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Euro, Stocks Gain as Mutual Fund Flows Rise, Trichet Says No Greek Default

April 9, 2010

By Clyde Russell and Hanny Wan April 9 (Bloomberg) — The euro strengthened for a second day against the yen, Asia stocks gained and prices to insure against corporate defaults in the region fell after European Central Bank President Jean-Claude Trichet said Greece will be able to pay its debt. The yen weakened against all 16 of its major counterparts, falling to 125.45 per euro at 4 p.m. in Tokyo from 124.75 in New York yesterday. The cost of protecting Japanese corporate bonds dropped by the most since April 5. The MSCI Asia Pacific Index rose 0.2 percent to 127.78 and the Stoxx Europe 600 increased 0.7 percent to 268.09 at 8 a.m. in London. Futures for the Standard & Poor’s 500 Index rose 0.2 percent. Trichet said yesterday that “a default is not an issue for Greece,” calming investors who had driven credit-default swaps on Greece’s government debt to a record. Investors are seeking higher-yielding assets with emerging market stock funds taking in the most money in six months during the week ended April 7, according to EPFR Global. “The momentum is in place,” said Danny Yan , a portfolio manager at Taifook Asset Management Ltd. in Hong Kong, which oversees $400 million. “Valuations aren’t demanding. I’m reducing cash and deploying it.” Telecom companies and commodity producers were among the biggest gainers on the MSCI Asia Pacific Index . The measure has climbed 12 percent from its 2010 low on Feb. 8 amid mounting confidence in the global economic recovery. South Korea’s Kospi index sank 0.5 percent, the first drop in seven days, while Hong Kong’s Hang Seng advanced 1.5 percent. Macarthur Rejects Bid Macarthur Coal Ltd. , already a target of takeover offers from Peabody Energy Corp. and Noble Group Ltd., rose 8.3 percent to A$15.55 after receiving and then rejecting a A$3.71 billion ($3.4 billion) takeover offer from New Hope Corp. New Hope bid 2.7 of its shares for every 1 of Macarthur’s, valuing the company at A$14.58 per share. Chinese demand for both coking and thermal coal is driving prices higher, with spot prices for power-station coal at Newcastle Port rising 53 percent over the past year. Crude oil rose for the first time in three days, gaining 0.7 percent to $86.02 a barrel in New York, as concerns over a Greek default subsided and better-than-estimated retail sales in the U.S. bolstered optimism of a global economic recovery and increased fuel demand. Copper for three-month delivery on the London Metal Exchange increased 0.7 percent to $7,949.75 a ton. Emerging Markets Emerging-market equity funds attracted the most net inflows in six months amid a strengthening global economic recovery, EPFR Global said. Funds investing in emerging-market stocks drew a combined $3.27 billion in the week ended April 7, the most since the third week of October and taking net inflows for the year to $10.8 billion, according to Cambridge Massachusetts- based EPFR. The MSCI Emerging Markets Index rose 0.4 percent, gaining for the 10th day in 11 after posting its first drop in two weeks yesterday. “We are watchful of inflation and we do recognize that there are some issues there,” Michael Dommermuth , head of Asia investments at MFC Global Investment Management, said in a Bloomberg Television interview today. “Long term, we’re very bullish on the market.” STX Pan Ocean Co. , South Korea’s biggest bulk carrier, fell 1.2 percent, declining for a sixth day, and Korea Line Corp., the second-biggest, lost 3.7 percent to a two-week low. The Baltic Dry Index, a measure of shipping costs for commodities, posted a fourth straight decline. Won Nears High South Korea’s won climbed 0.4 percent to 1,118.40 per dollar, approaching its highest level in 18 months, on signs investor demand for emerging-market assets is strengthening. Mounting speculation China, the biggest buyer of Korean exports, will let its currency gain is also supporting the won. U.S. Treasury Secretary Timothy F. Geithner met in Beijing yesterday with Chinese Vice Premier Wang Qishan amid rising pressure from American lawmakers for the yuan to be allowed to appreciate. “One of the main reasons why we’re seeing the strength in the Korean won is because of capital inflows,” said Sam Hong , a currency dealer with Shinhan Bank in Seoul. “There’s also the possibility that the yuan will appreciate.” Twelve-month non-deliverable yuan forwards strengthened 0.4 percent this week to 6.6223 per dollar, reflecting bets the currency will strengthen 3.1 percent in one year’s time, according to data compiled by Bloomberg. They were little changed today. Euro Holds Gains The euro held onto yesterday’s gain versus the greenback on speculation the ECB’s Trichet will reiterate that Greece can avoid default. He is scheduled to speak today and tomorrow at conferences in Italy. Greece’s first-quarter budget deficit fell 40 percent to 4.3 billion euros ($5.7 billion) from 7.1 billion euros in the same period a year earlier, Finance Minister George Papaconstantinou said in an e-mailed statement yesterday. “The comments from Trichet were quite supportive and we could see a bounce, but the underlying concerns will remain,” said Derek Mumford , a Sydney-based senior consultant at HiFX, a foreign-exchange risk management firm. “There are more problems down the line which will keep interest rates low and pressure the euro.” Indicators of corporate credit risk also fell 2 basis points in Asia and Australia, according to prices from Morgan Stanley and CMA DataVision in New York. Investors use the default-swap indexes to hedge against losses on corporate debt or speculate on creditworthiness, and the swaps typically fall as investor confidence increases. The Markit iTraxx Japan index declined 5 basis points to 94 basis points. The Markit iTraxx Australia index fell to 84.5 basis points, according to Westpac Banking Corp., while the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan declined to 96 basis points, Royal Bank of Scotland Group Plc prices show. A basis point is 0.01 percentage point. To contact the reporters for this story: Clyde Russell in Singapore at crussell7@bloomberg.net ; Hanny Wan in Hong Kong at hwan3@bloomberg.net

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LBO Capital Raising Plummets 81% in Quarter From ’08 Peak as Returns Slump

April 6, 2010

By Emily Thornton April 6 (Bloomberg) — Carlyle Group, the world’s second- largest buyout firm, needs more time to raise $3 billion. So does Chicago-based Madison Dearborn Partners LLC, even after cutting its target by 25 percent to $7.5 billion. Private-equity firms, more reliant than in the past on management fees to offset lower profits from selling or taking companies public, saw quarterly fundraising decline 81 percent from the peak in 2008, according to London-based research firm Preqin Ltd., forcing them to extend deadlines and scale back the amounts they seek from investors. It’s taking almost four times longer to cement commitments for funds of more than $1 billion than it did in 2004, Preqin data show. At the same time, investors are getting stingier and more discriminating. Buyout funds of all sizes raised $13 billion in the first quarter, the least since the fourth quarter of 2004, the firm said. At the peak of fundraising in the first quarter of 2008, they took in $68 billion. “The prerequisite today for raising capital has gotten harder than at any time over the last 20 years that we’ve been involved in the business,” said Michael Hoffmann , the San Francisco-based president of Probitas Partners LP, a company that helps private-equity firms find investors. Fresh capital commitments not only provide buyout firms with new money to invest, they generate fees that are used to pay salaries. Management fees often shrink when the investment period of a fund ends — usually after three to six years — and are collected only on the money that has gone into deals. Capital Stockpile Buyout firms are sitting on $502 billion of unspent capital, according to Preqin. They announced $80.5 billion of pending or completed acquisitions in the 12 months ended March 31 compared with $170.3 billion for the same period a year earlier, according to data compiled by Bloomberg. The average management fee on capital committed for a fund with $1 billion or more ranges from 1.52 percent to 1.76 percent, according to Preqin. “If you don’t raise a new fund, then you eventually can’t sustain the status quo at a certain size or someone has to start making less money,” said Brian Korb, a partner at Glocap Search LLC, a New York-based executive-search firm specializing in recruiting for alternative-asset managers. “The words ‘fee- income shortage’ and ‘our fees are running out’ are words that I have been hearing on a more regular basis.” Twin Freezes Management fees have become more important since buyout firms are having difficulty exiting deals, preventing them from taking their cut of the profits, usually 20 percent. The decline has been caused by the twin freezes in takeovers and initial public offerings that followed the 2007 credit crisis. Buyout firms sold $5.75 billion of companies in the first quarter, compared with a quarterly average of $13.35 billion in 2007, according to PitchBook Data Inc., a Seattle-based private- equity research firm. “I’m getting calls from private-equity professionals who feel the music is stopping and there’s one less chair,” said Abby Adlerman, who leads the private-equity practice in the Americas for executive-search firm Russell Reynolds Associates in San Francisco. “People are not making as much money as they’re used to making.” One reason private-equity firms are having trouble drumming up investor interest is poor returns. Private-equity funds raised in 2006 valued their portfolios at 86 cents on the dollar as of Sept. 30, the most recent data available, according to Boston-based research firm Cambridge Associates LLC. Almost half of nonfinancial companies in the U.S. that defaulted in 2009 had private-equity sponsors, according to New York-based rating firm Moody’s Investors Service . ‘More Challenging’ “It’s always been more challenging to fundraise if managers don’t have positive performance to show,” said Andrea Auerbach, a managing director at Cambridge Associates . Buyout funds seeking more than $1 billion now spend an average of 19 months courting investors, according to Preqin. Last year it took 16 months, compared with eight months in 2007 and five months in 2004. “Group after group is coming through here and saying how difficult it is to raise new money,” said Jay Fewel , a senior investment officer at the Oregon State Treasury, which has invested in private equity since 1981. Oregon is reviewing its investment mix, said James Sinks , a spokesman for the treasury. It oversees more than $68 billion in funds, including the pension plan for state workers, according to its Web site. Buyout funds usually agree to wrap up fundraising 12 months after their first round of taking in money, what the industry calls the first close. Investors care because the longer fundraising goes on, the longer the firms are marketing instead of focusing on investing. Many funds also begin charging management fees after the first close. Carlyle, Madison Dearborn Carlyle, run from Washington by founders David Rubenstein , Daniel D’Aniello and William Conway , won approval to keep working on a $3 billion Asia fund it began marketing in 2008, according to a person with knowledge of the matter. Madison Dearborn, whose investors have committed more than $18 billion since it was started in 1992, got permission in February to extend fundraising for its sixth buyout pool. The firm previously had cut the amount it aimed to bring in from $10 billion, a person with knowledge of the fund said. Officials at Carlyle and Madison Dearborn declined to comment. Freeman Spogli & Co., whose holdings include Petco Animal Supplies Inc., the second-largest U.S. pet-store chain, got a six-month extension for a $1 billion buyout pool, said William Wardlaw , a partner at the firm in Los Angeles. Choosy Investors Avista Capital Partners finished gathering $1.8 billion for a fund on March 15 only after it asked investors to permit marketing for eight months longer than expected. The amount was 40 percent below the $3 billion target. “The market for private-equity funds is incredibly difficult,” said Thompson Dean , co-managing partner and co- chief executive officer of New York-based Avista, which was formed in July 2005 by a 19-person team from DLJ Merchant Banking Partners. Pension funds, foundations and endowments are getting more selective, gravitating toward fund managers with strong track records and support from existing investors. “First-time funds are pretty much out of luck for the foreseeable future,” said Hoffmann, the Probitas president. A team hired to run Carlyle Global Financial Services Partners LP, the firm’s first fund dedicated to investing in financial companies, had to seek permission from investors in September to continue marketing. They began raising $1 billion in 2008. Castle Harlan Managers with established records also are feeling the heat. It has taken two years for New York-based Castle Harlan Inc., founded by John Castle , the former CEO of investment bank Donaldson, Lufkin & Jenrette Inc., to attract about $800 million to invest in companies with equity and debt valued at as much as $750 million. The fund plans to close this quarter, according to Michael Millican, a spokesman for Castle Harlan. The buyout firm, along with an Australian affiliate, has more than $3.2 billion in capital commitments and has produced annual returns averaging 30 percent. Some firms are building longer fundraising periods into their agreements with clients to avoid having to seek an extension, said Hoffmann. Schwarzman Solution While Blackstone Group LP, the world’s largest private- equity firm, has been trying to raise $10 billion for Blackstone Capital Partners VI since 2008, it hasn’t asked investors for permission for more time. That’s because the New York-based firm, run by Chairman Stephen Schwarzman , has marketing documents that allow it to fundraise for a year after it declares a final close and the investment period starts, according to a person familiar with the fund. That’s also when the fund begins to collect a management fee, the person said. Peter Rose , a spokesman for the firm, declined to comment. Some funds are avoiding a showdown with investors by simply not setting a first close. “Technically, if you don’t have a first closing, you can actually fundraise forever,” said Jeremie Le Febvre, a partner at Triago, a Paris-based private-equity adviser. To contact the reporter on this story: Emily Thornton in New York at emthornton@bloomberg.net ;

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Richard Grubman: Hedge Fund Manager Allegedly Threw Keys In Hotel Valet’s Face, Banned From Boston’s Ritz

April 2, 2010

A Cambridge hedge-fund honcho won’t be putting on the ritz anytime soon after a judge ordered him away from the Ritz-Carlton Hotel and Towers on Boston Common yesterday for allegedly hurling his BMW keys into a valet’s face.

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Harvard Twins Who Sued Facebook Now Take on Cambridge in 156th Boat Race

April 1, 2010

By Danielle Rossingh April 1 (Bloomberg) — Cameron and Tyler Winklevoss took on Facebook Inc. as Harvard students when social networking was still new. Now, they’re taking on one of the oldest challenges in sports. The 28-year-old identical twins from Greenwich, Connecticut, will row for Oxford University in the 156th edition of the Boat Race against Cambridge . The crews will meet on the 4.25-mile (6.8-kilometer) course through west London in two days. The six-foot-four Olympians were selected for the Oxford boat after a seven-month training and selection regime. They took exams for their MBA degree last week. Neither Oxford nor Cambridge allows their students to forgo their studies because of the race, which is sponsored by back-office service provider Xchanging Plc . “It’s a pretty full-on schedule,” Tyler Winklevoss said in an interview on London’s Putney Embankment, where both teams will start in front of 250,000 spectators on the banks. The twins’ boat, which includes rowers from Britain, Ireland, the Netherlands, Germany and Canada, is expected by bookmakers to win. William Hill Plc says Cambridge is the 7-4 underdog, with the Dark Blues 1-3 to be victorious. That means a successful $3 wager on Oxford would return $1 and the original stake. Long Days The Cambridge crew, which includes four Britons, two Americans and three Canadians, last won in 2007. Last year, the Light Blues lost by 3½ boat lengths. Tyler Winklevoss said their days start around 6:30 a.m. with indoor training, followed by lectures for 3½ hours. The afternoon brings more exercise, ending at 6 p.m. “And then eat, study, sleep,” said Tyler, a right-hander who plays the drums. The brothers, who are enrolled at Christ Church college in Oxford, England, were introduced to rowing by an Irish coach when they were 15. They were U.S. national pairs champions in 2005 and 2007. They won a gold medal in the eight boat at the 2007 Pan American Games and finished sixth in the coxless pairs final at the 2008 Beijing Olympics. “It is a doable schedule,” said Cameron Winklevoss , the left-handed of the twins who plays the guitar. “But certain things have to give, like perhaps a social life, or meeting up with your friends once in a while. That takes a bit of a beating.” The addition of overseas students such as the Winklevoss twins to the race adds to the prestige of the event, former oarsmen say. ‘A Spectacle’ “It raises the interest,” said Telecom Plus Chief Operating Officer Andrew Lindsay , who was the president of the Oxford boat in 1998 and won an Olympic gold two years later in Sydney, Australia. “If you didn’t have foreign people coming, you wouldn’t have such a high standard. As a spectacle for the public, it’s much more interesting.” The discipline needed to be successful in a physically demanding sport has helped the brothers in their legal dispute with Facebook, they said. They founded ConnectU as Harvard students in 2003, and hired Facebook founder Mark Zuckerberg to help build the dating Web site. The brothers sued him in 2004, saying Zuckerberg had stolen their idea for the company. They accused him of delaying the ConnectU project while secretly building Facebook. Millionaires The dispute was settled in 2008 for $65 million in cash and Facebook shares, according to San Francisco-based newspaper The Recorder. The paper wrote in February 2009 that details of the settlement had been accidentally disclosed in a marketing brochure for the law firm that had represented the brothers in the past. Facebook, the largest social networking site, was valued at $11.5 billion in a new index created by SharesPost Inc., a marketplace for trading in private companies, in March. “We don’t think too much about what we would do differently,” Tyler said, when asked about the lawsuits. “We’re still ongoing with that saga. But I think you just have got to fight for what you believe in is right and stay true to that, and be willing to stick it out. It’s a lot like rowing in some ways.” The future may be a combination of both rowing and business for the Winklevoss brothers. They may return to London for the 2012 Olympics . ‘New Challenges’ “We have a high level of curiosity, and we’re always looking for new challenges,” Cameron said. “That might be a combination of rowing and business in the near term. Perhaps a little more school. At some point, you have to hang the oar up and after that, we’ll probably look for the next challenge. Maybe some kind of start-up.” Last year, Oxford beat Cambridge to win the title for a fourth time in five years. Cambridge leads the series 79-75. There has been one tie in the competition, which started in 1829 when a Cambridge student wrote to an Oxford friend proposing a race. “We’ve clearly invested a lot of effort and time into the whole process,” Cameron said, when asked what it would mean if Oxford won. “It would be great if we could have a good day Saturday.” To contact the reporter on this story: Danielle Rossingh on the Putney Embankment in west London through the London sports desk at drossingh@bloomberg.net

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OPEC, Energy Agencies to Unveil Action Plan to Combat Oil-Price Volatility

March 30, 2010

By Margot Habiby and Peter Millard March 30 (Bloomberg) — OPEC, the International Energy Agency and the International Energy Forum will announce a “joint action plan” this week to combat oil-market volatility, IEA Executive Director Nobuo Tanaka said. The plan will tackle “volatility of the price and other issues like the outlook of the energy market,” he told reporters yesterday before the biennial IEF ministerial meeting that starts today in Cancun, Mexico. “We’ll have closer dialogue with our organizations and we’ll see what we can do.” The accord involves pooling expertise and sharing data to improve transparency, two people with direct knowledge of the plan said. They declined to be identified because the information hadn’t been made public. Details of the agreement will be announced March 31 at the end of the meeting. Saudi Arabian Oil Minister Ali al-Naimi and U.S. Deputy Energy Secretary Daniel Poneman , representing the world’s biggest oil exporter and the largest consumer, are among officials from more than 60 countries attending the gathering. Chief executive officers from some of the largest oil companies, including Exxon Mobil Corp. ’s Rex Tillerson and Royal Dutch Shell Plc ’s Peter Voser , will join a concurrent business forum. IEF Secretary General Noe van Hulst said in an interview on March 28 in Cancun that oil producers and consumers, trying to avoid a repeat of the $115 a-barrel price swing in 2008, will seek a “broad agreement” to combat volatility. “The better the market is informed about what happened in the past, what’s happening in the present and what will happen in the future, the less room there will be for, say, unfounded speculation and second-guessing,” he said. G-8 Mandate The Group of Eight nations called for measures to curb volatility in energy prices in July at its L’Aquila, Italy, meeting, to enable oil producers to plan their spending. The G- 8’s formal statement called for continued dialogue between energy producing, consuming and transit countries through the Riyadh-based IEF. Members account for more than 90 percent of global oil and gas supply and demand. The Organization of Petroleum Exporting Countries, the IEA and IEF “should work hard together to reduce volatility,” OPEC Secretary-General Abdalla El-Badri told reporters in Cancun yesterday. He called the IEF “a good vehicle” for dialogue. El-Badri also applauded the U.S. for “putting some brakes on speculation. It’s a positive step in the right direction.” Oil’s climb to a record $147.27 a barrel in 2008 led regulators in the U.S. and U.K., home to the world’s two major oil exchanges, to consider trading limits on the commodity. CFTC Limits The U.S. Commodity Futures Trading Commission, which oversees more than $5 trillion in daily trading, in January proposed adding limits to the energy markets as part of a government campaign to prevent individuals or companies from gaining too much control of a commodity market. The market needs better data on supply, demand and output levels from all producing and consuming countries, particularly those from nations outside the Organization for Economic Cooperation and Development, Van Hulst said. Improvements in futures-market transparency are also needed, he said. Non-OECD countries such as China and India are forecast to drive energy-demand growth after the global economic recession. “Transparency is one of the themes of the times, particularly after 2008,” Daniel Yergin , chairman of IHS Cambridge Energy Research Associates, said in an interview earlier this month in Houston. “Understanding demand better on a global basis, particularly where the growth is, and at the same time better understanding supply would at least ground markets more in the realities of supply and demand.” Implied Volatility Oil prices traded between $32.40 a barrel and $147.27 a barrel in 2008. Implied volatility for at-the-money options expiring in 30 days, a measure of expected price swings in the futures contract and a key gauge of options prices, climbed to 105 percent at the end of 2008. Implied volatility fell to 27.8 percent on March 26, the lowest level since Dec. 24, 2007. Oil has traded in a $68-to-$84 range since October. Sudden accelerations in oil prices hurt consumers because they cause inflation and reduce spending, curbing economic growth. A plunge in prices affects investment in future supplies by both publicly traded and state-owned oil companies. “Being against excess volatility is kind of like being against world hunger,” said David Kirsch , the Kansas City, Kansas-based director of oil markets at consultant PFC Energy. “Who’s for it? At the end of the day, what are you going to do about it?” Crude for May delivery rose $2.17, or 2.7 percent, to $82.17 a barrel on the New York Mercantile Exchange yesterday, the highest settlement since March 18 and the biggest gain since Feb. 16. The increase caused implied volatility to rebound to 28.5 percent. Oil was at $82.12 in after-hours trading at 10:46 a.m. in Singapore. To contact the reporters on this story: Margot Habiby in Cancun, Mexico at mhabiby@bloomberg.net ; Peter Millard in Cancun, Mexico, at pmillard1@bloomberg.net .

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Obama Said to Name Health Scholar Berwick as Head of Medicare, Medicaid

March 27, 2010

By Hans Nichols and Viola Gienger March 27 (Bloomberg) — President Barack Obama plans to nominate Donald Berwick , a Harvard University health-policy professor, to oversee the Medicare and Medicaid programs, an administration official said. As head of the Centers for- Medicare and Medicaid Services, Berwick would run nation’s health insurance programs for the elderly and the poor. The agency, part of the Department of Health and Human Services, will play a large role in implementing the president’s health care overhaul. The position requires Senate confirmation. Obama announced plans today to install 15 nominees to other administration positions by recess appointments, which bypass the need for Senate confirmation. Berwick wasn’t on that list because he hasn’t yet been nominated by the president, said the official, who spoke on the condition of anonymity. Berwick is a pediatrician and health policy expert who runs the nonprofit Institute for Healthcare Improvement in Cambridge, Massachusetts. To contact the reporter on this story: Hans Nichols in Washington at hnichols2@bloomberg.net

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Obama Said to Name Health Scholar Berwick as Head of Medicare, Medicaid

March 27, 2010

By Hans Nichols and Viola Gienger March 27 (Bloomberg) — President Barack Obama plans to nominate Donald Berwick , a Harvard University health-policy professor, to oversee the Medicare and Medicaid programs, an administration official said. As head of the Centers for- Medicare and Medicaid Services, Berwick would run nation’s health insurance programs for the elderly and the poor. The agency, part of the Department of Health and Human Services, will play a large role in implementing the president’s health care overhaul. The position requires Senate confirmation. Obama announced plans today to install 15 nominees to other administration positions by recess appointments, which bypass the need for Senate confirmation. Berwick wasn’t on that list because he hasn’t yet been nominated by the president, said the official, who spoke on the condition of anonymity. Berwick is a pediatrician and health policy expert who runs the nonprofit Institute for Healthcare Improvement in Cambridge, Massachusetts. To contact the reporter on this story: Hans Nichols in Washington at hnichols2@bloomberg.net

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Health-Care Legislation Judged Able to Withstand Constitutional Challenge

March 24, 2010

By William McQuillen and Andrew Harris March 24 (Bloomberg) — Lawsuits by 14 states seeking to scuttle health-care legislation signed by President Barack Obama were given little chance of success in the face of the broad powers granted Congress by the U.S. Constitution, scholars said. Thirteen states led by Florida said the law signed yesterday illegally places a fiscal burden on their cash- strapped budgets with an expansion of state-run Medicaid. Virginia filed a separate suit contending the “individual mandate” requiring people to buy health insurance exceeds Congress’s powers. “It’s unlikely to succeed,” said Jack Balkin , a professor at Yale Law School in New Haven, Connecticut, of the effort by the states, equating the new law to Congress’s power to levy taxes. “Congress has the ability to force people to pay taxes. If it is a constitutional tax, then that is the ballgame.” The $940 billion health care overhaul subsidizes coverage for uninsured Americans, and is financed by Medicare cuts to hospitals and fees or taxes on insurers, drugmakers, medical- device companies and Americans earning more than $200,000 a year. Many of the changes enacted by the bill, such as requiring most people to have health insurance and employers to provide coverage, will take at least two years to go into effect. The 13 states joining in the lawsuit filed in federal court in Pensacola, Florida, claim that “the act represents an unprecedented encroachment on the liberty of individuals living in the plaintiffs’ respective states, by mandating that all citizens and legal residents of the United States have qualifying health care coverage or pay a tax penalty.” 13 States Joining Florida in the suit are Alabama, Colorado, Idaho, Louisiana, Michigan, Nebraska, Pennsylvania, South Carolina, South Dakota, Texas, Utah and Washington. Along with a separate suit by Virginia filed in federal court in Richmond, the states asked the courts to declare the law unconstitutional and seek to bar its enforcement. The complaints were filed moments after Obama, a Democrat, signed the legislation, which totals more than 2,400 pages. “This is a continuation of politics by a national political faction that lost in Congress,” said Aziz Huq , a University of Chicago law professor, who predicted the lawsuits will likely fail. Twelve of the state attorneys general participating in the Florida case are Republicans. Buddy Caldwell of Louisiana is the lone Democrat. Virginia’s lawsuit was filed by Ken Cuccinelli, a Republican. The health-care overhaul will allow 16 million more Americans to qualify for Medicaid coverage, according to an estimate by the nonpartisan Congressional Budget Office. It will cost the states billions of dollars to administer, according to the states that sued. ‘Ruin the State’ Florida Attorney General Bill McCollum said at a press conference yesterday that the act’s legislative mandates will cost his state billions of dollars. The legislation “will ruin the state financially,” said McCollum, who predicted the lawsuits would end up before the U.S. Supreme Court. The states claim the legislation will deprive them of sovereignty and violates the Constitution’s Tenth Amendment, which says powers not granted to the national government are reserved to the states, or the people. In its lawsuit, Virginia specifically attacked the new law’s requirement that Americans obtain health coverage, calling it unconstitutional. Charles Fried , a professor at Harvard Law School in Cambridge, Massachusetts, disagreed. ‘What Virginia Says’ “As long as the federal law is independently constitutional, it doesn’t matter what Virginia says,” said Fried, who served as solicitor general, the government’s chief lawyer before the U.S. Supreme Court, during the administration of President Ronald Reagan . “It’s like Virginia saying we don’t have to pay income tax.” The Florida lawsuit claims the reform contains “unfunded mandates” and is too financially burdensome at a time when states already need to cut their budgets. The attorneys general also said the law imposes an illegal tax on people “for their failure or refusal to do anything other than to exist and reside in the United States.” Balkin said throwing out the health care law may require overturning decades of court precedent leading back to the “New Deal” legislation of President Franklin Roosevelt . Robert Kaufman, a public policy professor at Pepperdine University in Malibu, California, who calls himself a “fervent opponent” of the new health law, said chances are slim that litigation by the states will reverse it. The Issue “The issue is whether this is constitutional, not whether this is wise,” said Kaufman, who is also an attorney. U.S. Supreme Court decisions since Roosevelt have tended to support a broad reading of the Constitution in allowing the federal government to regulate interstate commerce, Kaufman said. The Supreme Court in 2005 cited the Constitution’s Commerce Clause in upholding a federal ban on marijuana, showing the reach of that provision in the face of state laws allowing its use for medical reasons, said Peter Edelman , a constitutional law professor at the Georgetown University in Washington. “Bottom line, I don’t think there is any substance to any of the arguments,” said Edelman, who was an assistant secretary at the U.S. Department of Health and Human Services during the administration of President Bill Clinton . “But you always have to put a small asterisk, given the current membership of the court.” The cases are State of Florida v. U.S. Department of Health and Human Services, 10-cv-00091, U.S. District Court for the Northern District of Florida (Pensacola); Commonwealth of Virginia v. Sebelius, 10cv00188, U.S. District Court for the Eastern District of Virginia (Richmond). To contact the reporters on this story: William McQuillen in Washington at bmcquillen@bloomberg.net and; Andrew Harris in Chicago at aharris16@bloomberg.net .

