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Jerry Jasinowski: The Next Generation of Cost Savings

by on May 6, 2011

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In these times of anemic economic growth, businesses must continue to increase profits by reducing costs. Procurement officers have become experts at extracting savings and innovations from suppliers, negotiating raw-materials contracts and managing complex global supply chains. But large amounts of goods and services are purchased too casually. Market researcher Gartner Inc., estimates that a typical company spends 30 to 60 percent of revenue on indirect goods and services. That’s not surprising in enterprises like law firms and ad-agencies where, except for salaries, almost all spending is “indirect.” But even manufacturers spend a lot of money on purchases related to sales and administration, rather than the production of goods. At packaged good companies, about 20 percent of non-core spending is logistics, encompassing everything from ocean-freight to short-haul trucking. Another 17 percent is in marketing services. About 9 percent is information technology and telecom. Corporate CFO’s are aware that indirect spending is significant, but do not appreciate the aggregate size, and find it difficult to control. Internal procurement managers are often stretched thin and focused on ensuring supply and optimizing pricing for core commodities. Even companies that have addressed indirect spending may still be leaving a considerable amount of money on the table. Although they have dedicated people and tools to improve the purchasing process, they do not have the full infrastructure to effectively managed indirect spending. With hundreds of supply markets to address and thousands of purchases to control, companies lack the market intelligence, specialized category expertise, structured processes and technology to maximize cost savings. Knowledge of the market, commodity experts and better buying processes can cut total indirect costs by 15 percent or more. One company I know had just negotiated 6 percent savings on linerboard, a dramatically fluctuating commodity. What they didn’t know was that the market had deflated further while they were negotiating. Using this outside intelligence they secured a total of 13.5 percent savings. Savings like this require a whole different level of discipline and resources. Some manufacturers such as Whirlpool, Kimberly Clark and Goodyear are using outside providers, leveraging the provider’s investments in dedicated category teams, market intelligence, and technologies to manage buying and enforce purchasing policies. But many are not. In one study by ICG Commerce, average companies were able to affect about half of indirect spending, while world-class companies were able to affect 93 percent. World-class companies have established business processes to make certain that everyone who buys anything used preferred suppliers to maximize savings. With $2 billion in indirect spending, an average company received a bottom line benefit of $54 million. A world-class company would save $272 million over the same time, and could increase that by 3 percent a year through continuous improvement. In today’s competitive environment, few companies can afford to overlook the opportunity to achieve this next generation of cost savings, which could amount to as much at 1 percent or more of a firm’s profit margin. Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.

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J&J CEO ‘Disappointing Recalls’ Won’t Slow Company Down

by AP on April 28, 2011

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NEW BRUNSWICK, N.J. — Johnson & Johnson’s chief executive told shareholders at their annual meeting Thursday that the company will come back “stronger than ever” after addressing quality problems that resulted in an astounding string of product recalls. William Weldon, who became CEO in 2002, said the series of “disappointing recalls” troubled him and employees and meant thousands of parents could not get medicines they needed for their children. Since September 2009, the company has had about two dozen recalls of prescription and nonprescription medicines, replacement hips, contact lenses and diabetes test strips, including tens of millions of bottles of children’s and adult Tylenol and Motrin. Many of those nonprescription drugs were made at a liquid medicines factory in Fort Washington, Pa., that J&J closed a year ago, gutted and is rebuilding as a state-of-the-art factory. Shareholders saw photos of the plans and steel framework as work there continues, while Weldon tried to reassure them. “You would be right to ask if we made mistakes, and yes, we did,” Weldon said. “Our goal is to restore McNeil Consumer Health Care to the highest level of quality … thus restoring confidence in McNeil.” Weldon, 62, said J&J has inspected 120 plants around the world and invested millions to improve the quality of its manufacturing and satisfy federal regulators, who have three of its factories under scrutiny. J&J has shifted manufacturing of some products to other factories. Its biggest challenge may be winning back consumers as recalled products such as Tylenol and Motrin come back on the market this year and next. Roughly 1,300 shareholders – fewer than in recent years – packed into four different rooms at a hotel opposite J&J’s headquarters seemed satisfied with Weldon’s explanation of the recalls and what J&J has been doing to rectify the problems. The audience clapped repeatedly during his comments and lengthy presentations about the company’s financial results and innovative medicines and medical devices in development. After 2 1/4 hours of speeches, slideshows and testimonials about J&J products and health care programs, only six people in the audience asked questions or made comments. “When I look at what’s been happening at J&J over the last couple of years, I see a fundamental attack on the credo,” Tom Williamson told Weldon. He referred to J&J’s corporate pledge, displayed prominently at headquarters, that stresses responsibility to patients, doctors and nurses. “Your company tried to do a stealth recall of Motrin,” he added. Congress has been investigating that 2008 incident, in which J&J paid a third company to quietly buy up faulty Motrin packets, rather than issuing a recall. But another shareholder, Kathleen Bennett, told Weldon she appreciates his efforts to fix the recall-related problems. “I say, Mr. Bill Weldon, well done,” she said, drawing loud applause. Shareholders also sided with the company on the three shareholder proposals on the agenda, voting them all down by 95 percent or more. One, by the Sisters of Charity of Saint Elizabeth and other religious groups, would have restricted future prescription drug price increases sharply. Another would have expanded J&J’s employment nondiscrimination policy to include people with health problems, but J&J said its broad policy is sufficient. The third would have required ending use of animals in training surgeons to use J&J’s high-tech surgical tools; Weldon said J&J already tries to use alternatives when possible. That proposal was presented by Alka Chandna, a spokeswoman for People for the Ethical Treatment of Animals. The group had four picketers outside the hotel protesting on the issue, two in big pink piggy suits because pigs are sometimes used in surgical training. A second group of three medical students picketed beside them, because J&J has not agreed to join an international “medicine patent pool” that would make it easier and cheaper for generic drugmakers to produce inexpensive HIV medicines for developing countries. Weldon opened the meeting by touting J&J’s biggest deal ever, reached the day before. J&J agreed to buy U.S.-Swiss medical device maker Synthes Inc. for $21.3 billion. The deal, which should close next year, would give J&J a much bigger share of the market for surgical trauma equipment and orthopedic implants. “It is consistent with our long-term strategy to strengthen our leadership position around the world,” Weldon said. “Our pipeline today is considered one of the best in the industry,” Weldon added. He also noted that J&J’s board had just decided to raise the quarterly dividend on company stock by 5.6 percent, from 54 cents to 57 cents per share. In afternoon trading, shares of the company fell 8 cents to $65.49.

