Business News: A Wild Week for Wall Street?

Business News: A Wild Week for Wall Street?

A Wild Week for Wall Street?

Posted: 26 Dec 2010 04:41 PM PST

Stock Picks of Top Emerging Markets Funds

Posted: 17 Dec 2010 04:39 PM PST

QE2 Joins with Eisenhower Yields in 1% Returns for Treasuries

Posted: 27 Dec 2010 04:46 AM PST

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By Susanne Walker and Daniel Kruger

(Updates with today’s 10-year yield in sixth paragraph.)

Dec. 27 (Bloomberg) -- Wall Street’s biggest bond-trading firms say investors in U.S. government debt will barely break even next year as yields climb from the lowest levels since the 1950s and the Federal Reserve boosts economic growth.

Investors buying benchmark 10-year notes will gain about 1 percent in 2011 once interest payments are re-invested, as the yield rises to 3.65 percent after averaging 3.2 percent in 2010, according to a Bloomberg News survey of the Fed’s 18 primary dealers. Bank of America Merrill Lynch’s U.S. Treasury Master index returned 8.15 percent annually since its start in 1978.

Average yields on 10-year notes are already the lowest since 1956, when Dwight D. Eisenhower was president, according to “A History of Interest Rates” by Sidney Homer and Richard Sylla and data compiled by Bloomberg. Even though bonds declined the most in a year this month, the dealer estimates show Wall Street anticipates stable inflation as the Fed’s policy of purchasing Treasuries through so-called quantitative easing stimulates growth and demand for riskier assets.

“QE2 has had unforeseen benefits in raising risk appetites and improving confidence across the board,” said Mark MacQueen, a partner at Austin, Texas-based Sage Advisory Services, which oversees $9.5 billion. “At best it’s going to be a mediocre year, but not negative” for Treasuries, he said.

Heartbreak Hotel

Treasuries have returned 5.28 percent this year even after December’s 2.39 percent drop, according to Bank of America Merrill Lynch data. That compares with a loss of 3.72 percent last year and a gain of 14 percent in 2008, when investors worldwide sought U.S. government debt as a refuge during the financial crisis.

Ten-year note yields rose four basis points, or 0.04 percentage point, to 3.43 percent as of 12:23 p.m. in London. The price of the 2.625 percent security maturing in November 2020 fell 10/32, or $3.125 per $1,000 face amount, to 93 10/32.

The average 10-year yield was the lowest this year since Elvis Presley first entered the music charts with “Heartbreak Hotel” and Eisenhower defeated Adlai Stevenson for a second term. Rates reached a 2010 high of 4 percent on April 5 and dropped as low as 2.33 percent on Oct. 8.

The average 3.07 percent rate in 1956 accompanied economic growth of 1.8 percent, consumer price gains of 3 percent and an unemployment rate that fell to 4.1 percent. In 2010’s third quarter, the U.S. expanded at a 2.6 percent pace, the Commerce Department said Dec. 22. Inflation rose at a 1.1 percent annual rate in November, while unemployment climbed to 9.8 percent.

Economic Outlook

U.S. growth will slow to 2.6 percent next year from 2.8 percent in 2010, according to the median estimate of 69 economists in a Bloomberg News survey. The consumer price index is forecast to rise 1.5 percent, a separate survey showed.

Europe’s sovereign debt crisis and prospects for subdued inflation make Treasuries attractive, according to Gary Pollack, who helps oversee $12 billion as head of bond trading at Deutsche Bank AG’s private wealth management unit in New York. Portugal was cut to A+ from AA- on Dec. 23 by Fitch Ratings, which cited a slow reduction in the nation’s current account deficit and a difficult financing environment.

“The Fed is buying through June and the outlook for inflation is rather benign,” said Pollack, who is purchasing Treasuries maturing in four to six years. “There are still question marks about the economy, which will keep growth below trend and support lower yields.”

Debt Auctions

Demand at Treasury auctions has held near record levels even as bonds fall and the administration of President Barack Obama predicts the fiscal 2011 budget deficit will top $1 trillion for a third consecutive year.

Investors bid about $2.96 for each dollar of Treasuries sold last month, near the $3.19 peak in September and the $2.99 average through November, Treasury data show. The so-called bid- to-cover ratio was 2.5 in U.S. note and bond sales last year.

Primary dealers, who are required to bid at debt auctions, reduced their Treasuries to $30 billion as of Dec. 15, from a 2010 high of $81.3 billion on Nov. 24, according to Fed data. That suggests they’re confident the U.S. will avoid falling back into a recession, said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $72 billion in assets.

“What we’ve gotten is marginally better economic news and that’s made Treasuries a less-favored holding,” Brady said.