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Euro Drops on Greece Bailout Concerns; Asian Stocks, Oil, Copper Decline

March 18, 2010

By James Poole March 18 (Bloomberg) — The euro weakened against the dollar and the yen for a second day on concern Greece won’t receive aid from the European Union next week and may need help from the International Monetary Fund. Asia stocks and oil fell. The euro dropped to $1.3667 per dollar as of 5:15 p.m. in Tokyo from $1.3738 yesterday in New York. The MSCI Asia Pacific Index lost 0.3 percent to 124.53, declining for the first time in three days. Standard & Poor’s 500 futures were down 0.3 percent. The Stoxx Euro 600 gave up 0.1 percent to 261.15 at 8:15 a.m. in London. Crude oil dropped 0.9 percent to $82.19 a barrel and copper slid 0.7 percent to $7,481 a metric ton. While Greek government proposals to reduce its deficit led S&P to affirm Greece’s investment-grade credit rating on March 16, the shift in Germany underscored the rift in the European Union as the global economy emerges from the worst slump since World War II. Michael Meister , the chief finance spokesman for German Chancellor Angela Merkel ’s party, said attempting a Greek rescue without the IMF “would be a very daring experiment.” “Fundamentally the euro will be undermined by the situation, even though there may not be a complete sovereign default by Greece,” said Derek Mumford , a Sydney-based senior consultant at HiFX, a foreign exchange risk management firm. “The euro-zone will have low growth and the euro will suffer.” The yen strengthened to 123.58 per euro in Tokyo from 124.06 yesterday in New York. The Japanese currency snapped a two-day drop against the Australian dollar after Chinese newspaper reports indicated the nation, the fastest-growing major economy, is trying to quash land and currency speculation. Risk Aversion “Worries over further monetary tightening in China and political discord within Europe over a rescue package for Greece are sparking risk aversion,” said Lee Wai Tuck , a currency strategist at Forecast Pte in Singapore. “This is leading to buying in the yen and the dollar and selling of the euro.” Greece may seek aid from the IMF over the April 2 to April 4 Easter weekend, Dow Jones said today, citing a senior Greek official it didn’t name. China has banned banks from lending to developers found to be hoarding land or holding back sales of apartments to wait for higher prices, the China Securities Journal said today, citing an unidentified source. Yuan forwards snapped a three-day decline after a trade group said the government is testing the ability of companies to withstand a stronger currency. China is conducting yuan stress tests for 12 industries, Zhang Wei , vice chairman of the China Council for the Promotion of International Trade, said at a briefing in Beijing today. The yuan’s 12-month forwards gained 0.1 percent to 6.6650. The contracts reflect bets the currency will strengthen 2.4 percent from the spot rate of 6.8264. Intervention Speculation Asian currencies declined from near their strongest levels since 2008 on speculation central banks will intervene to damp appreciation that may hurt exports. The South Korean won dropped 0.5 percent to 1,133.85 per dollar. Central banks intervene in the currency markets by arranging purchases or sales. “There’s some rumors that the Bank of Korea has been in the market,” said Gerrard Katz , head of foreign-exchange trading at Standard Chartered Plc in Hong Kong. “Fundamentals still point to a lower dollar against Asian currencies.” Credit risk is declining as Australia & New Zealand Banking Group Ltd., the third-largest bank in Australia, said domestic corporate lending was increasing for the first time in a year. The Markit iTraxx index for Japan and its Asia counterpart fell 1 basis point to the lowest level since the middle of January. More shares fell than gained on the MSCI Asia Pacific Index , which has advanced 3.4 percent this year. Japan’s Nikkei 225 Stock Average lost 1 percent, the biggest drop among major markets in Asia. Westfield, Mitsui Westfield Group, the world’s largest owner of shopping malls by market value, gained 2.2 percent in Sydney after Deutsche Bank AG upgraded the stock. Mitsui Fudosan Co. , Japan’s largest developer, dropped 2.4 percent after a downgrade from Morgan Stanley. A combination of record mutual fund inflows and the world’s fastest economic growth are failing to lift shares in the largest developing nations with valuations at the highest level versus advanced countries since at least 1995. Emerging-market stock funds lured $86.6 billion in the year through January, the most in 14 years of data , according to Cambridge, Massachusetts-based researcher EPFR Global. MSCI’s developing nation index slid 2.2 percent from this year’s peak on Jan. 11 and pared an 80 percent rally in the previous 12 months that sent its price-to-book ratio to a record 17 percent over the MSCI World Index, data compiled by Bloomberg show. Crude Oil, Copper Crude oil declined as the dollar gained and a government report showed fuel demand dropped and crude supplies rose in the U.S. The Organization of Petroleum Exporting Countries, supplier of about 40 percent of the world’s oil, agreed to keep its production limits unchanged for a fifth meeting. It cut quotas by a record 4.2 million barrels a day in late 2008 when global demand collapsed because of the recession. Copper for three-month delivery fell for the first time in three days. To contact the reporter for this story: James Poole in Singapore jpoole4@bloomberg.net ;

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Asia Credit Risk at Two-Month Low; Stocks Climb to Highest Since January

March 17, 2010

By James Poole March 18 (Bloomberg) — The risk of default in Asia declined to the lowest level in two months and a regional stock index traded at its highest since January. The euro fell on speculation Germany will endorse International Monetary Fund help for Greece if it needs aid. The Markit iTraxx index for Japan and its Asia counterpart, a gauge of bond risk, fell 1 basis point to the lowest level since the middle of January. The MSCI Asia Pacific Index was up 0.1 percent at 125.08, the most since Jan. 20. The euro fell for a second day against the dollar, and the Korean won dropped on speculation the central bank was seeking to curb gains. Oil fell 0.6 percent, dropping for the first time in three days. Credit risk is declining as Australia & New Zealand Banking Group Ltd., the third-largest bank in Australia, said domestic corporate lending was increasing for the first time in a year, providing evidence that the global economy was improving after the deepest recession since World War II. Share gains slowed as high valuations deterred buyers. “Globally, economies are improving, but markets are awash with excess liquidity,” said Mitsushige Akino, who oversees the equivalent of $450 million at Tokyo-based Ichiyoshi Investment Management Co. “Technically the market is overheating, so people are enticed to lock in profit.” About as many shares gained as declined on the MSCI Asia Pacific Index , which has advanced 3.8 percent this year. Japan’s Nikkei 225 Stock Average lost 0.2 percent, while Australia’s S&P/ASX 200 Index and futures on the Standard & Poor’s 500 Index were little changed. Toshiba, Westfield Toshiba Corp. , Japan’s biggest memory-chip maker, climbed 2 percent after research firm ISuppli Corp. said the company won market share last year. Westfield Group, the world’s largest owner of shopping malls by market value, gained 1.9 percent in Sydney after Deutsche Bank AG upgraded the stock. Mitsui Fudosan Co. , Japan’s largest developer, dropped 2.6 percent after a downgrade from Morgan Stanley. A combination of record mutual fund inflows and the world’s fastest economic growth are failing to lift shares in the largest developing nations with valuations at the highest level versus advanced countries since at least 1995. Emerging-market stock funds lured $86.6 billion in the year through January, the most in 14 years of data, according to Cambridge, Massachusetts-based researcher EPFR Global. MSCI’s developing nation index slid 2.2 percent from this year’s peak on Jan. 11 and pared an 80 percent rally in the previous 12 months that sent its price-to-book ratio to a record 17 percent over the MSCI World Index, data compiled by Bloomberg show. Euro Declines The euro fell versus the dollar and the yen as Michael Meister , a lawmaker who is chief finance spokesman for Chancellor Angela Merkel ’s Christian Democratic Union, said attempting a Greek rescue “without the IMF would be a very daring experiment.” Merkel used a budget speech in parliament in Berlin yesterday to caution against “overly hasty” pledges of financial support. The euro fell to $1.3720 from $1.3738. The Japanese currency snapped a two-day drop against the Australian dollar after Chinese newspaper reports indicated the nation, the fastest growing major economy, is trying to rein in land and currency speculation. “Worries over further monetary tightening in China and political discord within Europe over a rescue package for Greece are sparking risk aversion,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is leading to buying in the yen and the dollar and selling of the euro.” Asia Currencies The yen rose 0.2 percent to 83.21 per Australian dollar in Tokyo. Japan’s currency traded at 123.82 per euro from 124.06 yesterday in New York. China has banned banks from lending to developers found to be hoarding land or holding back sales of apartments to wait for higher prices, the China Securities Journal said today, citing an unidentified source. Asian currencies declined from near their strongest levels since 2008 on speculation central banks will intervene to damp appreciation that may hurt exports. The South Korean won dropped 0.2 percent to 1,130.90 per dollar. Central banks intervene in the currency markets by arranging purchases or sales. “There’s some rumors that the Bank of Korea has been in the market,” said Gerrard Katz , head of foreign-exchange trading at Standard Chartered Plc in Hong Kong. “Fundamentals still point to a lower dollar against Asian currencies.” The Markit iTraxx Japan index dropped 1 basis point to 119 basis points as of 9:12 a.m. in Tokyo, according to Morgan Stanley prices. That’s the lowest since Jan. 12, according to CMA DataVision prices in New York. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 1 basis point to 90 basis points as of 8:20 a.m. in Singapore, Citigroup Inc. prices show. That is the lowest since Jan. 13, according to CMA DataVision. Crude Oil, Copper Crude oil declined for the first time in three days as the dollar gained and a government report showed fuel demand dropped and crude supplies rose in the U.S. Oil for April delivery dropped 45 cents to $82.52 a barrel in electronic trading on the New York Mercantile Exchange. The Organization of Petroleum Exporting Countries, supplier of about 40 percent of the world’s oil, agreed to keep its production limits unchanged for a fifth meeting. It cut quotas by a record 4.2 million barrels a day in late 2008 when global demand collapsed because of the recession. Copper for three-month delivery dropped 0.3 percent to $7,515 a metric ton at 11:36 a.m. To contact the reporter for this story: James Poole in Singapore jpoole4@bloomberg.net ;

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BRICs Rally Slows as Highest Valuations Since 1995 Undermine Record Flows

March 17, 2010

By Michael Patterson March 18 (Bloomberg) — The combination of record mutual fund inflows and the fastest economic growth are failing to lift shares in the largest developing nations with valuations at the highest level versus advanced countries since at least 1995. Emerging-market stock funds lured $86.6 billion in the year through January, the most in 14 years of data, according to Cambridge, Massachusetts-based researcher EPFR Global. MSCI’s developing nation index slid 2.2 percent from this year’s peak on Jan. 11 and pared an 80 percent rally in the previous 12 months that sent its price-to-book ratio to a record 17 percent over the MSCI World Index , data compiled by Bloomberg show. For BlackRock Inc.’s Bob Doll , the declines won’t last as developing country equities deserve higher valuations for their faster economic growth, bigger profits and lower debt than developed nations. Gartmore Group Ltd.’s John Bennett says the best gains may be over, while Antoine van Agtmael , who coined the term “emerging markets,” predicts shares will take a “breather” this year before resuming a long-term advance. “It’s not a good idea to buy super-duper growth when it’s already priced for super-duper growth,” said Bennett, the London-based lead manager of the $2.6 billion Gartmore European Selected Opportunities Fund , which beat 97 percent of its peers in the past five years with a gain of 65 percent. While the MSCI emerging gauge is 25 percent lower than its October 2007 peak, the rally pushed its price relative to net assets, a measure of long-term value cited by Templeton Asset Management Ltd. Chairman Mark Mobius , to 2.17 on Jan. 6. Record Premium That’s a record 17 percent more than the MSCI World index’s price-to-book ratio of 1.84, Bloomberg data show. The premium, which has lasted 10 months, was 15 percent yesterday, compared with an average discount of 36 percent since Bloomberg began compiling the data in January 1995. The MSCI emerging index’s 1.9 percent gain this year trails a 3 percent rise in the MSCI World and 4.5 percent climb in the Standard & Poor’s 500 Index . Brazil’s Bovespa has risen 2.6 percent, while the Micex in Russia is up 4.8 percent. India’s Bombay Stock Exchange Sensitive Index has advanced 0.1 percent and China’s Shanghai Composite Index is down 6.9 percent. “We need a bit of a breather,” van Agtmael, who first used the term “emerging markets” in 1981 and now helps manage about $13 billion as chairman and chief investment officer of Emerging Markets Management LLC, said in an interview with Bloomberg Television this week. “It’s not going to be the panic of 2008 and it’s not going to be this fabulous year we had last year.” China Overhang Concern that China, the world’s biggest developing economy, will pare economic stimulus measures to slow gains in consumer prices and real estate is weighing on emerging markets, said Mikio Kumada , a senior market analyst at LGT Capital Management in Singapore. The People’s Bank of China raised reserve requirements for the biggest lenders twice this year in a bid to curb credit growth. Inflation is also rising in India and Brazil, increasing pressure on those nations’ central banks to raise borrowing costs. India’s inflation accelerated to a 16-month high in February, while consumer prices in Brazil rose at the fastest pace in 21 months. The International Monetary Fund forecasts emerging markets as a group will expand 6 percent this year, leading the global recovery, compared with 2.1 percent for advanced economies. Emerging-market stocks still may outperform advanced-nation shares because of higher profits and lower debt, said Doll, vice chairman and global chief investment officer for equities at New York-based BlackRock, which oversees more than $3 trillion. Lower Leverage The debt of emerging-nation governments will hold around 2007 levels this year at 39.6 percent of gross domestic product, while surging in advanced countries to 106.7 percent from 78.2 percent, IMF estimates show. Profits at companies in the MSCI emerging index may jump 29 percent in 2010, compared with 20 percent for the MSCI World, based on at least 2,400 analyst projections compiled by Bloomberg. “Growth is faster, profit margins are higher and leverage is lower,” said Doll. “That does warrant a premium.” The MSCI emerging gauge’s price-to-book ratio is down from a record 2.96 in October 2007, according to Bloomberg data. The 22-country gauge trades for 13.1 times analysts’ estimates for 2010 earnings , lower than the ratio of 15.1 for the MSCI World, Bloomberg data show. Turkiye Garanti Bankasi AS , Turkey’s biggest bank by market value, is trading at a price-to-book ratio 32 percent higher than San Francisco-based Wells Fargo & Co. , the largest U.S. home lender. That compares with an average discount of 22 percent since 1999. Analysts predict shares of Istanbul-based Garanti will rise 18 percent within the next 12 months, compared with 4.4 percent for Wells Fargo, according to 41 price estimates compiled by Bloomberg. Relative Values Brazilian clothing retailer Lojas Renner SA is valued at 21 times analysts’ earnings estimates. Gap Inc. , operator of the Old Navy and Banana Republic clothing chains, trades at 13 times, Bloomberg data show. Shares of Porto Alegre-based Lojas Renner trade at a premium as analysts predict the company’s long-term growth rate will almost double that of San Francisco- based Gap. Gartmore’s Bennett says premium valuations and record inflows signal emerging-market shares are vulnerable to losses. His call in October 2007 that developing-nation stock prices were too high proved prescient. The MSCI measure peaked that month and sank 58 percent in the next year while the MSCI World lost 43 percent as bad mortgage loans sparked a freeze in credit markets and pushed the global economy into recession. ‘Cause For Concern’ The only other time emerging market equities traded at a premium for at least 10 months, in the period to June 2008, MSCI’s developing nation gauge trailed the developed index by 12 percentage points over the next six months, according to Bloomberg data. “Given that emerging markets historically traded at significant discounts to developed markets, these valuations give investors some cause for concern,” said Andrew Milligan , the Edinburgh-based head of global strategy at Standard Life Investments, which oversees about $224 billion, in a March 12 report. “In certain circumstances, such as a double-dip recession in the developed economies, their future returns could be rather worse.” To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net .

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AVEO Raises 23% Less Than Sought in First U.S. Biotechnology IPO of 2010

March 12, 2010

By Michael Tsang and Craig Trudell March 12 (Bloomberg) — AVEO Pharmaceuticals Inc. , which is developing a treatment for kidney cancer, sold $81 million of shares in its initial public offering, raising 23 percent less than it sought after delaying its IPO by one day. AVEO offered 9 million shares at $9 each, the Cambridge, Massachusetts-based company said in a release through Business Wire yesterday. AVEO tried to sell as much as $105 million in a 7 million-share deal at $13 to $15 each, its filing with the Securities and Exchange Commission and Bloomberg data showed. U.S. initial offerings have raised just $2.83 billion this year after London-based Barclays Plc predicted in December that sales will triple to $50 billion in 2010. While AVEO was the first biotechnology IPO of the year, the 14 companies that have completed deals cut their size by 25 percent on average as investors extracted concessions in almost every sale. “The buyer has a little more control because there’s a bunch of companies coming public, so we can be picky,” said Scott Billeadeau , who helps oversee about $19 billion at Fifth Third Asset Management in Minneapolis. “The market has come back, but there’s plenty of competition.” AVEO’s offering was the third this week after IPOs by Baltic Trading Ltd. and Sensata Technologies Holding NV. Baltic Trading, the New York-based shipping company formed to operate dry bulk vessels, sold $228 million of shares, while Sensata , the maker of sensors for Ford Motor Co. and controls for Samsung Electronics Co., raised $569 million in the biggest U.S. offering this year. Price Range Both Baltic Trading and Sensata priced their offerings at the low end of their forecast range, becoming only the second and third companies this year to sell shares within the original terms set by their underwriters. Crude Carriers Corp. , the Piraeus, Greece-based company formed in October to engage in crude-oil shipping, also held an IPO yesterday, raising $257 million. The shares, which start trading today on the New York Stock Exchange under the ticker CRU, were sold at $19 each, the low end of its price range. AVEO, which hired JPMorgan Chase & Co. and Morgan Stanley of New York to lead its sale, will begin trading on the Nasdaq Stock Market under the ticker AVEO. The company intends to use the proceeds from the IPO to help fund the clinical trial of a drug called tivozanib, which is in the final stage of testing for U.S. approval in patients with kidney cancer. AVEO has yet to gain clearance for any of its drugs and doesn’t expect to generate revenue from product sales until at least 2013, its filing showed. The drugmaker has accumulated losses of $177.7 million since its founding in 2001. Additional Financing Its auditor, Ernst & Young LLP, said AVEO’s losses raised “substantial doubt” about the company’s ability to continue as a going concern without additional financing by the end of the year, according to the SEC filing. “Buying into any biotech IPO is like purchasing a lottery ticket,” Philip J. Cole , senior advisor at Northbrook, Illinois-based Hochman & Baker Investment Advisors Inc., which oversees $160 million, said in an e-mail. “If you believe they have something that will work, you can make good money.” At the $14 midpoint price of its original 7 million share offering, AVEO estimated the deal would give the company a value of 5.07 times its tangible net assets , a measure of shareholder equity that excludes assets that can’t be sold in liquidation. That’s a 23 percent premium to the median for 268 biomedical and gene companies, Bloomberg data show. ‘Claim to Fame’ AVEO’s tivozanib is known as a VEGF receptor inhibitor, a class of medicines that prevent the production of new blood vessels so tumors don’t grow. The company’s drug selectively blocks all three known VEGF receptors, according to Arie Belldegrun , the director of the Institute of Urologic Oncology at the University of California, Los Angeles, and a researcher at UCLA’s Jonsson Comprehensive Cancer Center. “That’s their claim to fame and why some believe it will work extremely well in kidney cancer specifically,” Belldegrun said. “But in the past three or four years, there have been about five drugs already approved for metastatic kidney cancer. It makes the space very crowded.” New York-based Pfizer Inc.’s Sutent, which generated $964 million in revenue last year, is the most widely used “targeted” medicine for advanced kidney cancer, he said. To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net ; Craig Trudell in New York at ctrudell1@bloomberg.net .

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Stocks Rise, Led by Emerging Market Banks, Miners; Gold Gains, Yen Weakens

March 12, 2010

By Daniel Tilles and Mark Gilbert March 12 (Bloomberg) — Stocks rose as commodity companies and banks drove the MSCI Emerging Markets Index to its fifth week of gains. Gold led commodities higher, while the yen weakened. The emerging-markets gauge rose 0.4 percent at 10:50 a.m. in London, heading for its longest winning streak since May. Futures on the S&P 500 added 0.2 percent, after the benchmark index for U.S. equities yesterday hit a 17-month high, while the MSCI World Index climbed 0.6 percent. The yen fell against 11 of its 16 most-traded counterparts. Gold rose for a second day and nickel climbed for the first time in five days. Emerging-market and high-yield bond funds each took in more than $1 billion in the week to March 10, according to EPFR Global, a Cambridge, Massachusetts-based research company. European industrial output rose the most in more than two decades in January, signaling the recovery may be strengthening. Japanese Finance Minister Naoto Kan said intervention is an “option” when “markets move too abruptly.” “This is a continuation of the improvement in risk appetite,” said Henrik Degrer , a fund manager at Svenska Handelsbanken in Stockholm, which oversees $36 billion. “The Greek issue seems to be contained, so now we can shift again to the macro-economic data, which is looking fairly good.” Sasol, Cnooc South Africa’s Sasol Ltd. and Cnooc Ltd. of China climbed, driving the MSCI emerging index higher. The Micex index in Russia, the world’s largest energy supplier, advanced 0.9 percent for the first gain in four days. The ruble strengthened 0.6 percent against the dollar, heading for its biggest weekly rise this year. The MSCI World Index of 23 developed nations’ stocks rose 0.3 percent, while the Stoxx Europe 600 Index advanced 0.3 percent. Volkswagen AG, Europe’s biggest carmaker, climbed 2.7 percent in Frankfurt on speculation yesterday’s announcement of a convertible-bond sale reduces the likelihood of a rights offer. The MSCI Asia Pacific Index advanced 0.4 percent as Japan’s Nikkei 225 climbed 0.8 percent. Nissan Motor Co. , which gets about 77 percent of its revenue outside Japan, increased 2.4 percent. U.S. futures gained before a Commerce Department report at 8:30 a.m. in Washington that may show retail sales fell in February as blizzards kept Americans away from auto dealers and limited shopping at malls. Purchases dropped 0.2 percent after rising 0.5 percent in January, according to the median estimate of 77 economists surveyed by Bloomberg News. Confidence, Inventories A report from Reuters/University of Michigan, due at 9:55 a.m., may show the group’s preliminary consumer sentiment index for March rose to 74 from 73.6 last month. A Commerce Department report at 10 a.m. may show business inventories increased 0.1 percent in January. The yen weakened to 124.18 per euro, from 123.82. The pound strengthened 0.5 percent to $1.5139 after U.K. house prices increased in February at the fastest pace in more than seven years. The Swiss franc strengthened to 1.4589 per euro, from 1.4617 yesterday, even after the central bank said yesterday it would act to stem “an excessive appreciation” against the euro. The Dollar Index declined 0.5 percent to 79.922, paring its gain for the year to 2.7 percent. “The Bank of Japan is sensitive to the dangers of deflation, after the yen appreciated in the current cycle, and is looking at intervention, along with the Swiss National Bank,” said Henrik Gullberg , a currency strategist at Deutsche Bank AG in London. Gold, Oil Gold for immediate delivery gained 0.7 percent to $1,116.90 an ounce in London and silver added 0.7 percent to $17.295 an ounce. Nickel for delivery in three months advanced 1.6 percent to $21,625 a metric ton, taking its gain this year to 17 percent, the most of any of the main metals traded on the London Metal Exchange. Crude oil rose 0.3 percent to $82.35 a barrel in New York, before a meeting of the Organization of Petroleum Exporting Countries next week. The yield on the 10-year Greek bond, the country’s new benchmark, fell 1 basis point to 6.34 percent, while the two- year note yield advanced 10 basis points to 5.12 percent. The yield premium investors demand to hold the 10-year security over German bunds declined 4 basis points to 311 basis points. The cost of protecting against a default on Greek government bonds rose, with credit-default swaps climbing 5 basis points to 307, according to CMA DataVision prices. To contact the reporter for this story: Daniel Tilles in London at dtilles@bloomberg.net

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Company Bonds Rally Most in Two Months on Greece, ECB Rate: Credit Markets

March 5, 2010

By Bryan Keogh March 5 (Bloomberg) — Corporate bonds are rallying the most since the beginning of the year as Greece successfully raised 5 billion euros ($6.8 billion) in a sale of 10-year bonds and European policy makers pledged to keep interest rates low. The extra yield investors demand to hold investment-grade bonds instead of government debt narrowed 3 basis points this week to a one-month low of 165, heading for the biggest decline since the period ended Jan. 8, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. On Feb. 17, spreads were 171 basis points. The Greek sale was a test of Prime Minister George Papandreou ’s austerity measures designed to tame Europe largest budget deficit, and the bonds rose in the first day of trading. European Central Bank President Jean-Claude Trichet kept the region’s key interest rate unchanged yesterday and extended some economic stimulus measures to cement the recovery. “Low rates and ample liquidity are clearly supportive for corporate credits and risky assets in general,” said Tim Brunne , a Munich-based credit strategist at UniCredit SpA. “As long as the interest-rate curve is very low, at the short end in particular, holding cash is a prohibitive strategy.” Elsewhere in credit markets, HSBC Holdings Plc raised A$1.5 billion ($1.35 billion) in its first sale of Kangaroo notes, and Teco Energy Inc. , the parent of the electricity provider serving west-central Florida, led issuers selling the most utility debt in six weeks. Kangaroo Notes HSBC, Europe’s biggest bank, sold five-year local-currency notes in Australia priced to yield 1.25 percentage point more than benchmark swap rates, it said in an e-mailed statement. JPMorgan Chase & Co. raised A$1 billion at a 1.3 percentage- point spread yesterday in Wall Street’s first Kangaroo sale since Lehman Brothers Holdings Inc. collapsed in September 2008. “There’s more risk appetite now that concerns about Greece have abated somewhat, and that is helping Asia,” said Krishna Hegde , a credit strategist at Barclays Capital in Singapore. Investors “are taking down their hedges given the improved risk backdrop,” he said. The Markit iTraxx index of credit-default swaps on 50 investment-grade Asian borrowers outside Japan fell 4.5 basis points to 102 basis points in Hong Kong today, the lowest since Jan. 25, according to Citigroup Inc. In London, the Markit iTraxx Europe index of swaps on 125 companies with investment- grade ratings fell 1.5 basis points to 79.5, near the lowest level since Jan. 26, according to JPMorgan prices. U.S. Bond Risk The Markit CDX North America Investment-Grade Index Series 13, which is linked to credit-default swaps on 125 companies, increased 0.25 basis point to a mid-price of 88.75 basis points yesterday, according to Barclays Capital. Default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 a year on a contract protecting against default on $10 million of debt for five years. “This is a reflection of improving credit conditions and investors’ improving confidence,” said Tom Irving , head of Asian syndicate at TD Securities Inc., the top underwriter of Kangaroo bond sales last year. Investors plowed a record $2.6 billion into global bond funds in the week ended March 3, moving out of money markets to seek higher returns because of the threat of quickening inflation, EPFR Global said in a report published today. Bond Funds U.S. bond funds drew in $2 billion, attracting cash for a 61st straight week, the report showed. Money market funds lost $30 billion of assets, the Cambridge, Massachusetts-based data company said. Companies globally issued $38.7 billion of bonds this week, compared with $50.2 billion last week, according to data compiled by Bloomberg. Year-to-date, sales totaled $490.2 billion, down 34 percent from the $745 billion raised through March 5, 2009. Teco, which sold $550 million of six- and 10-year notes through its Teco Finance Inc. unit, has the largest of five utility offerings totaling about $1.62 billion this week, according to data compiled by Bloomberg. Newark, New Jersey- based Public Service Electric & Gas Co. , the state’s largest utility, sold $300 million of 30-year bonds on March 2. Investors are buying utility bonds amid mixed signals on the strength of the U.S. economic recovery. While initial jobless claims fell last week, pointing to a strengthening labor market, pending sales of existing homes dropped in January. Debt from electric and gas companies represents a middle ground for investors looking to pick up yield while curbing risk, said Bill Larkin , a portfolio manager at Cabot Money Management. ‘Perfect Model’ “The thing that’s attractive about utilities is that it’s regulated, in place,” said Larkin, who helps oversee $500 million for the firm in Salem, Massachusetts. “It’s the perfect business model for fixed-income investing.” Teco’s offering was its first in almost two years, Bloomberg data show. The utility sold $250 million of six-year, 4 percent notes at 180 basis points more than similar-maturity Treasuries, and $300 million of 10-year, 5.15 percent bonds at a 160 basis-point spread. A basis point is 0.01 percentage point. This week’s utility offerings are the most since the period ended Jan. 22, when Electricite de France led $2.7 billion of issuance, Bloomberg data show. U.S. utility bonds returned 0.21 percent in February, lagging the 0.38 return on all investment-grade debt, according to Bank of America Merrill Lynch data. In January, each returned about 2 percent. Utility debt has lost 0.14 percent this month. Europe Rally Bonds in Europe led the company-debt rally, with spreads narrowing 5 basis points to a one-month low of 157 basis points yesterday, according to Bank of America’s EMU Corporate Index. Spreads are heading for the biggest weekly drop since the period ended Jan. 8, when they narrowed 14 basis points. The bonds rose even as investors anticipated a worsening in U.S. unemployment. Payrolls in the largest economy dropped by 68,000 workers last month after falling by 20,000 in January, according to the median estimate of 82 economists surveyed by Bloomberg News before a government report today. The unemployment rate, which may be less affected by the weather, probably rose to 9.8 percent from 9.7 percent the previous month. “The market is much healthier, and even if U.S. payrolls data aren’t that good, it’ll be disregarded because of the snow,” which may mean economic indicators are worse than they should be, said Mehernosh Engineer, a strategist at BNP Paribas SA in London. Greek Bond Sale Greece’s bond sale was “seemingly a great success” after the European Union provided implicit support and the new budget austerity measures “paved the way for Greece to fund a small part of their 2010 refinancing needs,” according to Jim Reid , head of fundamental strategy at Deutsche Bank AG in London. The new Greek bonds rose to about 99.4 cents on the euro to yield 6.32 percent, compared with an issue price of 98.94 cents yesterday, according to EFG Eurobank Trading prices on Bloomberg. according to EFG Eurobank Trading prices on Bloomberg. The ECB yesterday phased out some of the emergency tools used to fight the financial crisis. The bank will tighten the terms of its three-month market operations in April by returning to the pre-crisis practice of offering the funds at a variable rate. In its main seven-day operations, it will keep lending commercial banks as much money as they need at its benchmark rate for at least seven months. The ECB left that rate at a record low of 1 percent yesterday. To contact the reporter on this story: Bryan Keogh in London at bkeogh4@bloomberg.net

