Business Blog Posts

In stark contrast to the jobless U.S. recovery that the White House is trying to shore up with tax cuts, Australia's jobs growth in November was the biggest since January, blowing past forecasts and lifting the Australian dollar and domestic shares.

The financial world is becoming split between investors who are deeply concerned a proposal from U.S. President Barack Obama to extend tax cuts will worsen a budget shortfall, and investors who are relieved U.S. authorities are trying to use fiscal and monetary medicine for the economy.

Both higher U.S. yields and higher growth are being seen as supportive for the dollar, for now.

"The stimulus measures agreed by the U.S. administration will likely lead to many analysts penciling in higher growth forecasts over 2011 whilst reducing the prospects of QE3 from taking place, all of which is dollar positive," Mitul Kotecha, global head of foreign exchange strategy with Credit Agricole CIB in Hong Kong, said in a note.

The lead 10-year U.S. Treasury future was up around 9/32 in early Asian trade, after hitting the lowest since June 25 overnight. Even after the Federal Reserve's highly anticipated plan to buy more bonds to push down interest rates was hatched in early November, the bond market has relentlessly sold mid to longer-maturity bonds.

Since November, the difference between 10-year yields and 2-year yields has widened by nearly 40 basis points.

In the cash market, the benchmark 10-year yield was at 3.22 percent after climbing to 3.33 percent on Wednesday, the highest since June.

The poor performance of sovereign bond markets in the fourth quarter made much worse this week has become a question of allocation for many investors. Bob Doll, chief investment strategist at BlackRock, told the Reuters 2011 Investment Outlook Summit the deal in Washington to extend tax cuts will probably accelerate the move of cash into equities and out of fixed income.

The U.S. dollar has benefited from the rapid pace of rising Treasury yields relative to other sovereign bonds. The move lower in U.S. yields on Thursday pushed down the dollar index, a gauge of performance against six other major currencies, 0.33 percent.

The Australian dollar rose 0.7 percent to $0.9863 after employment increased by a net 54,600 jobs last month, surpassing expectations of a 19,000 gain.

Interbank rate futures tumbled while Australian government bond futures fell, unlike other sovereigns on the day.

In stock markets, Japan's Nikkei share average hit a seven-month high though short-term measures showed the market was due for a pause, having risen 12 percent since November compared with the 6 percent advance in the MSCI all-country world index .MIWD00000PUS.

"Thanks to both the yen's weakness and Nikkei futures ending higher in Chicago, the Nikkei may see more buying, but the market has been overbought," said Yumi Nishimura, a senior market analyst at Daiwa Securities Capital Markets.

Foreign investors gobbled up Japanese stocks last week, with net buying reaching the highest since early April, Finance Ministry data showed. Foreigners have been net buyers for 5 straight weeks, bringing the total net buying to 730.6 billion yen over the period. Out of the last 10 weeks foreigners were net buyers in nine weeks.

The MSCI index of Asia Pacific stocks outside Japan rose 1.1 percent .MIAPJ0000PUS, with gains spread evenly across all sectors.

(Additional reporting by Chikafumi Hodo and Ayai Tomisawa in TOKYO, editing by Kazunori Takada)

A lack of surveillance across the 50 some trading venues, and between the mostly electronic stock, futures and options markets was a clear focus at a congressional hearing into how to avoid a repeat of the May 6 "flash crash."

Since the unprecedented market plunge, the SEC and the Commodity Futures Trading Commission have been under intense pressure to bolster the integrity of the markets now seen by many as flawed and unstable.

SEC enforcement staff are investigating whether market participants "intentionally contributed to market volatility or manipulated the price and volume of securities at the expense of innocent investors," Schapiro told a congressional panel.

Schapiro said her staff was examining trading practices such as "spoofing," which includes when a trader submits many bids and offers with no intention of carrying them out.

The flash crash reverberated across asset classes, rocked investor confidence in the vast trading network and has prompted lawmakers to demand fixes to the markets.

At the hearing, Senator Carl Levin dropped a stack of paper measuring "five inches high" that he said contained the message and trading traffic across all exchanges in one major U.S. stock "over the course of one second."

"There is a long, long way to go particularly with respect to coordinating market protections and surveillance across market venues and across the futures, options, and equities markets," said Levin, who along with fellow Democratic Senator Jack Reed, chaired Wednesday's hearing.