Wrong Prediction

Dealers predicted at the end of last year that the median yield on 10-year notes would rise to 4.14 percent in 2010. They were more accurate in 2009, forecasting an increase from the all-time lows reached after the September 2008 bankruptcy of New York-based Lehman Brothers Holdings Inc. froze credit markets.

Goldman Sachs Group Inc., this year’s most accurate forecaster among the dealers, had predicted the yield would end 2010 at 3.25 percent. Morgan Stanley, the most bearish forecaster, said the 10-year rate would rise to 5.5 percent.

James Caron, head of U.S. interest-rate strategy at New York-based Morgan Stanley, now predicts 4 percent by the end of 2011 after acknowledging in August that the firm’s estimates for economic growth and yields were too high.

The Standard & Poor’s 500 Index slid 8.3 percent from the start of 2010 through July 2 on concern the economic rebound was deteriorating. The benchmark index for U.S. equity has since surged 23 percent, bringing the year’s advance to 13 percent, as industrial production, consumer confidence and retail sales signaled the recovery was gaining momentum and investors anticipated the Fed would begin a second round of bond purchases to sustain growth.

Mutual Fund Flows

Investors removed $8.62 billion from U.S. fixed-income funds in the week ended Dec. 15 as bonds fell and stocks rallied, up from a $1.66 billion outflow the week before, the Investment Company Institute said Dec. 22. Bond funds had taken in $234.8 billion through Oct. 31 and $306.7 billion in 2009, according to the Washington-based trade group. Last week’s withdrawals were the largest since the week ended Oct. 15, 2008, when investors took out $17.6 billion.

Bill Gross, who oversees Pacific Investment Management Co.’s $250 billion Total Return Fund, the world’s biggest bond fund, said in October that asset purchases by the Fed probably mean the end of the 30-year rally in bonds. The Newport Beach, California-based firm this month raised its forecast for U.S. growth next year as President Obama agreed to extend current rates for high-income taxpayers for two more years and reduce the payroll tax by $120 billion for one year.

‘Same Issues’

Pimco said in a U.S. Securities and Exchange Commission filing that the fund may invest in equity-linked securities for the first time since 2003.

Even with growth picking up, the central bank will leave its rate for overnight loans between banks unchanged in a range of zero to 0.25 percent through 2011, according to the primary dealers in this year’s survey. Edward McKelvey, senior U.S. economist at Goldman Sachs in New York, said that should help keep yields from surging as growth accelerates.

“The markets will live some of the same issues in 2011 that they had in early 2010, which is perennial expectations that the Fed will tighten,” said McKelvey, who projects 10-year notes will yield 3.75 percent at the end of 2011. “In the end, we don’t see policy changes, but we will have a diet of data that will feed that perception. Our forecast is for strong growth, low inflation and no Fed tightening.”

--With assistance from Cordell Eddings in New York and Wes Goodman in Singapore. Editors: Dave Liedtka, Paul Cox

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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

Hassett: Fed Cash Lures This Important Writer

Posted: 26 Dec 2010 07:10 PM PST

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By Kevin Hassett

Dec. 27 (Bloomberg) -- If AIG was too important to fail, can’t I be, too?

The U.S. Financial Stability Oversight Council is working to identify parts of our financial system that can’t be allowed to go under. Once called “too big to fail,” these companies are now referred to as “systemically important” and fall under the authority of the Federal Reserve.

Therein lies my opportunity.

I’m no American International Group Inc., the huge insurer that needed a $182.3 billion federal rescue to survive its central role in the financial crisis. So no, I’m not too big. But I’m important.

See, I’m a Ph.D. economist with a reputation for parsimony fostered by a somewhat infamous wardrobe. My teenage son, for instance, can’t believe I still wear “that sweater.”

If I were to default on my debts, the world would see that even trained economists who spend little on their appearance can’t make ends meet. Imagine the global panic, the massive selloff, that would follow.

Clearly, then, I meet the definition of systemically important. Not convinced? The Dodd-Frank financial law, in creating the Financial Stability Oversight Council, empowered it to consider, in addition to a company’s leverage, size and exposure, “any other risk-related factors the council deems appropriate.”

Bear Stearns Precedent

What might those factors be? Given what has already happened, it could be anything at all. And when it comes to determining whom to lend money to, suffice it to say that if we can lend to Bear Stearns and AIG at ridiculously low interest rates, we can lend to me.

Sure, I’ve been paying my bills lately, but given the line of cut-rate credit waiting for me at the discount window should I need it, my creditors are rightly worried that I might stop payment at any moment.

Once I have access to the Fed, I will borrow at close to zero percent interest and invest in longer-term Treasuries that pay a higher interest rate. A few hundred billion dollars of such transactions, and I’ll be looking at some nice profits.

And for that I say: Thanks, America!