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Stocks Climb, Yen Drops, Default Costs Ease on U.S. Jobless Claims, Japan

March 4, 2010

By James Poole and Shani Raja March 5 (Bloomberg) — Asia stocks advanced, heading for their second weekly gain, and the yen dropped as U.S. jobless claims fell, Greece debt concerns eased and speculation grew the Bank of Japan will take further steps to ease credit. The MSCI Asia Pacific Index added 0.9 percent to 120.75 at 12 p.m. in Tokyo and the yen fell against 15 of its 16 most- traded counterparts. The cost of protecting Asia-Pacific bonds from default tumbled to the lowest level in at least five weeks and shipping rates for commodities jumped the most since July. Investor confidence increased after American jobless claims dropped from a three-month high , easing concern today’s employment report will show the rebound is slowing. The Bank of Japan may discuss moves to loosen monetary policy, the Nikkei newspaper said, and investors bid for more than three times the 5 billion euros of 10-year bonds Greece sought to sell yesterday. “There’s been quite an abundance of leading indicators pointing to an improving employment backdrop,” said Nader Naeimi, an investment strategist in Sydney at AMP Capital Investors, which oversees about $90 billion globally. “Jobs are key to the sustainability of the recovery.” More than five shares climbed for each one that fell on the MSCI Asia Pacific gauge which is up 2.2 percent this week. Japan’s Nikkei 225 Stock Average gained 2.1 percent today, while Australia’s S&P/ASX 200 Index added 0.4 percent and Standard & Poor’s 500 stock futures rose 0.1 percent after U.S. jobless applications fell by 29,000 to 469,000 in the week ended Feb. 27. Billabong, Sony Billabong International Ltd., a surfwear maker that gets 44 percent of its revenue from the Americas, added 3.2 percent in Sydney. Sony Corp. , maker of the PlayStation 3 game machine, was up 2.7 percent, while STX Pan Ocean Co. and Korea Line Corp., Korea’s biggest bulk-shipping lines, jumped as much as 5 percent after the Baltic Dry Index soared 7.2 percent yesterday. The yen dropped against higher-yielding currencies on speculation the Bank of Japan will take more credit-easing measures. The yen fetched 89.20 per dollar in Tokyo from 89.02 in New York yesterday when it touched 88.14, the strongest level since Dec. 10. The euro stood at $1.3594 from $1.3581 in New York and bought 121.28 yen compared with 120.91 in New York. “Given the fact that the BOJ is already running far behind other central banks in exit strategies and prospects that interest rates here will remain low, the yen-carry trade may become popular again,” said Soichiro Mori , a Tokyo-based strategist at FXOnline Japan Co., a margin-trading company. Bank of Japan The Bank of Japan may discuss ways to lower short-term rates at its two-day meeting starting March 16, Nikkei said. A decision on specific measures is likely to take place in April, when two board meetings are scheduled, the newspaper said. The London interbank offered rate, or Libor, for three- month yen loans fell to 0.251 percent yesterday, compared with 0.252 percent for dollar loans, according to data from the British Bankers’ Association. South Korea’s won strengthened 0.2 percent to 1,142.8 per dollar, bringing its advance this week to 1.5 percent, as investors bought emerging-market assets on signs investors are gaining confidence in Greece’s plan to cut its deficit. The Indonesian rupiah climbed 0.2 percent to 9,270 per dollar. Greece yesterday sold 10-year bonds with investors bidding for more than three times the 5 billion euros ($6.8 billion) it sought to raise. The won also gained on speculation the yuan will resume appreciation this year. Yuan Options “The Greece stuff has led to stock markets going up and sentiment improving,” said Tae-Shin Park, a currency and bond trader at Societe Generale SA in Seoul. “Positions for yuan appreciation are quite heavy in China, so I think once more risk appetite comes in, emerging markets will outperform.” Options traders are more bullish on the yuan than any other currency. The premium charged for the right to buy yuan in three months over contracts to sell has more than tripled this year to 2 percentage points, the most since China last ended a fixed- exchange rate in July 2005, so-called risk-reversal rates show. Premier Wen Jiabao told lawmakers the government will promote the yuan’s usage abroad and aims to manage inflation expectations, goals that may be aided by a stronger currency. He also said China will keep the yuan “basically stable.” The cost of protecting Asia-Pacific bonds from default fell to the lowest level in at least five weeks, according to traders of credit-default swaps. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 4.5 basis points to 102 basis points as of 8:20 a.m. in Hong Kong, according to Citigroup Inc. and CMA DataVision prices. Bond Funds Global bond funds received $2.6 billion in the week to March 3, the biggest inflows since at least 2000, EPFR Global , a Cambridge, Massachusetts-based research company, said in an e- mailed statement. U.S. bond funds absorbed $2 billion in their 61st week of inflows. Emerging market bond funds received more money and have taken more than $4 billion this year, EPFR said. Crude oil advanced in New York, and was poised to increase for the third time in four weeks, on optimism fuel demand will grow amid improved prospects for an economic recovery in the U.S., the biggest consumer. Oil gained 0.5 percent to $80.62 a barrel on a report that the Organization of Petroleum Exporting Countries will cut shipments by 2.3 percent in the month ending March 20. Copper for three-month delivery added 0.5 percent to $7,437 a metric ton. To contact the reporters for this story: James Poole in Singapore jpoole4@bloomberg.net ; Shani Raja in Sydney at sraja4@bloomberg.net .

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JV To Buy $668M Science Campus in Cambridge, MA

February 22, 2010

Forest City Enterprises formed a $668 million partnership with Health Care REIT Inc., which included HCN buying a 49 percent interest in FCE’s seven-building portfolio at University Park at MIT, a 1.2-million-square-foot life sciences campus in Cambridge…

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Pharma completes earnings Cambridge Labs’ acquisition

February 22, 2010

Pharma completes earnings Cambridge Labs’ acquisition

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Gridlock Is Good for Bernanke Dollar in Fight Over Audit of Rate Decisions

February 22, 2010

By Scott Lanman and Mike Dorning Feb. 22 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke may be in favor of a do-nothing Congress when it comes to his fight over audits of monetary policy. Opposition in the Senate to a measure that would allow the Government Accountability Office to examine Fed interest-rate decisions is likely to doom the populist cause after it passed in the House Dec. 11, according to Gregory R. Valliere , a chief strategist at Potomac Research Group in Washington. Its defeat would remove a threat that might weaken the dollar while giving Bernanke, who testifies before Congress this week, a freer hand to raise rates as he seeks to unwind a $1 trillion expansion of credit, investors said. “This may be one of the areas where gridlock is a positive for the markets,” said Valliere, who has covered federal issues for investors for more than 30 years. The audit proposal is “very unlikely” to pass this year, he said. Passage during a period of continuing record budget deficits “would be very detrimental to the dollar and would steepen the yield curve, widen credit spreads and cause yields to shift higher,” said Anthony Crescenzi , market strategist and portfolio manager at Pacific Investment Management Co. in Newport Beach, California, which manages the world’s largest bond fund. The U.S. Dollar Index , a gauge of the greenback against six major currencies, has gained about 3.5 percent this year, in part because investors expect the Fed to keep winding down stimulus and eventually raise interest rates. Emergency Loans The dollar strengthened last week after the Fed increased the rate on emergency loans to banks by a quarter-point to 0.75 percent, the first such move in the discount rate since June 2006, even as the central bank said the change didn’t signal a shift in monetary policy. Traders expect the benchmark federal funds rate to rise at least a quarter-point to 0.5 percent by year-end, based on futures on the Chicago Board of Trade. Economists predict the rate, which banks charge each other on overnight loans, will increase to 2 percent by September 2011, even as the unemployment rate averages 9.1 percent next year, according to the median estimates in a Bloomberg News survey conducted Feb. 4-9. Bernanke, 56, won a 70-30 Senate vote last month for a second four-year term, the most opposition since the chamber started approving Fed chiefs in 1978. He will visit Capitol Hill Feb. 24-25 for semiannual hearings on monetary policy and the economy. ‘Maximum Transparency’ “We will continue to work with the Congress to ensure maximum transparency of America’s central bank, without compromising our ability to conduct policy in the public interest,” Bernanke said Feb. 3 in comments to Fed employees after being ceremonially sworn in for the new term. The audit measure would overturn a provision in a 1978 law that blocks the GAO from examining the Fed’s monetary policy. “To our knowledge, there are no other statutes with such express prohibitions,” said Chuck Young, a spokesman for the office in Washington. Supporters of the provision prevailed in the House, attaching it — over Bernanke’s objections — as an amendment to a broad financial-service regulatory overhaul passed in December. The bill contains passages aimed at assuaging concerns it would interfere with monetary policy, such as a ban on examining unreleased minutes or transcripts of Fed meetings. Similar proposals haven’t garnered enough support so far to pass in the upper chamber and are opposed by Senate Banking Committee Chairman Christopher Dodd , a Connecticut Democrat, who is managing the Senate’s version of the financial legislation and will release a draft bill as soon as this week. ‘Very Concerned’ Representative Ron Paul , the Texas Republican who introduced the measure and helped recruit 317 House co-sponsors, said in an interview that he’s “very concerned” about Senate prospects for the provision. Even if it isn’t included in the Senate’s version of the legislation, Paul, author of the 2009 book “End the Fed,” said he would press for it when House and Senate negotiators meet to reconcile differences between each chamber’s bills and draft a final version. The matter might not be resolved this year and could be resurrected after November’s midterm elections for roughly one- third of the Senate and the entire House. Dodd, 65, and other opponents of the audit measure including New Hampshire Republican Judd Gregg , 63, are retiring from the Senate, leaving a potential opening in 2011 for its main backers — Vermont Independent Bernard Sanders , 68, and South Carolina Republican Jim DeMint , 58 — to pick up more support. More Scrutiny Ultimately the Fed is likely to face more scrutiny because of voter anger and congressional concern about a lack of transparency in its bank bailouts and its use of taxpayer funds to aid financial firms such as New York-based American International Group Inc. At issue is how intrusive and intense the oversight will be. “Historically they’ve maintained their secrecy, and that’s true of most central banks in the world,” said University of Texas Professor Robert D. Auerbach in Austin, a former congressional economist and author of the 2008 book “Deception and Abuse at the Fed.” “But we’re in a democracy, a great democracy. We shouldn’t have that here.” The debate over Fed audits goes back to the 1950s and Texas Representative Wright Patman , a populist Democrat who died in 1976 and was historically one of the central bank’s biggest opponents. “Members of Congress have a right to inquire what they have to hide in refusing to permit audits,” Patman, who fought to open the Fed to GAO reviews, said in a 1956 letter published in the Washington Post when Bernanke was two years old. Still Needed The exemption is still needed today, said retired Ohio Representative Thomas Ashley , the Democratic author of the monetary-policy measure in the 1978 law that allowed audits of other Fed operations. “I don’t think the Fed does right in every instance at all, not for a minute,” Ashley, now 87 and living in Michigan, said in an interview. “What I know to an absolute certainty is that it would be a disaster to entrust any of the real operations of the Federal Reserve with the Congress of the United States.” Supporters of audits disagree. “The public is very concerned about the Fed and about these sorts of decisions from the Fed that have been cloaked in ultra-secrecy,” Senator David Vitter , a Louisiana Republican, said in an interview, adding that he’s “open to any suggestions” about how to avoid politicizing the central bank. Identify Borrowers Sanders, a self-described socialist, won a 59-39 vote in April on a nonbinding resolution urging the Fed to identify borrowers, so “we have a very good chance of getting a strong audit-the-Fed amendment through the Senate,” said Warren Gunnels , a Sanders senior policy adviser. Sanders has 32 co-sponsors for a Senate version of Paul’s audit provision, short of the 60 votes it will probably need to overcome procedural delays. “I’ll do whatever I can to stop it,” Gregg said in an interview, calling the measure “pandering populism, which is basically going to significantly undermine our capacity as a nation to manage our money supply.” Attaching the provision as an amendment to the financial- services regulatory overhaul is the only hope this year for the measure, which depends on the fate of the broader bill, said Steve Elmendorf , a Washington lobbyist and senior adviser to then-House Democratic Leader Dick Gephardt . ‘Have a Fight’ “It’s not clear to me that both parties have resolved the question: Do they want to get something done or have a fight” over the bill, Elmendorf said in an interview. The possibility of more GAO oversight is currently a “speculative discussion” that Mark MacQueen , partner and portfolio manager at Austin, Texas-based Sage Advisory Services, said he isn’t factoring into investment decisions. Were Congress to approve the measure, “fears of an audit” may influence policy makers’ decisions and would be “bearish for bonds in the long run,” said MacQueen, whose firm oversees $8.5 billion. Central bankers should have the “backbone” to withstand monetary-policy audits because of their 14-year terms, said Auerbach, 81, the Fed critic. While President Barack Obama ’s administration opposes the audit measure, Lawrence H. Summers , the president’s chief economic adviser, declined in a Feb. 9 interview with Bloomberg Television to say whether Obama would veto legislation containing the provision. ‘Avoid Inflation’ “We support what’s necessary for the Fed to be transparent,” Summers said. At the same time, “a great deal of research demonstrates that an independent Federal Reserve is really crucial, not just if we’re to avoid inflation but also for it to keep interest rates down over time and to maximize growth in employment.” The 55-year-old former Treasury secretary wrote some of that research. In a 1993 paper, Summers and co-author Alberto Alesina of Harvard University in Cambridge, Massachusetts, said greater central-bank independence is associated with lower inflation, yet has “no measurable impact on real economic performance.” The audit proposal is the “wrong policy for our central bank” and could result in a “possible rapid decline” in the dollar, Indiana Senator Evan Bayh , 54, said in a Feb. 19 statement to Bloomberg News. The Democrat announced last week he won’t seek re-election this year because there is “too much partisanship and not enough progress” in Congress. “I do believe that a level of increased transparency at the Fed is necessary, and there may be some middle ground that can be achieved to meet that objective, and hopefully that can be worked out for possible inclusion in the financial-regulatory reform bill,” Bayh said. To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net Mike Dorning in Washington at mdorning@bloomberg.net

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$10.9 Million HUD Lean Loan Funds Purchase of Manor Court of Peoria in Illinois, Cambridge Realty Capital Reports

February 12, 2010

closely resembles the timing for conventional loans, Davis said. Privately owned since its founding in 1983 as a real estate investment banker specializing in commercial real estate properties, Cambridge today has three distinctive business units:

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Emerging-Market Stock Funds Post Biggest Outflows in 19 Months on Greece

February 12, 2010

By Bloomberg News Feb. 12 (Bloomberg) — Investors pulled the most money from emerging-market equity funds in 19 months as Greece’s debt crisis escalated and the Federal Reserve laid the groundwork for exiting its record credit expansion. Outflows from emerging-market equity funds reached $2.9 billion in the week to Feb. 10, the highest since the period ended July 9, 2008, according to Cambridge, Massachusetts-based research firm EPFR Global in an e-mailed release. “Investors fretted that Greece’s sovereign debt woes could drive up yields, and hence credit costs, worldwide,” EPFR said. “Further talk by U.S. Federal Reserve officials about an ‘exit strategy’ also weighed on sentiment.” European leaders yesterday ordered Greece to get the bloc’s highest budget deficit under control and promised “determined” action to staunch the worst crisis in the euro currency’s 11- year history. The MSCI Emerging Markets Index has declined 6.5 percent this year amid concern that Greece, Spain and Portugal may struggle to repay lenders as their budget gaps widen. That compares with the 4.9 percent drop in the MSCI World Index, which tracks developed markets. The developing-nation gauge surged a record 75 percent last year, more than triple the 23 percent gain by the Standard & Poor’s 500 Index. Brazil, Russia, India and China led gains among the major global markets in 2009. Less Profitable While emerging-market stocks outpaced advanced-nation equities by about 10 percentage points a year during the past decade, returns since 1975 show they were a less-profitable investment, according to a report by by Elroy Dimson , Paul Marsh and Mike Staunton of London Business School. Emerging-market stocks will probably only outperform advanced markets by about 1.5 percent a year over the “long run,” the authors wrote. Federal Reserve Chairman Ben S. Bernanke said in congressional testimony Feb. 10 that a potential increase in the Fed’s discount rate would be part of the “normalization” of lending “before long” and wouldn’t signal a change in the outlook for monetary policy. U.S. policy makers are trying to determine when to tighten credit with unemployment at 9.7 percent and the world’s largest economy forecast to grow at the fastest pace since 2005. High-yield bond funds posted outflows of more than $1 billion for their worst week since early in the third quarter of 2008, EPFR said. Japanese equity funds had net inflows for a seventh week, the longest since July 2008. Asia ex-Japan Equity funds had their worst week since August amid concerns over a possible trade spat after the U.S. proposed to sell arms to Taiwan, EFPR said. China halted planned military exchanges with the U.S. and said it will punish companies involved in a Pentagon plan to sell weapons worth $6.4 billion to Taiwan. To contact the Bloomberg News staff on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

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Asian Stocks Rise as Growth Optimism Overcomes Greece Concerns; Euro Drops

February 11, 2010

By Will McSheehy Feb. 12 (Bloomberg) — Stocks in Asia rose, with the benchmark index set for its longest winning streak in two months, on optimism the global economic recovery will be sustained. Concern about Greek finances drove down the euro for a third day. The MSCI Asia Pacific Index climbed 0.6 percent to 116.61 as of 12:49 p.m. in Tokyo, gaining for a fourth day. The euro weakened for a third day against the dollar and the yen. Futures on the Standard & Poor’s 500 Index dropped 0.2 percent. The cost of protecting Asian bonds from default declined. U.S. stocks rallied and commodities gained yesterday after European Union leaders said they will support Greece, without offering a detailed plan. Lower-than-estimated U.S. jobless claims and a pledge by China’s central bank to withdraw stimulus polices gradually helped allay concern the global economic recovery will falter. “The EU will most likely prevent Greece from abruptly defaulting on its debt, which would otherwise have adverse effects among the region’s other countries such as Portugal,” said Akio Yoshino , the chief economist in Tokyo at Societe Generale Asset Management (Japan) Inc., which manages the equivalent of $17 billion. “Companies have done terrifically at slashing costs. Once sales rise even a bit it will result in a terrific earnings recovery.” Japan’s Nikkei 225 Stock Average advanced 0.8 percent, while Hong Kong’s Hang Seng Index rose 0.3 percent. China’s Shanghai Composite Index rose 0.3 percent, advancing for a fourth day, as raw-material producers climbed on higher commodity prices. Material Stocks Mitsubishi Corp ., a Japanese trading company that gets 39 percent of its sales from commodities, climbed 2.9 percent in Tokyo. Sony Corp., which derives 23 percent of its sales from the U.S., added 1.7 percent. Asahi Glass Co. climbed 7 percent after forecasting profit to increase. Jiangxi Copper Co., China’s biggest producer of the metal, increased 2.3 percent as copper prices gained the most since August. Investors pulled the most money from emerging-market equity funds in 19 months as Greece’s debt crisis escalated and the Federal Reserve laid the groundwork for exiting its record credit expansion. Outflows from emerging-market equity funds reached $2.9 billion in the week to Feb. 10, the highest since the period ended July 9, 2008, according to Cambridge, Massachusetts-based research firm EPFR Global. “Investors fretted that Greece’s sovereign debt woes could drive up yields, and hence credit costs, worldwide,” EPFR said in a statement. Euro, Yen The euro approached a one-week low against the dollar, falling to as low as $1.3654 and traded at $1.3667 as of 12:43 p.m. in Tokyo. It declined to 122.61 yen as of 12:55 p.m. in Tokyo, from 122.90 in New York yesterday. The common currency has fallen 4.5 percent against the dollar this year on concern that nations with the biggest debt burdens will struggle to meet their obligations. Greece’s deficit is 12.7 percent of gross domestic product, more than four times the EU limit. Statements by European leaders left open how the EU will respond to a fresh wave of speculative attacks against Greece or countries such as Spain and Portugal, which are also struggling to cut budget deficits. An agreement brokered by German Chancellor Angela Merkel , Greek Prime Minister George Papandreou and European Central Bank President Jean-Claude Trichet called for closer monitoring of the Greek economy. The dollar strengthened versus 12 of 16 major counterparts on prospects U.S. reports today will add to signs the world’s largest economy is gaining momentum, providing the Federal Reserve with more evidence to increase borrowing costs. Retail Sales Sales at U.S. retailers rose 0.3 percent in January, after a 0.3 percent drop the previous month, according to a Bloomberg News survey of economists before the Commerce Department’s report today. The Reuters/University of Michigan final index of U.S. consumer sentiment, also scheduled for release today, increased to 75 this month from 74.4 in January, a separate Bloomberg survey showed. New Zealand’s currency declined 0.3 percent to 69.67 U.S. cents. Retail sales for December were unchanged from the previous month, Statistics New Zealand said today, compared with economists’ forecasts for a 0.6 percent gain. The Markit iTraxx Asia index of credit-default swaps on 50 investment-grade borrowers outside Japan fell 3 basis points to 113 basis points as of 8:16 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show. Oil fell for the first day in five ahead of the release of a U.S. Energy Department report, which may show an increase in crude stockpiles in the world’s largest energy consumer. Crude oil for March delivery dropped as much as 43 cents, or 0.6 percent, to $74.85 a barrel in electronic trading on the New York Mercantile Exchange. Copper for three-month delivery dropped 0.4 percent to $6,915 a metric ton, trimming its weekly gain to 10 percent, the most in a year. Aluminum rose 1.1 percent to $2,078 a ton and zinc gained 0.7 percent to $2,195. To contact the reporter for this story: Will McSheehy in Singapore at wmcsheehy@bloomberg.net

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Thain’s CIT Resurrection May Provide Second Chance After Exit From Merrill

February 10, 2010

By Christine Harper and Linda Shen Feb. 10 (Bloomberg) — John Thain and CIT Group Inc. are giving each other something that ousted chief executive officers and bankrupt lenders usually don’t get: a second chance. Thain’s record of success at Goldman Sachs Group Inc. and NYSE Euronext was marred by his exit from Merrill Lynch & Co. last year, when he was pilloried for $27.6 billion of losses, $3.6 billion of bonuses and $1.2 million of decorating expenses for his office. CIT, once the biggest independent commercial lender in the U.S., sought court protection last year, a move that’s usually a death sentence for a financial firm. CIT, which survived its reorganization, and Thain, its new CEO, are counting on each other to burnish their reputations. John Reed , the former Citigroup Inc. co-CEO who recruited Thain in 2003 from Goldman Sachs to the New York Stock Exchange, says it’s a good match. “He’s learned a lot,” said Reed, who was the Big Board’s interim chairman. At the time, Reed said he thought Thain, a fellow graduate of the Massachusetts Institute of Technology, needed to broaden his horizons after 24 years at Goldman Sachs. “He is today a different person than when he came over and first joined me, and a more capable person. He’s more mature.” The CIT job gives Thain, 54, a chance to fix a public company whose business — which includes lending to more than 3,000 small- and mid-sized businesses — is tied to the heart of the U.S. economy. To rescue the company, Thain must find lower- cost sources of funding, lift restrictions on its banking unit and win over regulators wary after the bankruptcy wiped out a $2.3 billion Treasury Department stake. ‘Big Difference’ “It’s clearly an opportunity to make a big difference and you can see why John would find it attractive,” said Paul Deighton , a former Goldman Sachs colleague who is now CEO of London 2012 Ltd., the organization that’s running the London 2012 Olympics. Thain had previously arrived at new jobs with a track record of success. He became CEO of the NYSE after helping to build Goldman Sachs into the world’s leading investment bank. When he took the helm of Merrill Lynch four years later, Thain had modernized the exchange, doing deals that transformed it into an electronic, international and publicly traded company. As the financial crisis deepened in 2008, Thain sold Merrill Lynch over a weekend, only to be fired by his new boss and criticized for the firm’s losses, bonus payments and office redecoration. Erasing the ‘Blot’ “He wants to find a way to erase the blot on his career from the ending of the Merrill Lynch saga, and what better way to do that than to take a very visible public company and turn it around,” said Douglas J. Elliott , a former JPMorgan Chase & Co. investment banker who is now a fellow in economic studies at the Brookings Institution in Washington. “If he does pull it off, he’s a hero.” Thain’s arrival at CIT was well-timed. On Feb. 8, his first day on the job, the company officially became free of limitations on compensation and other activities imposed on companies that received money from the Troubled Asset Relief Program, or TARP. “Contingent value rights” that the U.S. Treasury received in CIT’s bankruptcy were “terminated and cease to exist,” according to a CIT regulatory filing. “While the U.S. Treasury no longer has an investment in CIT, we are generally endeavoring to apply Treasury governance best practices,” CIT spokesman Curt Ritter said in an e-mailed statement Feb. 8. MIT, Harvard Thain, the son of a doctor, grew up in Antioch, Illinois, population 13,400, a town 60 miles (97 kilometers) from Chicago. He didn’t visit the East Coast of the U.S. until he arrived at MIT in Cambridge, Massachusetts, to study electrical engineering. From MIT he went straight to Harvard Business School and then directly to Goldman Sachs, where he worked in investment banking and traded mortgage bonds. In 1993, Thain moved into the administrative side of the company — known as operations, technology and finance — or by its nickname “The Federation” after the fictional organization in Star Trek, according to a Goldman Sachs executive who worked with Thain and spoke on condition of anonymity. Thain became chief financial officer and eventually ascended to president and chief operating officer under then-CEO Henry Paulson . Several former colleagues from Goldman Sachs credit Thain with leading the effort to build the firm’s risk-management processes and infrastructure over the next decade, saying he excelled at understanding the plumbing of the organization and recruiting talented executives to join a department that is dismissed at many Wall Street firms as “the back office.” ‘Real Contribution’ “The very fact that you had one of the best people in the firm running it, which made it a breeding ground for other good people, you could see this was a place that you could make a real contribution,” London 2012’s Deighton said of his decision to move from investment banking into operations under Thain in 1993. Bradley Abelow , who worked under Thain in the operations business for about a decade, said Thain was crucial to building a risk-management department at Goldman Sachs that could act as a check on the firm’s traders and bankers. He said Thain was also adept at collecting information from a variety of sources so that he didn’t rely too heavily on his deputies. “I always wanted to surprise him, to tell him something he didn’t know — I viewed that as an extreme challenge,” said Abelow, a founding partner of New York-based private-equity firm NewWorld Capital Group who previously served as chief of staff to Jon Corzine , the former governor of New Jersey. “I don’t know that I ever succeeded in that.” Sept. 11 Thain distinguished himself on Sept. 11, 2001, when terrorists struck the World Trade Center a half mile away, former colleagues say. Thain, who was the highest-ranking executive present at Goldman Sachs’s 85 Broad Street headquarters, turned his office into a crisis control center, established teams to locate Goldman Sachs employees and secured telecommunications for the firm. “He’s just a very level head, very cautious, and has absolutely excellent judgment both on people and situations,” said Deighton. In the crisis that brought down Lehman Brothers Holdings Inc. in September 2008, Thain succeeded in persuading Bank of America Corp. to pay $29 a share for Merrill Lynch during a single weekend, a 70 percent premium to the shares’ closing value the previous Friday. “He basically sold the company for a lot more than it was worth at a time when that was the right thing to have done,” Reed said. Bank of America Merrill Lynch’s losses accelerated after the sale and Ken Lewis , who was then CEO of Bank of America, fired Thain three weeks after the transaction closed. Thain found himself facing accusations that he’d failed to do enough to keep Bank of America apprised of the losses and that he’d accelerated bonus payments to Merrill staff. Information about Thain’s $1.2 million redecoration of his Merrill office, which took place when Thain joined in late 2007, was provided to the press at the same time. In April 2009, Lewis was stripped of his chairman title at Bank of America after investors rebelled against his handling of the Merrill Lynch takeover. He later resigned from the company. Last week, New York Attorney General Andrew Cuomo filed a civil fraud case against Bank of America, Lewis and former Chief Financial Officer Joe Price. The case alleges that they deceived investors and taxpayers in 2008 by not disclosing losses at Merrill Lynch before shareholders voted on the firm’s pending takeover, and used those losses to extract more bailout funds from U.S. regulators. ‘Without Merit’ Bank of America, based in Charlotte, North Carolina, has called the charges “totally without merit” and lawyers for Lewis and Price have denied wrongdoing. Cuomo’s lawsuit said that “from the moment the merger was announced, Merrill was transparent with Bank of America management about the losses Merrill was incurring.” The lawsuit “stands on its own and I’m glad that the truth has come out,” Thain said in an interview on Feb. 7. “I’m focused on CIT and I’m focused on moving forward — that is history to me.” Thain said he’ll start his job by studying CIT’s businesses and determining what kind of funding model can be most successful. Naming new senior managers will be a priority, Thain said. On Feb. 1, CIT Chief Operating Officer Alexander Mason became the fourth executive to announce a departure, saying he would leave on Feb. 26. That came on the heels of CEO Jeffrey Peek’s exit Jan. 15, and after CIT said in December that Chief Financial Officer Joseph Leone would retire in April. Chief Risk Officer Nancy Foster stepped down Dec. 31. Nelson Chai At Merrill, Thain assembled a management team largely by recruiting colleagues from Goldman Sachs and NYSE Euronext. Thain recruited Nelson Chai , chief financial officer at NYSE Euronext, to be CFO at Merrill. He said on Feb. 7 that Chai would probably be a candidate for the CFO position at CIT. Thain will also have to adapt to a very different culture at CIT than he was used to in his Wall Street jobs, said Brookings Institution’s Elliott. “This may be significantly harder for him than even he thinks because he hasn’t really run this type of company before,” Elliott said. “It’s easy to think that because you’re good at finance in general that you’d be good at every single aspect of it. But lending to small businesses is quite a different business.” Factoring Concern Some of CIT’s clients who rely on the company to provide financing that enables them to ship their merchandise to retailers are concerned that Thain doesn’t have enough understanding of that side of the business, known as factoring, said Vano Haroutunian , a partner at law firm Ballon Stoll Bader & Nadler PC in New York, which advises clothing and accessory companies that are customers of CIT’s. “They don’t see the logic of going with someone who’s from investment banking rather than someone who would be a little bit more familiar with asset-based lending and factoring,” Haroutunian said. “The concern is not about him personally, although there is some of that because of his record at Merrill Lynch.” To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net ; Linda Shen in New York at lshen21@bloomberg.net

