Fewer Stock Splits, Record Share Prices

Stock splits, designed to attract investors by making stocks more affordable, have become a rarity since the 2008 financial crisis. Four companies in the Standard & Poor’s (MHP) 500-stock index split their shares this year, and 16 did in 2011. That’s down from an average of 35 annually from 2004 through 2007 and a recent peak of 102 in 1997, data compiled by S&P and Bloomberg show.

When a company splits its stock, holders get one or more shares for each share they own, while the price of the stock comes down proportionately, leaving the market value of the company unchanged. Traditionally, corporate boards have favored splits when the company’s share price has risen so high that individual investors find it difficult to buy 100 shares at a time. They often aimed to do a split at a time when they were “confident” the stock would maintain its value or rise, says Doug Ramsey, chief investment officer at Leuthold Group, a money management firm. The market plunge that accompanied the financial crisis has made corporate executives cautious about splits. “There’s a reluctance to split a stock after such a decline is still fresh in the collective memory of management,” he says.

The scarcity of splits has helped send the average stock price of companies in the S&P 500 to a record $58.52 on April 30, more than two decades of data compiled by Bloomberg show. That’s 9.1 percent higher than the average price of $53.66 when the index reached its all-time high of 1,565.15 in October 2007. With the S&P 500 up 97 percent as of May 15 from its low of March 2009, the effect has been to push 48 stocks above $100 a share, a record, according to Bloomberg data going back to 1990.

Individual investors have been wary of stocks since the market plunge that accompanied the financial crisis, and higher per-share prices may be contributing to the drop in stock trading by creating psychological barriers for investors who want to purchase blocks of 100 shares. “This is starting to be a real big issue for retail investors,” says Christopher Nagy, managing director for order routing sales and strategy at online brokerage TD Ameritrade (AMTD). “There’s this phenomenon going on where there’s hardly any trades in the marketplace, volume is at 10-year lows, and a lot of that can be attributed right back to share pricing.”

Trading at discount brokerages has slowed since the financial crisis, according to data on E*Trade Financial (ETFC) and TD Ameritrade compiled by Barclays (BCS). At 537,636 transactions per day in March, volume was 15 percent below a high in October 2008. Trading on all U.S. exchanges fell to 6.73 billion shares a day this year from 9.99 billion in the second half of 2008, data compiled by Bloomberg show.

Apple (AAPL), which hasn’t split since 2005, is up 37 percent this year to $553 on May 15. In the four months through April 9, it added more than $250 billion in market value. Priceline.com (PCLN) trades at $662, the highest price in the S&P 500.

Chipotle Mexican Grill (CMG), with the sixth-highest price in the S&P 500, hasn’t split its stock in the six years since it became a standalone company. The restaurant operator reached an all-time high of $440 on April 13. “Splitting is nothing more than window dressing,” says Chris Arnold, a Chipotle spokesman. “It doesn’t change or add value for anybody, not customers, not the company, and not shareholders. Doing these things to manipulate the price in a way that doesn’t create value just to make it accessible to a few more people is really unimportant to us.”

When Google (GOOG) announced its first stock split in April, it wasn’t to appease stockholders. Instead, the company said it created a class of nonvoting shares to exchange for options owned by employees, so that redemptions wouldn’t dilute the control of its top executives. After issuing the new stock, shares of the search engine operator will be cut in half from more than $600.

Warren Buffett is known for his opposition to stock splits, saying that companies that avoid them even when prices soar encourage investors to think like owners instead of traders. His Berkshire Hathaway (BRK/A) Class A shares trade above $120,000. Even Buffett bowed to investor demand for lower-priced stock by adding Class B shares that were worth about 1/30th the equity value when introduced in May 1996. He split those 50 for 1 in 2010 to facilitate the takeover of Burlington Northern Santa Fe.

Not everyone believes high share prices discourage investors. “I don’t think that just because stocks are not being split or they are too expensive would keep investors out of the market,” says Michael Gibbs, co-head of the equity advisory group at Raymond James & Associates. “It might push them to other stocks. The reason they’re not in the market is the decade they suffered.”

The bottom line: A decline in stock splits helped push the average price of a stock in the S&P 500 to a new record, $58.52, on April 30.

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Record Art Sale Boosts Orders for 'The Scream' Poster

On Wednesday, one of four original versions of Edvard Munch’s iconic and often parodied work The Scream sold for $119,922,500 at Sotheby’s (BID). It was a record-shattering transaction. Previously, the highest sum to change hands at auction for a work of art was $106.5 million, in 2010, for Nude, Green Leaves and Bust, a painting by Pablo Picasso.