We shouldn’t fight the spread of the Fed’s power in the New Year; we should embrace it, rejoice in it, even baste ourselves in it. Looking back at the past two years with the benefit of hindsight -- that phrase always makes people think the forthcoming observation must be wisdom-filled -- it becomes clear that policy makers have not been creative enough. The policy that could take this fledgling recovery and turn it into an unprecedented boom has eluded them.

But I’m here now.

Not Stimulating

Many of our leading financial institutions have been handed the same free cash I’m seeking, but they’re sitting on it, not making loans, slowly recapitalizing after incurring massive losses. So much for stimulus.

While I might seem small by contrast, I’m a better risk than many of the troubled institutions that have been playing this game. I have no huge losses to tie me down. Right here, right now, I promise that I will spend every penny of my multibillion-dollar windfall. Hello, new Bentley. Ready for a spin?

Why should you, dear reader, support me in my quest to achieve systemic importance?

Once our financial overseers realize how stimulative I become, they will want to share their largesse with you as well. Before long, we’ll all be important, and the free money that previously was limited to banks will be available to us all. How great is that?

In the old days, we had to work hard to make ends meet. If the broad new powers granted by Congress are used to declare me systemically important, those sweat-filled days will be gone forever. The path to your personal fortune will become no more laborious than the well-worn path to your refrigerator.

And for that I say: You’re welcome.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain in the 2008 presidential election. The opinions expressed are his own.)

--Editors: Laurence Arnold, James Greiff.

Click on “Send Comment” in the sidebar display to send a letter to the editor.

To contact the writer of this column: Kevin Hassett at khassett@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

Slowly, Top B-Schools Gain in Diversity

Posted: 23 Dec 2010 10:25 AM PST

JBS May Scrap U.S. Unit IPO, Extend BNDES Debt Sale

Posted: 27 Dec 2010 05:04 AM PST

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By Fabiola Moura and Lucia Kassai

(Updates with analyst comment in fourth paragraph.)

Dec. 27 (Bloomberg) -- JBS SA, the world’s largest beef producer, may abandon plans for an initial public offering of its U.S. unit as it seeks to extend the terms of a convertible debt sale to Brazil’s development bank, known as BNDES.

The Brazilian company is in an “advanced stage of negotiations” to sell 4 billion reais ($2.3 billion) of 8.5 percent local bonds to BNDES that must be converted into shares in five years. Should the agreement be reached, the notes would replace 3.48 billion reais of debt BNDES already holds and eliminate the need for the planned IPO of JBS USA Holdings Inc., according to a regulatory filing.

JBS, the Sao Paulo-based company led by Chief Executive Officer Joesley Mendonca Batista, controls more than 10 percent of global beef processing after takeovers including Swift & Co. in 2007 and two Smithfield Foods Inc. units in 2008. The transaction increases the likelihood holdings of existing stock owners will be diluted because of the conversion of bonds into shares, Link Investimentos SA analyst Rafael Cintra said.

“Previously, dilution was a possibility,” Cintra, who rates the stock “outperform,” said in a telephone interview from Sao Paulo. “Now it’s practically certain.”

The stock rose 8.1 percent last week to 7.57 reais in Sao Paulo, compared with a 0.7 percent gain in the benchmark Bovespa index. JBS said it would convert the bonds for BNDES at a price of 9.5 reais per share.

Extended Deadline

JBS also said it paid 521.9 million reais to BNDES to extend the deadline of the U.S. unit initial sale to December 2011, according to the filing, sent to Brazil’s regulator yesterday evening. The initial bonds sold to BNDES were to be exchanged for Brazilian depositary receipts of the U.S. unit should it go public no later than the end of this year. In case the IPO didn’t happen, the bonds would be exchanged for shares of JBS SA by the end of next month, according to the original terms.

JBS postponed the planned U.S. unit IPO twice this year, citing market conditions.

The beef company is seeking to extend the maturity of its debt to BNDES to expand its distribution network after buying Greeley, Colorado-based Pilgrim’s Pride and Brazil’s Bertin SA.

Sara Lee Corp., the U.S.-based maker of Jimmy Dean foods and Ball Park hotdogs, recently rejected a takeover offer from JBS, deeming the price too low, according to two people with direct knowledge of the situation.

--Editors: Laura Zelenko, Carlos Caminada.

To contact the reporter on this story: Fabiola Moura in New York at fdemoura@bloomberg.net

To contact the editor responsible for this story: Laura Zelenko at lzelenko@bloomberg.net

Joe Montana’s Modern Bank Hires Citigroup’s Kozlowski as CEO

Posted: 27 Dec 2010 05:02 AM PST

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By Bradley Keoun

Dec. 27 (Bloomberg) -- Modern Bank NA, a lender to the wealthy where former football quarterback Joe Montana is vice chairman, hired Citigroup Inc. veteran Damian Kozlowski to lead a turnaround after almost $30 million of losses in five years.