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Solar Capital Falls After Junk Bond Investor Cuts Price of $93 Million IPO

February 9, 2010

By Michael Tsang Feb. 9 (Bloomberg) — Solar Capital Ltd. , which invests in companies with junk-rated debt, fell in its first day of trading after cutting the price for its $93 million initial public offering by as much as 12 percent. The New York-based firm, run by former Apollo Management LP partner Michael Gross , declined 4.9 percent to $17.59 as of 12:02 p.m. in New York trading. The company sold 5 million shares for $18.50 apiece after asking investors to pay as much as $21 each, a Jan. 27 filing with the Securities and Exchange Commission and Bloomberg data showed. Solar Capital began trading today on the Nasdaq Stock Market under the ticker SLRC. The IPO comes after U.S. companies from Imperial Capital Group Inc. to FriendFinder Networks Inc. postponed or delayed initial sales. The four previous companies that completed deals this year cut them by an average of 23 percent as the Standard & Poor’s 500 Index fell for four straight weeks, the longest decline since July. Solar Capital, backed by former Citadel Investment Group LLC traders at Evanston, Illinois-based Magnetar Capital LLC and Seth Klarman’s Baupost Group LLC in Boston, plans to use the proceeds to make investments, pay operating expenses and repay debt, according to the filing. Solar Capital hired Citigroup Inc. and JPMorgan Chase & Co. of New York to lead its sale. 2010 IPO Slump While Barclays Plc of London estimates that initial U.S. sales will triple to $50 billion this year, Ironwood Pharmaceuticals Inc.’s offering was the only IPO of four scheduled for last week to be completed. The Cambridge, Massachusetts-based drug developer cut its price by 30 percent in the biggest reduction for a U.S. sale this year. Imperial Capital of Los Angeles shelved what would have been the first IPO by a U.S. investment bank since 2007. Boca Raton, Florida-based FriendFinder , the publisher of Penthouse magazine, said it postponed due to “market conditions.” At least three U.S. companies are scheduled to offer stock through IPOs today, according to Bloomberg data. Graham Packaging Co. , 75-percent owned by New York-based Blackstone Group LP, is scheduled to sell as much as $373 million of shares in the first U.S. IPO of 2010 for the world’s largest private-equity firm. Terreno Realty Corp. , the San Francisco-based company formed to buy industrial properties in coastal markets, plans to sell stock after cutting its offering to 8.75 million shares. The fund on Jan. 25 became the first U.S. company to postpone an IPO in 2010 after its lead underwriter, New York based Goldman Sachs Group Inc., couldn’t find enough buyers for 10 million shares at $20 each. The IPO had already been reduced from 15 million shares and pushed back from Jan. 21. To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net .

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`Blind Pools’ Lose Appeal as Ziman, Callahan Plan Real Estate IPO Comeback

February 9, 2010

By Dan Levy and Brian Louis Feb. 9 (Bloomberg) — Richard Ziman and Timothy Callahan want to raise money in the equity market after selling their real estate companies for a combined $12 billion before the property crash. Investors may balk at bankrolling their return. Ziman, former chairman of Arden Realty Inc., and Callahan, who ran Trizec Properties Inc., have each filed to offer shares in so-called blind-pool companies, which seek to raise money before owning any assets. They plan to use proceeds from the deals to acquire discounted office properties , hoping their talent and track records will lure investors. Their timing may be wrong. Recent blind-pool stock sales have been cut in size or canceled, or the shares are treading water, amid a slump in demand for initial public offerings. Meanwhile, real estate owners are trying to hold onto distressed or defaulted properties rather than unload them at fire-sale prices, leaving few buying opportunities. “Blind pools have huge negatives and only make sense if they have the perfect management and the perfect opportunity,” Mike Kirby , chairman of Newport Beach, California-based Green Street Advisors Inc., a research firm focused on real estate investment trusts, said in an interview. Almost $1 billion of commercial real estate-related IPOs registered as blind pools have been withdrawn or postponed in the past year, according to data compiled by Bloomberg. An additional $3.9 billion of deals are in the pipeline. Five of the seven blind pools that raised about $2 billion did so before October, the data show. Terreno Flops Terreno Realty Corp., a San Francisco-based fund formed to buy industrial properties, postponed a $200 million sale Jan. 25 after reducing it by a third, and cut it again yesterday by 13 percent. The company is set to price the offering today, according to Bloomberg data. Fairfield, New Jersey-based Chesapeake Lodging Trust raised 40 percent less than it sought, and the stock’s total return including reinvested dividends is down 5.5 percent after its Jan. 22 debut. Pebblebrook Hotel Trust , based in Bethesda, Maryland, is up 0.45 percent since going public Dec. 8. Blind pools are risky because “the commercial market is in abysmal shape” and investors are worried the economic recovery will sputter amid high unemployment, said Robert Edelstein , a professor specializing in real estate at the University of California at Berkeley’s Haas School of Business. The U.S. employment picture showed signs of improvement in January, with the jobless rate unexpectedly falling to 9.7 percent from 10 percent the previous month, the Commerce Department said Feb. 5. Unemployment touched a 26-year high of 10.1 percent in October. Commercial real estate transactions declined 64 percent last year to $52 billion, data from researcher Real Capital Analytics Inc. show. Distressed ‘Overhang’ Sales of commercial mortgage-backed securities, or CMBS, fell to $12.2 billion in 2009 from a record $237 billion in 2007, removing a major source of financing for building owners, according to JPMorgan Chase & Co. in New York, the second- largest U.S. bank. Delinquencies for loans packaged into CMBS rose to a record 6.5 percent in January from 1.5 percent a year earlier, Trepp LLC, a New York-based research firm, said Feb. 1. Only 14 percent of an estimated $150 billion in distressed U.S. commercial real estate has been taken back by lenders, according to Jessica Ruderman , director of research services at New York-based Real Capital. “There’s an overhang of real estate that no one is quite sure what will happen with,” Edelstein said. “The market is starting to recognize the complexities of owning troubled real estate.” Ziman and Callahan sold their companies a year before the collapse of subprime residential mortgages led to the worst financial crisis since the 1930s and a more than 40 percent decline in commercial property values from their 2007 peak. Beating REIT Index Ziman, 67, was chairman of Arden Realty when Fairfield, Connecticut-based General Electric Co. agreed to buy it for $3.2 billion in December 2005. Arden, which Ziman founded in 1990, had 116 office properties with 18.5 million square feet in Southern California. The Los Angeles-based company went public in October 1996 and returned 326 percent to shareholders, including dividends, through the announcement of the GE deal, according to a Dec. 18 IPO prospectus filed by Ziman’s new company, Halvern Realty Inc. That compares with a 237 percent return by the MSCI US REIT Index . Halvern, based in Los Angeles, is seeking to raise as much as $400 million, according to its filing with the U.S. Securities and Exchange Commission. The company intends to buy and manage Southern California office properties and will be organized as a real estate investment trust. REITs must distribute at least 90 percent of their taxable income to shareholders, and don’t pay corporate taxes on that amount. Zell’s CEO Callahan, 59, was chief executive officer of Chicago-based Trizec Properties from 2002 until it was bought for about $9 billion by New York-based Brookfield Properties Corp. and Blackstone Group LP of New York in October 2006. He was CEO of billionaire Sam Zell’s Equity Office Properties Trust, also in Chicago, from 1997 to 2002. Under Callahan, Trizec returned 189 percent, compared with a 125 percent gain by the REIT Index, according to a Dec. 11 prospectus by his new company, Callahan Capital Properties Inc. Equity Office returned 89 percent while he was in charge, twice the rate of the index. Callahan’s REIT plans to buy prime office properties initially in Boston, Los Angeles, New York, San Francisco, Seattle and Washington, according to its filing. The Chicago- based company may raise as much as $500 million in the IPO. Ziman declined to comment, citing the so-called quiet period required before an IPO. Callahan didn’t return calls seeking comment. IPO Slump The IPO market is slumping after the largest stock-market rally since the 1930s revived deals in the last four months of 2009 from a record slowdown that followed the credit crisis. This year, Boca Raton, Florida-based FriendFinder Networks Inc.’s $240 million initial offer and Los Angeles-based Imperial Capital Group Inc.’s $113 million sale were pulled; Cambridge, Massachusetts-based Ironwood Pharmaceuticals Inc. cut its share price by 30 percent; and Fort Lauderdale, Florida-based Patriot Risk Management Inc. delayed a $204 million deal. The Standard & Poor’s 500 Index has lost 5.1 percent in 2010, including dividends. U.S. IPOs will triple in 2010 to $50 billion, according to an estimate by Barclays Plc, the second-largest U.K. bank. Even with a projected rise, real estate investors may favor trusts that already own buildings rather than blind pools, said Craig Guttenplan , a New York-based REIT analyst for CreditSights Inc. “People are really wary of those,” Guttenplan said. REIT Appeal The load, or commission, for blind pools can reach 14 percent and covers underwriting and legal fees and general costs, according to Green Street Advisors’ Kirby. Terreno had a 10 percent load, one reason the IPO didn’t pass an “economic merit” test, he said. U.S. office REIT share prices are trading at 7 percent above the underlying value of their real estate and are a safer investment than blind pools, Kirby said. Blind pools face competition from other investors. Private- equity managers raised $21.4 billion for 50 North America real estate funds last year, according to data compiled by Preqin Ltd., a London-based research firm. Barry Sternlicht’s Starwood Capital Group LLC in Greenwich, Connecticut, has $900 million in a hotel fund, managing director Marc Perrin said Nov. 6 at a real estate industry meeting. Capital Raises The REIT boom that began two decades ago raised almost $27 billion in initial share sales from 1993 through 1998, according to the National Association of Real Estate Investment Trusts in Washington. More than 150 real estate companies went public in that period, and “few” of them were blind pools, said Michael Grupe , executive vice president for research. Last year, facing tight credit markets and needing to pay down debt, almost 90 existing REITs raised more than $21 billion in secondary share offerings, the most since 1997, NAREIT data show. Companies also raised more than $10 billion in unsecured debt. Still, buildings aren’t changing hands, and even established REITs can’t find deals because owners expect values to rise following the government’s massive support of capital markets, according to Dan Fasulo , managing director of Real Capital. “I don’t think we’re going to see the wave of distressed opportunities that everyone thinks is out there,” Fasulo said. “Lenders aren’t in a forced position at all. They’re not giving the good stuff away.” To contact the reporters on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net ; Brian Louis in Chicago at blouis1@bloomberg.net .

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S&P 500 Plunge Fails to Shake Gabelli in Bet Technology Leads U.S. Economy

February 8, 2010

By Rita Nazareth, Lynn Thomasson and Jeff Kearns Feb. 8 (Bloomberg) — The combination of record earnings growth and the fastest withdrawals from mutual funds since before credit markets froze is creating opportunities for Mario Gabelli . Apple Inc. and Google Inc. are poised to rally after technology companies in the Standard & Poor’s 500 Index fell 7.8 percent this year through last week and bearish options on chipmakers rose to the highest level since 2003, Howard Ward of Gamco Investors Inc. said. Gabelli’s firm says lower valuations will offset more than $560 million of redemptions from global technology funds at the end of January, a 71-week high. The biggest rally since the Great Depression gave way to a 7.3 percent retreat in the S&P 500 since Jan. 19, erasing $1 trillion from U.S. markets. Pacific Investment Management Co. Chief Executive Officer Mohammed El-Erian says the losses will get worse, while Ward and Carlyle Group’s David Rubenstein say prices are low relative to earnings and governments have eliminated the chance of another credit crisis. “There’s always going to be a reflexive action, a knee- jerk reaction, but it’s not a signal that the bull market is over,” said Ward, who helps oversee $22 billion in Rye, New York. “I see rising earnings this year and next year pulling the market higher. There’s a good a chance the S&P 500 sees 1,300 before the year is out.” Earnings Season Slump The benchmark gauge for U.S. equities retreated 7 percent to 1,066.19 as of Feb. 5 since Alcoa Inc. reported results on Jan. 11, compared with average gains of 9.1 percent for the last three earnings seasons, data compiled by Bloomberg show. Stocks dropped as governments in the U.S. and China acted to limit banks and investors seeking the shelter of fixed income helped corporate bonds beat shares by the largest margin in a year. The S&P 500 lost 0.6 percent to 1,059.66 at 9:52 a.m. in New York today. Equities declined worldwide on Feb. 5 after the U.S. Labor Department said employers unexpectedly cut 20,000 jobs in January. Concern that Greece, Portugal and Spain will slow global growth sent the MSCI World Index in 23 developed countries down 3.8 percent on the final two days of last week, the biggest slide since March, data compiled by Bloomberg show. Speculation the European Union will propose a solution to the budget deficit in its smaller economies prompted a rally in U.S. stocks in the final hour of trading. Stimulus Measures Group of Seven finance ministers pledged at a Feb. 6 meeting in Iqaluit, Canada, to press ahead with economic stimulus measures even as investors intensify their focus on mounting budget shortfalls. The G-7 officials, who oversee about half of the world economy, are betting that spending now will generate enough growth to help erode their fiscal imbalances and make it easier for them to pull back later. The four-week drop in the S&P 500, the longest streak since July, reduced its rally since reaching a 12-year low in March 2009 to 58 percent. Bears say the failure of stocks to rise even as companies beat analysts’ earnings estimates at the second- fastest rate on record may mean the advance is finished. “Investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes,” El-Erian wrote in a Bloomberg News column. “Judging from market valuations, I sense quite a gap between consensus market expectations and key political and economic realities, especially in the U.S.” Beating Estimates Technology stocks, whose 60 percent increase was the biggest among 10 industries in the S&P 500 last year, have slumped 7.8 percent in 2010 for the third-largest decline. Fourth-quarter results from software developers, computer producers and Internet companies weren’t enough to stem the retreat even as 45 out of 50 companies that reported since Jan. 11 exceeded analysts’ estimates. The number of bearish options on the Semiconductor HOLDRs Trust jumped to 1.71 times bullish contracts at the end of January, a six-year high, even though fourth-quarter earnings at S&P 500 companies are poised to rise 78 percent from a year ago, the biggest jump on record, data compiled by S&P and Bloomberg show. Profits are breaking a nine-quarter streak of declines. Ward, the chief investment officer for growth equities at Gamco, is scooping up Cupertino, California-based Apple , maker of the MacBook laptop and iPhone, and Google , which runs the world’s most popular Internet search engine in Mountain View, California. He’s betting companies will boost spending on computer equipment to match demand as the economy rebounds. More Spending Morgan Stanley estimates that 38 percent of the companies it follows intend to raise capital spending over the next three months, up from a low of 3 percent in August, according to a Jan. 15 survey from the New York-based bank. Technology stocks trade at 12.8 times estimated profit for 2011, half the median valuation since 1994, data compiled by Bloomberg show. Rubenstein, who helped start private-equity firm Carlyle in 1987, says energy producers are attractive as fuel prices rise with the expansion in emerging economies. Health-care companies are a good bet because aging Americans will “spare no expense” to stay healthy, he said at the annual World Economic Forum in Davos, Switzerland, last month. “The U.S. economy has largely recovered in the view of professional investors,” Rubenstein said in a Jan. 27 interview. “There are a lot of great opportunities we see in the United States and abroad.” Record Number More than 73 percent of S&P 500 companies that have reported fourth-quarter profit beat analysts’ estimates, the second-highest percentage since Bloomberg began tracking the data in 1993. A record number of companies exceeded forecasts the previous earnings season. The performance has helped push down valuations in the S&P 500 to an average of 18.3 times earnings, from as high as 24.4 at the end of 2009. Technology shares in the index trade for 18.5 times profits in the last 12 months, compared with 25.8 when the U.S. market peaked in the fourth quarter of 2007. Whitney Tilson , whose mutual fund at T2 Partners LLC in New York has beaten 97 percent of its peers in the last year, says prices already reflect a recovery in earnings as the S&P 500’s valuation has almost doubled since March 9. T2 is about “25 percent net long” equities, the lowest level in more than 11 years as a fund manager, he said. Tilson owns shares of the world’s biggest companies on speculation they’ll hold up better should the stock market keep falling. Removing Money Investors pulled more than $9 billion out of global equity funds in the week through Jan. 27, the most since October 2008, according to data compiled by Cambridge, Massachusetts-based EPFR Global. Another $981 million was taken out last week, the data show. “We’re positioning ourselves extremely conservatively,” Tilson said in an interview from New York. “Given how much stocks have rallied since March, it’s hard to imagine a big bull market continuing from these levels.” Ward, whose forecast that the S&P 500 may reach 1,300 this year implies a 22 percent surge, disagrees. The slump in equity prices in the past month will reverse as profit forecasts for the next two years climb, he says. Earnings for the S&P 500 are projected to grow at the fastest rate in two decades, surging 61 percent from 2009 to $93.89 a share by 2011, according to analysts’ estimates compiled by Bloomberg. “We’re getting greater evidence that the economy is beginning to kick into gear,” he said. “There’s every reason to expect a good year for stocks.” To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net ; Lynn Thomasson in New York at lthomasson@bloomberg.net ; Jeff Kearns in New York at jkearns3@bloomberg.net .

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Playboy Surfers Are Targets for VW Polos in $4 Billion Web Video Ads Push

February 5, 2010

By Ragnhild Kjetland Feb. 5 (Bloomberg) — Christian Baudis has profiled the perfect target for Volkswagen Polo online video advertisements in Germany: a man aged 25 to 39 who watches soccer matches, checks out the Playboy site and reads Der Spiegel magazine. So the European head of New York-based Tremor Media Inc., an advertising network, knows which Web sites to market to the German carmaker’s ad agency. “We go to them and say here are 150 sites with video content that is attractive to that target group,” said Baudis, who works with Volkswagen’s ad agency, Mediacom, a unit of WPP Plc , the world’s biggest advertising company. “Targeted advertising is more efficient. It costs less money to reach the target. That’s the beauty of it.” Online video ads are the fastest-growing piece of the advertising industry, aided by their ability to show off products in a feature-rich medium and, increasingly, to zero in on a target audience. Volkswagen and HSBC Holdings Plc are among European companies using online video ads to reach potential customers as television audiences shrink. In Europe, spending on online video ads could triple between 2009 and 2013 to about 1 billion euros ($1.4 billion), said Nate Elliott , an analyst in London for Cambridge, Massachusetts-based Forrester Research Inc. In the U.S., the online video ad market could grow to $3.01 billion in 2014 from $879 million in 2009, according to Forrester. Such ads currently account for just 1.6 percent of what’s spent on TV commercials, says New York-based research firm eMarketer Inc. Still Young HSBC’s two video ads on Web sites including those of the British Broadcasting Corp. and National Geographic, were among the bank’s “best-performing campaigns we ran last year,” said Ceren Dogany , digital account director at Mindshare Worldwide, a WPP unit. “We received a massive number of clicks and a really high click-through rate.” Targeted advertising is in its infancy, Baudis said. Information on consumer preferences is drawn through “cookies,” or a small piece of text stored on a user’s computer by a Web browser. Ad agencies can then post ads based on consumers’ browsing habits. The system relies on consumers accepting the cookies and may be capped by privacy concerns. “Consumers do appreciate targeted advertising, although it will take some time to develop, to convince them because of privacy issues,” he said. “Normally, targeted advertising will mean that you get better ads.” The ads are inserted in a video program on a Web site or occupy space on an Internet page. Program developers in Europe are scrambling to capture this new revenue. ‘Huge Opportunity’ “ Welt der Wunder ,” a German producer of science, technology and educational shows that gets no ad revenue for programs aired on TV, sought the aid of Tremor, which pools several Web sites to make it worthwhile for advertisers. “I liked the idea right away,” said Hendrik Hey , a producer for “Welt der Wunder.” “As a production company it’s hard to set up your own marketing division.” Tremor, which aggregates Web sites for advertisers and provides them technology to place their ads, is among new players spawned by the online video ad trend. It is banking on Europe following a trajectory similar to the U.S. At about 25 million euros, online video ad spending in Germany is miniscule compared with the 3.9 billion euros spent on TV ads, said Baudis . Online video advertising in Germany alone could grow six-fold by the end of 2012, he said. SAP Ventures, an investment arm of SAP AG, the world’s largest maker of software for businesses, last year invested an undisclosed amount in Tremor. ‘Ubiquitous’ “We felt that growth in online video advertising would be one of the strongest online advertising sub-segments,” said David Hartwig , a SAP Ventures partner in Palo Alto, California. “Online video is going to start encroaching on some traditional TV viewing and it’s going to start to pull from TV advertising, making it a really huge opportunity.” Other companies capitalizing on the trend include Cambridge, Massachusetts-based Brightcove Inc., with a platform that publishers use to manage video content. Its investors include General Electric Co. and Hearst Corp., and it manages video content on the Web sites of The New York Times , Conde Nast Publications and Universal Music Group. “Video will become as ubiquitous and pervasive as text on the Web, and if you’re an organization, a corporation, a media company, you’re going to make video a much more central part of how you market, communicate, educate and entertain,” said Jeremy Allaire , its founder and chief executive officer. TV Decline Most online videos, into which ads can be inserted, are between three and five minutes long. Microsoft Corp. recently established MSNmovies in Germany with 200 movies into which it inserts ads in every chapter. “It’s on demand, for free and a continuous experience to the consumer, like on TV,” said Marc Adam , marketing director of Microsoft’s MSN.com. MSN.de in Germany sold all movie ad space for months to come and may now put in two or more ads per chapter, he said. Tremor’s Baudis said advertisers don’t understand the technology and still place the bulk of their marketing dollars in TV. That may change as companies including Ford Motor Co., Mars Inc., and Citibank Inc. earmark a portion of their ad budgets for online media. TV is already feeling the pain. According to Forrester, 2009 was “the worst advertising year since 2001” for broadcasters. Reasons it cites include a shift to online advertising, a shrinking audience share during prime time and increased competition from digital media among younger viewers. Higher Engagement “A lot of big brand advertisers are taking us as if we were a TV station,” Baudis said. Tremor has more than 3,500 Web sites globally where it can stream ads. Advertisers online know exactly how many viewers they’ve reached, unlike with TV, said Brightcove’s Allaire. On TV, it’s a “brand impression,” he said. “On the Internet, a video ad comes up and it’s designed as a call to action for the user and they can click it, taking them to the marketing Web site.” Advertisers can target age groups and gender by analyzing browsing habits. “If Tremor has a client, a big pharma company like Bayer or Novartis , they will come to us and ask what programs we have on health or medicine that can be put on our Web site, with the ad from the company running with it,” Welt der Wunder’s Hey said. On TV and in newspapers, such targeting is harder. “The more it’s targeted, the more advertising becomes information, and the more it becomes information, the higher the engagement and interest in the ad,” Microsoft’s Adam said. “That’s what can happen online.” To contact the reporter on this story: Ragnhild Kjetland in Frankfurt rkjetland@bloomberg.net

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Emerging Equity Funds Post Biggest Outflows in 24 Weeks on Greece, Profits

February 5, 2010

By Shiyin Chen and Chan Tien Hin Feb. 5 (Bloomberg) — Emerging market equity funds lost $1.6 billion in weekly withdrawals, the biggest outflows in 24 weeks, as earnings and Greece’s debt woes raised concerns that the global recovery may falter, EPFR Global said. Investors removed almost $1 billion from global emerging market stock funds in the week ended Feb. 3, the most in more than a year, and withdrew $516 million from Asian equities outside of Japan, the research company said in a statement. The MSCI Emerging Markets Index fell 2.6 percent to 902.12 as of 5 p.m. in Hong Kong, the lowest since Oct. 2. The gauge of 22 developing nations, which rallied a record 75 percent in 2009, has slumped 12 percent from this year’s peak on Jan. 11, entering a correction, on speculation central banks from China to Brazil will start to raise borrowing costs to curb inflation. “Recoveries have been reliant on policy measures,” said Michael Auyeung , who manages about $500 million as chief investment officer at Pacific Mutual Fund Bhd. outside Kuala Lumpur. “As we move into the transition phase where the burden of growth shifts back towards the private economy on stimulus withdrawal, we will start to get a better idea of how bad the damage has been to the structural integrity of the financial and business architecture. We may not like what we find.” Global stocks are plunging for a second straight day as U.S. initial jobless claims rose unexpectedly last week and companies from MasterCard Inc. to Monster Worldwide Inc. reported earnings that trailed analyst estimates. Shares also retreated on concern Greece’s attempts to cut the European Union’s biggest budget deficit may hurt other nations in the region. ‘Reasons For Caution’ “Investors had plenty of reasons for caution going into February as corporations continued to paint a gloomy picture for earnings in 2010, Greece’s debt story went from bad to worse and policy makers began to flesh out their ideas for closing yawning budget deficits,” EPFR wrote. Emerging market currencies also weakened today in Asia amid concern that Europe’s fiscal woes have eroded investor appetite for riskier developing-nation assets. South Korea’s won dropped the most in two months while India’s rupee was headed for its biggest two-day loss since October. Indonesia’s rupiah dropped the most in 10 weeks. The cost of protecting Asian corporate and sovereign bonds from default surged. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 11 basis points to 128 basis points, Deutsche Bank AG prices show. That’s the biggest increase since Aug. 17 and takes the index to its highest since Sept. 9, CMA prices show. China Losses During the week, Latin American funds posted outflows, while those buying emerging Europe, Africa and the Middle East shares reported “modest” net inflows, EPFR said. Within Asia, China equity funds reported net outflows for the fifth time in six weeks while Indian funds lost $180 million, the most in 68 weeks, according to the statement. China’s Shanghai Composite Index has dropped 10 percent this year, among the 10 worst performers globally. In India, the Bombay Stock Exchange’s benchmark Sensitive Index has slipped 9.1 percent. A report this week that showed China sustained its manufacturing last month heightened speculation the government will take additional measures to prevent the economy from overheating, while India’s central bank increased its cash reserve ratio by more than economists had forecast. Too Early to Buy? JPMorgan Chase & Co. said last month it was turning “less bullish” on developing-nation equities in the first half of 2010 amid concern central banks will tighten monetary policy to combat accelerating inflation. Nikhil Srinivasan , the chief investment officer for Asia and the Middle East at Allianz Investment Management, also said this week it was too early to buy stocks, including those in China, even as they decline. Still, BofA Merrill Lynch Global Research said this week that China’s stocks are “approaching a bottom” as concerns of tightening are overstated, joining CLSA Ltd., Morgan Stanley and Macquarie Group Ltd., in predicting a rebound in the nation’s equities. During the week, developing-nation bond funds attracted $406 million, according to EPFR. Overall, equity funds with $3.1 trillion in assets lost $981 million while bond funds with $1.1 trillion in assets drew $4.6 billion in new inflows, the Cambridge, Massachusetts-based research company said. To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net ; Chan Tien Hin in Kuala Lumpur at thchan@bloomberg.net