Levin said that coordinated protections across asset classes "isn't even on the drawing board," adding: "It took the CFTC and the SEC five months of intense work to figure out what happened over a few minutes on May 6."

The SEC is painfully aware that it cannot see the entire marketplace or easily collect data from the dozens of trading venues.

The regulator has proposed to improve market surveillance by tracking stock orders across all U.S. equity markets -- a plan generally supported by market participants.

Kevin Cronin, the global head of equity trading at Invesco, told lawmakers that regulators need to be able to analyze the data. Tradeworx CEO Manoj Narang agreed that regulators needed better analytical tools.

"Regulators need to see markets in the same way its most active participants see it," said Narang, whose hedge fund runs high frequency trading strategies.

NOT JUST THEORY

Schapiro and CFTC Chairman Gary Gensler are looking for potential remedies for the markets, where high-frequency algorithmic traders are increasingly dominant.

Fortune owns Jim Beam bourbon, Titleist golf balls and Moen faucets -- brands with little strategic overlap -- and has a market capitalization of $9.3 billion. In October, Ackman's Pershing Square Capital Management became its largest shareholder after buying an 11 percent stake.

Fortune would keep the spirits business, the world's fourth-largest, with $2.5 billion in annual revenue and brands like Sauza tequila and Maker's Mark bourbon.

Analysts say it would be an attractive takeover target, especially for top player Diageo Plc (DGE.L), which lacks a large bourbon whiskey. According to Reuters Breakingviews, applying a multiple of 15 times operating earnings for the spirits business alone would yield a price tag of $10 billion.

"It's really only a matter of time before it gets acquired," said Morningstar analyst Philip Gorham.

Fortune Brands said it had been considering a restructuring over the last four years as it weighed whether the businesses would be worth more on their own. It said now was a good time, as all the units emerged from a U.S. economic downturn in better shape than expected.

"While the breadth and balance of our portfolio have served shareholders very well, we see the potential for even greater value by separating our businesses into focused companies," said Chief Executive Bruce Carbonari in a statement.

Fortune will spin off its home and security unit to shareholders in a tax-free transaction, and either sell or spin off its golf business, the world's biggest. It plans to complete plans for these actions in the coming months.

FOR-SALE SIGN

Last year, spirits made up more than three-quarters of total operating profit but only 37 percent of sales. Demand for drinks was dampened by the recession, but the unit's resiliency relative to the others helped Fortune in the recession.

Even though Fortune said it plans to spin off the home unit, one banker familiar with the situation said the move was "tantamount to putting up a 'for-sale' sign" on the business, which includes Aristokraft cabinets and Therma-Tru doors.

The banker, who was not authorized to speak to the media, said the business could attract private equity or strategic buyers from Asia, among others. Other industry sources said Asian buyers could eye the golf business, which has been expanding in Korea and China.

Fortune shares were up 0.9 percent at $61.71 in late afternoon trade on Wednesday, outpacing a 0.2 percent increase for the wider stock market. Fortune shares have gained 17.6 percent in the two months since Ackman's investment.

While analysts see the breakup as a good deal for shareholders, the impact on bondholders is less clear. Research firm Gimme Credit downgraded its credit score on Fortune to "deteriorating."

"In order to preserve investment grade credit quality, we believe the company will need to use some of the cash to pay down a meaningful amount of debt, not simply hand it all over to shareholders," Gimme Credit analyst Carol Levenson said in a note to clients.

Bond funds have been absolutely crushed in the recent Treasury market selloff that began after Federal Reserve Chairman Ben Bernake announced a second round of government bond-buying, dubbed "quantitative easing 2." The downdraft accelerated in recent days amid fears the U.S. budget deficit is out of control.

Long-term government bond funds have lost 9.4 percent from mid-September through December 7, according to Morningstar. And the price of the iShares Barclays 20+ Year Treasury Bond ETF (TLT.P) is down 11.4 percent.

The losses came as a painful wake-up call for investors who have been buying bond funds hand over fist for most of the past two years. Through late November, investors have poured a net $268.4 billion into fixed income mutual funds this year while yanking a net $30.9 billion from stock funds, according to data compiled by the Investment Company Institute.

Investors have pulled money from U.S. stock funds for seven months in a row.

That has kept the basic trend intact that began amid the Lehman Brothers bankruptcy in 2008. Investors withdrew $243 billion from stock funds and added $404 billion to bond funds in 2008 and 2009.