Kozlowski, who ran Citigroup’s private bank from June 2005 through April 2007, said he joined New York-based Modern as chief executive officer on Nov. 8. In October 2009, the Office of the Comptroller of the Currency declared the bank in “troubled condition” and ordered it to improve management and capital while diversifying holdings of real-estate loans.

“My job is to put the right strategy and team in place, to make sure that the bank ongoing is profitable and can grow,” Kozlowski, 46, said in an interview. Kozlowski also joined Modern’s board of directors.

He replaced Jeffrey B. Lane, 68, who resigned Nov. 1 after serving as CEO since June 2008, according to Kozlowski. Lane is the former Travelers Group Inc. and Neuberger Berman Inc. executive who ran Bear Stearns Cos.’ money-management arm for a year following the near-collapse of two hedge funds in June 2007. Lane didn’t return a call for comment.

Modern caters to clients with a net worth of at least $25 million, with specialties serving Latin Americans and private- equity and real-estate entrepreneurs, Kozlowski said.

Montana, 54, who played in the National Football League for the San Francisco 49ers and the Kansas City Chiefs and won four Super Bowl titles, was one of four original officers at Modern, according to a September 2006 press release. While not currently a member of Modern’s executive team, he serves on the board of directors, according to the bank’s website.

“Being Joe Montana, he can be effective with client contact,” Kozlowski said.

Kozlowski’s Career

Modern’s 2009 revenue of $16.6 million is a fraction of Citi Private Bank’s $2.07 billion. Still, for Kozlowski the new post marks a return to being a banker for wealthy people.

After a series of jobs at Bank of America Corp. early in his career, he joined New York-based Citigroup in 2000 as head of strategy at Citi Private Bank, which caters to people with more than $20 million. In November 2002, he was named president of the private bank’s U.S. region and was promoted to global CEO of the unit in June 2005.

Two years later, he was forced out in a shakeup under Sallie Krawcheck, 46, the head of wealth management who herself was later pushed out and now works at Bank of America. Kozlowski formed a private-equity group to buy a bank or obtain a charter for a new one, then abandoned the effort this year because regulators were reluctant to approve such deals, he said.

Modern History

Modern was formed in December 2005 by Chairman Bippy Siegal, 43, through a buyout of Excel Bank NA for an undisclosed price. Siegal is CEO of New York-based private-equity firm Raycliff Capital and a Boston University trustee. Regulatory records show $6.83 million was pumped into Modern in late 2005.

The September 2006 press release called Modern the “first new private bank in New York in 25 years,” with a goal of serving “a select clientele of high-net-worth individuals and families.”

Other board members include David House, a J. Crew Group Inc. director and former American Express Co. executive, and Jonathan Linen, another former AmEx manager who serves on the boards of Intercontinental Hotels Group Plc and Yum! Brands Inc.

Modern was unprofitable before Siegal bought it, and the net loss almost tripled to $16.9 million in 2008 from $5.8 million in 2005, regulatory records show. Modern Bank loaned at least $10 million to William “Boots” Del Biaggio, the co- founder of investment firm Sand Hill Capital, who filed for bankruptcy in June 2008 after being accused of fraud, according to an Associated Press report at the time.

Departed Executives

Several executives departed before Lane. Leslie Bains, Modern’s head of private banking, was hired by Citi Private Bank in October 2009 to oversee new-client development in the New York area. Theresa Yoon, who was a managing director at Modern, joined First Republic Bank as a senior relationship manager in New York, according to a September 2010 press release from the San Francisco-based bank.

Modern has required $54.7 million of capital infusions since the Siegal-led buyout, regulatory records show. In July 2009 the real-estate firm Fisher Brothers Realty Corp. bought a 16 percent stake for an undisclosed price.

Under the October 2009 OCC order, known as a “formal written agreement,” Modern is restricted from paying dividends unless it adheres to a three-year capital program, according to a copy on the agency’s website. The company also was ordered to adopt “commercial real estate exposure limits,” reduce its sensitivity to interest-rate changes and put “competent management in place,” according to the agreement. It was signed by Siegal, Lane, Montana and the other board members.

The bank plans to raise capital for growth once regulators are satisfied with improvements under the OCC agreement, Kozlowski said.

--Editors: Rick Green, Steve Dickson

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

Stocks, U.S. Futures Fall on China Rate Concern; Treasuries Drop

Posted: 27 Dec 2010 05:00 AM PST

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By Stephen Kirkland

Dec. 27 (Bloomberg) -- Stocks dropped in Europe and the Shanghai Composite Index lost the most in a month as China’s interest-rate increase fanned concern policy makers may accelerate efforts to curb lending. Bonds and the dollar fell.

