Consumer Confidence: It’s the Stock Market, Stupid

To read the economic news, there’s plenty to feel glum about: China’s slowing down, Europe’s still a mess, U.S. job growth has flatlined, manufacturing in particular is starting to weaken. And yet, Americans are beginning to feel better about things, especially their own finances.

The weekly Bloomberg Consumer Comfort Index increased by the most since December, with 47 percent of respondents rating their own finances in positive terms, the most since early August. The index’s –42 rating is still well below the recent April high of –31. And it’s nowhere near the 2.0 rating clocked in 2007.

Still, in the face of a stalling global economy, rising gasoline prices, and jobless claims, the fact that Americans are feeling more confident is noteworthy, if not a bit odd. And it’s not just the Bloomberg survey that’s registering an uptick. The University of Michigan’s consumer sentiment index also rose unexpectedly in September to the highest level since May. As Neil Dutta, an economist at Renaissance Macro Research, pointed out in a note on Friday morning, the University of Michigan measure “tends to be more sensitive to equity price action.”

And there you have it. The economy may be in the dumps, and you may be paying ?50 more for a gallon of gasoline than you did two months ago, but the stock market is on fire. If you have one, your 401(k) balance probably looks a lot better than it did a few months ago. The Standard & Poor’s 500-stock index has gained more than 4 percent in September alone. On the year, it’s up nearly 15 percent.

Add that to a slow rise in housing prices, and it’s easy to see why Americans are starting to feel a bit better about their finances. Although there’s a debate about whether confidence is a leading or lagging indicator for the economy, despite all the other measurables out there, most economists agree that confidence is absolutely essential.

Earlier this week I spoke with James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, about his views for 2013. Unlike most of the economists I talked to, he was rather bullish on the prospects for growth in 2013. “The biggest stimulant in the next four years is not monetary policy, and it’s not fiscal policy. It’s confidence,” said Paulsen. “If confidence goes up, everything else gets better.”

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Takeovers Slump to Lowest in Year as Debt Crisis Saps Confidence

December 29, 2011, 6:34 AM EST By Serena Saitto

Dec. 29 (Bloomberg) -- The value of global takeovers dropped to the lowest level in more than a year this quarter, and dealmakers say Europe’s debt crisis may hamper a recovery in 2012 as cash-rich companies hold off on major purchases.

Mergers and acquisitions have slumped 16 percent from the previous three months to $457.1 billion, putting the fourth quarter on course to be the slowest since at least mid-2010, according to data compiled by Bloomberg. For the year to date, announced takeover volume has risen less than 3 percent to $2.25 trillion after regulatory hurdles scuttled AT&T Inc.’s bid for T-Mobile USA, which would have been 2011’s biggest deal.

Tightening credit markets, the risk of a euro-zone collapse and stock-market swings have deterred companies from pursuing transformational deals that would spur sales growth, M&A bankers said. Earlier in 2011, more favorable conditions emboldened acquirers to part with stockpiled cash, such as Johnson & Johnson’s $21.3 billion bid for Synthes Inc. and Express Scripts Inc.’s $29.1 billion offer for Medco Health Solutions Inc.

“There’s definitely pent-up demand for M&A as well- capitalized companies continue to focus on opportunities for strategic acquisitions,” said Yoel Zaoui, co-head of global M&A at Goldman Sachs Group Inc. “The key driver for M&A, however, is confidence, and in Europe, at the moment, that is lacking.”

Seven of the year’s 10 biggest deals were announced before August, when European markets fell the most since October 2008 amid a global stock rout and Standard & Poor’s cut the U.S. credit rating. Goldman Sachs is the top adviser on global takeovers for 2011, with $537 billion of deals this year, followed by JPMorgan Chase & Co. and Morgan Stanley, Bloomberg data show. This year’s growth in M&A volume compares with a 24 percent jump in 2010.

‘Wait and See’

Europe’s financial crisis will stifle lending, push the region into recession and weigh on the U.S. economy through early 2012, Jan Hatzius, Goldman Sachs’s chief economist, said on a Nov. 30 conference call. The euro zone’s unemployment rose to 10.3 percent in October, the highest since the currency began in 1999.