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Rent Or Food? Soaring Costs Forcing Americans To Choose

April 26, 2011

NEW YORK — Around 10 million American households — or one in every four families that rent their homes — could have to chose between paying rent, buying groceries or keeping current with bills, according to a report released Tuesday. The number of households spending more than 50 percent of their income on rent and bills jumped by 2.6 million over the last decade, according to a Harvard Joint Center for Housing Studies report . Economists generally consider “affordable” rent to cost about 30 percent of a tenant’s income. When housing costs hit certain levels, many Americans are forced to choose between rent and food. “In real terms, it means more people have less money to spend on household necessities such as food, health care, or savings,” Eric Belsky, director of the Harvard Joint Center for Housing Studies, said in the report. Households which spend 50 percent or more of their income on rent also spend almost 40 percent less on food and over 50 percent less on health care than households with more affordable rent. “In the last decade, rental housing affordability problems went through the roof,” Belsky said in the report. “And these affordability problems are marching up the income scale,” he added. Already, rising rents mean the household budgets of working-class and middle-class families are under strain. Growing numbers of middle-income, and lower-middle-income renters are spending between 30 percent and 50 percent of their incomes on rent. And the report found that rents could start to soar as the recovery takes hold. Belsky said that after a boom, the rental market took a brief hit during the recession. “Rental housing costs went up and up. There was a brief dip in 2009, now they’ve moved up again,” he told The Huffington Post. Affordability could become such a problem, Belsky said, that even financially secure Americans could start to struggle to make rent. Even before the recession, rent increases and growing bills outpaced many stagnant salaries. Now, with modest improvements in the job market, there is renewed upward pressure on rents. Many former homeowners who faced foreclosure are now looking to rent, and people who ordinarily would have bought homes are struggling with tighter mortgage lending, while others are waiting for home prices to sink even lower. Mortgage lending for apartment buildings — the multifamily sector — was severely hit during the financial crisis, and financing for the sector has dropped by $40 billion, according to the report. Since 2008, the only refinancing for loans on apartment buildings has come from federally-backed sources: Fannie Mae, Freddie Mac and the Federal Housing Administration. And for Americans with lower incomes, the availability of federally protected affordable housing is shrinking. The report found 700,000 affordable rental units had either been removed from federal programs or demolished since the mid 1990s, with very little new housing being offered at the lower end of the rent scale.

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Small Business Confidence Slips In March: NFIB

April 12, 2011

(Reuters) – Small businesses grew less optimistic about the economy in March but raised prices for a second straight month, a potential warning sign about inflation, a survey showed on Tuesday. The National Federation of Independent Business’ overall optimism index slipped 2.6 points to 91.9 as owners anticipated a slowdown in economic activity over the next six months and few saw higher real sales growth. Although businesses were pessimistic about sales, a net nine percent reported raising prices, up from 5 percent in February — when the price gauge swung into positive territory for the first time in 26 months. The survey was conducted through March 31 and covered 811 businesses. “The bad news for the Fed is that price pressures continue to mount,” the NFIB said in a statement. “It is not clear why owners expect a deterioration in the economy over the next six month. GDP and employment growth have not been spectacular, but have maintained positive momentum.” Rising food and energy prices are putting upward pressure on headline inflation, but Federal Reserve officials expect the impact to be temporary. The central bank tracks core inflation, which excludes food and energy prices, for monetary policy purposes. Indications are that rising commodity prices and bad weather held back economic growth in early 2011 after expanding at a 3.1 percent annual rate in the fourth quarter. The NFIB survey showed sluggish sales remained a major hurdle, with the share of owners expecting higher real sales declining eight percentage points to 6 percent. It found that 24 percent of respondents planned to raise average selling prices, many by 10 percent or more. The NFIB attributed the planned price hikes to the elimination of unwanted inventory, noting that some increases started long before the commodity price spike. “The ‘fire sale’ is over and profits are badly in need of some price support,” the NFIB said. Although hiring plans eased in March, job creation remained in positive terrain, with 18 percent of owners looking to add workers over the next three months and six percent planning to reduce their workforce. “The largest hole in the employment picture remains housing, a million housing starts short of ‘normal’ and all the associated jobs missing,” the NFIB said. Employers added 216,000 jobs in March, the government reported early this month. Despite concerns about weak sales, more businesses planned capital investment and many continued to liquidate unwanted inventory — but at the lowest frequency in 35 months, the NFIB said. (Reporting by Lucia Mutikani, Editing by Chizu Nomiyama) Copyright 2011 Thomson Reuters. Click for Restrictions .