The Stoxx Europe 600 Index slid 0.8 percent at 7:25 a.m. in New York as an index of the region’s automakers tumbled 3.7 percent. Standard & Poor’s 500 Index futures slipped 0.4 percent, signaling the gauge may trim this year’s 13 percent rally. China’s benchmark index retreated 1.9 percent. The 10- year Treasury yield rose four basis points, with the similar- maturity German bund yield jumping five basis points. The Dollar Index, which tracks the U.S. currency against those of six trading partners, fell 0.3 percent. Oil fell from a two-year high. U.K. markets were closed today for a public holiday.

The People’s Bank of China boosted its key one-year lending and deposit rates by 25 basis points on Dec. 25, with JPMorgan Chase & Co. and Morgan Stanley predicting further tightening in the first half of 2011. Reports today showed U.K. house prices fell for a sixth month and the number of mortgages for Spanish homes sank the most since April 2009.

“There’s a realization setting in that perhaps China’s problems are a bit more serious, and this is the first of many increases and this is going to result in tighter liquidity,” said Peter Elston, a Singapore-based strategist at Aberdeen Asset Management Plc, which oversees about $277.3 billion. “Tighter liquidity is bad for stock prices.”

Daimler, Volkswagen

Nine shares fell for every one that rose on the Stoxx 600. Daimler AG, the world’s second-largest maker of luxury autos, tumbled 4.5 percent, while Volkswagen AG, Europe’s biggest carmaker, slid 5.5 percent. China is the world’s largest car market. Banco Santander SA, Spain’s largest lender, fell 3 percent, while BNP Paribas SA lost 1.6 percent.

The decrease in U.S. futures indicated the S&P 500 may extend its 0.2 percent drop on Dec. 23. The benchmark gauge trimmed its fourth weekly decline in the last trading session before the Christmas holiday after its price-earnings multiple climbed to a six-month high.

The MSCI Asia Pacific Index added 0.2 percent as Japanese shares advanced, while Chinese stocks reversed earlier gains. China’s policy makers may keep raising interest rates and banks’ reserve requirements, and sell bills to soak up cash and allow more gains by the yuan against the dollar, according to JPMorgan.

“These policy moves could be front-loaded in coming months, as headline inflation figures remain high and economic growth faces overheating risks early next year,” said Wang Qian, the brokerage’s Hong Kong-based chief China economist.

Turkey, Brazil

Two stocks fell for every one that rose in the MSCI Emerging Markets Index, which was little changed as gains in financial stocks offset declines in commodity producers and automakers. Turkey’s ISE National 100 Index lost 0.8 percent, Russia’s Micex Index slipped 0.6 percent and South Korea’s Kospi traded 0.4 percent lower. Futures on Brazil’s Bovespa sank 0.7 percent.

The dollar weakened 0.3 percent against the euro, and the yen slipped 0.2 percent per euro. The New Zealand currency depreciated against all 16 of its most-traded peers, while the Australian dollar fell against all but one of its counterparts.

The yield on the two-year Treasury note climbed three basis points to 0.69 percent before the government auctions $35 billion of the equivalent-maturity securities today, the first of three sales this week totaling $99 billion, while the two- year German note yield rose one basis point to 0.95 percent.

Oil slipped 0.5 percent to $91.04 a barrel. Copper on the Comex in New York climbed as much as 0.9 percent to $4.2985 a pound, the highest ever, amid declining stockpiles in China, the largest user of the metal.

--With assistance from David Merritt and Dan Tilles in London and Anna Kitanaka in Tokyo. 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: Justin Carrigan at jcarrigan@bloomberg.net.

Oil Rise to $100 May Stall as Refiners Curb Tax: Energy Markets

Posted: 27 Dec 2010 04:58 AM PST

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By Margot Habiby

Dec. 27 (Bloomberg) -- Oil supplies may come back to the U.S. Gulf Coast in January, sapping crude’s drive toward $100 a barrel, after stockpiles tumbled the most in 30 years this month as refiners sought to avoid year-end tax liabilities.

Supplies in states along the Gulf of Mexico, home to more than half of U.S. stockpiles, have fallen 9.2 percent this month to 167.3 million barrels, data from the Energy Department in Washington show. Oil settled at a two-year high of $91.51 a barrel on Dec. 23, bringing this year’s gain to 15 percent.

“I wouldn’t suspect plus-$90 is sustainable past the middle of January, because I think we’re going to see some stock builds” from Jan. 1, said Ken Medlock, an energy fellow at the James A. Baker III Institute for Public Policy at Rice University in Houston.

Accounting rules allow refiners to take a bigger 2010 tax deduction by cutting stockpiles that have jumped this year as prices increased. Gulf Coast supplies fell in 27 of the past 29 Decembers. They have risen in four of the past five Januaries.