And an annual survey of wealthy investors released on Wednesday by the Spectrem Group found only 23 percent plan to invest more money in equities over the next 12 months, down from 25 percent in the 2009 survey and 36 percent who were looking to add stocks at the end of 2008.

Investor appetite for bonds was basically unchanged at 17 percent. Cash remained king with 40 percent planning to add money.

"If you look at bonds or stocks, they're not compelling asset classes no matter what your risk appetite," said Jason Huntley, chief investment officer at money manager Mars Hill Partners in Colorado Springs, Colorado. "That does create a dilemma."

The lack of evident enthusiasm has not deterred a growing group of bullish stock managers from predicting that 2011 will be the year when stocks come back in vogue.

The next year will see a resurgence in equities investing, marking the end of the bull market in bonds, Martin Sass, founder of asset management firm MD Sass, said on Tuesday, speaking at the Reuters 2011 Investment Outlook Summit in New York. U.S. equities are the "cheapest major asset class out there," Sass said.

Blackrock chief equity strategist Bob Doll, who helps manage more than $3.3 trillion in assets, told the Reuters summit on Wednesday that the deal to extend the Bush-era tax cuts will "accelerate" the move of cash into equities and out of fixed income.

"First of all, an unknown is removed. Markets don't like unknowns and if you don't know something, you kind of tend to own a few more Treasuries and a few less stocks," Doll said.

Charles de Vaulx, portfolio manager at International Value Advisers, said investors ought to prefer gold to bonds if they are worried about inflation, as he is. Gold is the better hedge at a time when owning long-dated bonds may be too risky, he said.

De Vaulx, also speaking at the Reuters' summit on Wednesday, said debt worries in Europe and the temptation for the United States to inflate away some of its outstanding debt means "it may be time as an investor not to own any long-dated bonds.

Shares of the world's largest hamburger chain were down 1.4 percent at $79.25 in premarket trading. The stock hit an all-time intraday high of $80.94 on Tuesday.

"They're a victim of their own success during the recovery, and I guess one would be skeptical: Are they going to potentially lose share that they have gained?" said Oppenheimer analyst Matt DiFrisco, who has a "peer perform" rating on the stock. "That would be overreading these numbers."

He added, "People are going to look at this as the fast food demand remains relatively lackluster and it's very much in line with what you'd expect with the slow job recovery."

Despite the macroeconomic weakness that has dented overall demand, McDonald's has been taking U.S. market share from rivals like No. 2 hamburger chain Burger King, which is now private after its sale to 3G Capital.

McDonald's has lured diners with low-priced food on its U.S. Dollar Menu, renovated restaurants and, in some markets, longer operating hours. But analysts said the easy comparisons with a year ago were coming to an end.

Worldwide November sales at restaurants open at least 13 months were up 4.8 percent. In the United States, where high unemployment has taken a bite out of sales at fast-food chains, sales were up 4.9 percent.

Several analysts said Wall Street had expected global sales to rise 5.6 percent and U.S. sales to increase 5.1 percent. The U.S. market accounts for about 35 percent of McDonald's revenue.

Same-restaurant sales in Europe were up 4.9 percent, while sales in the Asia/Pacific, Middle East and Africa unit rose 2.4 percent. Analysts had expected Europe sales to rise 4.9 percent and APMEA sales to jump 6.4 percent.

The company said Australia drove results in the APMEA region, and sales were positive in China and most other markets. But it cited weakness in Japan.

(Reporting by Ben Klayman; Editing by Lisa Von Ahn and John Wallace)

The dollar extended gains on Wednesday on a spike in U.S. Treasury yields as Washington's proposed extension of tax cuts brightened the outlook for U.S. growth but raised fears of fiscal deterioration.

The 10-year U.S. Treasury yield rose to 3.25 percent, a level not seen since late June and beyond Tuesday's high of 3.18 percent.

Oil fell for a second day, dragged by the rise in the greenback and after an industry report showed a larger-than-expected increase in the country's gasoline stockpiles.

European shares were up 0.2 percent in morning trade, extending their week-long rally and flirting with a two-year high, as prospects for further economic recovery outweighed lingering worries about sovereign debt levels in the euro zone.

North Korea fired artillery shells in a suspected military drill on Wednesday, spooking markets on an already tense peninsula, as the top U.S. military official warned of more provocations from Pyongyang's "bad guy.