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‘Flash Crash’ Report: Waddell & Reed’s $4.1 Billion Trade Blamed For Market Plunge

October 1, 2010

WASHINGTON — A trading firm’s use of a computer sell order triggered the May 6 market plunge, which sent the Dow Jones industrial average dropping nearly 1,000 points in less than a half-hour. A report issued Friday by the Securities and Exchange Commission and the Commodity Futures Trading Commission determined the so-called “flash crash” was caused when the trading firm executed a computerized selling program in an already stressed market. The firm’s trade, worth $4.1 billion, led to a chain of events the ended with market players swiftly pulling their money from stock market, the report said. The report does not name the trading firm. But only one trade that day fit the description in the report. The firm Waddell & Reed, based in Overland Park, Kan., has acknowledged making such a trade that day. The free fall highlighted the growing complexity and diversity of the fast-evolving securities markets. Sleek electronic trading platforms now compete with the traditional exchanges, with stocks now traded on some 50 exchanges beyond the New York Stock Exchange and the Nasdaq Stock Market. Powerful computers give so-called “high frequency” traders a split-second edge in buying or selling stocks – based on mathematical formulas. The risk looms that electronic errors at high speeds could ripple through markets and disrupt them. The stock market was already stressed even before the plunge that day. Anxiety was mounting over a debt crisis in Europe. The Dow Jones was down about 2.5 percent at 2:30 p.m. when the trader placed an enormous sell order on a futures index of the S&P’s index. The trade on the E-Mini S&P 500 was automated by a computer algorithm that was trying to hedge its risk from price declines. In that one trade, 75,000 contracts were sold in a span of 20 minutes. It was the largest single trade of that investment since the start of the year. The firm’s previous transaction of that size took more than five hours, the report notes. The trade triggered aggressive selling of the futures contracts and that sent the index down about 3 percent in four minutes. In a previous statement, Waddell & Reed acknowledged that it had sold the contracts to reduce its funds’ risk quickly. It said traders were worried that the European debt crisis could spread to U.S. markets. The company maintained that the transaction “was not the cause of any abnormal price action.” It said the move involved just 1 percent of the contracts of that type that changed hands on May 6. The sale would not have caused problems in a normal market, the company said. “Our portfolio managers and the funds acted in a manner consistent with the interests of their fund shareholders,” it said. Nearly 21,000 trades were canceled in the ensuing weeks because the exchanges deemed them erroneous. Responding to the episode, the SEC and the major U.S. exchanges agreed on a six-month pilot program that briefly halts trading of some stocks that mark big price swings. The new “circuit breakers” are in effect until Dec. 10. Under the rules, trading of any Standard & Poor’s 500 stock that rises or falls 10 percent or more within a five-minute span is halted for five additional minutes. On May 6, about 30 stocks listed in the S&P 500 index fell at least 10 percent within five minutes. (This version CORRECTS where the firm is based. )

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Unemployment Rate Rises In August For First Time In 4 Months As Labor Force Expands