Gulf Coast inventories were 4.1 percent above the Jan. 1 level in the week ended Dec. 17, down from 15 percent at the end of November. The decline so far this month is almost double the 4.8 percent average drop in the past five Decembers.

“I would expect to see more and continued draws into early January and then see those barrels replaced later in January and into February,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania.

LIFO Accounting

Oil traded above $90 a barrel for three straight days last week as signs the U.S. economic recovery is gaining pace fanned optimism fuel demand will rise in 2011. Crude for February delivery climbed $1.03, or 1.1 percent on the New York Mercantile Exchange on Dec. 23 before sliding 20 cents, or 0.2 percent, to $91.31 at 6 a.m. local time today. Oil last traded above $100 a barrel on Oct. 2, 2008.

Companies typically expense the cost of items they have sold from their taxable income. Many refiners use an accounting method known as “last in, first out,” or LIFO, which allows them to deduct the cost of the more-expensive crude they have purchased most recently and assert for tax purposes that the oil in their tanks was bought before at cheaper prices.

“You don’t want to build large increments at high prices, because what winds up happening is that remains on your balance sheet,” said Scott Rabinowitz, a director at PwC’s national tax-services practice in Washington. “You’re taxed on your net income, your receipts minus your expenses. One of your expenses is the cost of the item you’ve sold.”

In years when prices rise, companies get a bigger tax deduction via LIFO accounting if they manage their supplies so that their inventories at year-end are close to the levels at which they started the year.

Higher-Priced Oil

“The higher-priced oil that’s going into their storage system is the one they get off the books first,” said Doug MacIntyre, senior oil-market analyst at the Energy Information Administration in Washington, the Energy Department’s statistical arm. “They’re trying to get that crude oil out of their system so they’re not priced on the value of the crude.”

LIFO accounting benefitted oil and gas companies when crude topped $100 a barrel in 2007 and 2008. President Barack Obama proposed eliminating it in the budget announced in January 2009.

The accounting method has been used since the 1930s and is viewed as the most accurate measure of income for financial- statement purposes, according to the congressional Joint Committee on Taxation, a nonpartisan panel, in 2009.

Texas, Louisiana

Texas and Louisiana, the two states with more drilling rigs and refineries than any other, provide an added incentive to oil companies to reduce their supplies on hand because companies are subject to local property taxes, based on the fair-market value of oil as of Jan. 1.

The two states are among the minority that impose property taxes on business inventories, according to the Tax Foundation, a nonpartisan policy center in Washington.

“If they’re managing their business efficiently, they’ll pay attention to how much crude oil or distillate or whatever is in storage and try to reduce it as much as possible,” said Michael Cooper, an attorney who specializes in energy taxation issues with Haynes and Boone LLP, the largest Dallas law firm.

U.S. oil imports have dropped 22 percent since July to 8.74 million barrels a day in the week ended Dec. 17, based on Energy Department figures. They tumbled 15 percent in the seven days ended Dec. 10 to the lowest level since September 2008. Imports into states along the Gulf of Mexico have fallen by 28 percent since July.

Falling Supplies

Total U.S. inventories have plunged 19 million barrels this month to 340.7 million in the week ended Dec. 17, poised for the biggest monthly decline since December 2006. Stockpiles were 4.1 percent higher than at the start of the year, down from 9.9 percent at the end of November, Energy Department data show.

“There may be some movement in inventories to adjust for these things, but there’s much more movement in inventories for normal day-to-day business reasons,” said Bill Day, a San Antonio-based spokesman for Valero Energy Corp., the largest U.S. refiner. “There’s much more demand in the summertime, so you may build up inventories in the middle of the year and then draw down inventories at the end of the year.”

--With assistance from Richard Rubin and Ryan J. Donmoyer in Washington. Editors: Joe Link, Dan Stets

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

NYSE Plans to Open for Trading as Normal, Customer Support Says

Posted: 27 Dec 2010 04:58 AM PST

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By Alexis Xydias

Dec. 27 (Bloomberg) -- The New York Stock Exchange plans to open for trading as normal today and no disruptions have been reported as of 7:25 a.m. local time, according to Scott Derta, a member of the exchange’s customer support team.

The U.S. East Coast faces a second day of travel disruption after snowstorms blanketed cities from New York to Boston, closing airports and halting trains with waist-high drifts and blinding winds.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net

To contact the editor responsible for this story: David Merritt at dmerritt1@bloomberg.net

Euro Pain Turns to 23% Gain for Europeans in S&P 500

Posted: 27 Dec 2010 04:46 AM PST

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By Alexis Xydias

(Adds today’s trading in seventh paragraph.)

Dec. 27 (Bloomberg) -- For all the losses facing Europeans this year, investors from the region who bought U.S. stocks as the euro weakened are getting the best returns in a decade.