U.S. retailer Costco Wholesale Corp (COST.O) posted a better-than-expected quarterly profit as sales and traffic grew at its U.S. stores and the weakening dollar helped sales overseas.

CBS Corp (CBS.N) Chief Executive Leslie Moonves is optimistic about 2011 advertising trends and expects the brisk pacing of ad revenue growth to continue in the first quarter.

Microchip bellwether Texas Instruments Inc (TXN.N) said it was confident a recent demand correction would be short-lived and narrowed its quarterly earnings guidance in line with analysts' expectations.

Fortune Brands Inc (FO.N), which owns brands ranging from Jim Beam whiskey to Titleist golf balls and faucet manufacturer Moen, plans to split into three companies, a source familiar with the situation said on Tuesday. An announcement is expected on Wednesday, the source said.

U.S. private equity firm Blackstone Group (BX.N) is in talks to join a bid by China's Bright Food Group Co for U.S. healthcare products seller GNC Holdings Inc, a source familiar with the situation said on Wednesday.

Economic indicators on tap for Wednesday include the release of the Mortgage Bankers Association's Mortgage Market Index for the week ended December 3.

U.S. stocks eked out a small gain on Tuesday as investors' enthusiasm over a tax cut extension deal was short-circuited by rising bond yields and reports regulators were stepping up an insider-trading probe.

The Dow Jones industrial average .DJI dropped 3.03 points, or 0.03 percent, to 11,359.16. The Standard & Poor's 500 Index .SPX added 0.63 points, or 0.05 percent, to 1,223.75. The Nasdaq Composite Index .IXIC gained 3.57 points, or 0.14 percent, to 2,598.49.

(Reporting by Blaise Robinson; Editing by Hans Peters)

Li Daokui, an academic member of the central bank's monetary policy committee, said that U.S. bond prices and the dollar would fall when the European economic situation stabilized.

"For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States," Li said, when asked about U.S. President Barack Obama's plan to extend tax cuts for all Americans.

"But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, U.S. Treasury bonds and the dollar will experience considerable declines."

U.S. Treasury prices fell sharply for a second day on Wednesday as the proposed tax deal sparked concerns over the government's ability to service its massive debt burden. Moody's Investors Service said it is worried the tax cuts could become permanent, hurting U.S. finances and credit ratings in the long run.

In Europe, Ireland's parliament passed the first in a series of resolutions underpinning its 2011 austerity budget on Tuesday, marking the first step in a lengthy approval process. But investors are now worried that the region's debt crisis could engulf Portugal next, or Spain.

China has a big stake in the performance of dollar assets. The country holds the world's biggest stock pile of foreign exchange reserves at $2.64 trillion and an estimated two-thirds of that is invested in dollar assets, including U.S. Treasuries.

The State Administration of Foreign Exchange (SAFE), an arm of the central bank, is responsible for managing the reserves.

Li was speaking on the sidelines of a financial forum in Beijing. He sits on the monetary policy committee of the central bank but does not have real influence on key decisions on interest rates and the yuan.

ROBUST CHINA GROWTH

China's annual economic growth will exceed 9.5 percent in 2011 and will remain above 9 percent through the coming decade, Li told the forum.

The long-term growth outlook would be underpinned by the need to continue investing in infrastructure, he said.

"China has a vast domestic demand that is untapped, and that's the fundamental difference between China now and Japan in 1985," Li told a forum.

In addition, China would have to spend a lot on "low carbon" industries, lending more support for the economy, he said.

Li also predicted that global commodities prices, including oil, would rise sharply next year.

Speculation about a Chinese interest rate rise in the coming days has intensified after an official newspaper flagged the chances of an imminent move amid expectations of rising inflation in November.

Costco, which sells bulk packages of everything from diapers to detergent, said profit was $312 million, or 71 cents per share, in the fiscal first quarter ended November 21, compared with $266 million, or 60 cents per share last year.

Analysts on average forecast a profit of 69 cents per share, according to Thomson Reuters I/B/E/S.

Last week, Costco, the largest U.S. warehouse club operator, said sales in the quarter rose 11 percent to $18.8 billion.

Sales at stores open at least a year rose 7 percent, helped by higher gasoline prices, the company said.

Issaquah, Washington-based Costco stock closed at $69.64, after touching a 52-week high of $70.06, on Tuesday.

(Reporting by Abhinav Sharma in Bangalore; Editing by Dan Lalor)