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Imperial Capital Shelves IPO, Patriot Risk Delays Offer as Slump Deepens

February 4, 2010

By Michael Tsang, Nikolaj Gammeltoft and Craig Trudell Feb. 4 (Bloomberg) — Imperial Capital Group Inc. postponed the first initial public offering by a U.S. investment bank in two years, while Patriot Risk Management Inc. delayed its share sale as the IPO market’s 2010 slump deepened. Imperial Capital, the Los Angeles-based firm that specializes in high-yield and distressed debt, shelved its $113 million sale yesterday. Patriot Risk , which underwrites workers’ compensation insurance plans, pushed back a $204 million IPO, according to Bloomberg data. A day earlier, Ironwood Pharmaceuticals Inc. cut the size of its deal by 30 percent in the biggest price reduction for a U.S. offering this year. Buyers are extracting concessions on IPOs after two of the first three deals of 2010 fell more than the Standard & Poor’s 500 Index, which slid by the most in a year in January. Imperial Capital was asking investors to pay three times the median so- called tangible book value for investment banks, while Ironwood took a 30 percent discount after trying to sell its shares at 31 percent more than what the company said was its “fair value.” “It is hard for IPOs to carve out a lot of interest in a market that’s been generally frustrating,” said Brian Barish , president of Denver-based Cambiar Investors, which oversees $5.5 billion. “As a portfolio manager, why compound your frustration with these unseasoned offerings? We’ve looked at a couple of IPOs, but we haven’t participated in any meaningful way.” Barish’s $1.07 billion Cambiar Opportunity Fund has beaten 92 percent of rival funds over the past year. 2010 Forecast While Barclays Plc of London estimates that U.S. IPOs will triple this year to $50 billion, Alpharetta, Georgia-based Cellu Tissue Holdings Inc. has lost 13 percent since selling shares at 24 percent less than the price it sought. Chesapeake Lodging Trust in Fairfield, New Jersey, has retreated 5.5 percent since its offering, and Bellevue, Washington-based Symetra Financial Corp.’s deal priced 14 percent below the highest level sought. Terreno Realty Corp. of San Francisco became the first U.S. company to shelve its IPO in 2010 last week as the S&P 500 extended its January slump to 3.7 percent, the biggest monthly drop since the gauge’s 62 percent surge began in March 2009. The biggest U.S. stock-market rally since the 1930s revived deals in the last four months of 2009, with IPOs increasing from the slowest pace on record after the failure of New York-based Lehman Brothers Holdings Inc. froze credit markets. China to Belgium Chinese companies, which accounted for six of the world’s 10 largest IPOs last year, are also accepting lower prices in 2010. China First Heavy Industries Co., a maker of equipment used in the mining and energy industries, yesterday became the first mainland company in at least a year to sell a domestic IPO at less than the highest level sought from investors. Taminco Group NV of Ghent, Belgium, the world’s largest producer of alkylamines, canceled its initial share sale yesterday because of “unfavorable” market conditions. “On the surface, it would appear the market should be working” for IPOs, said Jack Ablin , Chicago-based chief investment officer of Harris Private Bank, which oversees about $55 billion. “Looking under the hood suggests there may be more problems than people realize.” Imperial Capital had estimated in a Feb. 1 filing with the Securities and Exchange Commission that it has a net tangible book value, a measure of shareholder equity that excludes assets that can’t be sold in liquidation, of $3.41 a share. The bank would have been valued at 4.69 times its net tangible assets per share after the offering, assuming an IPO price at $16, the midpoint of the forecast range. That’s more than the median 1.52 times tangible book value of 48 investment banks and brokerages in the U.S., data compiled by Bloomberg show. Patriot Risk, Ironwood Patriot Risk had planned to sell 17 million shares at $10 to $12 each. Net premium revenue at the Fort Lauderdale, Florida-based company fell 12 percent to $28.4 million in the nine months ended Sept. 30, according to its SEC filing. At the midpoint IPO price of $11 a share, Patriot Risk’s existing shareholders stood to make an eightfold profit from the offering, based on the per-share average of $1.31 paid. Ironwood’s common stock had a “fair value” of $12.18 a share, according to models used by the Cambridge, Massachusetts- based drugmaker, its Jan. 20 SEC filing showed. That meant buyers were asked to purchase shares at a premium of 15 percent to 31 percent, Bloomberg data show. The company’s shares gained 3.6 percent to $11.65 yesterday in Nasdaq Stock Market trading. FriendFinder Networks Inc. , the publisher of Penthouse magazine, didn’t announce the pricing of its scheduled $240 million IPO yesterday. The Boca Raton, Florida-based company had planned to sell 20 million shares at $10 to $12 each after delaying its offering last week. The operator of AdultFriendFinder.com has lost money for five straight years. Marc Bell , FriendFinder’s chief executive officer, didn’t respond to e-mail and telephone messages. To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net ; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net ; Craig Trudell in New York at ctrudell1@bloomberg.net .

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Brain-Damaged Patient Reaches Outside Vegetative World by Mapping Thoughts

February 3, 2010

By Andrea Gerlin Feb. 3 (Bloomberg) — A man in Belgium, presumed for five years to be in a vegetative state, communicated with doctors through a brain scan that mapped his thoughts, a tool that may offer some people who cannot move or speak a line to the outside world. The patient effectively answered “yes” or “no” to questions posed by researchers using a technique known as functional magnetic resonance imaging, according to a report in today’s New England Journal of Medicine . The 29-year-old, who had suffered a head injury in a road accident in 2003, showed activity in one of two specific regions of his brain on five of six autobiographical questions put to him. He was one of 54 patients with little or no consciousness in the study. Five showed some activity in one or two regions of the brain when asked to imagine specific tasks; 49 didn’t show any activity when asked to think of the same tasks. “Some patients who appear behaviorally to be vegetative may not be,” said Adrian Owen , one of the report’s authors and a professor at the Medical Research Council Cognition and Brain Sciences Unit in Cambridge, England, in a telephone interview. “They may be able to give yes-or-no responses.” About four in 10 patients who are classified as having consciousness disorders — vegetative and minimally conscious states being two of these — are misdiagnosed, according to the paper. The technique the researchers used may enable doctors to better define their levels of awareness and to establish basic communication. Quality of Life Smaller, less expensive bedside imaging machines may allow some patients diagnosed with limited consciousness to engage in minimal communication, improving their quality of life, Owen said. The information they communicate could enable doctors and nurses to know if they are in pain and need painkillers or relatives to better interpret the extent of their awareness. Twenty-three of the study patients were diagnosed as being in a vegetative state and 31 were in a minimally conscious state. Patients in a vegetative state can’t respond to stimuli after emerging from a coma and opening their eyes. Minimally conscious patients show limited and erratic verbal responses and movement. Functional MRI enables doctors to see inside the body without using radiation and measures brain activity by mapping blood flow, or oxygen use, in different parts of the organ. In the study, conducted in Cambridge and Liege, Belgium, the patients were asked to imagine playing tennis or walking through familiar streets or from room to room at home. Tennis Game In a separate group of healthy patients, imagining a tennis game activated a part of the brain called the pre-motor cortex and imagining walking the streets or through a house activated another structure called the parahippocampal gyrus. The five brain-injured patients who responded to the test had activity in one or both areas when asked questions, the researchers said. The road accident victim correctly answered all but the last of six additional autobiographical questions, including one referring to his father’s name, the researchers reported. No activity was detected when he was asked the final question. In an accompanying editorial, neurologist Allan H. Ropper of Brigham and Women’s Hospital in Boston said the study’s results would make it difficult for doctors to tell families that their unresponsive relatives are not “in there somewhere.” The new data suggest that functional MRI should be added to traditional methods of diagnosing patients with consciousness disorders, Ropper wrote. Life Support In words of caution, Ropper said brain activity was detected in a small number of patients in the study, only in some patients whose brain injuries were from trauma, and in none who had suffered strokes or oxygen deprivation. The activity didn’t prove the presence of more complex thought processes, he said. “Persons who look to this study to justify continued and unqualified life support in all unresponsive patients are missing the focus of the findings,” Ropper wrote. To contact the reporter responsible for this story: Andrea Gerlin in London at agerlin@bloomberg.net

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Amazon.com Says It Will Restore Macmillan Books, Give in to Higher Pricing

February 1, 2010

By Greg Bensinger Feb. 1 (Bloomberg) — Amazon.com Inc., the world’s largest Internet retailer, said it will start selling Macmillan books on its Web site again and give in to the publisher’s demands to charge more for titles on the Kindle digital reader. Amazon.com temporarily stopped selling all Macmillan books to show the “seriousness of our disagreement,” Amazon.com said in a notice on its Web site yesterday. Macmillan, publisher of Elie Wiesel’s “Night” and Michael Cunningham’s “The Hours,” proposed new prices for electronic books last week, Macmillan Chief Executive Officer John Sargent said in an e-mail to authors and agents. “Amazon and Macmillan both want a healthy and vibrant future for books,” Sargent said. “We clearly do not agree on how to get there.” Under the new terms, Macmillan wants to be able to set the prices of electronic books individually, with most new titles costing $12.99 to $14.99. Amazon.com charges $9.99 for most best-sellers and new releases. Retailers would get a 30 percent commission under the proposal, Macmillan said. Titles such as “Sarah’s Key” by Tatiana de Rosnay and “Wolf Hall” by Hilary Mantel , listed as best sellers on Macmillan’s Web site, weren’t available for purchase directly from Amazon.com yesterday. A 2006 edition of “Night” and “The Hours” were also not available. Macmillan books are still available on Amazon.com from third-party sellers, Sargent said. Digital Future The clash highlights the struggle between Amazon.com and the publishing industry over the economics of electronic books. Some publishers are unhappy with pricing models on the Kindle and want more control over how much they charge, said Carl Howe, an analyst with Boston-based Yankee Group . “This is really a war for who wins control of the digital book publishing industry,” Howe said in an interview. Drew Herdener , a spokesman for Seattle-based Amazon.com, declined to comment beyond the notice on its Web site. Amazon lost 62 cents to $125.41 on Jan. 29 in Nasdaq Stock Market trading. The shares have lost 6.8 percent this year. Macmillan, which has offices in New York and London, is a unit of Verlagsgruppe Georg von Holtzbrinck GmbH. Eventually customers will have to decide whether it’s reasonable to pay $14.99 for a bestselling electronic book, Amazon.com said. ‘Strong Disagreement’ “We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles,” Amazon.com said. “We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms.” Amazon.com sells digital books that can be viewed on a range of devices, including the best-selling Kindle e-reader. The Kindle has about 60 percent of the U.S. market, with Sony Corp. ranking second, according to Cambridge, Massachusetts- based Forrester Research Inc. Apple Inc. ’s new iPad, debuted last week, will also display electronic books. Macmillan’s Sargent said in his e-mail that he met with Amazon.com in Seattle on Jan. 28 to propose the new pricing model. By the time he arrived back in New York, Amazon.com had told him that it planned to remove the publisher’s books. Amazon.com said Jan. 20 that it plans to offer a 70 percent commission to authors and publishers that put their titles on the Kindle. The e-books must sell for no more than $9.99 and the price must be at least 20 percent cheaper than the lowest available price for the physical version of the book, the company said. Revenue Split The 70-30 revenue split mirrors the arrangement Apple has with programmers who make applications for its iPhone and iPod Touch devices. In announcing the iPad, Apple appeared to be giving publishers more control over the price of their books for the device, Yankee Group’s Howe said. Macmillan is among five publishing houses, including News Corp.’s HarperCollins and Pearson Plc’s Penguin, that signed agreements with Cupertino, California-based Apple to distribute books on its tablet computer. “Publishers weren’t happy with the Kindle pricing before, and the release of the iPad has accelerated their displeasure,” Howe said. To contact the reporter on this story: Greg Bensinger in New York at gbensinger1@bloomberg.net

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Toyota Suspends Sales Of 8 Vehicle Models (LIST)

January 26, 2010

WASHINGTON — Toyota suspended U.S. sales of some of its most popular vehicles – including the best-selling car in America, the Camry – to fix sticking gas pedals that could make the cars accelerate without warning. In another blow to the world’s No. 1 automaker, Toyota Motor Corp. said Tuesday it would halt some production at six assembly plants beginning the week of Feb. 1 “to assess and coordinate activities.” The company said it would stop selling eight models of cars and trucks, a significant portion of its fleet. The suspension comes after a recall of the same models last week involving 2.3 million vehicles. Toyota has said it was unaware of any accidents or injuries due to the pedal problems associated with the recall, but could not rule them out for sure. “This action is necessary until a remedy is finalized,” said Bob Carter, Toyota’s group vice president and general manager. The Japanese automaker said the sales suspension includes the following models: the 2009-2010 RAV4, the 2009-2010 Corolla, the 2007-2010 Camry, the 2009-2010 Matrix, the 2005-2010 Avalon, the 2010 Highlander, the 2007-2010 Tundra and the 2008-2010 Sequoia. Some dealers suggested taking vehicles to dealerships for inspections if people have safety concerns. Aaron Bragman, an auto analyst for the consulting firm IHS Global Insight in Troy, Mich., said Toyota typically sells about 65,000 Camrys and Corollas a month, and the frozen sales could strike at the company’s bottom line and reputation for quality. “That’s huge if they can’t sell these and they don’t have a fix identified. They need to go and get a solution to this fast,” Bragman said. Toyota sold more than 34,000 Camrys in December, making the midsize sedan America’s best-selling car. It commands 3.4 percent of the U.S. market and sales rose 38 percent from a year earlier. Sales of the Corolla and Matrix, a small sedan and a hatchback, totaled 34,220 last month, making up 3.3 percent of the market and sales up nearly 55 percent from December of 2008. Toyota spokesman Mike Michels said production would be suspended on the affected vehicle lines this week and it was unclear exactly when it would resume. In an e-mail to employees, company officials said, “we don’t know yet how long this pause will last but we will make every effort to resume production soon.” Michels said engineers were trying to develop a fix as quickly as possible but he did not have a firm timeline on when the vehicle sales could resume. Toyota shares were down 2.3 percent in early Tokyo trading at 3,780 yen. The automaker said the move would affect plants in Princeton, Ind., Lafayette, Ind., Georgetown, Ky., San Antonio, Texas, and Cambridge, Ontario, and Woodstock, Ontario, in Canada. Toyota spokesman Mike Goss said most workers were expected to be at their jobs during the assembly line shutdown. Workers will receive additional training or work on improvements to their assembly processes, but can also take vacation or unpaid leave, he said. About 300 workers who build V8 engines at a Toyota plant in Huntsville, Ala., will be affected, said Stephanie Deemer, a spokeswoman for the plant. Goss said the shutdowns will also affect engine plants in Georgetown, Ky., and Buffalo, W.Va. Toyota said no other North American Toyota facility would be affected by the decision. Toyota dealers said they were concerned the move would hamper sales and were hopeful parts to fix the problem could be distributed quickly. “They’re going the extra mile to reassure people that they really care about the customers,” said Earl Stewart, owner of a Toyota dealership in North Palm Beach, Fla. “It is something that’s going to be at least a short-term hardship on the dealers, and especially on Toyota.” The auto company said the sales suspension wouldn’t affect Lexus or Scion vehicles. Toyota said the Prius, Tacoma, Sienna, Venza, Solara, Yaris, 4Runner, FJ Cruiser, Land Cruiser and select Camry models, including all Camry hybrids, would remain for sale. The announcement follows a larger recall months earlier of 4.2 million vehicles because of problems with gas pedals becoming trapped under floor mats, causing sudden acceleration. That problem was the cause of several crashes, including some fatalities. About 1.7 million vehicles fall under both recalls. Owners with questions can call the Toyota Customer Experience Center at (800) 331-4331. ___ AP Auto Writer Tom Krisher in Detroit contributed to this report.

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Princeton Will Raise Tuition 3.3% in Next School Year, Outpacing Inflation

January 25, 2010

By Janet Frankston Lorin Jan. 25 (Bloomberg) — Princeton University will charge 3.3 percent more for undergraduate tuition, room, board and some fees in the next school year, an increase exceeding inflation during the worst U.S. recession in 70 years. Princeton, in Princeton, New Jersey, is the first school in the Ivy League to announce its tuition rate for 2010-11. Other members of the group of eight northeastern colleges include Harvard University, in Cambridge, Massachusetts, Yale University in New Haven, Connecticut, and Brown University in Providence, Rhode Island. The increase is the fourth-smallest since the 1967-68 school year, according to data provided by Princeton. Top-ranked colleges such as Princeton can charge what the market will bear, Kalman A. Chany , the author of “Paying for College Without Going Broke,” said in an interview. “Besides death and taxes, another sure thing is that college tuition will rise each year, no matter what is happening with the overall economy,” Chany said. In December, the consumer price index rose at an annual rate of 2.7 percent, the second month of inflation after eight months of deflation, or falling prices. Tuition and fees set by private, four-year colleges in the U.S. for the current school year rose the most in 21 years, when adjusted for inflation. Sticker Price Princeton’s increase to $48,580 from $47,020 isn’t the total price students will pay for the school year beginning in September. Other fees will be set in July, including student activity charges and class dues, Cass Cliatt , a spokeswoman for the school, said in a telephone interview. The total cost for the current year is $50,620, which includes books and supplies, she said. Colleges are balancing the need to help families struggling to pay tuition and other costs while covering their own budget gaps after endowment losses, said Sandy Baum , a senior policy analyst at the New York-based College Board, which owns the SAT college entrance exam. Princeton’s increase comes as the university is reducing its operating budget by $170 million over two years. “We believe this recommendation strikes a reasonable balance that recognizes both the university’s budgetary challenges and the need to avoid putting unnecessary burdens on tuition-paying families,” Christopher Eisgruber , Princeton’s provost, said in a statement. Financial Aid Princeton is increasing its financial aid budget next year to $113.1 million, up 9.6 percent from $103.2 million in the current year. Last year, Princeton raised its tuition, room, board and fees 2.9 percent, the smallest percentage increase in 43 years, the university said. The value of investments in Princeton’s $12.6 billion endowment fell 24 percent in the year ended June 30. Princeton’s endowment is tied with that of Stanford University, near Palo Alto, California, as the third-largest in the U.S., while Harvard and Yale are the two richest universities. Applications to attend Princeton increased 19 percent this year, for Brown 20 percent, for the University of Pennsylvania in Philadelphia 17 percent, and for Duke University in Durham, North Carolina, 12 percent, according to data from the schools. Princeton is tied with Harvard for the top spot among national universities in U.S. News & World Report magazine’s annual rankings for 2010. Wants Moratorium For parents who are paying the full cost, the tuition increases are hard to handle, especially during the recession, said Al Eng, who works for a bank in investment management. Eng’s youngest daughter is a junior at Duke, which costs $53,390 this school year, according to its Web site. “They probably should have a moratorium on tuition increases, given the economy,” said Eng, who lost about half the money he had set aside for college tuition and about 25 percent of the savings in his retirement fund. “When the endowments were at record highs, I don’t think we saw any stoppages in tuition increases.” To contact the reporter on this story: Janet Frankston Lorin in New York jlorin@bloomberg.net .

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Doll in Sync With Biggs Queries Roubini Exit Strategy With Davos Wise Men

January 25, 2010

By Simon Kennedy and Scott Lanman Jan. 25 (Bloomberg) — The bears of Davos are brandishing their claws again, even as investors declare it’s time for them to hibernate. Billionaire George Soros , Nobel laureate Joseph Stiglitz and Roubini Global Economics LLC Chairman Nouriel Roubini return to the Swiss ski resort this week warning the economic recovery will prove weaker than financial markets are betting and the 10- month rally in global stocks may falter. Investors are lining up against the pessimists, who were lauded at last year’s meeting of the World Economic Forum for predicting the economic and financial crisis. The MSCI World Index of stocks is up 67 percent since March, as money managers at companies including BlackRock Inc. , the world’s largest asset manager, and Barton Biggs’s Traxis Partners LP buy equities partly on the expectation the recovery will strengthen. “The bears continue to preach,” Bob Doll , vice chairman and chief investment officer for global equities at New York- based BlackRock, said in a Jan. 6 presentation. “We lean to the bull case.” BlackRock predicts the Standard & Poor’s 500 Index will end the year at 1,250, up 13 percent from the Jan. 22 close, and the 10-year Treasury note will yield almost a percentage point more at 4.5 percent. Biggs began 2010 projecting a 10 percent gain in stocks and the dollar. Weaker Dollar Roubini’s firm forecasts corporate bonds will outperform equities, the dollar will weaken and the interest rate on longer-dated U.S. government securities will fall toward the end of the year. A report with specific projections is currently being prepared. “If I’m correct, by the second half of the year there’s going to be a slowdown of growth in the U.S., Europe and Japan,” Roubini said in Hong Kong on Jan. 21. “That could be the beginning of a market correction, because the macroeconomic news is going to surprise on the downside.” Who is right will be one of the debates dominating this week’s 40th Davos conference of more than 2,500 political, business and financial leaders. With the crisis ebbing and the International Monetary Fund set to raise its forecast for global growth in 2010 from 3.1 percent, “the mood is likely to be upbeat,” said Niall Ferguson , 45, a history professor at Harvard University in Cambridge, Massachusetts. “Dr. Dooms will be somewhat at a discount in the Davos market.” Stocks Decline The MSCI World Index dropped 3.8 percent last week, the biggest decline since October, after U.S. President Barack Obama sought limits on the size and trading activities of financial institutions and China moved to remove stimulus from its economy. Ben S. Bernanke ’s renomination to lead the Federal Reserve Board also ran into resistance in the Senate, and governments are under pressure to cut the debt they ran up fighting the turmoil. Investors are nevertheless upbeat. Forty-three percent of respondents in a quarterly global poll of market professionals who are Bloomberg subscribers said the international economy is improving, up from 37 percent in October. Thirty-eight percent said their country’s benchmark stock index will rise in the next six months; 33 percent say it will vary little and 27 percent say it will fall. “The global economy is picking up strength,” said Traxis Managing Partner Biggs, 77, who piled into equities at the bottom of the market in March. Exceeding Estimates A “whole load of positive feedbacks” are in place as companies have to reverse the cuts they made to inventories and capital spending when the crisis flared, he said in a Jan. 13 interview. Of 62 companies in the S&P 500 that reported fourth- quarter earnings last week, 46 were better than the average analyst estimate, according to data compiled by Bloomberg. After shrinking an estimated 3.4 percent last year, the economy of the Group of Seven nations will outpace BlackRock’s projection of a 2 percent potential growth rate by rising 2.5 percent this year, led by a 3.2 percent expansion in the U.S., Doll said. While the U.S. recovery will be slower than the 5 percent of previous rebounds, it will be spurred by $400 billion from Obama’s fiscal-stimulus program, low borrowing costs, demand from emerging markets and companies rebuilding inventories, Doll said. Although he acknowledges the doomsayers have a greater probability of being right given the depth of the crisis, he added that stocks will also benefit from earnings growth linked to cost cutting and productivity gains. ‘Good 2010’ “We’ll have a good 2010,” Doll, 55, told Bloomberg Television on Jan. 6. “Caution, given where we’ve come from, makes some sense, but there’s an awful lot of stimulus in the system.” He forecast 2009’s double-digit percentage increase in U.S. stocks. Such optimism was hard to detect a year ago at what Harvard Professor Kenneth Rogoff called the “grimmest Davos” ever amid the worst financial crisis in seven decades and deepest recession since World War II. The turbulence that began in August 2007 wiped out more than $30 trillion of stock-market wealth and forced policy makers to cut interest rates to record lows, adopt so-called quantitative-easing measures such as buying bonds and hand out more than $2 trillion in fiscal support. They also provided the financial industry with more than $11 trillion of aid, bailing out banks including New York-based Citigroup Inc. and Royal Bank of Scotland Group Plc in Edinburgh. ‘Hard Landing’ Attendees praised Roubini, 51, who teaches at New York University, for his 2007 forecast of an imminent “hard landing.” Morgan Stanley Asia Chairman Stephen Roach , 64, also had reason to be proud after warning of a looming global recession at the forum in 2008, the same year Soros, 79 and founder of the $25 billion hedge-fund firm Soros Fund Management LLC, declared that a U.S. recession was “almost inevitable.” Their forecasting record has been patchier since. Roubini, an adviser to Timothy Geithner a decade ago before he became U.S. Treasury secretary, said in a Davos interview last year that the world economy would shrink through 2009. Instead, growth resumed in Japan in the second quarter of last year, followed by the U.S. and 16-nation euro-area in the subsequent three months. The S&P 500 has climbed 45 percent since Roubini said March 14 that its advance that month was a “dead-cat bounce.” He will sit on the first Davos panel on Jan. 27, where he will debate the economic outlook with Carlyle Group co-founder David Rubenstein and former IMF Chief Economist Raghuram Rajan . IMF Forecast While Roubini was unavailable for an interview, Christian Menegatti , his head of global research, said the firm had underestimated the amount and success of liquidity that governments and central bankers injected. The IMF estimates the Group of 20 central banks expanded their balance sheets by $4.1 trillion from June 2007 to April 2009 to combat the crisis. “Policy made a difference,” Menegatti said, calculating that 90 percent of the U.S. economy’s 2.2 percent growth in the third quarter was linked to emergency aid. Officials were “more successful in putting a bottom to the global economy than I anticipated,” Roach, who is unable to attend Davos this year for the first time in a decade, said in a Jan 5 Bloomberg Television interview. Expanding Economy At the forum last year, he said the then-median forecast of economists for the U.S. to grow 2 percent in the fourth quarter was “overly optimistic.” The Commerce Department will report Jan. 29 that the U.S. economy expanded 4.6 percent in the final three months of 2009, according to the median estimate of 74 forecasters surveyed by Bloomberg News. Soros, who made $1 billion selling the pound in 1992, said in a syndicated column this month that he “failed to anticipate the extent of the rebound.” Many of the Davos delegates nevertheless return downbeat on the assumption that the impact from stimulus will wear out and consumers and companies remain too weak to take over. JPMorgan Chase & Co., the biggest New York-based bank by market value, estimates fiscal stimulus will add just 0.2 percentage point to global growth this year, down from 1.2 percentage point in 2009. Meantime, central banks from the Fed to the European Central Bank are beginning to peel back support for financial markets and may raise interest rates before year- end. “The recovery is liable to run out of steam and may even be followed by a second economic downturn , though I am not sure whether it will occur in 2010 or 2011,” Soros said in his column, adding that his views are “at variance with the prevailing mood.” Capacity Glut Roubini forecasts the G-7 will grow 1.7 percent this year, almost a percentage point less than BlackRock’s estimate. Hiring and incomes will stay weak in advanced economies, fiscal policy will begin to drag in the second half of the year, banks need to clean balance sheets more than markets calculate and companies must fill a glut of capacity before they invest, he said in his Hong Kong speech. There’s even a 40 percent chance of a relapse into recession this year, Roach said. Unemployment , currently at 10 percent, will lower the consumption share of the U.S. economy by 5 percentage points from its record 71.2 percent of gross domestic product, while China can’t sustain the investment that accounted for 70 percent of its GDP growth in 2009, he said. Stiglitz argues the current disconnect between the economy and stocks should be no surprise. Stocks are up because interest rates are low and companies such as New Brunswick, New Jersey- based Johnson & Johnson, the world’s largest maker of health- care products, are cutting costs by reducing payrolls. The Stiglitz View All this buoys equities and suggests that underlying economies are lackluster, he said in a Dec. 29 interview. He predicts a full recovery won’t be in place before 2012 at the earliest. “People at Davos and elsewhere want to believe things are good,” said Stiglitz, 66, a professor at Columbia University. “They will be more optimistic than me.” Harvard’s Rogoff, a former IMF chief economist who co- authored a recent book on financial crises over eight centuries, said history shows stocks tend to rebound rapidly after an economic slide. The historical norm is for recessions caused by financial turmoil to run for 1.7 years and equity markets to return to their previous peak within two to three years, according to his research. “There’s a famous saying at Davos that whoever are the heroes one year, you can guarantee something happens in between,” Rogoff said. “Last year I would say the extreme pessimists were celebrated and we didn’t get the extreme outcomes.” To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net Scott Lanman in Washington at slanman@bloomberg.net .