The Standard & Poor’s 500 Index rose 23 percent this year when translated to euros, the most since the currency was formed in 1999 and almost double the 13 percent gain for Americans, according to data compiled by Bloomberg. Buying the Nikkei 225 Stock Average in Tokyo produced a 20 percent increase for Europeans, compared with a 2.5 percent loss when priced in yen, the data show.

Record budget deficits and bailouts of Greece and Ireland sent the European currency down 8.4 percent in 2010, boosting winnings for anyone converting dollar-denominated investments back into euros. Concern about further declines may spur more overseas investment in 2011, according to Dirk Pattyn at Degroof Fund Management Co. in Brussels, whose U.S. fund gave European investors a 24 percent return this year.

“The focus is still the debt problem in Europe, and many clients might be looking at the U.S. as a first alternative,” said Pattyn, who held Chevron Corp. and Microsoft Corp. among $33 billion in investments at his company this year. “It’s been an excellent year for U.S. investors in Europe. You have the currency that added a lot, and also you had the performance of the underlying index.”

Most Since 2007

Investors outside the U.S. purchased American stocks at an annual pace of $146 billion in the third quarter, on course for the biggest annual gain since 2007, data from the Federal Reserve show. Europeans bought a net $18.3 billion of U.S. stocks in September, the most since May 2007, just as credit markets started to freeze, the data show.

While the benchmark Euro Stoxx 50 Index slipped 3.5 percent this year up to the end of last week, traders in the 16 nations that share the single European currency made an average 29 percent by investing in 62 non-euro nations tracked by Bloomberg.

The Euro Stoxx 50 slid 1.4 percent at 8:40 a.m. in London today, while futures on the S&P 500 fell 0.5 percent.

The euro’s retreat against the dollar this year has been the biggest since 2005 even as the U.S. deficit swelled to a record in February and the unemployment rate rose to seven-month high of 9.8 percent in November, according to Bloomberg data.

“We were expecting a good performance of the U.S. market. What we didn’t expect is that the dollar would be as strong as it has been,” said Paris-based Hubert Goye, who helps oversee $707 billion for BNP Paribas Investment Partners. “Given the budget situation in the U.S., given the fact that the economy was not extremely strong, there were many reasons why the dollar could remain under pressure.”

Boosting Returns

Goye’s Actions USA fund rose 28 percent in euros this year and 17 percent in dollars, according to data compiled by Bloomberg. Currency movements boosted his return from holding shares of Cupertino, California-based Apple Inc. to 68 percent and doubled the value of his investment in Norwalk, Connecticut- based Priceline.com Inc.

Chevron in San Ramon, California, the second-biggest U.S. energy company, has gained 18 percent this year, the equivalent of 29 percent in euros. Redmond, Washington-based Microsoft’s 7.2 percent drop turns into a 1.5 percent rally when the largest software maker is priced in Europe’s currency.

The debt crisis in Europe has made the U.S. economy look strong by comparison. Surging borrowing costs in the region’s so-called peripheral nations forced the European Union to lead bailouts of Greece and Ireland for a combined 195 billion euros ($256 billion). Greece’s ASE Index has plunged 34 percent this year and Spain’s IBEX 35 has tumbled 14 percent, the worst performances among 24 developed markets tracked by Bloomberg.

‘Flight to Safety’

“It has been a flight-to-safety trade from Europe to the U.S.,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees more than $72 billion. “They will continue to move their money out of the less well-capitalized countries of Europe and the U.S. is still considered one of the safer places to invest.”

Moody’s Investors Service cut Ireland’s credit rating five levels on Dec. 17, put Greece on review for a potential downgrade, and said Dec. 15 that Spain’s ranking was at risk. Fitch Ratings trimmed Portugal’s rating to A+ on Dec. 23, citing concern about government financing and the country’s banks. In contrast, Moody’s said last month the U.S.’s top Aaa rating won’t be under pressure this year or next.

‘Nice Situation’

“We’ve seen quite a nice situation due to the credit crisis,” said Henrik Drusebjerg, a senior strategist at Nordea Investment Management, which oversees $76 billion in Copenhagen, where the Danish krone has declined 8.7 percent against the dollar in 2010. “Equities have done very nicely, partly because the reporting season was much better than expected.”

Denmark’s benchmark OMX Copenhagen 20 Index soared 36 percent this year, the best performance among 24 developed markets tracked by Bloomberg.

Profit for companies in the S&P 500 rose 42 percent in the third quarter, with 79 percent of members beating analyst estimates, according to data compiled by Bloomberg. For the Stoxx Europe 600 Index, 57 percent of firms topped predictions, the data show.