As the European crisis deepened, “dealmakers entered a wait-and-see mode, and that’s where we are now,” said Paul Parker, global head of M&A at Barclays Plc in New York. “Offsetting forces such as companies’ cash piles and low valuations should drive the recovery of M&A activity in the second half of the year.”

The MSCI World Index of about 1,600 companies trades for 12.6 times reported earnings, showing equities in developed economies are cheaper than they’ve been more than 95 percent of the time since 1995, according to data compiled by Bloomberg. Those companies are also sitting on $5.3 trillion in cash, the data show.

Antitrust Hurdles

Companies that did tap funds this year may not be able to complete their purchases as regulatory scrutiny threatens to derail more takeovers. Express Scripts’s offer for Medco, which would create the largest U.S. manager of pharmacy benefits for employers, insurers and union health plans, has prompted state inquiries over whether the combination would command too much market power.

AT&T abandoned efforts to buy T-Mobile USA from Deutsche Telekom AG this month after the U.S. Justice Department sued the companies in August, saying a combination would substantially reduce competition. Companies contemplating similar deals may hold off until the next presidential election in the hope that a Republican White House would make it easier to win approval for big transactions, said Jeffrey Silva, a Washington-based policy analyst with Medley Global Advisors.

European Deals

Deutsche Boerse AG and NYSE Euronext this week delayed the deadline for completing their merger until March 31 as the exchange operators try to persuade European Union regulators to approve the deal. While the U.S. cleared the combination, the EU has told the companies that concessions they offered to allay antitrust concerns don’t go far enough, two people familiar with the talks said this month.

Dealmaking involving European companies rose 2.2 percent this year, bolstered by the first half. For the fourth quarter, announced volume sank 14 percent from the previous three months to $161.4 billion. Valuations have also dropped, making the MSCI Europe Index even cheaper than the MSCI World Index at 10.8 times earnings. That may create opportunities for buyers from nations such as China.

“Chinese companies have been very successful at buying natural resources in emerging markets, and they are now very supportive of buying industrial assets in Europe,” said Thierry d’Argent, global head of M&A at Societe Generale SA in Paris.

Asia Pacific

French dairy-product maker Yoplait and the aviation unit of Royal Bank of Scotland Group Plc both attracted interest from Chinese bidders this year, according to people with knowledge of those negotiations.

The value of acquisitions involving Asia Pacific companies rose 3.8 percent to $698.4 billion this year, according to Bloomberg data. The biggest deal was Nippon Steel Corp.’s proposed takeover of Sumitomo Metal Industries for about $22 billion, including debt. That was followed by BHP Billiton Ltd.’s purchase of Houston-based oil and gas explorer Petrohawk Energy Corp.

Foreign buyers also spent more on Asia Pacific in 2011 than any year since 2007, according to the data. The largest overseas bid was SABMiller Plc’s $10 billion takeover of Australian beer maker Fosters Group Ltd., the data show. Among Asian countries, Japan overtook China as the biggest acquirer of foreign assets for the first time since 2008 after the March 11 earthquake spurred companies to retrench.

Japan’s Takeovers

“Japanese industries had been shrinking, and companies needed growth drivers,” said Kenji Fujita, head of M&A advisory at Mitsubishi UFJ Morgan Stanley Securities Co., the Tokyo-based investment banking venture of Morgan Stanley and Mitsubishi UFJ Financial Group Inc. “The earthquake raised the urgency for that.”

Japan’s Kirin Holdings Co. bought Brazilian beermaker Schincariol Participacoes e Representacoes, and China Petrochemical Corp., or Sinopec, agreed to purchase a 30 percent stake in Galp Energia SGPS SA’s Brazilian unit.

Still, after a record-high volume of $161 billion in 2010, the volume of announced deals involving Brazilian companies tumbled to $98.3 billion this year as the Brazilian real strengthened while the country’s economy slowed.

“I’m glad to leave 2011 behind,” said Flavio Tavares Valadao, head of corporate finance at Banco Santander do Brasil SA, based in Sao Paulo. “Deals are difficult to make and companies are worried for the future.”

Brazilian Deals

Santander worked on Telefonica SA’s merger of its Brazilian fixed line unit, Telecomunicacoes de Sao Paulo SA’s with its mobile unit, Vivo Participacoes SA. The Spanish bank also advised Spain’s Iberdrola SA on the acquisition of Brazil’s Elektro Eletricidade & Servicos SA for 1.77 billion euros ($2.3 billion).

