Business Blog Posts

Third-quarter reports among the big names have been reasonably solid, with Google, McDonald's and others reporting strong results.

But, unless there's a turnaround in the outlook for the U.S. economy, the next few quarters may be less rosy.

Currently, the market is focused on Europe. Hope for a series of summits designed to find a way to solve the growing euro zone debt crisis buoyed the Standard & Poor's 500 index to a 1.1 percent gain for the week and put the index at the top of a recent range it has struggled to break through.

With so much focus on Europe, earnings -- even with most companies beating expectations -- have been given less of the spotlight.

At the same time, S&P 500 earnings forecasts for the fourth and first quarters have come down since the start of October, especially in the materials, energy and financial sectors, according to Thomson Reuters data.

"That's part of this fear factor that has gripped not only the marketplace but corporate America as well," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

Much of what's driving worries about earnings is related to expectations for less demand from Europe and other parts of the world, including China, where indicators show growth is slowing.

The sovereign debt crisis in Europe has plagued markets for months, and the U.S. economy has been a worry, too, with the nation's high unemployment rate among the chief problems.

Much of the third-quarter profit strength stems from still-strong international revenue growth, according to a report from Thomson Reuters earnings analyst Jharonne Martis.

"There is still a dichotomy between robust earnings growth and global economic uncertainty," the report said.

Foreign sales total 30 percent on average for S&P 500 companies.

Of the 133 S&P 500 companies that have reported earnings to date, 68 percent have come in above expectations, above the long-term average, the Thomson Reuters data showed.

On next week's earnings agenda are results from more top S&P 500 names: Caterpillar, Coach, Boeing and Procter & Gamble Co among others.

The data shows S&P 500 earnings are expected to have risen 14.7 percent in the third quarter from a year ago, compared with an October 3 estimate for 13.1 percent growth.

Projections for the fourth quarter are for growth of 12.5 percent -- down from an October 3 estimate of 15 percent -- and forecasts for the first quarter of 2012 are for growth of 7.6 percent -- down from an October 3 estimate of 10.2 percent.

WORRIES PRICED IN

Some analysts said the changes in earnings estimates may just be catching up to sentiment already priced into stocks.

If so, an improvement in the outlook would make the forecasts too low.

"If Europe does satisfy the markets (with a solution to the debt crisis), then I think these estimates will be proven wrong," Cardillo said.

As long as the U.S. economy doesn't fall back into recession, corporations can deliver profit growth, strategists argued.

Among next week's data is a report on U.S. economic growth on Thursday. U.S. gross domestic product likely grew at a 2.5 percent annual rate in the third quarter, according to a Reuters survey, a improvement from 1.3 percent in the second quarter.

"The general macroeconomic data in the U.S. continues to confirm a protracted, slow painful recovery but not a recession at this stage. And if it continues to maintain that however slow pace, on the upside the earnings should be supported by economic activity," said Natalie Trunow, chief investment officer of equities at Calvert Investment Management in Bethesda, Maryland, which manages about $14.8 billion.

(Reporting by Caroline Valetkevitch; Editing by Kenneth Barry)

Even after scaling back the issue and cutting the company's valuation in half, the IPO may struggle. Aside from recent regulatory and operational bumps, investors and analysts are troubled by Groupon's business model.

The concept is simple and potentially lucrative: sell a coupon for a local business and take a cut of the proceeds for facilitating the deal. But the market has attracted hundreds of rivals, including well-funded giants such as Google Inc (GOOG.O) and Amazon.com Inc (AMZN.O). Even Facebook was a Groupon rival for a short while before it shut down its effort.

"My views have not changed, despite the reduced valuation. We still have significant long-term questions about their business model," said Michael Cuggino, who helps manage about $15 billion at Permanent Portfolio Funds in San Francisco.

"They will get a lot of very hard questions from investors focused on their business outlook and profit expectations," Cuggino said, adding he would not be attending the road show and is "nowhere near" investing in Groupon.

Other investors said they were intrigued enough to attend the roadshow, but saw the IPO price as still on the high side.

Groupon plans to sell 30 million shares, or less than a 5 percent stake, at between $16 and $18 each, raising up to $540 million, according to a regulatory filing on Friday.

The midpoint would value Groupon at $10.8 billion, far less than the $20 billion initially expected but still above the $6 billion that Google offered to pay for the company last year.

"Groupon is an impressive business, but it's coming with a pretty rich price tag," said Ryan Jacob, manager of the Jacob Internet Fund, who watched Groupon's roadshow presentation online this morning.

"They're still young enough that the price seems too high to us -- even at the reduced level," Jacob added. "There's impressive growth potential but a lot of risks."