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Kramlich’s $2.5 Billion Last Hurrah Has Silicon Valley Skeptics Buzzing

January 21, 2010

By Tim Mullaney Jan. 22 (Bloomberg) — Even some of Dick Kramlich ’s friends predict he’s headed for trouble, Bloomberg BusinessWeek reports in the Feb. 1 issue. The 74-year-old co-founder of the venture capital firm New Enterprise Associates just raised a new fund so large that many in Silicon Valley say he’ll never be able to keep up with the returns at other top firms. Chevy Chase, Maryland-based NEA’s $2.48 billion fund is 20 times the size of the average venture fund raised last year and the largest since the financial crisis. Bob Ackerman , the founder of Allegis Capital in Palo Alto, California, who made his first fortune with Kramlich, says NEA’s task would be tough in the best of circumstances and looks near-impossible now because it’s so hard for venture firms to sell their startups through initial public offerings. “Big funds need big IPOs to generate a return, and those have been in short supply for a very long time,” Ackerman said. Such skepticism is widespread as the Valley legend begins his last act. Kramlich, who works out of NEA’s office in Menlo Park, California, says his firm’s thirteenth fund will be his last as a full-time partner, capping a career in which he helped commercialize everything from balloon angioplasty to PowerPoint. When it’s over, he says, he’ll have the last laugh. “With me, you’re dealing with a different kind of cat,” he says. “I don’t have an ego. I have quiet confidence.” Dabs of Money Kramlich and NEA 13 are part of a broader debate about the best way to finance innovation. In the wake of the economic crisis and a decline in startups going public, many experts say the venture business has to get much smaller, shrinking individual funds and the total size of the $200 billion industry by as much as half. VCs like Ackerman, Greycroft Partners LP’s Alan Patricof , and Netscape co-founder Marc Andreessen say the best approach is to put dabs of money into lots of tiny companies, quickly discarding ideas that flame out and feeding those that work. They may initially invest $1 million in the average startup, rather than the $20 million NEA typically has. Bloomberg LP, or a subsidiary of the company, is an investor in Andreessen’s fund. Kramlich and his backers counter that startups need serious money if they’re going to tackle the kinds of issues that boost the economy and raise living standards. A new drug can cost hundreds of millions of dollars to develop. Tesla Motors Inc. has raised $223 million to build electric cars. “If you’re going to climb Mount Everest, you can’t do it with gym shorts and sneakers,” says Alan E. Salzman , chief executive of Vantage Point Venture Partners , a Tesla investor. ‘Flexible Strategy’ NEA took a year longer than expected to raise its thirteenth fund, largely because of Lehman Brothers’ collapse, says Suzanne King , the partner in charge of fund-raising. Kramlich and his partners ultimately got the money by convincing institutional investors of their approach: They plan to hedge their bets on newly formed companies by also backing more mature startups that have perfected their technology and will use NEA’s cash to grow. The fund will focus on health care, energy, and tech companies, while looking for opportune deals in other sectors. “We wanted a diversified fund with a flexible strategy, and that’s what these guys do,” says Vince Smith , chief investment officer of Kansas’ Public Employees Retirement System, which put $10 million into the fund. NEA 13 made 15 investments before the fund closed in early January. The biggest was in Boulder, Colorado-based Clovis Oncology , which plans to buy cancer treatments from inventors who lack the money or management skills to get them to market, said CEO Patrick J. Mahaffy. Clovis will run clinical trials, work with regulators, and handle marketing, splitting rewards with inventors. The NEA fund put $20 million into Montclair, New Jersey e-tailer Diapers.com, largely for marketing. It’s also invested in social-networking and energy startups. Triple Their Money The challenge for NEA is the math, say advocates for smaller venture funds, such as Ackerman. Historically, venture firms have had to triple their money over 10 years to give investors’ top-notch returns. In a stock market where it’s difficult to take even small companies public, that looks highly unlikely, say the skeptics. “Turning $150 million into $450 million is a lot easier than turning $2.5 billion into $7.5 billion,” says Ackerman. He figures NEA needs its portfolio companies to be worth a total of $50 billion. “In one fund, you need 50 $1 billion exits? Or 200 $250 million exits? Has that ever been done?” Laying Plans Still, big venture funds have done better than most others in the past. Of the 11 funds of $1 billion or more raised through 2005, all of them outperformed the average fund raised the same year, according to researcher Cambridge Associates . NEA has raised three funds of $1 billion or more, and all three rank in the top 30% of funds raised the same year, Cambridge says. In the last stretch of his career, Kramlich is giving more responsibility to younger NEA partners and laying plans to build a museum for digital and audio art. But before he goes part- time, he wants to show he can thrive during what may turn out to be the worst stretch for the venture business in decades. “The legacy I want,” he says, “is top-quality people and a top-quality institution that combines the venture art form with scale.” — Editor: Peter Elstrom , Jim Aley To contact the reporter on this story: Tim Mullaney in New York at tmullaney1@bloomberg.net .

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Asian Stocks, Oil Fall on China Rates Concern, Obama Bank Plan; Yen Rises

January 21, 2010

By James Regan Jan. 22 (Bloomberg) — Stocks in Asia fell for a fifth day and commodities slumped on concern China will raise interest rates and banking curbs proposed by President Barack Obama will dent the U.S. recovery. The yen rose to a nine-month high against the euro and the risk of corporate defaults climbed. The MSCI Asia Pacific Index sank 1.7 percent to 121.69 at 2:05 p.m. in Tokyo, set to complete its longest losing streak in six months. Stock benchmarks in Japan, China, Hong Kong and South Korea fell more than 2 percent, while U.S. futures were little changed after declines in New York. Copper dropped for a third day and crude oil slipped below $76 a barrel. The yen rose against all 16 of the most-traded currencies. Indexes tracking Asian credit-default swaps rose the most in almost two months. Investors are retreating from higher-yielding assets after China’s 10.7 percent growth in the fourth quarter ignited concerns that the nations responsible for leading the world out of a recession will raise borrowing costs to keep their economies from overheating. Obama’s plan to restrict proprietary trading by lenders triggered declines of more than 6 percent in JPMorgan Chase & Co. and Bank of America Corp. yesterday. “There are some worries about the extent of tightening in China,” said Shane Oliver , head of investment strategy in Sydney at AMP Capital Investors, which oversees $90 billion. “I don’t think they’re seeking to crunch their economy, but obviously the market worries that that will be the case.” Stocks Slide Sixteen stocks declined on the MSCI Asia Pacific Index for each one that rose. Japan’s Nikkei 225 Stock Average slumped 2.5 percent, almost erasing this year’s advance. South Korea’s Kospi dropped 2.4 percent, the most since November. Mitsubishi Corp. , which gets 39 percent of its sales from commodities, lost 4.8 percent. Samsung Electronics Corp. , which relies on China for more than 20 percent of its sales, slid 2.7 percent. The Shanghai Composite Index fell 2.5 percent, extending the year’s decline to 5.7 percent. China’s central bank will raise interest rates by the end of June and increase banks’ reserve requirements, according to the median forecasts of 17 economists surveyed by Bloomberg after government reports yesterday on gross domestic product and consumer prices. “We’re looking toward a small correction going forward,” Seth Freeman , chief executive officer at New York-based EM Capital Management, said in a Bloomberg Television interview in Hong Kong. “The change in economic policy should have some impact on the market.” China Sales Investors pulled $348 million from China equity funds in the week ended Jan. 20, the biggest drop in four months, according to EPFR Global, in Cambridge, Massachusetts. Shares of Jiangxi Copper Co. slumped 3.7 percent in Shanghai and Aluminum Corp. of China Ltd. dropped 2.8 percent after they were cut to “sell” from “neutral” at Goldman Sachs Group Inc., which said accelerating inflation has increased risks for the industry. China’s inflation accelerated to 1.9 percent in December, from 0.6 percent the previous month. Copper for May delivery in Shanghai fell for a third day, dropping as much as 3.1 percent to 59,110 yuan ($8,658) per metric ton in Shanghai. Zinc tumbled 4.8 percent. Gold for immediate delivery traded at $1,092.15 an ounce, near the low of $1,088.65 yesterday, a level not seen since Dec. 30. The metal is poised for its biggest weekly decline in seven as the dollar’s rebound curbed investor demand. The Dollar Index , a gauge of the greenback’s strength against the currencies of six major U.S. trading partners, has gained 1.1 percent this week and yesterday reached a four-month high. U.S. Fuel Demand Crude oil dropped for a third day to $75.86 a barrel in New York, after the U.S. Energy Department said refineries ran at 78.4 percent of capacity last week, the lowest rate outside the Atlantic hurricane season since at least 1989. Gasoline stockpiles were the highest since March 2008. Fuel consumption in the past four weeks was 1.8 percent less than a year earlier. The yen advanced to 126.98 per euro in Tokyo from 127.37 in New York yesterday. It earlier reached 126.56, the strongest level since April. Japan’s currency gained to 89.93 per dollar from 90.43 yesterday after reaching 89.79, the highest level since Dec. 18. Korea’s won was the worst performer among the most-traded currencies, falling 1.8 percent against the yen and 1.3 percent versus the dollar. “Weakness across global equity markets is suppressing risk appetite,” said Mike Jones , a currency strategist at Bank of New Zealand Ltd. in Wellington. “Against this backdrop, investors will continue to sell growth-sensitive currencies in favor of safe-haven currencies like the dollar and the yen.” ‘Double-Dip’ Risk Japan’s 10-year bonds rose the most in six weeks, pushing the yield on the 1.3 percent note due December 2019 down three basis points to 1.310 percent. Similar-maturity U.S. Treasuries yielded 3.58 percent, about a quarter percentage point less than at the start of the year. A basis point is 0.01 percentage point. “There’s a possibility of a double-dip recession,” said Hiromasa Nakamura , a Tokyo-based senior investor at Mizuho Asset Management Co., which oversees $21.1 billion. “There is limited room for stocks to rise. Those factors are positive for U.S. Treasuries.” The Asia-Pacific region’s three benchmark indexes for credit-default swaps were on track for their biggest daily increases since Nov. 27, prices from CMA DataVision show. The indicators rise when the credit outlook deteriorates. The Markit iTraxx Japan index jumped 9.5 basis points to 142.5 basis points, according to Morgan Stanley prices. The Markit iTraxx Australia index climbed 9 basis points to 93 basis points, according to Citigroup Inc. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan increased 6 basis points to 108.5 basis points, Royal Bank of Scotland Group Plc prices show. To contact the reporter on this story: James Regan at jregan19@bloomberg.net ;

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Apple Said to Talk With Microsoft About Replacing Google Search on IPhone

January 20, 2010

By Peter Burrows and Cliff Edwards Jan. 20 (Bloomberg) — Apple Inc. is in talks with Microsoft Corp. to replace Google Inc. as the default search engine on the iPhone, according to two people familiar with the matter. The talks have been under way for weeks, said the people, who asked not to be identified because the details aren’t public. The negotiations may not be concluded quickly and might still fall apart, the people said. The discussions reflect the intensifying rivalry between Apple and Google, currently the main search engine on the iPhone. While the companies have worked as partners in the past and Google Chief Executive Officer Eric Schmidt served on Apple’s board , they now compete in markets such as mobile phones. Google introduced its Nexus One phone this month and offers a mobile operating system called Android. “To the extent that it threatens Google, such a deal would be good for Apple,” said James McQuivey , an analyst at Cambridge, Massachusetts-based researcher Forrester Research Inc. Apple is also working on ways to manage ads displayed on its mobile devices, a move that would challenge Google’s advertising business, one of the people said. Frank Shaw , a spokesman for Redmond, Washington-based Microsoft, and Katie Cotton , a spokeswoman for Cupertino, California-based Apple, declined to comment. Google spokeswoman Katie Watson also declined to comment. Microsoft, the world’s largest software maker, fell 38 cents to $30.72 at 9:39 a.m. New York time in Nasdaq Stock Market trading. Apple declined $1.48 to $213.56. Google, based in Mountain View, California, dropped $7.37 to $580.25. Bing Default A deal between Apple and Microsoft would likely mean iPhone owners would automatically get Microsoft’s Bing as the main search engine, possibly requiring them to actively change the phone’s settings if they want to search using Google. Google is now the default engine on the iPhone. To search via Bing, users need to go to the Bing Web site through the phone’s Web browser or download a separate Bing application. Being the default search engine on the iPhone generates sales for Google, which collects revenue from ads placed alongside its search results. To clinch the deal, Microsoft may be willing to share more revenue with Apple, one of the people said. Apple and Google don’t disclose the financial terms of their search partnership. Market Share Taking the default spot on the iPhone would also help Microsoft gain market share for Bing. Of people who use their phones to search the Web, 86 percent used Google in November, compared with 11 percent for Bing, according to New York-based Nielsen Co. Cooperation between Apple and Microsoft isn’t unprecedented. Microsoft sells Mac versions of its Office suite of business programs. When Apple co-founder Steve Jobs returned to the company in 1997, one of his first acts was to settle intellectual property infringement claims with Microsoft in exchange for $150 million and a promise from Microsoft that it would continue developing Office for the Mac. To contact the reporters on this story: Peter Burrows in San Francisco at peter_burrows@businessweek.com ; Cliff Edwards in San Francisco at cliff_edwards@businessweek.com

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Vietnam May Pay Full Point More Than Indonesia in International Debt Sale

January 19, 2010

By Lilian Karunungan and David Yong Jan. 20 (Bloomberg) — Vietnam may have to pay at least a percentage point more than the Philippines and Indonesia to sell international bonds as a weakening local currency and surge in developing-nation sales spur investors to seek a higher premium. The government aims to issue $1 billion of 10-year bonds as long as the interest rate doesn’t exceed 7 percent per year, the central bank said in a statement yesterday. The Philippines sold debt due 2020 at 5.67 percent on Jan. 7 and Indonesia offered similar notes at 6 percent last week. Both countries carry lower debt ratings than Vietnam from Standard & Poor’s. Vietnam is planning its second sale of dollar debt as the dong trades near a record low, inflation accelerates and the trade deficit widens. AllianceBernstein L.P. and Western Asset Management Co. say they are becoming more selective after developing nations sold more than $13 billion in overseas bonds this year, the busiest start for emerging-market foreign borrowing in at least a decade. Indonesia scaled back its offer to $2 billion and canceled a planned 30-year note sale. “The Vietnamese authorities have at present a difficult task in addressing mounting inflationary pressures and external balances,” said Dennis Shen , an analyst in New York at AllianceBernstein, which oversees $496 billion globally and is an affiliate of French insurer Axa SA. “With the risks inherent, we would likely consider participation only should yields come in around the 7 percent to 7.25 percent range.” Growth Policies Vietnam’s government is struggling to balance policies that spur growth with efforts to ensure its economy remains stable, Moody’s Investors Service said Jan. 15. The nation is rated Ba3 by Moody’s, three levels below investment grade, with a negative outlook. The ranking is on par with the Philippines and one grade weaker than Indonesia. S&P rates Vietnam BB, one level higher than the BB- ranking for Indonesia and the Philippines. Vietnam sold $750 million of 10-year bonds to yield 7.125 percent at its first global bond sale in October 2005, a premium of 2.56 percentage points over similar-maturity Treasuries. The January 2016 notes yielded 6.158 percent yesterday, for a spread of about 3.3 percentage points, according to data compiled by Bloomberg. With a 7 percent yield on the new 10-year debt, Vietnam would be offering about the same level of premium. Barclays Capital Plc, Citigroup Inc. and Deutsche Bank AG are managing the sale and have already held marketing lunches in Hong Kong and London. The central bank’s release on its Web site was later revised to remove references to the possible yield. The Finance Ministry plans meetings with fund managers in Boston on Jan. 20 and New York the following day. ‘Scarcity Value’ Sergey Dergachev , who helps oversee $250 billion including $6 billion in emerging-market debt, at Frankfurt-based Union Investments, said he will add more Vietnam bonds because the nation doesn’t borrow overseas often, limiting supply for investors in higher-yielding bonds. Investors added almost $3 billion into equity and bond funds in developing nations in the week to Jan. 13, following record inflows last year, Cambridge, Massachusetts-based fund tracker EPFR Global said Jan. 15. “It’s the scarcity value these upcoming Vietnamese bonds offer,” Dergachev said. “The new issue should have an absolute yield of around 6.85 percent to 7 percent.” Vietnam’s dollar debt is in limited supply and it’s difficult to buy local-currency bonds, Dergachev said. Because they may be difficult to sell quickly, the bonds need to offer a “liquidity premium,” he said. “In the case of Vietnam, many investors got burned in the past when they got into local-currency debt and couldn’t get out,” said Mark Dow , who helps manage $3 billion at Pharo Management LLC in New York. “That may be a factor.” Pharo Management will consider buying the debt if it prices attractively, he said. ‘More Careful’ A surge in debt sales by emerging-market nations and the shrinking yield advantage may add to Vietnam’s difficulty in attracting investors, according to Rajeev de Mello , Singapore- based head of Asian investment who helps manage $506 billion globally at Western Asset. Albania is planning to sell its first international bonds, after the Philippines, Mexico, Poland, Turkey, Indonesia and Slovenia issued debt this year. Investors demanded a 2.97 percentage point premium to own developing-nation debt on Jan. 19, according to the EMBI Global Composite Index , down from 4.14 percentage points six months ago. “Investors have a fairly large choice now of issues,” De Mello said. “They are bit concerned the spreads to Treasuries are too low and are going to be a bit more careful.” Currency Weakness Vietnam’s dollar-denominated bonds returned 25 percent in the past year, beating the 21 percent gain for the Philippines, according to indexes compiled by JPMorgan Chase & Co. They trailed the 56 percent rally in Indonesian notes and the 29 percent for the EMBI Global index, which tracks the debt of 37 developing nations. Credit default swaps for Vietnam cost 236 basis points, 40 percent more than for the Philippines and 24 percent more than for Indonesia. They are contracts used to protect against or speculate on default, paying the buyer face value if a borrower fails to adhere to debt agreements. The central bank devalued the dong by 5.4 percent last year as the trade balance recorded a $12.25 billion deficit for all of 2009 after a first-quarter surplus. The dong is trading at 18,474 per dollar, near a record low of 18,500 reached in November. Consumer-price gains quickened to 6.52 percent in December from a year earlier, compared with 4.35 percent in November. Without a successful bond sale, Vietnam will have to rely on international donors to fund energy and infrastructure projects, said John T. Sullivan , founder of Washington-based consultancy Kerry Emerging Global Opportunities LLC. That may hamper growth in exports, investment and the economy, he said. “Vietnam can be a dynamic economy if the proper infrastructure is put into place,” he said. To contact the reporters for this story: Lilian Karunungan in Singapore at at lkarunungan@bloomberg.net ; David Yong in Singapore at dyong@bloomberg.net .

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Chicago Seeing 42% Increase in Applicants in Drive to Compete With Harvard

January 14, 2010

By Janet Frankston Lorin Jan. 14 (Bloomberg) — The University of Chicago, whose faculty and alumni have won 85 Nobel Prizes, is getting harder to get into. The university, which accepted 27 percent of applicants for the current freshman class, is reporting a 42 percent surge in applications after a push to increase interest in the school. The campaign is designed to escalate competition for scholars with top-rated schools such as Harvard University, which has a 7 percent admission rate for freshmen, and Princeton University, at 10 percent, that are more selective. Admission rates are more than numbers in a ledger. They are a crucial tool in the business of U.S. higher education, so relentlessness about recruiting makes sense, said Jack Maguire, chairman of Maguire Associates Inc ., a Concord, Massachusetts, consulting company. Alumni may donate more when they see that their alma mater “is the place everyone wants to go and few are chosen,” Maguire said in an interview. Professors prefer to go where the top students are, he said. While the ranks of the rejected will swell as more high school seniors apply, not everyone courted by Chicago is taking the bait. David Floyd, a National Merit Scholarship semifinalist at Westminster Schools in Atlanta, received e-mails from the university that enticed him to visit the campus in October. The communications are part of Chicago’s campaign to attract more of the smartest students, said John Boyer, undergraduate dean. Floyd said he found “over-intellectual angst” and not enough fun. ‘Showed Me Up’ “I really wanted to like it,” said Floyd, 18, a wrestler who applied instead to Brown University in Providence, Rhode Island, Williams College in Williamstown, Massachusetts, Kenyon College in Gambier, Ohio, and four other institutions, and will learn by April of their decisions. “I’d always thought that I was more academic than social, but they showed me up.” Chicago’s deadline for first-year applications was Jan. 2. The eight colleges in the Ivy League in the northeastern U.S. also had early-January due dates. So far, Chicago’s recruitment campaign appears to be paying off. Chicago today said a record 19,306 students applied for undergraduate admission to next September’s entering class. ‘Overwhelmingly Positive’ The numbers are “really astonishingly encouraging and positive,” Boyer said in an interview. “It’s a blend of better communications and also having high-quality programs to communicate about.” In December, James Nondorf , vice president and dean of college admissions and financial aid since July 1, sent potential applicants copies of an admission essay — which he called “lighthearted” — in the form of a love letter. The submission began: “Dear University of Chicago, / It fills me with that gooey sap you feel late at night when I think about things that are really special to me about you.” The writer was one Rohan, whose last name wasn’t made public, and he won entrance to the college. Nondorf’s e-mail provoked hundreds of responses to the Web site College Confidential . Nondorf, in another e-mail, called the feedback “overwhelmingly positive.” The quality and quantity of undergraduate applicants, and the percentage rejected, influence a college’s image, said Henry Bienen , who retired Aug. 31 as president of Northwestern University in Evanston, Illinois. ‘People Do Care’ “People do care,” Bienen said in an interview. “Faculty care. Alumni care. It’s another data point that you’ve done better in the marketplace for strong students.” High school counselors say there’s a downside in the quest for applicants. Chicago may be jeopardizing its reputation as “an intellectual think tank for a particular kind of brilliant and serious undergraduate,” said Laura Clark, director of college counseling at Ethical Culture Fieldston School in New York. “One of the things I loved about Chicago is, it didn’t fall into this kind of crazy marketing boondoggle that has nothing to do with education,” Clark said in an interview. While Clark said merit-based scholarships might help Chicago attract more of the applicants it wants, Nondorf said the university has no plans to increase such aid. Merit awards account for almost 10 percent of a financial aid budget of about $70 million that’s tilted toward need-based assistance, Nondorf said. The cost for freshmen this academic year is $55,200, covering tuition, fees, room and board, books and personal expenses, according to the university’s Web site. Hearing From Drexel Adam Katz, a senior who sings, plays viola and piano, writes for the newspaper, and plays tennis and basketball at Mamaroneck High School in Mamaroneck, New York, said he received 17 e-mails from Chicago, the most from any college. The messages told of the core curriculum, “courses that create a strong foundation of critical skills, which will transfer to any field of study” and said students play hide- and-go-seek in the library, attend “bad movie” night, and play inner-tube water polo and midnight Frisbee. Katz, 18, said he also got nine e-mails from Columbia University in New York, six from Yale University in New Haven, Connecticut, five from Johns Hopkins University in Baltimore and four from Brown, all institutions in which he had indicated interest when he took college-entrance exams. He also received unsolicited e-mails, including 15 from Drexel University in Philadelphia, he said. While he accepted an offer last month of early admission to Brown, Katz said he gave Chicago — which he visited twice without applying — more thought than some classmates did. Economics Department “I have a feeling a lot of people in Mamaroneck are trapped in the East Coast bubble and wouldn’t give anything outside of here the time of day,” Katz said in an interview. Catherine Gerkis, a Mamaroneck senior who plays the flute and is ranked in the top 5 percent of her class, may escape the bubble. Chicago might have everything she wants, including access to internships and entertainment and a top-rated economics department, she said. Gerkis, 17, applied for admission. Chicago drove applications up 9.6 percent, to 13,564, for the current first-year class, largely by accepting for the first time the Common Application , a form students can use to apply to multiple colleges. The university offered admission to 3,708 first-year students in 2009, and 1,335 enrolled, according to Chicago’s data. The institution, founded in 1890, has increased mailings to drum up still more candidates. A look at Chicago’s campaign shows the lengths to which marketers go in the rivalry of elite college recruiting. Campus Judaism Chicago for the first time sent “thousands” of letters with messages tailored to recipients who had expressed interest in the arts or premedical programs, Nondorf said. Students at Jewish day schools received a letter about Judaism on the campus. Students who indicated interest in the arts — by checking a box when taking a standardized test, for instance — received a one-page missive in the mail from Larry Norman, deputy provost of the arts. Norman wrote of a cappella and filmmaking groups on the campus, an arts center due to open in 2012, and professional venues in the city such as Steppenwolf Theatre Co . Nobel Prizes For students who responded to initial inquiries, the university also sent e-mails telling of 82 Nobel Prizes won by faculty and alumni , largely in physics and economics. That number has since increased to 85, including the Nobel Peace Prize received last year by U.S. President Barack Obama , who was a lecturer at the law school. A new brochure tells of Rhodes scholars from the university and boasts of alumni such as U.S. Supreme Court Associate Justice John Paul Stevens , from the class of 1941. Other graduates of the university include the author Philip Roth; David Axelrod , an adviser to Obama; and David Rubenstein , a managing director and co-founder of Washington-based Carlyle Group, the second-largest private-equity company. The admissions office in the past wasn’t so aggressive in contacting students, and relied mostly on the U.S. Postal Service, failing to recognize “the world students live in now,” Boyer said. Chicago now sends more e-mails, he said, and began opening the admissions office on Saturdays to accommodate visitors. ‘It All Adds Up’ “It all adds up,” Boyer said. “It’s like an election campaign. No one thing gets you over the winning line.” Chicago wants more undergraduate applications than Columbia University’s Columbia College gets, Boyer said. That college — also urban and focused on a core liberal-arts curriculum — said it drew 21,273 applicants last year, 57 percent more than Chicago. This year’s total isn’t available yet. Chicago and Columbia are tied for eighth in the U.S. News & World Report rankings of U.S. universities. Elements of “student selectivity,” such as admission-test scores of enrollees and the acceptance rate, account for 15 percent of the rankings, according to the magazine’s Web site . Harvard , in Cambridge, Massachusetts, shares the No. 1 rank with Princeton , in Princeton, New Jersey, receiving 29,112 undergraduate applications for the class that entered in 2009. Harvard also is increasing communications to recruited students, said William Fitzsimmons , dean of admissions and financial aid for undergraduates. Chicago’s 73 percent rejection rate for the class that entered in September, while more than triple the 23 percent in 1993, was the lowest among the top 10 universities ranked by U.S. News, according to data from the institutions. ‘Quirky and Distinctive’ Applicants must answer essay questions augmenting the Common Application. For 2009 admissions, Chicago asked writers to describe a “street, path or road — real or imagined or metaphorical.” The questions are “quirky and distinctive,” said Kirsten Madsen, 19, a first-year student from Crowley, Texas. She compared Choke Cherry Lane in her hometown with visions of a figurative Wall Street. Chicago began acquiring its “hyperintellectual” reputation under Robert Maynard Hutchins , who led the school from 1929 to 1951, Boyer said. Hutchins pursued the brightest 16-year-olds, who skipped two years of high school, Boyer said. In 1939, Hutchins abolished varsity football, and it wasn’t reinstated until 1969. T-shirts sold at the student union bear a slogan mocking the intellectuality: “Where Fun Goes to Die.” On the Road Nondorf, 42, was on the road during most of October, including a trip to Stuyvesant High School , a public institution in New York that emphasizes math and science. “Our kids really love to learn,” Nondorf told the Stuyvesant audience of about 50. “There’s a lot of discussion and intellectual vibrancy. You can feel it. It’s like a vibe on campus.” Caterina MacLean, a University of Chicago freshman from Scarborough, Maine, said she frets that the push to increase applications may change the vibe. “We do want to keep the student body relatively unique, with that special intellectual drive,” said MacLean, 18. “A lot of us worry that it might be watering itself down.” To contact the reporter on this story: Janet Frankston Lorin in New York jlorin@bloomberg.net .