September 3, 2010

WASHINGTON (AP) — Private employers hired more workers over the past three months than first thought, lifting hopes for the weak economy ahead of the Labor Day weekend. But the unemployment rate rose in August for the first time in four months as more people entered the market looking for work. Companies added a net total of 67,000 new jobs last month and both July and June’s private-sector job figures were upwardly revised, the Labor Department said Friday. Stocks surged after the report’s release. The Dow Jones industrial average rose more than 120 points in the first hour of trading and broader indexes were all up. While the report hardly suggests the economy is out of danger, it’s a reassuring sign after weeks of troubling data and comes after some encouraging economic figures in the past week. Scott Brown, an economist at Raymond James, said he sees no sign of the country slipping back into recession. “You’re still seeing broad-based job gains. It’s not strong, but it’s positive,” Brown said. Overall, the economy lost 54,000 jobs as 114,000 temporary census positions came to an end. For the first time this year, the manufacturing sector lost jobs — down a net total of 27,000 for the month. The auto industry accounted for 22,000 of those lost jobs, the department said. But those losses were largely due to a shift in the timing of the industry’s summer layoffs. State and local governments shed 10,000 positions and have had net jobs losses in every month but one this year. Temporary employment rose by nearly 17,000, after a slight loss in July. That indicates employers are looking to boost their work forces, but are reluctant to do so permanently. Temporary hiring averaged 45,000 per month from October to May, but has since slowed. The jobless rate rose to 9.6 percent from 9.5 percent in July. More than a half-million Americans resumed their job searches in August, which drove up the jobless rate. When the unemployed stop looking for work, they are no longer counted in the jobless rate. It’s the first time the labor force has grown since April. Both June and July’s figures were revised to show the private sector created more jobs in both months. The July figures were revised upward to 107,000 from 71,000. June was revised upward to 61,000 from 31,000. The revisions reflected smaller losses in construction, temporary help services and non-census government jobs. Still, hiring has now been weak for four straight months. That deprives consumers of cash and reduces their ability to spend. Analysts expect economic growth to be tepid for the rest of this year and the jobless rate could keep rising to 10 percent or more in the coming months. Average hourly earnings increased modestly and by more than economists expected, rising to $22.66 from $22.60. The economy lost nearly 8.4 million jobs in 2008 and 2009. This year, private employers have added back 763,000 jobs. But the unemployment rate has barely moved from the 9.7 percent rate in January. Including those who have given up looking for work and those who are working part time but would prefer full-time work, the so-called “underemployment” rate rose to 16.7 percent from 16.5 percent. A jobless rate nearing 10 percent will ratchet up pressure on the Obama administration, Congress and the Federal Reserve to do more to jump start the economy. Tax cuts enacted in 2001 and 2003 are set to expire by the end of this year and many rank-and-file Democrats in Congress are joining Republicans in calling for all the cuts to be extended. President Barack Obama wants to let some tax cuts on upper income earners end. Fed Chairman Ben Bernanke, meanwhile, said last week the central bank will take more steps to stimulate the economy if necessary. But he also said the foundations have been laid for economic growth to accelerate next year.

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Stocks That Rise as Market Tanks May Tempt You Commentary by John Dorfman

June 14, 2010

Commentary by John Dorfman June 14 (Bloomberg) — The stock market decline that began April 23 lasted six weeks — if June 7 was the bottom, which we don’t know for sure yet, of course. It felt more like six years. Holders of some stocks, though, have reason to smile. Surprisingly, about 30 percent of U.S. stocks have gained 10 percent or more for the year to date. That’s true even though the total return on the Standard & Poor’s 500 Index, perhaps the best gauge of the overall U.S. stock market, is negative 1.2 percent for the year. About 800 stocks with a market value of $250 million or more have scored gains of 10 percent or more for the year. Prominent in the winner’s circle is SPDR Gold Trust , better known by its stock symbol GLD. It is an exchange-traded fund that owns gold bullion and intends to track the price performance of gold, minus fund expenses. State Street Corp. created GLD in late 2004. Since then, it has posted gains every year, ranging from 5 percent in 2008 to 30 percent in 2007. So far this year GLD is up about 12 percent. No wonder I got an e-mail last week that said, “Forget about your (expletive deleted) stocks! Just buy gold.” I rarely dabble in gold or gold stocks, because one can’t calculate a price-earnings or price-revenue ratio on gold bullion, and those ratios are usually high on gold mining stocks. Yet I must agree there is a fair chance that gold will do well the next several years. Gold Strategy Many investors are seeing their faith in paper currencies weakened as governments around the world run up big deficits. In my opinion, GLD is not a bad way to own gold because it is simple, direct, and doesn’t involve large costs for storage and insurance. Speaking of gold, Newmont Mining Corp. , the largest U.S. gold producer, is up about 19 percent year to date. Newmont, based in Greenwood Village, Colorado, doesn’t meet my valuation criteria. However, its ratios are more attractive than most gold-mining stocks. Another big company in this favored group is DirecTV of El Segundo, California, the largest U.S. provider of satellite TV services. On May 6 it posted 59 cents a share in earnings, beating analysts’ average estimate of 46 cents, with good results in both the U.S. and Latin America. The shares are up about 15 percent this year. I wouldn’t buy DirecTV stock. Debt is about 300 percent of equity, which raises the risk level. And DirecTV shares seem high-priced to me at 21 times earnings and 12 times book value. No ‘Winner’s Curse’ Hershey Co. of Hershey, Pennsylvania, has risen about 42 percent this year. I believe that investors breathed a sigh of relief when Hershey let Kraft Foods Inc. of Northfield, Illinois, win the hand of Cadbury Plc. Investors had feared a bidding war, in which Hershey might overpay and suffer what’s known as the “winner’s curse.” In addition, Hershey posted first-quarter earnings almost double last year’s, surprising analysts. It pushed through a price increase on about a third of its product line, and sold more candy bars nevertheless. Would I bite? Not at 21 times earnings. Also, I don’t relish the company’s debt level, at more than 200 percent of equity. More to my taste is Impax Laboratories Inc. of Hayward, California, which trades at only seven times earnings. Impax manufactures both proprietary and generic drugs. Public since 1995, the company posted a series of losses, then broke into the black in 2007. The stock is up about 53 percent this year. Drugs, Satellites Its earnings bounce around. Last year Impax earned 82 cents a share. This year it is headed for $3.13, analysts estimate. Their early guesses for 2011 call for $1.46 a share. This month the company settled a patent dispute with Endo Pharmaceuticals Holdings Inc. and Penwest Pharmaceuticals Co. over a generic version of a medicine for Parkinson’s disease. I also like GeoEye Inc. of Dulles, Virginia. It operates a satellite imaging service, taking pictures of earth from space. Google Inc. uses the company’s satellite images for its Google Maps and Google Earth services. GeoEye shares are up about 14 percent this year and trade at 11 times earnings. The company posted record revenue in the first quarter. Consider this recommendation speculative, as the company’s debt is higher than I usually prefer. SanDisk Corp. , located in Milpitas, California, appears to be coming out of the recession nicely. In the first fiscal quarter, it posted revenue of about $1 billion, up from $659 million a year earlier. Earnings were 99 cents a share, one of SanDisk’s best quarters. Shares are up about 54 percent this year. Disclosure note: Personally and for clients, I own shares in Endo Pharmaceuticals. I have no long or short positions in any of the other stocks mentioned in this week’s column. ( John Dorfman , chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.) To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com .