David Berman, a technology and retail specialist at hedge fund firm Durban Capital, said he would attend the roadshow but has reservations about the IPO.

"It's a big part of the puzzle in terms of the future of retail. Whether it's a good model and priced right is another matter," he told Reuters.

"The big issue for me is competition. Are there barriers to entry?" Berman added. "The other question is repeat business. It's one thing to buy a Groupon once and visit the merchant, but are customers coming back again and again?"

NEW BUSINESSES

Rather than address the question of when it might start turning a profit -- a key issue for investors -- Groupon executives in the online version of its roadshow described how they are trying out new businesses, such as travel deals and selling discounted products online.

"We've just started doing these things in the last few months," said Chief Executive Andrew Mason. "We're finding our customers are buying at the same kinds of conversion rates as they do with local. We've been able to translate this audience because we have this trusted brand."

The company launched Groupon Live, a partnership with Live Nation (LYV.N) to offer discounted concert tickets; Groupon Getaways, its travel business; and Groupon Goods, the discounted product market, in the third quarter.

"These are expected to grow and become a larger part of Groupon's overall business," Chief Financial Officer and former Amazon executive Jason Child said. "The success of these new categories greatly increases our market opportunity."

While the Chicago-based company's revenue and sales staff have grown dramatically since its founding in October 2008, it has never been profitable on a net basis. It made a narrower operating loss in the third quarter, after excluding stock-based compensation.

"There are a lot of beat up Internet stocks that are profitable. This one isn't," said a manager of a Bay Area tech-focused investment firm.

He said he would look at Groupon but didn't feel like he had to own it: "A $20 billion valuation is completely ludicrous. Ten billion is still too much."

The investor didn't want to be identified because he planned to meet with Groupon.

(Reporting by Alistair Barr in San Francisco and Clare Baldwin in New York; editing by Carol Bishopric)

Leaders of the 17-nation euro zone will now hold a second summit next Wednesday to thrash out the toughest issues of how to maximize the bloc's financial rescue fund and how to reduce Greece's debt, because Merkel will not be empowered to conclude agreements when they meet in Brussels on Sunday.

The German leader stuck to her guns on Friday in rebuffing French pressure to make wider use of the European Central Bank in leveraging the EFSF bailout fund. France argues this is the most effective way of fighting a crisis that began in Greece, spread to Ireland and Portugal and now threatens bigger countries.

"The path is closed for using the ECB to ease liquidity problems," Merkel told her conservative parliamentary caucus in Berlin, according to participants at a closed-door meeting.

A German government spokesman said the most important decisions at the two-part meeting would only come on Wednesday.

The timetable forced the EU to postpone a summit with China next Tuesday, highlighting how the debt crisis is affecting Europe's place in the world. Chinese Premier Wen Jiabao told European Council President Herman Van Rompuy in a telephone call that European leaders should take concrete actions to contain the crisis and stabilize the euro and financial markets.

The outcome will determine whether investors' confidence in the euro area can be restored. It will also influence whether an expected Greek debt write-down triggers a chain reaction of financial turmoil across Europe.

As a first step, leaders of the 27-nation European Union are set to endorse a plan on Sunday to strengthen banks' capital base and may also launch a procedure for longer-term reform of the euro area's economic governance, EU sources said.

European banks will be required to increase their core tier one capital ratio to 9 percent to help them withstand losses on sovereign debt, but it is not yet agreed how long they will be given to raise extra funds.

EU officials said the total amount required was just short of 100 billion euros. Those banks that cannot raise money on the markets will have to turn to national government.

An EU source said France, which has presidential and parliamentary elections from April to June and is desperate to keep its top-notch AAA credit rating, was pressing for banks to be given at least nine months to meet the target.

FRANCO-GERMAN SPLIT

Berlin and Paris, Europe's two main powers, remain split on how to scale up the 440-billion-euro ($600) EFSF bailout fund to prevent bond market contagion spreading to Italy and Spain, the bloc's third and fourth largest economies.

France fears its credit rating could come under threat if the wrong method is chosen.

Ratings agency Standard & Poor's said on Friday it is likely to downgrade France and four other states if Europe slips into recession. It was the second agency this week to cast doubt on Paris' triple-A rating after Moody's on Tuesday.

There are also differences between Germany and France and between the EU and the International Monetary Fund over how deep a write-down banks and insurers will have to take on Greek bond holdings to make that country's debt sustainable.

Paris and Berlin called on Thursday for negotiations to start immediately with the private sector over its contribution to a sustainable plan for Greece's mountainous debt.

