk of more peripheral bond buying,” said Jeremy Stretch, executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “I wouldn’t be convinced that we’re seeing anything other than a temporary respite for the euro. Portugal may get their auction away, but accepting a bailout at some point may be prudent.”

German Opposition

Germany may soften its opposition to expanding the region’s 750 billion-euro ($966 billion) rescue facility after Chancellor Angela Merkel’s chief spokesman, Steffen Seibert, declined to repeat the nation’s objections to restocking the fund. The Handelsblatt newspaper reported that European Union leaders may discuss the matter in February.

“No decision has been taken about widening the rescue fund,” Seibert said by telephone yesterday. “We should note that only a small part of the available funds has been tapped.”

The krone gained versus all but one of its 16 most-traded peers as Norway’s headline inflation accelerated last month to 2.8 percent from 1.9 percent in November. Sweden’s krona also advanced as industrial production grew 1.1 percent in November from the previous month, signalling the largest Nordic economy may continue to outperform the EU this year.

The krone strengthened 0.3 percent to 5.9747 per U.S. dollar and 0.2 percent to 7.7127 per euro. The krona gained 0.3 percent to 6.9204 per dollar and 0.2 percent to 8.9334 per euro.

Australia’s Dollar

Australia’s dollar slid after the nation’s weather bureau said a torrent of rain in the 24 hours through 5 a.m. local time will push the Mary River at Gympie to a “major flood level” of above 20 meters (66 feet) tomorrow.

“The Australian dollar weakened on concerns about the economic impact of the flooding in Queensland,” Kate King, a Sydney-based senior economist at St. George Bank Ltd., wrote in a research note today.

Damage to the state’s transport network currently stands at around A$1.5 billion ($1.48 billion), Queensland Roads Minister Craig Wallace said today. Queensland is experiencing its worst floods in 50 years, forcing the evacuation of 4,000 people and affecting about 1 million square kilometers, or an area the size of France and Germany.

China’s customs bureau said today its trade surplus was $13.1 billion in December, less than the $20.8 billion median estimate of 20 economists surveyed by Bloomberg News. China is Australia’s largest trading partner and New Zealand’s second- biggest export market.

Australia’s dollar bought 98.90 U.S. cents from 99.59 cents on Jan. 7. It touched 98.84 U.S. cents, the lowest since Dec. 20.

--With assistance from Ron Harui in Singapore and Frances Yoon in Seoul. Editors: Keith Campbell, Matthew Brown.

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

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

Duke Energy to Buy Progress Energy for $13.7 Billion

Posted: 10 Jan 2011 04:20 AM PST

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By Jessica Resnick-Ault

(Adds assumed debt in third paragraph.)

Jan. 10 (Bloomberg) -- Duke Energy Corp. will buy Progress Energy Inc. for $13.7 billion, creating a company that will surpass Southern Co. as the largest U.S. utility.

Owners of Progress will get 2.6125 shares of Duke for each of their shares, the companies said today in a statement. The purchase values Raleigh, North Carolina-based Progress at $46.48 a share, 3.9 percent more than its Jan. 7 closing price, the companies said.

Duke, based in Charlotte, North Carolina, will assume about $12.2 billion in Progress Energy’s debt. A deal for Progress would add units that operate near Duke’s service territories in North Carolina and South Carolina, as well as an electric distribution unit in Florida. Progress also owns more than 22,000 megawatts of power generation capacity, according to its website.

“There should be substantial cost savings with the companies being so close to each other,” Paul Patterson, an analyst at Glenrock Associates LLC in New York, said in a telephone interview yesterday.

Duke will expand its regulated utility business after losing to PPL Corp. in a bidding contest last year for E.ON AG’s Kentucky electricity distributors.

Acquisitions in the U.S. power industry have picked up as companies seek to add customers to counter falling prices. Utilities expanding through mergers can also spread the cost of complying with environmental regulations or building new power plants across more customers. Regulators generally allow utilities to bill consumers for reimbursement of those costs.

Duke Customers

Duke supplies energy to about 4 million utility customers in North Carolina, South Carolina, Indiana, Ohio and Kentucky, according to its website. It has about 35,000 megawatts of electric generation capacity. Progress has about 3.1 million utility customers, according to its website.

Progress Chief Executive Officer William Johnson, 57, will lead the utility, replacing Duke CEO James Rogers, 63, who will retire.

Rogers has been a leading voice for the power sector in the U.S. climate legislation debate, supporting efforts last year for a federal cap-and-trade law that would also protect the financial interests of utilities.

Johnson joined Progress Energy in 1992 and rose to the position of chief executive in October 2007, according to the company’s website. He serves on the executive committees of the Edison Electric Institute and the Nuclear Energy Institute.