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Genzyme Investor Whitworth Suggests Sale of Some of Drugmaker’s Businesses

January 13, 2010

By Elizabeth Lopatto Jan. 13 (Bloomberg) — Genzyme Corp., the world’s largest maker of genetic disease drugs, should sell businesses that don’t focus in that area, said Ralph Whitworth , the head of Relational Investors LLC. Genzyme’s renal business, which includes Renagel and Renvela, is a poor investment, Whitworth said in an interview. Those two drugs generated $677 million in 2008. Relational Investors, Genzyme’s fifth-largest shareholder , wants the Cambridge, Massachusetts-based company to focus on its genetic disease treatments, which had sales of $2.23 billion in 2008, accounting for half of the drugmaker’s revenue. Over the last 25 years, Genzyme had a $1.3 billion loss in pre-tax earnings if genetic disease drugs such as Cerezyme were excluded, wrote Yaron Werber , an analyst for Citigroup, in a Jan. 12 note to investors. “We want to bring discipline to the financial side,” said Whitworth, a founder and principal of Relational Investors, in an interview yesterday. “The discipline increases the likelihood that money’s well-spent.” Genzyme shares rose 52 cents to $53.50 at 4:14 p.m. New York time in Nasdaq Stock Market composite trading. The company fell 17 percent in the last 12 months. Genetic-Disease Drugs Genzyme’s genetic-disease drugs had a return of invested capital of 25.8 percent in 2008, Werber said in his research note. That is a measure of how well a company uses its money from debt and equity markets. Excluding those drugs, Genzyme returned 8.8 percent in 2008. In 2009, contamination forced its Allston Landing plant to close, creating shortages of its best-selling Cerezyme. The company’s 2009 revenue shrank 2 percent to $4.5 billion because of the shortages, Chief Executive Officer Henri Termeer announced at a J.P. Morgan healthcare conference yesterday. Though San Diego-based Relational is “disgruntled” by the stock performance, the firm has not called for a change in management, Whitworth said. On Jan. 7, he deferred his request for board representation and agreed to support the company’s slate of directors in 2010. If he requests representation by November, he’ll be appointed to the board, according to the agreement. Carl Icahn Billionaire investor Carl Icahn is also an investor in Genzyme, having acquired a $72 million stake in the company during the third quarter. Icahn held 1.45 million Genzyme shares as of Sept. 30 after holding none three months earlier. Termeer said yesterday that he hadn’t spoken to Icahn. Whitworth said in the interview that he didn’t speak to Icahn about Genzyme. Genzyme said in June it would ration two drugs, Cerezyme and Fabrazyme, after the company closed its Allston Landing plant in Boston to decontaminate after detecting a virus called Vesivirus 2117. Most of Genzyme’s medicines treat hereditary disorders caused by lack of enzymes needed for critical bodily functions. the same period a year earlier. Gaucher disease treatment Cerezyme is Genzyme’s biggest product. People with Gaucher lack an enzyme needed to break down a type of fat that accumulates in organs and bones, causing liver and spleen enlargement, anemia, bruising and bone pain. Gaucher affects about 10,000 people worldwide. Fabrazyme treats Fabry disease, an inherited illness in which lipids build up to harmful levels in the eyes, kidneys, nervous system and cardiovascular system. Fabry disease affects 5,000 to 10,000 people. To contact the reporter on this story: Elizabeth Lopatto in New York at elopatto@bloomberg.net .

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Corporate Bond Returns Rising at Fastest Pace Since 1998: Credit Markets

January 12, 2010

By Bryan Keogh Jan. 12 (Bloomberg) — Corporate bonds are providing the best returns in more than a decade, spurring sales by PepsiCo Inc. and Bayerische Motoren Werke AG as investors anticipate that earnings growth will make it easier for companies to meet debt payments. The Bank of America Merrill Lynch Global Broad Market Corporate Index returned 1.02 percent since Dec. 31, the biggest gain for the start of a year since rising 1.51 percent in the same period of 1998. Financial and energy companies are the top performers, with issues by New York-based American International Group Inc. rallying 3.62 percent, and oil refiners rising 2.18 percent, the index shows. Amid no signs that last year’s record rally will end soon, combined profits of companies in the Standard & Poor’s 500 Index likely rose 62 percent last quarter, according to estimates from analysts compiled by Bloomberg. Some $95 billion has been raised in the global corporate bond market in 2010, compared with $101 billion in the same period of 2009, Bloomberg data show. “We’re telling our clients get into the markets now, get some of your financing done now, don’t leave it all for later in the year because it could be more difficult to finance by the middle of the year or later in the year,” said Mark Bamford , the head of global fixed-income syndicate at Barclays Capital Inc. in New York. Barclays is the biggest underwriter of U.S. debt this year, according to data compiled by Bloomberg. Elsewhere in credit markets, interest-rate swap spreads narrowed for a third day as Treasuries gained and investors added to bets the Federal Reserve will keep its target rate for overnight loans between banks at a record low through at least mid-2010. Indonesia is preparing to raise about $2 billion of 10-year bonds, after scrapping plans to also issue 30-year debt. Mortgages, Swaps Corporate bonds rallied 16.3 percent on average in 2009, after losing 4.73 percent in 2008 as credit markets froze, according to the Merrill Lynch index, which tracks almost 8,500 securities. The extra yield investors demand to own the debt instead of Treasuries has fallen 15 basis points, or 0.15 percentage point, this year to 161 basis points. Last year, the spread narrowed 313 basis points. Corporate yields closed yesterday at 4.17 percent in New York, compared with last year’s high of 7.41 percent on March 17. PepsiCo , the second-largest soft-drink maker, sold $4.25 billion of securities yesterday to finance its acquisition of two bottlers, split between 18-month, 5-year, 10-year and 30- year bonds. Higher Rates The Purchase, New York-based company’s five-year notes were priced to yield 57 basis points more than Treasuries, compared with a spread of 180 basis points on securities of the same maturity debt sold in February. The older bonds last traded Jan. 5 at 103.95 cents on the dollar, up from 99.788 cents when they were issued. “Coming to market now versus later is a good move, because everyone is anticipating that by the end of this year, rates will be higher,” said Stephen Mahoney , a money manager at Glenmede Trust Co. in Philadelphia, who oversees $4 billion in fixed-income assets that includes PepsiCo bonds. The company’s outstanding bonds are trading “very rich,” signaling the time was right for PepsiCo to issue, he said. Investors added a record $153.2 billion to U.S. bond funds in 2009 as the economy began to recover from the first global recession since World War II, according to EPFR Global, a research firm in Cambridge, Massachusetts. John Lipsky , the first deputy managing director at the International Monetary Fund, said in a Bloomberg Radio interview on Jan. 6 that the agency may raise its 3.1 percent forecast for global growth. ‘Strong Liquidity’ “Asset managers need to invest a lot of money from pension funds, insurance companies and banks, so bond spreads are tightening,” said Santiago Rubio , who helps oversee about 14 billion euros ($20 billion) as head of investment funds at La Caixa’s asset-management unit in Madrid. “The strong liquidity on the buy-side will be matched by a no-less-strong volume of new issuance, so the spread tightening may stop.” Bamford said sales in the U.S. may decline about 10 percent this year from the 2009 record. “The number, though, will vary based on the number of mergers and acquisitions,” Bamford said. “If there are far more mergers and acquisitions, we would expect to see far more corporate issuance.” Nasdaq Borrowing Nasdaq OMX Group Inc. , the second-biggest U.S. equity exchange operator, said it will borrow almost $2 billion in bonds and loans. Bank of America and JPMorgan Chase & Co. are arranging two term loans of $500 million each and a $250 million revolving credit line, Nasdaq said yesterday in a regulatory filing. The New York-based company said it also plans $700 million of senior notes due 2015 and 2020. Proceeds will be used to repay the $1.7 billion Nasdaq owed in term loans as of Dec. 31 and to refinance a $75 million revolver with no outstanding debt, according to the filing. The transaction will extend Nasdaq’s maturities and provide it with looser debt terms, it said. Munich-based BMW , the largest maker of luxury cars, issued 2.5 billion euros ($3.6 billion) yesterday in the biggest bond sale in Europe by a non-financial company in almost three months, Bloomberg data show. The offering was split between 1 billion euros of notes due April 2013 that pay interest at 68 basis points more than the benchmark mid-swap rate and 1.5 billion euros of notes due January 2017 with a spread of 90 basis points. Indonesia Bonds Indonesia’s 10-year bonds may be priced to yield about 6 percent, or 2.2 percentage points more than similar-maturity U.S. Treasuries, according to people familiar with the sale. A sale of 30-year bonds was canceled. The debt would have yielded about 7.25 percent, or 2.54 percentage point more than Treasuries, according to the people. European governments are preparing to expand their funding sources. Spain hired banks to sell bonds as it starts raising a budgeted 211.5 billion euros this year. Austria is issuing at least 3 billion euros of seven-year notes, according to the country’s Federal Financing Agency. The rate at which companies defaulted on their debt fell for the first time in two years in the fourth quarter, Moody’s Investors Service said yesterday. The global speculative-grade default rate dropped to 12.5 percent, from 12.6 percent in the previous three months, Moody’s said in a report. S&P raised the ratings on 184 U.S. borrowers last quarter and cut 181, the first time upgrades exceeded downgrades since the three months ended June 30, 2007, Bloomberg data show. Swap Spreads Rising confidence can be seen in U.S. interest-rate swap spreads. The difference between the rate to exchange floating- for fixed-interest payments and Treasury yields for two years, known as the two-year swap spread, narrowed as much as 0.94 basis point to 26.25 basis points. That’s down from last month’s intraday high of 39.75 on Dec. 8. Swap spreads are based in part on expectations for the London interbank offered rate, or Libor, and are used as a gauge of investor perceptions of credit risk. Swap rates serve as benchmarks for investors in many types of debt, including mortgage-backed and auto-loan securities. The most-senior mortgage securities backed by option adjustable-rate mortgages jumped 9 cents on the dollar from mid- December to 58 cents at the end of last week, according to Barclays. That’s almost double the low of 33 cents in March. So-called non-agency home-loan bonds have been “leading the pack,” Barclays analysts led by Ajay Rajadhyaksha in New York wrote in a Jan. 8 report. Investors, who in December were trying to protect their 2009 gains and boost their year-end cash to show shareholders, regulators and clients, are now buying, according to Scott Buchta , head of investment strategy at Guggenheim Securities LLC in Chicago. ‘Demand for Assets’ “It’s cash that was on the sidelines at the end of the year coming in,” Buchta said. “You’re seeing huge demand for assets.” Yield spreads on the most-senior 10-year commercial- mortgage securities originally rated AAA narrowed 0.26 percentage point last week to 3.99 percentage points, according to Morgan Stanley data . Spreads have contracted from 4.88 percentage points in the week ended Dec. 11 and a record 14.26 percentage points in November 2008. In Australia, overseas borrowers are selling the most local-currency notes in almost three years to exploit the record-low cost of swapping the proceeds for U.S. dollars. Australian Banks So-called kangaroo bond sales jumped to A$9 billion ($8.4 billion) last quarter from A$5.3 billion in the three months ended Sept. 30, according to data compiled by Bloomberg. The sales were the highest since A$11.4 billion was raised in the first three months of 2007. So far this year, kangaroo bonds totaled A$1.75 billion. Financial institutions are benefitting as Australian banks increase overseas borrowing before a change in capital reserves regulations triggered by the global credit freeze. A sevenfold increase in U.S. dollar bond sales after the rules were proposed drove the cost of exchanging debt in greenbacks for Australian dollars to the highest on record, the five-year basis swap shows, meaning kangaroo bond sellers performing the opposite transaction are getting the biggest-ever discount. Borrowers typically use cross-currency basis swaps to exchange floating-rate payments in one currency to another. The Australian dollar basis swap measures the cost of switching interest charges pegged to the Libor for rates linked to Australia’s bank bill swap rate. The basis swap rose to 48 basis points on Dec. 2, the highest since 1997 when Bloomberg records began, and was last at 41 basis points after averaging 16 basis points in the first nine months of 2009. To contact the reporter on this story: Bryan Keogh in London at bkeogh4@bloomberg.net

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Harvard University Audited as Part of IRS Probe of Nonprofit Organizations

January 11, 2010

By Michael McDonald and John Lauerman Jan. 11 (Bloomberg) — Harvard University is one of 40 colleges that will be audited this year as part of the Internal Revenue Service’s review of the tax-exempt status of some nonprofit organizations, the school said in bond offering documents. The audit “is just now beginning,” the Cambridge, Massachusetts-based university said in documents detailing plans to sell $400 million of tax-exempt securities this week. The “examinations typically extend over more than a year and involve a team of agents reviewing a broad array of activities,” according to the documents. In October 2008, the IRS sent questionnaires to 400 colleges and universities asking how they manage taxable operations as well as how they “invest and use endowment funds,” according to a description of the so-called compliance project on the federal agency’s Web site . The IRS is probing whether the institutions’ tax-exempt status should apply to income from activities not related to their educational mission. The questionnaire also sought to “determine types and amounts of executive compensation,” according to the IRS Web site. Bruce Friedland , an agency spokesman, declined to comment. Harvard received and responded to the IRS questionnaire and then learned it was one of 40 colleges and universities subject to a subsequent audit this year, the school said in its bond offering documents. Harvard “has no reason to believe that the examination will have an adverse effect on the tax-exempt status of the university or any other aspect of the university’s operations,” the school said in the documents. John Longbrake , a Harvard spokesman, declined to comment. Harvard is the world’s richest college with an endowment of $26 billion as of June 30, down from a peak of $36.9 billion in 2008. An alumni group criticized pay at the school’s endowment, known as Harvard Management Co., in 2003 after the top six in- house managers earned a combined $107.5 million the prior year. Jack Meyer , who ran the endowment for 15 years, left in 2005. Jane Mendillo took over Harvard Management in 2008. Senator Charles Grassley , an Iowa Republican, has been examining finances at universities, including how much funding rich schools give to student financial aid, and drug company payments to university researchers. Grassley called the IRS probe “long overdue” when it began in 2008. To contact the reporters on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net ; John Lauerman in Boston at jlauerman@bloomberg.net .

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Turner’s Plan to Curb `Socially Useless’ Trades Makes U.K. Bankers See Red

January 8, 2010

By Caroline Binham Jan. 8 (Bloomberg) — Sitting in his London office, Adair Turner is a study in gray eminence. A charcoal wool suit complements his silver fringe of hair, and he’s framed by a window that looks out to a leaden winter sky punctured by steely skyscrapers. The towers are home to Barclays Plc , HSBC Holdings Plc and other lenders Turner watches over as chairman of the U.K. Financial Services Authority, Britain’s financial regulator. The setting belies Turner’s growing reputation in the City, London’s financial district, as a troublemaker. Turner, a former director general of the Confederation of British Industry , or CBI, the main U.K. business lobby, might have reasonably been expected to act as a bureaucratic booster for banks and investment firms reeling from the global recession. Instead, since taking the job in September 2008, he’s used his time as regulator to scold the financial services industry for growing too large on the back of risky products that he says offer little value to society, Bloomberg Markets magazine reported in its February issue. To reduce the appetite for speculative risk, Turner is promoting a levy on financial transactions to divert money to the poor and support efforts to address climate change. The so-called Tobin tax is named after the late U.S. economist James Tobin , a Nobel laureate who proposed a surcharge on currency trading to deter speculation. “I believe in markets; I believe in enterprise,” says Turner, who numbers Franklin D. Roosevelt and British economist John Maynard Keynes among his personal heroes. “But I have always believed that market economies will not of themselves combine that with environmental sustainability or with a reasonably just and good society. I believe that capitalism needs to be saved from itself.” Pinstriped Provocateur Turner — a member of the British House of Lords and head of the country’s Committee on Climate Change — seems to enjoy his role as a pinstriped provocateur, casually remarking that he also supports the decriminalization of drugs. “I very strongly believe that society is best served by not having shibboleths, areas where we can’t go,” he says. Turner’s public campaign has helped nudge British lawmakers into getting tough on banks. U.K. Prime Minister Gordon Brown told a Group of 20 nations meeting in November that he supported a global transaction tax. Then, on Dec. 9, Brown’s government imposed a temporary 50 percent levy on bank bonuses, which applies to awards over 25,000 pounds ($39,800) issued from that day to April 5. The charge will be paid by banks instead of employees. ‘Core Issue’ Turner is using his post and influence to ask that bankers consider what purpose they serve in society. “To say that in Britain, in London, as head of the FSA, is really something one would not expect,” says Tommaso Padoa- Schioppa , European chairman of Promontory Financial Group , a regulatory advisory firm. “He addressed a core issue: that the size of finance may have grown beyond what is serving a useful purpose for the economy,” says Padoa-Schioppa, who was Italy’s finance minister from 2006 to 2008. Turner is lambasting an industry still smarting from the credit crisis. Financial services accounted for 10.1 percent of the U.K.’s gross domestic product and 27.5 percent of corporate taxes in 2007, according to statistics from the U.K. government and PricewaterhouseCoopers LLP. More than 1 million Britons were employed in financial services that year, according to the U.K. Office for National Statistics. The London-based Centre for Economics and Business Research estimates that City firms have cut as many as 50,000 jobs since the beginning of 2008. Covering Risk In the wake of the global recession, Turner’s FSA is proposing that U.K. banks at least double the amount of capital they set aside to cover the risks of proprietary trading and bolster the level of shareholder equity available to absorb potential losses from activities such as lending. The FSA also wants to require big banks to draw up so-called living wills to guide regulators on how to wind up their operations the next time a disaster strikes. Turner triggered controversy in August when he first floated the transaction tax idea and criticized the size of the U.K. financial sector in an interview in Prospect, a British journal. At a black-tie gathering of financial executives in London on Sept. 22, Turner said banks should move away from products, such as complex derivatives, that don’t benefit society. “Some financial activities which proliferated over the last 10 years were socially useless, and some parts of the system were swollen beyond their optimal size,” he told the gathering. ‘Appalled, Disgusted, Ashamed’ Turner’s remarks have been condemned by executives who say it’s ridiculous to introduce a moral dimension to regulation. “Quite honestly, I am appalled, disgusted, ashamed and hugely embarrassed,” wrote Howard Wheeldon , a senior strategist at BGC Partners LP, in an August note. “How dare he?” Wheeldon now says. “Markets will decide if something is too big or too small. It’s not for an individual, however powerful, to slam and damn nearly 1 million people.” Michael Spencer , chief executive officer of London-based broker ICAP Plc , joined the chorus of critics in late November. “I was genuinely offended,” Spencer said at an industry awards dinner in London. “Using his logic, I presume he would describe Porsche as socially useless for making cars that go twice the speed limit or Jimmy Choo for making shoes in dozens of different colors.” Turner is mostly unrepentant. While his words may have been imperfect, he now says, he stands by the sentiments behind them. “I wish I had said ‘economically useless’ rather than ‘socially useless,’ as it would have been more precise,” he says. Global Influence Now, Turner has a potentially more powerful forum for his ideas: the G-20. As a member of the global Financial Stability Board , he’s been asked by the G-20’s central bankers and finance ministers to propose ways in which governments should regulate international firms such as Deutsche Bank AG and Goldman Sachs Group Inc. His brief is to explore whether banks’ trading arms should be split from their deposit-taking units. Turner has said he’s against such a divide and instead favors surcharges on riskier trades to make them less attractive. He has also proposed requiring lenders to set up separate regional subsidiaries so that bank failures can be contained, helping to prevent the market seizures that followed the 2008 collapse of Lehman Brothers Holdings Inc . Power, Charisma The son of a town planner, Jonathan Adair Turner has displayed a political suppleness throughout his public career. At the University of Cambridge, where he studied history and economics, he was chairman of the student Conservative Association , only to shift his allegiance to the now-defunct center-left Social Democratic Party in 1981. Though Turner was given a peerage in 2005 by the Labour government, he joined the House of Lords as a cross-bench, or unaffiliated, member. “There are very few people out there who have his charisma,” Wheeldon says. “Power seems to ooze from his fingertips.” After graduating with top honors from Cambridge in 1978, Turner worked as an economics tutor and joined McKinsey & Co. four years later, eventually opening the management consulting firm’s banking practice in Eastern Europe and Russia. It was at McKinsey that he met his Irish-born wife, Orna Ni-Chionna , with whom he has two daughters. In 1995, he became director general of the CBI at the age of 39. ‘Red Adair’ At the CBI, Turner built a relationship with Labour Party leader Tony Blair and was dubbed “Red Adair” by the British press, a play on the name of the late American oil-well firefighter. At the time, Labour officials regularly met with City executives to assure them that the party was friendly to business. Blair became prime minister following Labour’s landslide win in May 1997, ending four terms of Conservative rule that began with Margaret Thatcher’s election in 1979. “The CBI in the old days was the bulwark of the Thatcher regime,” says Simon Gleeson , a regulatory lawyer at Clifford Chance LLP in London. “Adair was seen to be extending the CBI hand of friendship to the Blairites. For the mainstream CBI, this was just the most radical thing.” As one of his first acts as chancellor of the Exchequer in Blair’s government, Brown created the FSA in 1997 and divided oversight for the financial system among it, the Bank of England and the Treasury. In 2002, Blair appointed Turner to head a government commission on the U.K.’s pension system. Turner’s 2005 report recommended requiring all workers to enroll in a pension program and called for boosting the retirement age to 68 from 65. The proposals were initially rejected by Brown for being too costly. Today, both major parties endorse Turner’s plan to keep people working longer, following bank rescue deals that have cost U.K. taxpayers about 850 billion pounds. Stage Double Turner, named FSA chairman by now-Prime Minister Brown’s government in 2008, may lose his job after the next general election, which must be held by June. The opposition Conservatives have pledged to abolish the FSA and hand regulation back to the Bank of England. Thanks in part to his public profile, Turner currently appears as a character in a David Hare play about the financial crisis called “The Power of Yes.” The drama, based on interviews with bankers and investors, reaches a climax with Turner’s character noting that following the recession, talented people may turn their backs on financial careers to battle climate change or drive medical research. In real life, Turner is just as skeptical about the size of the industry he regulates. “There is a confusion that blew up over the years that the FSA ought to be the cheerleader for London’s financial services industry,” he says. “It’s not the role of the regulator to make the industry as large as possible. I think some people get confused about that.” After Turner’s yearlong campaign to challenge presumptions in the City, there’s little doubt that the days of uncritical oversight are over. — Editors: David Ellis , Gail Roche To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net ;

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Intel Vulnerable as Consumers Shift to Phones to Browse the Web

January 6, 2010

By Ian King Jan. 6 (Bloomberg) — Intel Corp. ’s position as the gateway to the Internet will come under attack in 2010 as more consumers start going online via phones, tablets, e-readers and scaled- down laptops. Qualcomm Inc. , Marvell Technology Group Ltd. and Freescale Semiconductor Inc. are among the chipmakers demonstrating new kinds of Internet devices at this week’s Consumer Electronics Show in Las Vegas. Their goal: persuade consumers to ditch their Intel-powered personal computers as the primary way of going online. “The next billion users that are going to connect to the Web aren’t going to be connected by the PC,” said Henri Richard , head of sales at Austin, Texas-based Freescale. “It’s going to be a multitude of devices.” Intel , the world’s largest chipmaker, makes more than 80 percent of PC processors — the brains of computers. It aims to use its Atom product, which runs small laptops known as netbooks, to break into chips for wireless devices, a market IDC estimates will increase 14 percent to more than $46 billion in 2010. Its rivals are heading in the other direction: using phone chips to woo users of PCs and consumer electronics. While the PC will remain the main way for people to go online, portable devices are chipping away at that dominance — with mobile phones leading the charge. Qualcomm , Freescale, Marvell and Texas Instruments Inc. are using chip technology developed by ARM Holdings Plc . Reaching a Billion By 2013, the number of phones regularly being used to access the Web will exceed 1 billion for the first time, a fivefold increase from 2006, according to Framingham, Massachusetts-based IDC. Over the same time period, the number of Internet-connected PCs will rise to 1.6 billion from 754 million, according to IDC. “The push right now is to connect everyone and everything, and that’s why we’re seeing a plethora of devices,” said Jim McGregor , an analyst at Scottsdale, Arizona-based research firm In-Stat. “In terms of sheer numbers and usability, you can’t compete with a handheld. Everything migrates to a mobile.” The Consumer Electronics Show will reveal which phone-chip makers have made progress persuading computer and consumer- electronics companies to use their components. Qualcomm, the world’s largest maker of phone chips, will show off a so-called smartbook made by Lenovo Group Ltd., China’s biggest computer maker. That device will run on San Diego-based Qualcomm’s Snapdragon chip. Freescale will demonstrate similar small laptops based on its products, and Marvell will introduce products based on a new range of faster processors. Apple Tablet? Apple Inc. , maker of the iPhone, also is planning to unveil a tablet computer this month, a person familiar with the matter said this week. Yesterday, Google Inc. introduced a touch-screen phone called the Nexus One. It makes more sense to use smartphone technology to build tablets, e-readers and handheld computers, rather than relying on PC chips, said Sehat Sutardja , chief executive officer of Santa Clara, California-based Marvell. Smartphones offer the right mix of processing speed, low power consumption and touch screens, making them easy to convert into Internet devices, he said. “A touch-screen smartphone is actually a small tablet PC,” said Sutardja, whose company supplies the main chip for Research In Motion Ltd. ’s Blackberry. “The time for tablet devices is now.” Armada Chips In October, Marvell released a new line of chips called Armada. Those products can run fast enough to bring PC-level computing to e-readers and tablets, Sutardja said. Internet devices have previously failed to catch on with consumers because the chips that ran them were either too slow to make them useful or drew too much power, draining batteries, he said. At CES, Intel CEO Paul Otellini plans to demonstrate mobile devices based on its chips. “We remain committed to delivering the benefits of Intel architecture to handhelds and consumer electronics and believe that these devices will continue to become smarter with PC-like performance, computer and Internet capabilities,” said Claudine Mangano, a spokeswoman for the Santa Clara-based company. “This is Intel’s strength.” Intel lost 1 cent to $20.87 yesterday in Nasdaq Stock Market trading. The shares added 39 percent in 2009. Qualcomm gained $1.13 to $48.07, and Marvell rose 40 cents to $21.43. Intel’s challenge in pushing into phones and mobile devices is creating less power-hungry chips with similar performance. The company’s rivals on the phone side are trying to gauge how quickly that will happen. Intel chips will continue to draw three to four times as much power as Marvell’s products, Sutardja said. ARM , though, doesn’t expect phone chips to have an edge for long. ‘Smart Company’ “Intel’s a smart company and in the next couple of years they’ll have the same type of power and performance,” said Bob Morris , director of mobile computing for Cambridge, England- based ARM. In the meantime, ARM chipmakers can gain an edge with electronics companies by selling chips that are cheaper than Intel’s, he said. They also can use Google’s free Android software, which works with ARM designs. Electronic-book readers, fueled by the success of Amazon.com Inc. ’s Kindle and Sony Corp. devices, are opening up another market for chips. For the first time, CES will have an area devoted to e-readers on the show floor. That market will double next year to about 11 million units and then double again by 2013, according to Vinita Jakhanwal , an analyst at El Segundo, California-based ISuppli Corp. As readers become more popular, they could become more general-purpose Internet devices, Freescale’s Richard said. His company makes the processors that power both the Kindle and Sony products, which account for about 75 percent of market sales. For now, the black-and-white screens of e-readers may make them unfit for broader applications, said ISuppli’s Jakhanwal. Until color displays are introduced, consumers won’t accept e- readers as Web browsers, she said. To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net .