Underlining the threat the euro zone crisis poses to the global economy, President Barack Obama held a video conference with Merkel and French President Nicolas Sarkozy on Thursday, reiterating that he hopes a solution will be in place in time for a summit of G20 leaders in France on November3-4.

Merkel and Sarkozy "fully understand the urgency of the issues in the euro zone and are working diligently to develop a comprehensive solution that addresses the challenge and which will be politically sustainable," the White House said.

The International Monetary Fund and the EU also do not see eye-to-eye over the sustainability of Greek debts, with the IMF concerned that EU projections may be too optimistic and that a deeper debt reduction is needed, EU sources told Reuters.

Despite the differences, EU and IMF inspectors are expected to go ahead and approve an 8 billion euro aid payment to Greece next month, the sixth tranche from a 110 billion euro package of EU/IMF loans agreed last May.

Without that payment Greece faces default, possibly dragging the larger economies of Spain and Italy into the mire and sending shockwaves through the European banking system.

A German government spokesman said the timing of the second summit would allow the parliamentary budgetary committee to debate plans for the euro zone rescue fund. The committee has to consider such plans, according to German regulations.

HOW TO SCALE UP

The biggest challenge is agreeing on the method of scaling up the EFSF. France has argued the most effective way of leveraging it is to turn it into a bank which could use funding from the ECB, but both the central bank and Berlin oppose this.

Instead, the most likely approach is to use the EFSF to guarantee a portion of potential losses on new euro zone bonds, a way of trying to restore market confidence and convince investors that Italian and Spanish bonds are safe to buy.

By guaranteeing only a portion, perhaps a third or a fifth, of each debt issue, the available EFSF funds would stretch 3-5 times further, increasing it to around 1 trillion euros.

However, analysts are concerned that such a plan could create a two-tier bond market, with bonds that have guarantees trading at a premium to the secondary market -- an outcome that could exacerbate market turmoil.

Markets traded cautiously on Friday after news of the summit delay, with safe-haven German Bund futures higher.

Adding to uncertainty, EU officials said some key euro zone member states were coming to the view that further private sector involvement in Greek debt reduction may have to be forced, not voluntary -- an outcome ruled out up to now.

"Let's be serious, everybody knows that a 50 percent haircut, as Germany is asking for, is not a voluntary move," one EU official said.

In July, banks and insurers agreed to contribute 50 billion euros to reducing Greece's debt via a debt buyback and swap agreement, which equated to a 21 percent writedown. That is now seen as insufficient to make Athens' debts sustainable.

Greece remains mired in recession and its overall debt is forecast to climb to 357 billion euros this year, or 162 percent of annual economic output. Economists say Athens is insolvent. ($1 = 0.730 Euros)

(Additional reporting by Andreas Rinke and Madeline Chambers in Berlin, John O'Donnell, Julien Toyer, Jan Strupczewski and Luke Baker in Brussels; Writing by Paul Taylor; editing by Janet McBride)

General Electric Co (GE.N) is expected to post an 11 percent rise in earnings per share, reflecting improved results at its large energy operation and strong demand from fast-growing economies including China.

Other companies announcing results include Honeywell International (HON.N) and Verizon Communications (VZ.N).

Economic Cycle Research Institute releases its weekly index of economic activity for October 14 at 1430 GMT. In the prior week the index read 120.2.

Senate Republicans and Democrats rejected each other's economic stimulus bills on Thursday, underscoring their inability to craft a bipartisan solution on job creation before next year's elections.

China is set to show the world that its currency policy begins and ends at home, slowing down the yuan's appreciation to shield exporters from a global economic downturn and show U.S. lawmakers they cannot push the pace of reform.

U.S. coal giant Peabody Energy (BTU.N) cleared the biggest hurdle to its long-running ambitions to buy Australia's Macarthur Coal (MCC.AX) after the target's major shareholder, China's Citic Resources, backed its $4.9 billion ($5 billion) bid.

Duke Realty Corp (DRE.N) said it will sell its suburban office portfolio to private equity firm Blackstone Group (BX.N) for $1.08 billion.

Exxon Mobil Corp's (XOM.N) refining complex in Singapore has suffered a power outage, industry sources said on Friday. It was unclear when the outage started and which units have been affected.

European shares .FTEU3 rose 0.8 percent on Friday, after losses in the previous session, on hopes decisions to resolve the region's debt crisis would emerge from meetings held by European leaders by Wednesday.

France and Germany said in a joint statement on Thursday that European leaders would discuss a global solution to the crisis on Sunday but no decisions would be adopted before a second meeting to be held by Wednesday at the latest.