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Morgan Stanley Purchases $1 Billion in Claims on Bankrupt Lehman Brothers

May 24, 2010

By Linda Sandler May 24 (Bloomberg) — Morgan Stanley bought about $1 billion in claims on bankrupt Lehman Brothers Holdings Inc. from Credit Industriel et Commercial , a holding company for French regional banks, and Banque Federative du Credit Mutuel, according to court filings. The purchase price wasn’t disclosed in the filings today in U.S. Bankruptcy Court in Manhattan. Claims on Lehman trade almost daily among banks and short- term or long-term debt investors at discounts from face value of 60 percent or more. The defunct investment bank, which received about $1 trillion in demands for payment, has said that many claims lack merit and that it aims to reduce them to about $260 billion. According to other filings today, Deutsche Bank AG bought two $60 million Lehman claims from CME Group Inc., a derivatives exchange, and more than $160 million in IOUs from Genworth Life Insurance Co. The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net .

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‘Flash Crash’: SEC Investigates Big Firms’ Role In Stock Plunge

May 24, 2010

WASHINGTON — Federal regulators said Monday they are looking at whether big trading firms abandoned the market during the massive sell-off on May 6 rather than providing cash support required under law. Staff of the Securities and Exchange Commission said the possible retreat of big “liquidity providers” during the market plunge is an area of focus in the investigation. Major securities firms are required by law to remain in the market by buying and selling stocks; high-speed electronic trading firms are not. Some firms that act as liquidity providers stopped doing so during the freefall, the SEC officials found. Those findings were presented at the first meeting of a special advisory committee to the SEC and Commodity Futures Trading Commission. The panel is examining what sent the Dow Jones industrials down nearly 1,000 points in less than 30 minutes. At the meeting, panel members also pressed staff about the nearly 21,000 trades that were canceled because the exchanges deemed them erroneous after the plunge. Staff said nearly all the broken trades involved so-called “stub quotes,” used by market makers as placeholders and often far above or below actual stock values. The SEC staff is considering whether stub quotes should be curbed or banned. SEC Chairman Mary Schapiro said last week the agency is examining whether decisions to cancel trades were made fairly and plans to propose new rules for cancellation. Executives from the major U.S. exchanges are expected to meet with the SEC this week to discuss the issue. The panel also questioned the role of “stop-loss” market orders in the slide. Stop-loss orders set the price at which a stock is automatically sold when it declines to a specified level. Many investors used them to protect themselves in the market freefall. Last week, the SEC and the exchanges unveiled a plan to adopt “circuit breakers” to pause trading during periods of high volatility. Under the plan, trading of any Standard & Poor’s 500 stock that rises or falls 10 percent or more within a five-minute period would be halted for five minutes. The rules would be applied if the price swing occurs between 9:45 a.m. and 3:35 p.m. Eastern time – nearly the entire trading day. The break is intended to head off a chain reaction of human and computerized selling, one of several possible causes of the May 6 plunge. The drop briefly wiped out $1 trillion in market value as some stocks traded as low as a penny. Investigators are focusing on a possible link between the steep decline in prices of stock indexes, and “simultaneous and subsequent” waves of selling in individual stocks. Also being looked at is a “severe mismatch” of liquidity in the market that may have been worsened by the withdrawal of electronic traders, a report by staff of the two agencies says.

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El-Erian Sees China Moving to More Market-Based Policies Within Two Years