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Emerging Funds Lured Record 2009 Inflows, Amid Global Recovery, EPFR Says

January 4, 2010

By Shiyin Chen and David Yong Jan. 5 (Bloomberg) — Emerging-market stocks and bond funds closed 2009 with record annual inflows as a recovery from the global financial crisis boosted demand for riskier assets, according to U.S.-based research company EPFR Global. Emerging-market equity funds received $64.5 billion, while those investing in developing-nation fixed-income securities drew more than $8 billion, EPFR in Cambridge, Massachussetts, said in an e-mailed statement, citing initial figures from funds reporting daily and weekly. Gains last year followed outflows of about $67 billion in 2008, when the failure of Lehman Brothers Holdings Inc. froze world credit markets. The MSCI Emerging-Markets Index of stocks rallied 75 percent in 2009, the most since the gauge was introduced in 1987. Emerging-market debt produced a 28 percent return, the best since 1996, according to JPMorgan Chase & Co.’s EMBI Global Index . “Liquidity will still be an important factor driving markets,” Vasu Menon , vice president of Oversea-Chinese Banking Corp.’s wealth-management unit, said in a Bloomberg Television interview. “But for 2010, fundamentals will play a bigger role.” Shares in developing nations may rally more than 20 percent this year as the U.S. economic recovery strengthens, Credit Suisse Group AG said yesterday. The brokerage joined JPMorgan and Morgan Stanley in predicting further gains in emerging markets. Stock Valuations Emerging markets are attracting more money to initial public offerings than developed nations for the first time, a warning sign that the record rally may turn into a 20 percent decline, according to Mark Mobius , who oversees $34 billion of developing-nation assets at Templeton Asset Management Ltd. Companies in the MSCI Emerging-Markets Index are trading at the highest levels relative to earnings since 2000. IPOs in developing economies raised $77 billion last year, exceeding industrialized nations by 160 percent, annual Bloomberg data starting in 2000 show. Stock funds investing in Asia excluding Japan, and diversified global emerging markets both attracted record inflows last year, along with those buying in Brazil, Russia, India and China, according to EPFR, which tracks funds with more than $12 trillion of assets. Final weekly and monthly data will be available from Jan. 16, it said. Dollar Bond Sales The 28 percent return in emerging-market debt in 2009 was the best in 14 years, according to JPMorgan’s EMBI Global Index. Indonesia’s sovereign bonds rallied 47 percent, the Philippines rose 24 percent and Vietnam’s gained 33 percent . “Investors are getting more comfortable with Asian growth stories,” said Irene Cheung , a Singapore-based director of Asian emerging-market trading at Royal Bank of Scotland Group Plc. “Credit qualities are good and not over-rated and that’s true for Indonesia and the Philippines.” Indonesia, the Philippines and Vietnam are lining up to sell foreign-currency bonds from this month, as a global economic recovery buoys investor appetite for higher-yielding assets in the region. Indonesia plans to sell as much as $4 billion of U.S. dollar debt with 10- and 30-year maturities, while the Philippines is offering as much as $1.5 billion of notes denominated in dollars or euros, according to people aware of the plans. Vietnam is seeking to raise as much as $1 billion. To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net ; To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net .

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Stocks Fall in Asia, Europe, Led by Airlines, Mining Shares; Aussie Drops

December 30, 2009

By Patrick Chu and James Paton Dec. 30 (Bloomberg) — Asian stocks fell for the first time in three days led by declines in airlines and mining companies, and the currencies of commodity-producing countries, some of the best performers in 2009, weakened against the dollar. The MSCI Asia Pacific Index declined 0.5 percent to 120.05 as of 4:20 p.m. in Tokyo. The Australian dollar fell 0.4 percent to 89.09 U.S. cents, snapping five days of gains. The New Zealand dollar fell 0.3 percent to 71.54 U.S. cents and the Canadian dollar declined 0.6 percent to C$1.0497. Norway’s currency slid 0.2 percent to trade at 5.8181 per dollar. Futures on the Dow Jones Euro Stoxx 50 rose 0.2 percent at 7:20 a.m. in and fell 0.2 percent for the Standard & Poor’s 500 Index . Shares in Asia trade at 30 times reported profits, the most since 2002, after the MSCI AC Asia Pacific Excluding Japan Index soared 66 percent this year, more than double the gains of the benchmark MSCI World Index of developed markets. Emerging-market equity fund inflows tripled last week, according to EPFR Global in Cambridge, Massachusetts. At the same time, investors opened fewer accounts to trade China stocks for a fourth straight week. “After strong gains over the past year, there’s a propensity to lock in profits and reposition for 2010,” said Mark Pervan , a senior commodity strategist at ANZ Banking Group Ltd. in Melbourne. “Now, I think you’re going to see sideways movement.” The Nikkei 225 Stock Average fell 0.9 percent to close at 10,546.44 in Japan, the country’s last day of trading this year. The Nikkei has gained 19 percent this year, compared to 34 percent for the MSCI Asia Pacific Index. JAL Plunges Japan Airlines plunged 24 percent on speculation the company may seek bankruptcy. Japan’s Cabinet meets tonight to discuss options for the carrier. Asiana Airlines lost 6.9 percent in Seoul after its parent said it may ask creditors to restructure the debt of some affiliates. Newcrest Mining Ltd. , Australia’s largest gold producer, declined 0.9 percent in Sydney. BHP Billiton Ltd., the world’s biggest mining company, retreated 0.5 percent. China’s Shanghai Composite Index rose 1.3 percent to a two- week high after commodity prices gained. China Shenhua Energy Co. , the nation’s largest coal producer, added 2.7 percent and Tongling Nonferrous Metals Group Co., the second-biggest copper producer, climbed 1 percent. “We are still optimistic about the market,” said Zhang Gang, a strategist at Central China Securities Holdings Co. in Shanghai. “It will probably go up higher next year after the fluctuations these days, because new economic data and money supply figures are expected to be strong.” Aussie Weakens Currencies of commodity producers fell, led by Australia’s dollar. The so-called Aussie is headed for its first monthly decline since January as traders pared bets the Reserve Bank of Australia will continue raising interest rates, damping demand for the nation’s assets. The Aussie has surged 27 percent this year, heading for its largest annual advance since 2003. The euro fell against the dollar for a third day on speculation renewed financial concerns in the euro-zone will make further rating downgrades likely The euro declined to $1.4337 in Tokyo from $1.4354 in New York yesterday. The dollar bought 92.02 yen from 92.00 yen. That’s the highest level since Oct. 27. The euro was at 131.93 yen from 132.05 yen. The dollar has appreciated 4.9 percent versus the euro this month, trimming its 2009 decline to 2.4 percent. The greenback has fallen 30 percent against the euro this decade. Treasury Auction Treasuries were little changed, heading for the worst year since at least 1978, as the U.S. stepped up debt sales to help spur growth in an economy recovering from its deepest recession in six decades. The Treasury will sell $32 billion in seven-year debt today, the last of three auctions this week totaling $118 billion. U.S. government securities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes, the worst performance since Merrill began collecting the data. The yield on the benchmark 10-year note was unchanged at 3.80 percent in Tokyo, according to BGCantor Market Data. The yield has increased 1.6 percentage points this year. The 3.375 percent debt due in November 2019 traded at 96 17/32. President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year. Crude oil traded little changed near $79 a barrel before a U.S. government report that is forecast to show a decline in stockpiles of the fuel in the largest energy-consuming nation. Oil supplies likely fell by 1.85 million barrels last week, according to analysts surveyed by Bloomberg News. The Energy Department is due to release its inventory report today at 10:30 a.m. in Washington. 77 Percent Advance Oil had climbed 8.8 percent in the past five days and surged 77 percent this year on signs of a global economic recovery. U.S. consumer confidence improved in December for a second month. Crude oil for February delivery fell as much as 35 cents, or 0.4 percent, to $78.52 a barrel in electronic trading on the New York Mercantile Exchange, and traded at $78.99 in Asia. Futures, which have tripled in the past decade, closed yesterday at the highest settlement since Nov. 18. Gold for immediate delivery declined 0.05 percent to $1,093.30 an ounce as a strengthening dollar curbed demand, trimming this year’s advance to 24 percent. Copper in London rose 0.8 percent to $7,335 a metric ton. The metal jumped to a 15-month high yesterday as workers at the world’s second-biggest copper mine voted to go on strike, and has more than doubled this year. To contact the reporters on this story: Patrick Chu in Tokyo at pachu@bloomberg.net .

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Russia Unbeatable for Emerging Market Funds as Kudrin Says Stocks Too High

December 30, 2009

By Michael Patterson Dec. 30 (Bloomberg) — Russia is the top investment pick for the biggest emerging-market stock funds in 2010, even after the RTS Index’s world-beating 129 percent rally prompted Finance Minister Alexei Kudrin to say shares are too expensive. Russia is the leading “overweight” holding among the world’s largest developing-nation mutual funds, EPFR Global data show. More than 95 percent of analyst ratings on Russian stocks are “buy” or “hold,” the highest level since Bloomberg began tracking the data in 1997. Goldman Sachs Group Inc. says Russia is the most attractive emerging market for 2010 and Troika Dialog, the nation’s oldest investment bank, predicts equities will climb about 40 percent. While Kudrin said at a Nov. 25 conference in Moscow that “speculative capital” led to “overheating” in the market, the RTS trades at 9 times estimated profits, a 30 percent discount to the MSCI Emerging Markets Index . Earnings will surge 43 percent next year, almost twice the gains in China , India and Brazil, as a rally in oil lifts Russia’s economy from its worst recession in a decade, forecasts compiled by Bloomberg show. “People are waking up to the fact that here’s a place you can’t overlook,” Mark Mobius , who oversees more than $30 billion as the chairman of Templeton Asset Management Ltd., said in an interview. “If you compare Russian valuations now with other major countries, it’s not overpriced. There are still opportunities there.” 2010 Rally Mobius’s Templeton Emerging Markets Investment Trust rose 104 percent in dollar terms this year through Dec. 18, compared with a 67 percent gain in Bloomberg’s index of the biggest emerging-market mutual funds. The Singapore-based investor, who predicted this year’s rally in developing-nation stocks in December 2008 after a 56 percent loss to his main fund, said he will probably hold more Russian shares than are represented in benchmark gauges in what will be a “very, very good” year for emerging markets. Adrian Mowat , JPMorgan Chase & Co.’s 43-year-old chief emerging-market strategist, expects a 34 percent rally in the MSCI emerging index in 2010 following this year’s 72 percent advance, while Morgan Stanley’s Jonathan Garner forecasts a 23 percent gain. Credit Suisse Group AG’s Andrew Garthwaite , 47, says the gauge will rise 18 percent by mid-2010. All three strategists predicted emerging-market stocks would climb this year, though they underestimated the rally. Mowat said in April that the MSCI index would rise to 900, while Garner predicted in December 2008 the gauge would advance to 810. Garthwaite’s estimate in January was 630, compared with the index’s closing level of 980.79 yesterday. Writedowns The MSCI gauge posted its best performance this year since its inception in 1987, as developing nations accounted for the top 12 gains among the world’s benchmark equity indexes. Emerging markets surged after banks avoided most of the $1.7 trillion of the credit losses and writedowns worldwide and investors speculated economic growth would outpace advanced countries. Developing-nation economies will expand 5.1 percent as a group next year, compared with 1.3 percent in developed nations, according to the Washington-based International Monetary Fund. The Shanghai Composite Index in China, the biggest emerging market, advanced 76 percent this year while Brazil’s Bovespa and India’s Bombay Stock Exchange Sensitive Index climbed 81 percent. The MSCI World Index of advanced-nation shares rose 28 percent. Company analysts estimate Russian shares will increase an average 21 percent in the next 12 months, led by gains of at least 30 percent in Moscow-based oil producer OAO Rosneft and cellular provider OAO Mobile TeleSystems , according to forecasts compiled by Bloomberg. That compares with an average projected advance of 18 percent in Brazil and 13 percent in China, and a 0.4 percent loss in India, the estimates show. 1998 Default Twelve months ago, the biggest emerging-market mutual-fund managers ranked Russia as the least attractive of the largest developing economies. Investors pulled at least $290 billion from Russia, the world’s biggest energy exporter, between August 2008 and February 2009 as the economy sank into its worst financial crisis since the government’s 1998 default on $40 billion of domestic debt. Russia’s dollar-denominated RTS Index tumbled 63 percent in 2008 and the ruble-based Micex Index tumbled 67 percent, the biggest decline among benchmark indexes in the 30 largest stock markets. The Micex rallied 121 percent this year. Investors are returning to Russia after the government pledged more than $100 billion in emergency aid, mainly for banks, and oil prices rallied 71 percent this year. Oil and gas production accounts for about 30 percent of Russia’s gross domestic product, according to the country’s energy ministry. Falling Yields Borrowing costs have plunged as the yield on the government’s benchmark dollar bonds maturing in 2030 almost halved to 5.4 percent yesterday from this year’s peak of 10 percent on March 3. Yields on $1.25 billion of five-year notes sold by OAO Gazprom, the country’s biggest company, have dropped to 6.4 percent from 8.125 percent when they were sold in July this year. The average price of ruble-denominated corporate bonds is the highest since October 2008, according to the Micex Corporate Bond Index of securities traded on the Micex Stock Exchange, recovering from an all-time low of 78.3 in January. The prospects for a retreat in Russian stocks are growing because the market is a “consensus trade” and gains in the U.S. dollar may derail this year’s rally in oil, Russia’s biggest source of export revenue, according to JPMorgan’s Mowat. The Hong Kong-based strategist downgraded Russian shares to “neutral” from “overweight” in a report this month. ‘Weak Link’ Kudrin, 49, said on Dec. 8 that Russia is a “weak link in global finance” and the economy still isn’t strong enough to attract investment when the U.S. and Europe start raising interest rates. GDP will probably contract 8.7 percent this year and a recovery may spark faster inflation, Kudrin told reporters in Moscow on Dec. 23. Carret & Co.’s Don Gimbel said he’s wary of investing in Russian stocks because the government is too unpredictable. The Micex tumbled 23 percent in July and August of 2008 as Prime Minister Vladimir Putin accused Moscow-based steelmaker OAO Mechel of price fixing and waged a five-day war with Georgia. OAO Yukos Oil Co. was bankrupted during Putin’s presidency in 2006 after the government claimed more than $30 billion in back taxes. “My faith in the government in Moscow is almost zero,” said Gimbel, who helps oversee about $1.5 billion as a senior managing director at New York-based Carret and has no Russian holdings. Russian President Dmitry Medvedev said last month the country needs to improve the “primitive structure” of the economy and pledged to “reduce corruption and to punish those responsible for it.” ‘Law and Order’ “There is a debate within Russia about how to go forward, but statements from Medvedev are quite encouraging in the sense that they want to move towards a market economy, want to emphasize law and order,” said Templeton’s Mobius, 73. The lack of transparency in corporate governance is already reflected in equity valuations, said Antoine van Agtmael , who oversees about $12.5 billion as the chief investment officer of Arlington, Virginia-based Emerging Markets Management LLC. “We are investors in Russia, and we are on the whole overweight,” said Agtmael, who coined the phrase “emerging markets” in 1981. Nineteen of the 48 largest emerging-market mutual funds have boosted Russian stock allocations to more than 2 percent above their benchmark, JPMorgan’s Mowat wrote in a Dec. 4 research report, citing data from Cambridge, Massachusetts-based EPFR Global. Developing-nation funds attracted more than $75 billion this year, set for a record, according to EPFR. ‘Marginal Money’ Money is likely to keep flowing into Russian stocks as investors shift some of the $3.3 trillion they stashed in U.S. money-market mutual funds into equities, according to Gareth Morgan , an emerging markets money manager at F&C Asset Management in London, which oversees about $150 billion. Investors fled to the safest assets last year as the global economy had its worst recession since World War II and the Standard & Poor’s 500 Index sank the most in seven decades. “At some point next year it will be difficult to see where the marginal money comes from, but we don’t think we’ve reached that point yet,” said Morgan, whose Russian Investment Company SICAV fund returned 139 percent this year according to data compiled by Bloomberg, beating the Micex by 19 percentage points. China’s Shanghai index is twice as expensive as the Micex at 19 times estimated 2010 earnings, while India’s Sensex is valued at 17 times and Brazil’s Bovespa trades for 14 times, according to data compiled by Bloomberg. The MSCI emerging index trades at 13 times. ‘Unfairly Cheap’ Russia’s “market is unfairly cheap, one of the cheapest in emerging markets,” said Sam Vecht , a London-based money manager at BlackRock Inc., which oversees about $3.2 trillion and has Russia as the biggest overweight holding in emerging-market stocks. “The country can grow a lot faster than people think,” said Vecht, whose Emerging Europe Fund climbed 85 percent this year, beating 88 percent of its peers. Russia’s economy will expand 3 percent next year after a 7.7 percent contraction in 2009, the widest swing in gross domestic product worldwide, according to the median of economists’ estimates compiled by Bloomberg. The last time Russia began recovering from a recession as deep, in 1999, the Micex surged 235 percent during the year. Sberbank OAO Sberbank , Russia’s largest lender, is poised to extend this year’s 253 percent advance in Moscow trading as a peak in bad loans near the middle of 2010 and rising demand for credit boost earnings, Morgan said. Profit at Moscow-based Sberbank may surge more than sevenfold next year, compared with a 30 percent increase for companies in the MSCI Emerging Markets Financials Index , analysts’ estimates compiled by Bloomberg show. Moscow-based Mobile TeleSystems, Russia’s largest cellular company, is one of the most attractive stocks in emerging markets because it’s adding revenue faster than peers and trading at a discount relative to earnings, according to Garner, Morgan Stanley’s chief emerging-market strategist in London. He cites cheap valuations and rising commodity prices for an “overweight” rating on Russian shares. Goldman’s global strategy team led by London-based Jim O’Neill , who coined the BRIC moniker in 2001, predicts buying Russian stocks will be one of the “top trades” of 2010 as earnings grow an above-consensus 60 percent next year. Troika’s Kingsmill Bond , the top-ranked Russian stock strategist in this year’s Thomson Extel survey, expects the rally to be driven by slowing inflation and oil prices near $70 a barrel. Oil closed at $76.95 a barrel yesterday. “Russia is our top bet for 2010,” said Marcus Svedberg, who helps manage about $4 billion as the chief economist at East Capital in Stockholm. “Growth will surprise on the upside.” To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net .

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Asia Commodity Stocks, Metals Gain on China Demand; Japan Bank Shares Drop

December 29, 2009

By Patrick Chu and Shani Raja Dec. 29 (Bloomberg) — Asian commodity stocks rose and metals gained on expectations for increasing demand from China and labor strife in Chile’s copper industry. Japanese banks fell on speculation the companies will have to raise capital. The MSCI Asia Pacific Index was little changed at 120.40 as of 2:58 p.m. in Tokyo. Copper on the London Metal Exchange rose as much as 2.8 percent to a 15-month high of $7,270 a metric ton, as trading resumed after a two-day break. Sumitomo Mitsui Financial Group Inc. fell as much as 3.5 percent, dragging down the Nikkei 225 Stock Average. U.S. stock futures edged higher. Mining companies led the MSCI Asia index’s 34 percent gain this year on demand from China, which said last week that it needs to revise growth estimates for 2008 and 2009 because they are too low. Emerging-market equity funds inflows surged threefold last week to $1.7 billion from the previous five days, according to EPFR Global. This year’s record $80.3 billion of inflows are “way off the charts in terms of being a record-seeing year,” Brad Durham , managing director at the Cambridge, Massachusetts-based EPFR, said in a Bloomberg Television interview. Australia’s S&P/ASX 200 Index advanced 1.1 percent, the biggest increase among stock markets in Asia. BHP Billiton Ltd. , the world’s biggest mining company, gained 1 percent. Japanese commodity trading houses climbed: Mitsubishi Corp. was up 1.5 percent and Mitsui & Co. added 2.4 percent. Chinese Mining Companies Huludao Zinc Industry Co. , China’s second-largest zinc producer, climbed as much as 2.8 percent to a two-week high. Jiangxi Copper Co. , the nation’s biggest metal producer, added 1 percent. Copper jumped by the most in six weeks on the LME as trading resumed after the holidays, catching up with gains in other metals markets. Workers at the Chuquicamata copper mine, the world’s second-largest, will begin a strike on Dec. 31 unless Codelco extends labor talks into the first week of January, union official Miguel Lopez said in an interview today. Xstrata Plc’s Altonorte copper smelter was hit by a strike yesterday after management and workers failed to agree on a new wage contract. Nickel in London today gained 3 percent to $19,200 a ton and zinc advanced as much as 3.7 percent. “Metals prices are still on an upward trend, thanks to the rising demand amid the economic recovery,” said Zhang Qi, an analyst at Haitong Securities Co. in Shanghai. “That will continue to boost prices of underlying equities.” Japanese Banks Fall Japanese banks were the biggest losers after Sumitomo , the country’s second-largest publicly traded bank, said it’s considering whether to raise more funds. The world’s largest financial companies are shoring up capital after more than $1.7 trillion in losses and writedowns following the collapse of the U.S. subprime-mortgage market and of Lehman Brothers Holdings Inc. in the world’s biggest bankruptcy. “There are still concerns about banks raising capital,” said Naoki Fujiwara , chief fund manager at Shinkin Asset Management Co., which oversees $4 billion in Tokyo. The dollar traded near a two-month high against the yen on speculation the Federal Reserve will start retracting emergency stimulus measures as the economy recovers. The dollar bought 91.69 yen in Tokyo from 91.63 in New York yesterday. The U.S. currency rose to 91.87 on Dec. 22, the strongest level since Oct. 27. The dollar traded at $1.4375 per euro from $1.4378 yesterday. The euro was at 131.74 yen from 131.76 yen. Treasury Auction Treasuries were little changed before today’s $42 billion auction of five-year notes. The U.S. government’s $44 billion sale of two-year notes yesterday met lower-than-estimated demand, sending yields on the securities at the highest level since August. Treasury is scheduled to sell $32 billion of seven-year debt tomorrow. Treasuries of all maturities have fallen 3.7 percent this year, according to Bank of America Merrill Lynch indexes. That would be the worst performance since at least 1978, when Merrill began collecting the data. The benchmark 10-year note yielded 3.85 percent, near the highest level since Aug. 10, in Tokyo, according to BGCantor Market Data. The yield on two-year notes was 1.09 percent, matching the highest bid at yesterday’s sale. Wheat for March delivery on the Chicago Board of Trade dropped 1 percent to $5.455 a bushel. The contract rallied 5 percent yesterday on speculation that fund managers will purchase agricultural commodities at the start of 2010, anticipating improved demand as the global economy strengthens. Corn fell 0.3 percent to $4.1475 a bushel after rising 1.8 percent yesterday. Crude Oil Crude oil for February delivery was at $78.65 a barrel, down 12 cents, in electronic trading on the New York Mercantile Exchange. Oil has advanced 76 percent this year, the biggest annual gain in a decade. Oil rose 0.9 percent yesterday as U.S. holiday retail sales climbed. The U.S. economy will turn in its best performance since 2004 next year as spending picks up and companies boost investment and hiring, said Dean Maki , the most accurate economic forecaster in a Bloomberg News survey. “It’s pure optimism leading into the first quarter,” Jonathan Barratt , a managing director at Commodity Broking Services Pty in Sydney, said by phone. “People are happy about what’s happening and think commodities will be sought after. Whether it will last after that is another thing.” To contact the reporters on this story: Patrick Chu in Tokyo at pachu@bloomberg.net .

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U.S. Economy Poised for Growth Surge as Most Accurate Forecaster Sees It

December 28, 2009

By Timothy R. Homan and Bob Willis Dec. 28 (Bloomberg) — The U.S. economy next year will turn in its best performance since 2004 as spending perks up and companies increase investment and hiring, says Dean Maki , the most-accurate forecaster in a Bloomberg News survey. The world’s largest economy will expand 3.5 percent in 2010, according to Maki, the chief U.S. economist at Barclays Capital Inc. in New York. The rebound in stocks and rising incomes will prompt Americans to do what they do best –consume, said Maki, a former economist at the Federal Reserve. Faced with dwindling inventories and growing demand, companies will soon become confident the expansion will be sustained, he said. Household spending “will pick up steam as we move into the second half of 2010,” said Maki, 44, who topped all 60 forecasters in the Bloomberg News ranking of gross domestic product projections for the first three quarters of 2009. “The overall picture for 2010 will be an economy growing rapidly enough to bring down the unemployment rate” to an average of 9.6 percent. Maki, who specialized in researching household finances at the Fed from 1995 to 2000, said the economic recovery this time will be similar to past rebounds. Consumer purchases improved after last year’s 61 percent plunge in gasoline prices and will keep growing in 2010, reflecting the surge in stocks. Faster growth will push Treasury yields higher and help the dollar strengthen as the Fed raises interest rates, he predicts. Consumer Behavior Maki holds a doctorate in economics from Stanford University near Palo Alto, California. His dissertation addressed Americans’ response to the phasing out of tax deductions for interest on consumer loans. He received a bachelor’s degree in economics from St. Olaf College in Northfield, Minnesota, and joined the investment banking unit of London-based Barclays in 2005. “One area that we put more weight on perhaps than others is the stock market,” he said in an interview. The 67 percent gain in the Standard & Poor’s 500 Index since a 12-year low on March 9 has helped shore up family balance sheets, putting Americans in a better position to spend. The prospects for a stronger rebound are consistent with recoveries from past recessions, he said. “We don’t believe this time is different from all other business cycles ,” said Maki. “The consensus view that growth will stay subdued all through next year — there’s no parallel to that in modern U.S. history.” Goldman More Pessimistic Maki’s forecast for 2010 is among the highest of the 58 economists in a Bloomberg News survey this month. He is more optimistic than Jan Hatzius , chief U.S. economist at Goldman Sachs Group Inc. in New York, who was No. 1 among forecasters of GDP during the 12 months through June 2009. Hatzius, 41, estimates the economy will expand 2.4 percent in 2010, and his 2.5 percent first-quarter growth forecast is half the pace Maki anticipates. Ed McKelvey , who works with Hatzius, said the Goldman team forecasts “subpar growth” next year because “employers will be reluctant to hire” and households will exhibit “a bias toward higher saving .” Budget difficulties at state and local governments and credit constraints will also restrain the economy, he said. Maki’s projected 5 percent rate of expansion in the first quarter, the fastest since the same three months in 2006, will reflect the need for companies to replenish inventories cut at a record pace in the first nine months of this year. Stocking Shelves Ramped-up production to increase stockpiles and investment in equipment will propel the expansion early in the year, leading to employment gains that will bolster spending in the second half, he said. “Businesses overreacted to the downside during the recession,” said Maki, who says he tries to keep fit by playing tennis and jogging with his dogs. “As firms turn to expansion mode rather than survival mode, they start raising both employment and investment spending in a similar way.” A rebound in corporate spending may be one reason investors have been eager to snap up shares of industrial equipment makers. The Standard & Poor’s 500 Industrial Machinery Index , which includes Cleveland-based Eaton Corp., a producer of circuit breakers and fuel pumps, and Craftsman brand tool-maker Danaher Corp., based in Washington, has outperformed the broader measure, rising 35 percent so far this year, compared with a 25 percent increase for the S&P 500. Higher Treasury Yields Economic growth will push the yield on the 10-year Treasury note up to 4.5 percent by year-end, Maki said, compared with a yield of 3.8 percent at the end of last week. Maki says central bankers will lift the U.S. overnight bank lending rate target to 0.5 percent in the third quarter, from zero to 0.25 percent currently, and to 1 percent by year-end. His colleague at Barclays, David Woo, global head of foreign- exchange strategy, predicts the dollar will end 2010 around $1.40 per euro. Maki’s top position in the Bloomberg ranking is based on estimates submitted in January for GDP. He forecast that month a 2 percent expansion for the third quarter. The U.S. economy expanded at a 2.2 percent annual pace, according to a Dec. 22 Commerce Department report. He also predicted a 4.5 percent contraction for the first quarter of 2009, followed by a 1 percent decline in the period from April through June. The Commerce Department later reported contractions of 6.4 percent and 0.7 percent. Soss and Lonski Neal Soss , 60, chief economist at Credit Suisse in New York, was the second most-accurate forecaster of GDP over the first three quarters of 2009. He projects the economy will grow 3.3 percent next year. John Lonski , 58, chief economist at Moody’s Capital Markets Group in New York, was No. 3. He sees a 2.7 percent expansion. Robert MacIntosh , chief economist at Boston-based Eaton Vance Management, was the most pessimistic forecaster on employment this year — and the most accurate. He expected unemployment to reach 10 percent in the fourth quarter and average 9 percent this year. The rate fell to 10 percent in November from a 26-year high of 10.2 percent the previous month, according to the Labor Department. MacIntosh, 52, agrees with Maki that the economy will rebound in 2010, forecasting growth of 3.5 percent, and that the jobless rate will average 9.5 percent. ‘Decent-Looking Economy’ “The combination of exports, investment and consumption will be enough to give us, on paper at least, a decent-looking economy,” said MacIntosh, a graduate of Harvard University in Cambridge, Massachusetts, with an MBA from Dartmouth College in Hanover, New Hampshire. He manages $4 billion in municipal bonds for Eaton Vance. He sees an “upward trend” in payrolls, with the first positive reading coming as early as January. The gains in hiring will lower unemployment “modestly,” he said. Hatzius and the economists at Goldman Sachs project the unemployment rate will average 10.3 percent next year, compared with a median estimate of 10 percent for 58 responses in this month’s survey. Bart van Ark , chief economist at the Conference Board, a New York-based research firm, forecasts a 10.4 percent average unemployment rate next year that he said will restrain household purchases. Van Ark, the best forecaster of consumer spending for the period from January through September, said he sees household purchases rising 1 percent in 2010 after falling 0.6 percent this year. Maki forecasts a 2.1 percent gain in 2010. “Even though we do see a pickup in recent quarters, it’s not a signal that the consumer is going to lead us out of the recession into solid growth territory,” said van Ark, a 49- year-old Dutch native. “The consumer cannot play that role” any longer. To contact the reporters on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net Robert Willis in Washington at bwillis@bloomberg.net .

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