The Dow Jones industrial average .DJI ended up 37.16 points, or 0.32 percent, at 11,541.78 on Thursday. The Standard & Poor's 500 Index .SPX was up 5.51 points, or 0.46 percent, at 1,215.39. The Nasdaq Composite Index .IXIC was down 5.42 points, or 0.21 percent, at 2,598.62.

(Reporting by Atul Prakash; Editing by Hans-Juergen Peters)

In his first speech explicitly on the economic outlook since joining the Fed in 2009, Fed Governor Tarullo on Thursday said there was "ample room" for policymakers to do more. Tarullo said mortgage bond purchases should be on the table, a sentiment echoed by Boston Fed President Eric Rosengren in an interview with the Wall Street Journal on Wednesday.

Tarullo and Rosengren's comments mark the first public discussion of the possibility of more mortgage bond purchases, which were a controversial part of the first round of quantitative easing in 2009.

Other Fed officials said on Thursday the Fed's current policy stance is appropriate.

For his part, St. Louis Fed President James Bullard told reporters that with recent economic data looking better, "monetary policy is appropriately calibrated for this situation." Cleveland Fed President Sandra Pianalto also said Fed policy actions were "appropriate."

The remarks suggest a growing debate among Fed officials about how aggressively to support an economy that is not growing quickly enough to make a significant dent in an unemployment rate hovering around 9 percent.

Pianalto described the economic recovery as "painfully" slow and unlikely to gather pace soon, while Tarullo likened it to a "slogging through the mud and occasionally hitting stretches of dry pavement."

"There is need, and ample room, for additional measures to increase aggregate demand in the near to medium term, particularly in light of the limited upside risks to inflation over the medium term," said Tarullo, who as a Fed Governor has a permanent vote on monetary policy.

ONGOING HOUSING PROBLEMS

Because the ongoing housing problems are so central to the recession and the anemic nature of the subsequent expansion, the Fed should refocus its efforts on housing, Tarullo said.

"I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities," he added. The Fed bought $1.25 trillion worth of mortgage-related debt, starting in 2009.

Given the controversial nature of mortgage bond purchases -- some Fed officials criticize them as propping up a specific sector of the economy. JPMorgan economist Michael Feroli said he did not expect the Fed's policy-setting Federal Open Market Committee to adopt this option anytime soon.

"Nonetheless, Tarullo's speech does show that there is a relatively-silent faction on the FOMC that favors continued action to get the economy to grow faster," he wrote in a note to clients.

"A faltering in growth or a decline in inflation could further embolden this faction."

Tarullo said the effectiveness of an MBS purchase program could be improved by further action to help borrowers whose mortgages are worth more than their homes.

He suggested a government program that helps borrowers whose loans are backed by Fannie Mae and Freddie Mac which could be adjusted, but also said steps could be taken to help underwater borrowers whose loans are not guaranteed by the two government-controlled firms.

"Policy changes directed at this last, larger group of homeowners would have to be carefully designed so as not to transfer credit risk from private investors to the government, and could well require legislation," he said.

The Obama administration and the regulator for Fannie Mae and Freddie Mac are expected to unveil new steps to help distressed homeowners in the next week or two, a senior congressional aide said on Thursday.

WAIT AND SEE

Bullard, who like Pianalto, does not have a vote on monetary policy this year, said the Fed should wait and see how policies it has put in place, including a recent decision to replace shorter-term securities it holds with longer-term ones, affect the economy before taking any further actions.

"Given that the tone of the data has been better in the last six weeks ... then I think you probably want to get into next year before you start thinking about what you do on top of Operation Twist," he said.

The Fed at its September meeting said it will replace $400 billion of short-term securities on its portfolio with longer term ones to push longer-term interest rates lower -- which is known as Operation Twist. It will also replenish its holdings of mortgage-related debt to support the depressed housing market. Tarullo said Operation Twist, while helpful, was "by definition limited".

Operation Twist was the latest in a long series of extraordinary steps to boost growth through a financial panic and deep contraction. The Fed cut rates to near zero almost three years ago and announced in August rates would likely stay that low through the middle of 2013. The central bank has also bought $2.3 trillion in securities to encourage borrowing.

Another Fed official, Minneapolis Fed President Narayana Kocherlakota said unemployment, which he described as "disturbingly high" now, would have been higher without the actions the Fed has taken.

(Additional reporting by Mark Felsenthal in St. Louis, Pedro da Costa in Washington, Larry Vellequette in Toledo, Ohio, David Bailey in Minneapolis and Ann Saphir in Chicago; editing by Bob Burgdorfer, Bernard Orr)