J.P. Morgan served as lead financial adviser to Duke and both it and Bank of America Merrill Lynch provided a fairness opinion. Lazard Freres served as lead financial adviser to Progress Energy and provided a fairness opinion with Barclays Capital Plc.

Wachtell, Lipton, Rosen & Katz served as legal counsel for Duke Energy. Hunton & Williams LLP served as legal counsel for Progress Energy.

--With assistance from Zachary Mider and Jeffrey McCracken in New York and Mark Chediak in San Francisco. Editors: Tina Davis, Susan Warren

To contact the reporter on this story: Jessica Resnick-Ault in New York at jresnickault@bloomberg.net.

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

Giffords Shooting Suspect Set to Appear in Court

Posted: 10 Jan 2011 04:20 AM PST

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By Edvard Pettersson

(Updates with scheduled court appearance in first paragraph.)

Jan. 10 (Bloomberg) -- Jared Lee Loughner is scheduled to appear in court today to face charges of attempting to kill U.S. Representative Gabrielle Giffords and murdering U.S. District Judge John Roll in a shooting spree at a Tucson, Arizona, shopping mall that claimed six lives and wounded at least 13 others, federal prosecutors said.

Loughner, 22, is accused of killing Roll and Gabriel Zimmerman, a member of Giffords’s staff and a federal employee, according to a criminal complaint filed yesterday in Phoenix. He is also charged with attempting to murder Giffords and two other members of her staff who are also federal employees, prosecutors said.

“He certainly could face the death penalty,” said Laurie Levenson, a professor at Loyola Law School in Los Angeles and a former federal prosecutor. “He killed a federal judge. That is a capital crime. It’s a similar kind of case as the Oklahoma City bombing.”

Timothy McVeigh was sentenced to death and executed in 2001 for the 1995 bombing of the federal building in Oklahoma City that killed 168 people.

“The U.S. Attorney’s Office for the District of Arizona is in the process of drafting an indictment against Loughner for presentation to the grand jury,” the Justice Department said in a statement yesterday announcing the criminal complaint.

Loughner is in custody and scheduled to make his initial court appearance today in federal court in Phoenix.

Motivation Unknown

“We do not yet have all the answers,” FBI Director Robert Mueller told reporters yesterday at a news conference in Tucson. It is “premature” to conclude “what the motivations were of the individual in this particular case,” he said.

Investigators found a 2007 letter from Giffords to Loughner during a search of his home, thanking him for attending a “Congress on your Corner” event at a mall in Tucson, according to a Federal Bureau of Investigation statement filed with the criminal complaint. They also found an envelope with handwriting saying “I planned ahead,” “My assassination” and “Giffords,” according to the statement.

Mueller said there were discussions between the U.S. attorney and the county district attorney about possible further charges in federal or state court.

Six Killed

Bystanders apprehended the suspect after he opened fire Jan. 8 at a community meeting organized by Giffords outside a supermarket in Tucson. Giffords is in critical condition after being shot in the head. Six people were killed in the attack, including a 9-year-old girl.

The court docket didn’t list a lawyer for Loughner. Manny Tarango, a spokesman for U.S. Attorney Dennis Burke in Phoenix, didn’t immediately return calls for comment.

CNN, citing an unidentified person with the federal judiciary, reported that Judy Clarke, who previously represented “Unabomber” Ted Kaczynski, was appointed to represent Loughner. Clarke didn’t immediately respond to an e-mail from Bloomberg News seeking comment.

“There’s absolutely no evidence to indicate anybody else was involved in this,” Pima County Sheriff Clarence Dupnik said yesterday in an interview.

Local authorities are looking at a possible connection between Loughner and American Renaissance, an online group known for its anti-government rhetoric, the Associated Press reported, citing an official who declined to be identified because the investigation is ongoing.

A “person of interest” the sheriff’s department had been looking for earlier turned out to be a cab driver who had taken Loughner to the mall where the shooting took place, according to a statement from the department.

Shooter Stopped

The woman who helped overcome the gunman was identified as Patricia Maisch, according to the sheriff’s statement. She was able to grab the bottom of the gun’s magazine as the suspect tried to reload, according to the statement. The pause in shooting that resulted enabled two men to tackle the shooter and hold him to the ground until deputies arrived, the sheriff’s office said.

Asked whether the woman was a hero, Dupnik responded “big time.”

“It’s an incredible act of heroism,” Dupnik said. “I don’t know of any other superlatives that could be used.”

In addition to the five federal employees, at least 14 other people were shot outside the Safeway grocery store, according to the FBI statement. Giffords, a Democrat beginning her third two-year term in the U.S. House, survived a single gunshot to the head.