After this week’s sale, however, Norwegian businessman Petter Olsen, who is the painting’s previous owner, and the citizens of Hvitsten, Norway, who will enjoy a forthcoming museum funded by the proceeds, aren’t the only ones reaping the benefits.

“Before this week, The Scream was a steady seller,” says Geoffroy Martin, the chief executive officer of Art.com, the world’s largest retailer of prints, movie posters, framed art, and other mass-produced wall decor. “I’d say it’s [usually] in the top 50. On Wednesday its sales increased three to four times. Sales increased 10 times yesterday. From a unit point of view, it was the top seller yesterday.”

Art.com, which merged with AllPosters.com in 2005, sells prints of millions of different works of art, and just as many posters. According to Martin, the Emeryville (Calif.)-based company has annual revenue of “well over $100 million.” (Art.com is a private company and does not release exact sales figures.) It maintains localized websites in 25 countries and partnerships with several museums, including the Museum of Modern Art in New York and the de Young Museum in San Francisco. (It’s a good bet you can trace the provenance of that Cezanne still life hanging in a high school classroom, or that Goodfellas poster pinned to the wall in a college dorm, to this site.)

“Whenever there is meaningful news that has an impact on an image, we’re going to see a big spike,” says Martin. “Whenever there is a sports team winning a championship like the World Series—or a blockbuster movie release. Last year we saw a big spike with the royal wedding and the British royal family. There’s a new band that is killing right now from the U.K. called One Direction. As for [The Scream], there’s nothing that looks like it. When it was painted, it was entirely unique and controversial. When you see it, you know that there is something special about it.”

On a typical day, the bestselling prints are paintings by Van Gogh such as Almond Blossoms and The Starry Night, works by Andy Warhol such as Three Elvises, and Monet’s The Artist’s Garden at Giverny.

But this week belongs to The Scream. The painting not only broke art-world records, but it also howled its way to the top spot for carbon-copy art—which was no humble feat. Martin had to consult his data to be certain that The Scream usually outsells its most popular spoof, a version of the painting with Homer Simpson in the face-clapped pose. (For the record, it does.)

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Record Euro Zone Debt Makes the Crisis Messier

The Keynesian solution for Europe’s crisis is government spending to rev up economic growth. Restoring growth will generate more tax revenue, the thinking goes, so the fiscal pump-priming will eventually pay for itself. But debt makes the Keynesian fix harder to implement. Heavily indebted countries can’t spend more for fear of losing the confidence of investors.

Debt, in short, takes away countries’ fiscal wiggle room.

That’s why the European Union’s report today on rising government debt in the single-currency euro zone is troublesome. The organization announced that the government debt-to-GDP ratio increased from 85.3 percent at the end of 2010 to 87.2 percent at the end of 2011. According to Bloomberg News, the 2011 ratio was the highest since the euro was introduced in 1999.

What’s doubly scary is that it’s not just the well-known problem children of Europe like Greece that are seeing government debt rise as a share of gross domestic product. Even the Netherlands, one of the four remaining AAA-rated countries in the euro zone, had an increase in its debt-to-GDP ratio from 62.9 percent to 65.2 percent, according to the European Union.

The Dutch have been stalwart supporters of Germany’s austerity drive until now, but they may be getting weak in the knees. RTL television reported that Dutch Prime Minister Mark Rutte will resign after losing the support of Geert Wilders’s Freedom Party in his coalition, following disagreement on an austerity package. “There is a danger that we will see a move to more radical, less Europe-friendly policies in the Netherlands,” Elisabeth Afseth, an analyst at Investec Bank in London, told Bloomberg News.

Here’s an excerpt from the European Union’s announcement with all the relevant figures:
At the end of 2011, the lowest ratios of government debt to GDP were recorded in Estonia (6.0%), Bulgaria (16.3%), Luxembourg (18.2%), Romania (33.3%), Sweden (38.4%), Lithuania (38.5%), the Czech Republic (41.2%), Latvia (42.6%), Slovakia (43.3%) and Denmark (46.5%). Fourteen Member States had government debt ratios higher than 60% of GDP in 2011: Greece (165.3%), Italy (120.1%), Ireland (108.2%), Portugal (107.8%), Belgium (98.0%), France (85.8%), the United Kingdom (85.7%), Germany (81.2%), Hungary (80.6%), Austria (72.2%), Malta (72.0%), Cyprus (71.6%), Spain (68.5%) and the Netherlands (65.2%).

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Insurers' 2011 Catastrophe Losses Hit Record

January 05, 2012, 12:11 AM EST By Nicholas Comfort and Carolyn Bandel

(Updates with company comment in fourth paragraph.)