February 22, 2010

By Paul Badertscher Feb. 22 (Bloomberg) — Pacific Investment Management Co.’s Mohamed El-Erian said he expects China to adopt more market- based economic policies, including allowing more flexibility for the yuan, “within the next two years.” “We would expect them to continue to take steps toward more market-based instruments of economic management,” said El- Erian, the co-chief investment officer at Newport Beach, California-based Pimco. This includes “allowing the yuan more flexibility” and having market-based pricing of credit. “It’s a natural evolution of successful emerging economies,” El-Erian, 51, said in an interview in Vancouver on the sidelines of a conference sponsored by the Financial Times. “China is at the stage now where it becomes increasingly in its national interest to adopt more market-based instruments.” China’s yuan strengthened the most in a year today on speculation the government will allow more flexibility in the currency’s exchange rate as exports recover from a slump. Policy makers have kept the yuan’s value at about 6.83 per dollar since July 2008, following a 21 percent appreciation over three years, to help exporters weather the drop in demand. The currency gained 0.1 percent to 6.8264 per dollar as of 5:30 p.m. in Shanghai, the biggest gain since February 2009, according to China Foreign Exchange Trade System. That’s the third fluctuation of 0.05 percent or more in four trading days, the same tally as for the previous seven months. China has managed the yuan against a basket of currencies, including the euro, the yen, the British pound and South Korea’s won since a peg against the dollar was scrapped in July 2005. The currency is allowed to trade by up to 0.5 percent against the dollar either side of the so-called central parity rate, which was fixed at 6.8271 today. ‘Small Range’ Vice Commerce Minister Zhong Shan said on Feb. 8 the government may allow the yuan to move in a “small range,” while stressing the official stance is to maintain stability in the currency. U.S. President Barack Obama said in a Feb. 9 interview with Bloomberg BusinessWeek that he set a year-end objective of persuading China to allow the yuan to strengthen. El-Erian, whose firm manages $1 trillion, has cut holdings of U.S. and U.K. debt, favoring sovereign debt of fiscally sounder nations such as Canada and Germany. To contact the reporter on this story: Paul Badertscher in Vancouver at pbadertscher@bloomberg.net

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Buy Stock Now to Ride Second Stage of Bull Market: John Dorfman

February 8, 2010

Commentary by John Dorfman Feb. 8 (Bloomberg) — From Jan. 19 through Feb. 4, the Standard & Poor’s 500 Index , a decent gauge of the overall U.S. stock market, dropped about 8 percent. Among the reasons sparking the decline were President Barack Obama’s proposed tax on banks and a congressional deadlock on health-care legislation. Some stock-market pundits take the drop as a sign that the stock surge that began March 9, 2009, is over, or almost over. I believe the rally will continue. The recent slump, in my view, was normal. The U.S. stock market historically has averaged at least three declines a year of 5 percent or more, and one fall of 10 percent or more, according to Ned Davis Research Inc. I think the rally will resume and run — with unpleasant interruptions, to be sure — through most of 2010, and possibly longer. Ned Davis , head of NDR, is one of my favorite analysts. His firm predicts a decline, perhaps even a “mini bear market,” during the second and third quarters. It expects the market to advance again after that. The Ned Davis team recommends that investors go “defensive” during that six-month stretch by buying the kinds of stocks that usually hold up better in declining markets: consumer staples, health care, utilities and telecommunications stocks. The Davis folks have given those four groups the acronym SHUT (staples, health, utilities, telecom). When the SHUT stocks break above their 200-day moving average, they say, investors should climb onboard. Saw-Tooth Advance Although I respect Davis, I’m not about to play defense. I don’t think the year will divide, like a concerto, into three distinct movements: up, down, up. Rather, I think the market will move in saw-tooth fashion, up and down all year, but with more ups than downs. Accordingly, I am staying with my “offensive” stocks: materials, energy, and industrial companies. In the materials field, for example, I recently purchased shares of Innophos Holdings Inc. , a small chemical company located in Cranbury, New Jersey. Innophos makes phosphate salts and other chemicals used for water treatment, as flavor enhancers, in pharmaceuticals, and for other applications. Chemical companies, like producers of steel and other metals, tend to rise and fall with the tides of the economy. Right now, in my view, the tides are rising. Evidence of Recovery Look at the fourth-quarter tally of the gross domestic product. It rose at a 5.7 percent annualized pace, the strongest reading since the third quarter of 2003. Or consider the Conference Board’s index of leading economic indicators. It has risen nine months in a row, from April through December. Auto sales are gaining, home prices have firmed in many cities, and technology orders are improving. All in all, the evidence points to an enduring recovery, in my view. If the economy is indeed recovering, it would be shocking for the stock market’s advance to stop abruptly. There has been a historical pattern, and the market seems to be following it. A terrible event such as a major terrorist act could, of course, cause markets to abruptly change direction. Second-Stage Bull During most bull markets, the first 40 percent or so of stock market gains occur in a spurt before an economic recovery begins. This time, that would be the period from March through, say, September. The remaining 60 percent of the gains usually occur more gradually and haltingly during the next year or two, as the economic recovery unfolds. Energy stocks usually do pretty well during the second stage of bull-market advances. Today, there are lots of energy companies I like. One is Atwood Oceanics Inc. , an oil and gas drilling contractor. Though the company is based in Houston, less than 5 percent of its revenue comes from the U.S. The bulk of its sales are from drilling in the Mediterranean and Black Seas as well as offshore sites in Asia and Australia. Atwood increased its fiscal year revenue to $587 million in 2009 from $161 million in 2004, and did it in the teeth of an economic slowdown. With that record of growth, I think the company should sell for more than the current multiple of nine times earnings. Twin Disc Undervalued Plenty of industrial stocks look good to me now. One is Twin Disc Inc. of Racine, Wisconsin, which makes heavy-duty transmissions used in off-highway vehicles, yachts and other large boats. In the nightmare year of 2008, Twin Disc shares dropped to about $7 from about $35. They have recovered only modestly since, and now trade for a bit less than $10. At that price, the shares are trading right around book value, a sign of a possible bargain. The price-earnings multiple looks bad, at near 30, but that is because earnings are evaporating– temporarily, I believe. After a profit of $1.03 a share in fiscal 2009, analysts look for earnings to fall to about 18 cents a share in fiscal 2010, which ends in June, and recover to 94 cents the following year. Twin Disc is well managed and happens to be economically sensitive. It has endured some pain, and now I think it will reap some gain. Disclosure note: I own shares of Innophos and Twin Disc personally and for clients. I have no long or short positions in Atwood Oceanics at this time. ( John Dorfman , chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com .