Dealmakers predict that technology, industrials, natural resources and health care will continue to be the sectors most actively consolidating, especially if European policy makers can prevent financial turmoil from spreading to more countries.

“Companies need to have more confidence that we aren’t going to have a break-up of the euro,” said Mark Shafir, global head of M&A at Citigroup Inc. “If you got that cleared up, then the first half of next year could be a lot better than the second half of 2011 has been.”

--With assistance from Aaron Kirchfeld in Frankfurt, Jeffrey McCracken in New York, Takahiko Hyuga in Tokyo, and Jacqueline Simmons and Matthew Campbell in Paris. Editors: Julie Alnwick, Jennifer Sondag.

To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net

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Home Prices Probably Fell, Confidence Up: U.S. Economy Preview

December 25, 2011, 12:34 AM EST By Timothy R. Homan

Dec. 25 (Bloomberg) -- Home prices in 20 U.S. cities probably declined at a slower pace and consumer confidence improved, signs the economy gained strength heading into 2012, economists said before reports this week.

Property values dropped 3.2 percent in October from the same month in 2010, the smallest year-over-year decrease since January, according to the median forecast of 20 economists before a Dec. 27 report from S&P/Case-Shiller. Consumer confidence rose to a five-month high in December and more people signed contracts to buy previously owned homes than a month earlier, other data may show.

Rising builder confidence, fewer unsold new properties on the market and a pickup in construction point to improvement in the industry that triggered the last recession. Real estate is still facing another wave of foreclosures that may keep pressure on home prices, making for an uneven housing recovery.

“We’ll continue to see prices drop,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “The middle of 2012 is when we think prices will actually bottom.”

Economists surveyed projected the gauge of residential real-estate values declined 0.3 percent in October from the prior month, when it fell 0.6 percent. The index was down 31 percent in September from its July 2006 peak.

The year-over-year gauge provides a better indication of trends in prices, the group has said. The panel includes Karl Case and Robert Shiller, the economists who created the index.

Pending Home Sales

Figures on Dec. 29 may show pending sales of previously owned homes rose 1.5 percent in November after a 10 percent jump, economists said before a report from the National Association of Realtors.

Reports last week showed a pickup in demand for houses. Sales of previously owned homes, which make up about 94 percent of the market, rose 4 percent to a 4.42 million annual pace, the most since January, the National Association of Realtors said Dec. 21.

Purchases of new single-family properties advanced 1.6 percent to a 315,000 annual pace, a seven-month high, figures from the Commerce Department showed Dec. 23. The increase pushed the number of new homes on the market to a record low.

Those gains have buoyed builders’ stocks since the end of the third quarter. The Standard & Poor’s Supercomposite Homebuilding Index, which includes Toll Brothers Inc. and Lennar Corp., has climbed 32 percent, while the broader S&P 500 has gained 12 percent.

Consumer Confidence

As housing stabilizes and employment strengthens, consumers are becoming more optimistic. Confidence rose to 58.6 from 56 last month, according to the Bloomberg survey median before a Dec. 27 report from the New York-based Conference Board.

Other surveys reflect gains in optimism. The Bloomberg Consumer Comfort Index improved to minus 45 in the period ended Dec. 18 from a reading of minus 49.9 the prior week, marking the biggest seven-day gain since January. The Thomson Reuters/University of Michigan index of consumer sentiment rose to a six-month high in December.

Some homebuilders say an increase in sentiment is needed to help boost demand.

“We need a higher level of confidence to get back to the traditional move-upstream or first-time buyer out of the rental,” Jeffrey Mezger, chief executive officer of KB Home, said on a Dec. 21 conference call with analysts. “A lot of consumers are surprised, frankly, at how low home payments are compared to rent.”

Policy makers are promoting programs designed to reinvigorate the housing market. The Obama administration this month started a new version of the federal Home Affordable Refinance Program, or HARP, after the original plan helped less than a quarter of the people targeted to lock in lower mortgage rates.

Officials at the Federal Reserve this month reiterated that they will keep the benchmark interest rate near zero until at least mid-2013. The central bank in September decided to reinvest maturing housing debt into new mortgage-backed securities instead of Treasuries.

--With assistance from Chris Middleton in Washington. Editors: Vince Golle, Kevin Costelloe

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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