Jan. 4 (Bloomberg) -- Japan’s earthquake and U.S. storms helped make 2011 the costliest year on record for insurance companies in terms of natural-disaster losses, according to Munich Re.

Several “devastating” earthquakes and a large number of weather-related catastrophes cost insurers $105 billion, more than double the natural-disaster figure for 2010 and exceeding the 2005 record of $101 billion, the world’s biggest reinsurer said in an e-mailed statement today. Competitor Swiss Re earlier estimated that the industry’s claims from natural catastrophes reached $103 billion.

Global economic losses jumped to $380 billion last year, surpassing the previous record of $220 billion in 2005, with the quakes in New Zealand in February and Japan in March accounting for almost two-thirds of the losses, Munich Re said.

“We had to contend with events with return periods of once every 1,000 years or even higher at the locations concerned,” Torsten Jeworrek, Munich Re’s board member responsible for global reinsurance, said in the statement. “We are prepared for such extreme situations.”

Japan’s earthquake and subsequent tsunami may cost insurers as much as $40 billion and the quake in New Zealand may cost $13 billion, the reinsurer said. Floods in Thailand were the third- costliest event at about $10 billion.

Other catastrophes included Hurricane Irene, causing $7 billion in insured losses, and severe storms and tornadoes in the U.S. in April, costing $7.3 billion.

For the first time, the U.S. National Oceanic and Atmospheric Administration classified a low-pressure system over the Mediterranean as a tropical storm, Munich Re said. Tropical storm Rolf made landfall on the French Mediterranean coast in November.

--Editors: Keith Campbell, Steve Bailey.

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net; Carolyn Bandel in Zurich at cbandel@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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BRIC Decade Ends With Record Fund Outflows as Growth Slows

December 28, 2011, 6:10 AM EST By Michael Patterson and Shiyin Chen

(Updates prices starting from third paragraph.)

Dec. 28 (Bloomberg) -- In the past decade, mutual funds poured almost $70 billion into Brazil, Russia, India and China, stocks more than quadrupled gains in the Standard & Poor’s 500 Index and the economies grew four times faster than America’s.

Now Goldman Sachs Group Inc., which coined the term BRIC, says the best is over for the largest emerging markets.

BRIC funds recorded $15 billion of outflows this year as the MSCI BRIC Index sank 24 percent, EPFR Global data show. The gauge, which beat the S&P 500 by 390 percentage points from November 2001 through September 2010, has trailed the measure for five straight quarters, the longest stretch since Goldman Sachs forecast the countries would join the U.S. and Japan as the top economies by 2050.

“In emerging markets, we’re waiting for things to get worse before they get better,” said Michael Shaoul, the chairman of Marketfield Asset Management in New York who predicted in February that developing-nation stocks would fall this year. The $845 million Marketfield Fund has topped 97 percent of peers in 2011, data compiled by Bloomberg show.

BRIC indexes may fall another 20 percent next year, buffeted by the liquidity squeeze stemming from Europe’s sovereign debt crisis, Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank, which oversees about $499 billion, said in an interview. Nations such as Indonesia, Nigeria and Turkey may overshadow the BRICS in the next five years as they expand from lower levels of growth, he said.

BRICs Slowdown

“The slowdown we’re seeing in the BRICs will continue for most of the first half,” Mahendran said. “Compared to the U.S., corporate profits haven’t been that good as companies face higher wages, higher interest rates and currency volatility, and at best, we’ll only start to see the effects of monetary policy loosening in the second half of 2012.”

Gross domestic product in the four countries rose at the slowest pace in almost two years last quarter and Goldman Sachs said this month that their potential economic growth rates have probably peaked because of a smaller supply of new workers. Even as Brazilian and Russian policy makers start to lower borrowing costs, profit growth in the MSCI index will slow to 5 percent next year from 19 percent in 2011, trailing the S&P 500 by five percentage points, according to more than 12,000 analyst estimates compiled by Bloomberg.

Average economic growth in the BRIC countries will decelerate to 6.1 percent next year from a high of 9.7 percent in 2007, according to September estimates by the International Monetary Fund. That would narrow the gap over America’s expansion to 4.3 percentage points, the smallest since 2004, the IMF data show. Global GDP may increase 4 percent next year, restrained by 1.1 percent growth in the euro area, the Washington-based fund said.