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Stocks’ Risk of Plunging Is at Highest Level Since April ’84, Survey Finds

February 3, 2010

By Craig Trudell Feb. 3 (Bloomberg) — Expectations that U.S. stocks will tumble 10 percent or more rose to highest level since April 1984 this week, according to Investors Intelligence’s weekly survey of newsletter writers. The proportion of investment writers who anticipate a so- called correction climbed to 38.9 percent in the week ended yesterday, an increase from 36.7 percent in the period ended Jan. 27. The New Rochelle, New York-based company has tracked the projections of newsletters since 1963. Mohamed A. El-Erian , whose firm runs the world’s biggest mutual fund, said today that the largest stock market decline in 11 months may worsen amid persistent U.S. joblessness and economic growth that trails analysts’ forecasts. “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, 51, wrote in a column published by Bloomberg News. He is the chief executive officer of Pacific Investment Management Co., which manages $1 trillion from Newport Beach, California. The Standard & Poor’s 500 Index fell 3.7 percent in January, more than any month in a year, after China set higher reserves for lenders and U.S. President Barack Obama proposed curbs on risk taking at banks. The retreat pared the S&P 500’s gain since sinking to a 12-year low in March to 59 percent. Investors Intelligence found that the proportion of bullish newsletter writers fell to 38.9 percent, the lowest since July, from 40 percent. Bearish publications slipped to 22.2 percent from 23.3 percent. Some technical analysts, who try to predict stock moves based on price and trading patterns, track investor sentiment as a contrarian indicator. They interpret decreased pessimism and increased optimism as bearish. To contact the reporter on this story: Craig Trudell in New York at ctrudell1@bloomberg.net .

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China Wealth Fund May Get $250 Billion Extra Funds This Month, Z-Ben Says

February 2, 2010

By Bloomberg News Feb. 2 (Bloomberg) — China Investment Corp ., the nation’s $300 billion sovereign wealth fund, may get at least $250 billion in extra funds before the Feb. 14 Chinese New Year, according to Z-Ben Advisors Ltd. CIC is likely to invest the cash in the first quarter with 60 percent or more of the new funds to be allocated to third- party fund managers, according to a report distributed yesterday by Z-Ben Advisors, a Shanghai-based company that provides research on China’s fund-management industry. In its latest investment moves, CIC announced investments in U.S. power producer AES Corp. and GCL-Poly Energy Holdings Ltd., China’s biggest polysilicon producer. The fund acquired an 11 percent stake in a unit of Kazakhstan’s state-run energy company and a 45 percent stake in Nobel Oil Group of Russia in September. It bought 17.2 percent of Teck Resources Ltd. , Canada’s largest base-metals producer in July. “CIC has been quite active last year in getting natural resources and I think it’s still going to be the case this year,” said Brayan Lai , a Hong Kong-based credit analyst at Calyon. A CIC press official, who declined to be identified, said she was unaware of the additional funds mentioned by Z-Ben. Future Investments The company has had “early” talks for direct investments in Brazil and Mexico, Lou Jiwei , CIC chairman, said on Jan. 20. The sovereign fund may expand its investment scope to “all categories” including U.S. infrastructure projects and European markets, Lou said. CIC was set up in September 2007, funded by $200 billion of foreign-exchange reserves. The nation’s $2.4 trillion foreign exchange reserves have swelled 60 percent since CIC was founded, putting more pressure on the government to find investment returns that would hedge the risks of a declining dollar. Liu Yuhui , an economist at the Chinese Academy of Social Sciences, said on Jan. 20 that China may scale back purchases of U.S. debt on concern the dollar will decline. The fund invested $3 billion in Blackstone Group LP in 2007 when it was just founded and later bought a $5.6 billion stake in Morgan Stanley the same year, concentrating on financial assets. It posted a 2.1 percent loss in 2008, and is expected to have a 10 percent or more return in 2009, according to Jan Randolph , director of sovereign risk, analysis and forecasting at IHS Global Insight. — Zhao Yidi . Editors: Malcolm Scott , Andreea Papuc To contact Bloomberg News staff on this story: Yidi Zhao in Beijing at +86-10-6649-7575 or yzhao7@bloomberg.net

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KeyCorp May Climb by Two Thirds as Bad Loans Recede, Analyst Cassidy Says