Pistol Recovered

Law enforcement recovered a Glock 9mm pistol that Loughner bought in November and is alleged to have used in the shooting, according to the statement.

Legislative business on the U.S. House calendar for the coming week is being postponed, said House Majority Leader Eric Cantor, a Virginia Republican. The House had planned to vote Jan. 12 on a repeal of Obama’s health-care overhaul.

The dead include Roll, 63, Zimmerman, 30, Christina Green, 9, Dorothy Murray, 76, Dorwin Stoddard, 76, and Phyllis Schneck, 79, according to the sheriff’s office.

Green was the granddaughter of Dallas Green, the manager of the Philadelphia Phillies when they won the World Series in 1980, the baseball team said.

Giffords was the only patient who remained in critical condition yesterday. Three patients were in serious condition.

Flag at Half-Staff

President Barack Obama called the shooting “a tragedy for our entire country,” and ordered the U.S. flag be flown at half-staff. He also asked Americans to observe a moment of silence at 11 a.m. New York time today to honor the victims.

“Violence has no place in a free society,” the president said. Obama sent Mueller to Arizona to lead the probe into the shooting.

On Jan. 12, the U.S. House of Representatives will consider at least one resolution honoring Giffords and the people who died, Cantor said.

Alex Villec, a 19-year-old volunteer for Giffords’s campaign, told reporters at the scene that he was just feet away when the man opened fire. The man barged through a line of people waiting to meet Giffords and asked to speak with her, he said.

Roll had come to the meeting to speak with Giffords and her staff about the help she had provided to deal with the growing volume of cases filed in Arizona federal courts, according to the FBI statement. Roll was speaking with Ron Barber, one of Giffords’s aides, before he was killed, according to the statement.

The case is U.S. v. Loughner, 11-00035, U.S. District Court, District of Arizona (Phoenix).

--With assistance from Justin Blum, Drew Armstrong and A.J. Flick in Tucson, Arizona. Editors: Michael Hytha, Peter Blumberg.

To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net.

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

Iceland Plans First Post-Crash Eurobonds as Debts Due

Posted: 10 Jan 2011 04:19 AM PST

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By Omar R. Valdimarsson

(Updates with Economy Minister comments in sixth paragraph, strategist estimate for borrowing cost in ninth, 2012 refinancing need in 13th.)

Jan. 10 (Bloomberg) -- Iceland is planning its first Eurobond sale since 2006 as 713 million euros ($920 million) of debt matures, forcing the government to test international capital markets two years after its financial system collapsed.

“We’ve been planning this and continue to evaluate the situation,” said Finance Minister Steingrimur J. Sigfusson, in a Jan. 7 interview. “We’re evaluating when will be the right time to break the ice.”

Iceland’s efforts to patch up relations with foreign investors took a step forward last month when it resolved a two- year depositor claims dispute with the U.K. and Netherlands. The cost of insuring against an Icelandic default fell below Spain’s in November. Iceland’s $4.6 billion of foreign reserves mean the government is under no pressure to refinance the whole amount due, and the first bond sale will probably be small, Sigfusson said.

“One shouldn’t take” plans for an international bond sale “as a mark of Iceland not being able to meet the maturity dates,” Sigfusson said. “We guaranteed those maturity dates a long time ago; but of course we want to return to the markets so we can, when it’s favorable, refinance our debts there.”

Rebuilding Trust

The central bank needs to refinance 638 million euros due in December and a 75 million-euro syndicated loan due September, according to data available on its website. Capital controls in place since the end of 2008 won’t prevent the government from selling bonds in euros, the bank said.

“We’re always in the position where we need to rebuild trust in the Icelandic economy,” said Economy Minister Arni Pall Arnason, in an interview. “Everything we’re doing targets that goal.”

Credit default swaps on Iceland’s five-year debt traded at 296.8 basis points on Jan. 7, compared with 357.6 for Spain and 658 for Ireland, according to CMA data available on Bloomberg. The CDS rates indicate investors deem the likelihood of an Icelandic default as slimmer than that of a Spanish or Irish failure to honor debt obligations.

“Based on the current three-month Euribor of around 1 percent, and the CDS spread according to information from Bloomberg of around 3 percent, the first floating rate set could be around 4 percent,” said Valdimar Armann, an economist at Reykjavik-based asset manager GAMMA. “This could be a likely starting point for investors, whether the actual rate will be set lower or higher.”

Euro-Area Comparison

By comparison, Spanish bonds due in five years yield about 5 percent while the euro member’s two-year notes yield 3.6 percent, according to data available on Bloomberg.