Bearish Call

As concern about Europe’s debt crisis deepens, the euro may slide to $1.18 by the third quarter from $1.31 at the end of last week, according to Stephen Hull, head of global foreign- exchange strategy at Morgan Stanley in London, who has the second-most bearish call among 46 analysts surveyed by Bloomberg. Investors should buy the dollar and sell the euro because governments in the monetary union don’t want a strong currency, the New York-based bank wrote in a Dec. 9 report.

The survey’s consensus suggests the euro will finish 2011 little changed from last week. Nordea’s Drusebjerg said the European currency may find support if the region’s governments present a “sensible” strategy to tackle their budget deficits.

Betting on dollar-denominated assets has “been fairly good in 2010, but it’s a theme you should be careful about,” he said.

This year’s gain for the S&P 500 in euros would be the highest since the 39 percent return in 1999, according to Bloomberg data. Euro-based investors that have held money in S&P 500 shares since the start of 2000 are worse off than their U.S. counterparts, having lost 34 percent compared with the Americans’ 14 percent decline.

Bullish on Franc

In addition to winning from moves against the dollar this year, investors based in the euro area have benefitted from the common currency’s 18 percent depreciation against the yen and 12 percent slide versus Sweden’s krona. The euro’s losses are helping boost the value of the Swiss franc. Options traders are more bullish on the franc for the next three months than any major currency except the yen, Bloomberg data show.

A 22 percent gain by the OMX Stockholm 30 Index, the second-best performing gauge in 2010 among 24 developed markets tracked by Bloomberg, translated into a 39 percent surge for euro-region investors. The currency effect makes the Swedish benchmark gauge the best-performing developed-market index worldwide when measured in euros, overtaking Denmark’s Copenhagen 20.

Pattyn at Degroof Fund Management says the U.S. may keep luring European investors, even without help from currency fluctuations, because it has faster economic growth.

“We do still have a positive view on U.S. investment,” said the fund manager. “With the returns this year, I can believe our European clients are quite happy.”

--With assistance from Nikolaj Gammeltoft and Liz Capo McCormick in New York and Anchalee Worrachate and Lukanyo Mnyanda in London. Editors: Andrew Rummer, David Merritt.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net.

To contact the editors responsible for this story: Andrew Rummer at arummer@bloomberg.net; David Merritt at dmerritt1@bloomberg.net.

U.K. December Home Prices Fall for Sixth Month, Hometrack Says

Posted: 27 Dec 2010 04:46 AM PST

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By Scott Hamilton

Dec. 27 (Bloomberg) -- U.K. house prices fell for a sixth month in December and will extend their decline in 2011 on “weak” demand and tighter mortgage-lending conditions, Hometrack Ltd. said.

The average cost of a home fell 0.4 percent from last month, and prices will drop a further 2 percent in 2011, the London-based property researcher said in an e-mailed report today. A separate release showed the majority of U.K. retailers predict a decline in sales next year.

The Hometrack report also showed sellers had to wait the longest since April 2009 to shift their properties in December and adds to forecasts for a weaker housing market in 2011. The Royal Institution of Chartered Surveyors said this month that prices in the fourth quarter of 2011 may be 2 percent lower than current levels, while Rightmove Plc sees sellers cutting asking prices by as much as 5 percent.

“We expect house prices to remain under downward pressure in the first half of 2011 on the back of weak demand,” Richard Donnell, Hometrack’s director of research, said in the report. However, “a tightening in supply together with continued low levels of housing transactions will continue to act as something of a support to pricing levels.”

Demand for homes, measured by the change in new buyers registering with real-estate agents, fell 4.8 percent in December from November, Hometrack said. That’s the biggest drop since January 2009 and the sixth consecutive monthly decline. The number of homes for sale fell 1.5 percent, the group said.

Demand Falls

Sellers achieved on average 92.1 percent of the asking price during the month, the lowest proportion since August 2009, while the time taken to sell increased to 10 weeks, Hometrack said.

In 2010, average values fell 1.6 percent, Hometrack said. The supply of homes for sale rose 24 percent, while demand fell 7 percent. The latter dropped 18 percent in the second half.

The housing market has weakened as banks tightened lending criteria, causing the level of home loans to drop below half of that seen at the peak of the property boom in 2007. U.K. banks approved the fewest mortgages last month since March 2009 when the economy was in the depths of the recession, the British Bankers’ Association said on Dec. 23.

Adding to uncertainty among prospective homebuyers, the government is implementing the biggest budget squeeze since World War II, which will lead to public-job losses and may slow the economic recovery.

“Lack of mortgage finance and falling consumer sentiment are trends that will continue into 2011,” Hometrack said.

Weaker household confidence is also likely to affect retail sales. The British Retail Consortium said today that almost two- thirds of U.K. retailers expect business to worsen next year. Eighteen percent predict an improvement, it said, citing a survey of 17 companies accounting for 51 percent of the country’s retailing by sales.

--Editors: Fergal O’Brien, Craig Stirling

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net

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