October 6, 2009

By Thomas R. Keene and Josh Fineman Oct. 6 (Bloomberg) — KeyCorp , Ohio’s second-largest bank, may jump by two thirds in New York trading as “problem” loans decrease and earnings rise, RBC Capital Markets analyst Gerard Cassidy said. KeyCorp shares may reach $10, the Cleveland-based company’s book value , Cassidy said today in an interview on Bloomberg Radio. The stock fell 4 cents, or 0.6 percent, to $6.19 in composite trading on the New York Stock Exchange at 1:53 p.m. “You are going to see the losses from problem loans decline dramatically for KeyCorp,” Cassidy, who is based in Portland, Maine, said. “We believe the non-performing assets will peak in the first half of 2010 and when you bring down their credit costs by 50 percent or more in the next 12 months, earnings will come back.” KeyCorp may be acquired in 2011, Cassidy said. “We anticipate that the earnings will recover from the credit improvement, but then at that point we believe that you are going to see that KeyCorp is going to face a challenge in growing their business and that could be the reason for them to sell out in 2011 or 2012,” Cassidy said. To contact the reporters on this story: Thomas R. Keene in New York at tkeene@bloomberg.net ; Josh Fineman in New York at Jfineman@bloomberg.net

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Merkel Suffers Losses in German Regional Voting as National Election Nears

August 30, 2009

By Brian Parkin and Tony Czuczka Aug. 30 (Bloomberg) — Chancellor Angela Merkel ’s Christian Democratic Union suffered losses in regional voting four weeks before national elections, potentially bolstering her challenger and damaging her bid for a second term. While the Christian Democrats emerged the biggest party in Saxony, Thuringia and Saarland after state elections today, exit polls show in two of those states, Thuringia and Saarland, the CDU lost its majority and will have to seek a coalition partner or could lose power. The CDU will be able to continue in coalition government in Saxony. The state votes offer a final gauge of voter sentiment before the Sept. 27 federal election. National polls since December have given Merkel’s CDU and her preferred ally, the Free Democratic Party, 50 percent or more, enough to ditch Frank-Walter Steinmeier ’s Social Democrats, her current coalition partner. Steinmeier, the foreign minister, is the SPD candidate for chancellor. “Psychologically it’s bad for Merkel just four weeks before elections but this is just a normalization” after a strong showing at the last state elections, Jan Techau , an analyst at the Berlin-based German Council on Foreign Relations, said in an interview. To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net ; Brian Parkin in Berlin at bparkin@bloomberg.net .

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Toxic Loans Topping 5% May Push 150 Banks To Point Of No Return

August 14, 2009

Aug. 14 (Bloomberg) — More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival.

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European, Asian Stocks Fall, Paced by ING, Nestle; U.S. Index Futures Drop

August 12, 2009

By Adam Haigh Aug. 12 (Bloomberg) — European stock-index futures were little changed as E.ON AG reported profit that beat analysts’ estimates, offsetting results from ING Groep NV that trailed projections. E.ON, Germany’s largest utility posted first-half adjusted net income of 3.46 billion euros ($4.89 billon). Nestle SA, the world’s biggest food company, may be active after reporting profit that beat analysts’ estimates. ING Groep, the largest Dutch financial-services company, may retreat. Futures on the Euro Stoxx 50 Index slipped 0.1 percent at 7:29 a.m. in London. The U.K.’s FTSE 100 Index is set to open 4 points higher, according to inter-dealer broker BGC Partners. Standard & Poor’s 500 Index futures expiring in September fluctuated between gains and losses before the Federal Reserve’s interest-rate decision, while Asian shares fell. Fed policy makers may today acknowledge that economic growth will be faster than they anticipated, while committing to keep the benchmark interest-rate target near the lowest level on record. Former Fed officials differed on whether the FOMC will announce an intention to let the program to buy long-term Treasuries expire as scheduled in September. The Federal Open Market Committee is scheduled to issue its statement around 2:15 p.m. in Washington. Recovery from the worst recession since the 1930s has begun as President Barack Obama ’s fiscal stimulus takes effect, a monthly survey of economists indicated. The U.S. economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median of 53 forecasts in the Bloomberg News survey. Nestle, BHP Nestle said it expects “organic” sales growth to accelerate in the second half from the first half’s 3.5 percent pace. First-half earnings were 5.07 billion Swiss francs ($4.7 billion), beating analysts’ forecasts for 4.82 billion francs. BHP Billiton Ltd., the world’s largest mining company, may rise after reporting full-year net income of $5.88 billion. ING may fall after the company posted net income of 71 million euros, missing the 362 million-euro median estimate of 10 analysts surveyed by Bloomberg. Europe’s Stoxx 600 has soared 43 percent since March 9 as companies from GlaxoSmithKline Plc to Intel Corp. reported better-than-estimated results. The measure was valued at 40.1 times the profits of its companies last week, the highest level since September 2003, according to data compiled by Bloomberg. Earnings at companies in the Stoxx 600 that reported results since July 8 have still slumped 38 percent, while less than half have topped analysts’ projections on an earnings-per- share basis, according to data compiled by Bloomberg. To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

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Jonathan Spalter: The Digital Divide: Is Mobile Technology Closing the Gap?

July 24, 2009

Anyone concerned about bridging the digital divide should be as fascinated with this week’s Pew Internet report as Charles Darwin was with the Galapagos. The report, based on an April survey of almost 2,300 adults, looks at the growing popularity of the mobile Internet. Its overall conclusion: Mobile Internet usage is surging, with 19 percent of adults reporting that they used the mobile web on the day prior to answering the survey.

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