The Reykjavik-based central bank may want to avoid tapping foreign reserves to cover euro debt as it prepares to ease capital controls after March, said Armann. Removing currency restrictions may put pressure on the krona, requiring the bank to intervene by selling its stockpile of reserves, he said.

“The government would have to want to prefer keeping the reserves at a certain size,” Armann said. That means it’s likely to issue amounts close to the size of the debt maturing, he said.

The krona has gained 18 percent against the euro in the past 12 months as Iceland’s trade surplus widened. The surplus rose to 10.4 billion kronur ($88 million) in November, compared with 2.1 billion kronur a year earlier, the Reykjavik-based statistics office said on Jan. 5.

‘Junk’ Rating

Iceland has been relying on a $4.6 billion loan led by the International Monetary Fund since the end of 2008, when its three biggest banks failed. The Washington-based Fund will complete its fourth review of Iceland’s economic plan today, said Franek Rozwadowski, the IMF’s representative in Iceland, on Jan. 7.

Next year, Iceland needs to refinance 218 million euros, according to the Finance Ministry. The island also needs to make a 120 million-euro payment on its IMF loan, said Sturla Palsson, director of international and market operations at the central bank, in a phone interview.

Iceland is rated BB+ at Fitch Ratings, or “junk.” Moody’s Investors Service and Standard & Poor’s both give Iceland their lowest investment-grade ratings. Moody’s rates Spain Aa1, its second-highest grade.

Sigfusson declined to comment on which banks Iceland is in talks with to manage its bond sale. The island in May sold 402 million euros in bonds in a transaction with its Luxembourg- based counterpart allowing it to purchase assets in a local subsidiary of failed Landsbanki Islands hf.

--Editors: Tasneem Brogger, Jonas Bergman.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

Basque Group ETA Calls End to 40 Year Terror Campaign

Posted: 10 Jan 2011 04:12 AM PST

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By Emma Ross-Thomas and Ben Sills

(Updates with lawmaker comment in fifth paragraph.)

Jan. 10 (Bloomberg) -- Basque terror group ETA, which has killed more than 800 people in a four-decade fight for independence from Spain, announced a permanent cease-fire.

“ETA has decided to declare a permanent and general cease- fire that can be verified by the international community,” said a statement posted on the website of Basque newspaper Gara, the habitual channel for the group’s statements.

The group called for recognition of the Basque Country’s “right to decide” on its future, including the possibility of independence. The Basque people should be allowed to decide on their future “without any type of interference or limitation.”

ETA, whose initials stand for Basque Homeland and Freedom, started its campaign for an independent nation carved out of northern Spain and southwestern France in 1968, when Spain was under a military dictatorship. Previous cease-fires have ended with the group’s return to violence. The government declined to comment immediately on the announcement.

“ETA has said these things many times over the course of this story,” Rosa Diez, a former Socialist lawmaker in the Basque parliament who leads the Union for Progress and Democracy in the national assembly in Madrid, said in a telephone interview. “They haven’t abandoned their objectives.”

Government Popularity

The announcement comes as the Socialist government’s popularity has collapsed in opinion polls amid the worst economic slump in six decades. It may bolster support for Interior Minister Alfredo Perez Rubalcaba, who has presided over a crackdown on ETA and who opinion polls rank as the leading candidate to replace Prime Minister Jose Luis Rodriguez Zapatero in elections scheduled for 2012.

The opposition People’s Party has an 18 percentage-point lead over the Socialists, according to an opinion poll published by newspaper El Mundo on Jan. 2.

Zapatero has hardened his line against the group since the peace talks he initiated collapsed in 2006 when ETA bombed a car park at Madrid’s Barajas airport, killing two people. Police have made more than 400 arrests of suspected ETA members since that cease-fire was broken, and at least seven alleged leaders have been detained in the last two years, according to the Interior Ministry.

An end to the violence may also strengthen the economy of the region that borders France and includes the cities of San Sebastian and Bilbao. The region is Spain’s richest in terms of gross domestic product per capita and has the country’s lowest unemployment rate at half the national average.

‘Revolutionary Taxes’

ETA has traditionally raised funds by extorting local businesses through “revolutionary taxes” or kidnapping executives and demanding ransom. The campaign has raised security costs for companies operating in the region where hundreds of corporate and government officials are protected by bodyguards.

Spain, the country in continental Europe most affected by domestic and international terrorism, has suffered from ETA violence for more than a generation. ETA was formed to fight the dictatorship of General Francisco Franco, who suppressed the Basque people and banned teaching of their language. In 1973, the group killed Franco’s prime minister and likely successor Admiral Luis Carrero-Blanco in a Madrid car bombing.

--With assistance from Manuel Baigorri in Madrid, Editors: Andrew Davis, James Hertling

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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