‘Meaningfully Slower’

Slowing exports to Europe and government restrictions on real-estate investment are curbing the expansion in China, the biggest emerging economy. India’s growth has been hampered by the fastest interest-rate increases since 1935 and the rupee’s decline to a record low, which fueled inflation and deterred foreign investment. Brazil and Russia, whose growth during the past decade was spurred by surging commodity demand, have been hurt by falling metals prices and the slowdown in China.

“In emerging markets across the board, all the numbers are pointing toward meaningfully slower growth” next year, Rajiv Jain, who oversees about $15 billion as a money manager at Vontobel Asset Management Inc. in New York, said in a Dec. 5 phone interview.

Jain’s emerging-market equity fund beat 98 percent of peers this year, buoyed by holdings of beverage and tobacco companies whose profits are resilient to economic slowdowns.

2011 Losses

The BSE India Sensitive Index led declines among BRIC equity gauges this year, falling 23 percent. China’s Shanghai Composite Index also dropped 23 percent, while Russia’s Micex retreated 18 percent and Brazil’s Bovespa sank 16 percent. The 21-country MSCI Emerging Markets Index lost 20 percent, while the S&P 500 gained 0.6 percent.

The MSCI BRIC Index slid 0.8 percent as of 8:30 a.m. in London and the MSCI Emerging Markets Index dipped 0.6 percent, set for the lowest close in a week. The Shanghai Composite gained 0.2 percent, the Sensex dropped 1.1 percent, while the Micex was little changed.

Egypt’s EGX30 Index tumbled 49 percent this year, the biggest decline in emerging markets, as political turmoil stifled tourism and deterred foreign investment following the popular uprising that ousted President Hosni Mubarak. The Philippine Stock Exchange Index posted this year’s largest gain, advancing 3.2 percent after higher consumer spending countered the global economic slowdown.

Peak Expansions

Longer-term economic growth rates in the BRIC nations are poised to drop as their working-age populations increase more slowly and then eventually shrink, according to a Goldman Sachs report on Dec. 7 titled “The BRICs 10 Years On: Halfway Through The Great Transformation.”

“We have likely seen the peak in potential growth for the BRICs as a group,” Dominic Wilson, an economist at Goldman Sachs, wrote in the report. Wilson made the New York-based firm’s first detailed long-term forecasts for the BRIC nations in 2003, two years after Jim O’Neill, then head of economic research, coined the term.

O’Neill, now chairman of Goldman Sachs’s asset-management unit, declined an interview request for this story. His latest book, “The Growth Map,” talks of “rosy prospects” for the BRICs as well as the potential of the “Next Eleven” most populous emerging economies.

Fund Flows

Goldman Sachs’s bullish outlook for the BRIC nations proved prescient as the economies expanded at an average pace of 6.6 percent during the past decade, more than four times faster than America, according to IMF data. Investors poured about $67 billion into Brazil, Russia, India, China and BRIC mutual funds from 2001 to 2010, data compiled by Cambridge, Massachusetts- based EPFR Global show.

This year’s fund outflows were the biggest on an annual basis since at least 1996, according to EPFR Global. India equity funds recorded about $4 billion of net withdrawals, while China funds lost $3.6 billion. Investors pulled $2.2 billion from Brazil, $326 million from Russia and $5.3 billion from funds that invest in all four of the BRIC countries. All emerging-market funds tracked by EPFR Global had about $47 billion of outflows, leaving assets under management at $605 billion.

Rate Cuts

Large fund outflows are a contrarian indicator because they may signal pessimistic investors have already sold, setting the stage for a trough in share prices, according to Jonathan Garner, the chief Asia and emerging-market strategist at Morgan Stanley in Hong Kong. Emerging-market funds recorded about $48 billion of outflows in the five months ended October 2008, when developing-nation stocks began a rally that sent the MSCI emerging-market index up 108 percent in 12 months.

Emerging-market stocks will probably outperform U.S. equities next year as central banks in developing countries cut interest rates to stimulate economic growth, said James Paulsen, the chief investment strategist at Wells Capital Management in Minneapolis. The MSCI emerging-markets gauge rose an average 35 percent after the BRIC nations began cutting interest rates in 2003, 2005 and 2008.

Brazil has reduced its benchmark Selic interest rate by 1.5 percentage points since August to 11 percent. China lowered banks’ reserve requirements in November for the first time since 2008, while forwards contracts in Russia and India show that traders are betting on interest-rate cuts in the next 12 months.

In the U.S., the Federal Reserve has pledged to hold interest rates near zero until at least mid-2013.

Easing Policies

“I like the emerging markets better than anything right now,” Paulsen said in a Dec. 7 interview on Bloomberg Television. “Most of these emerging-market policy officials are turning to easing policies.”

While the MSCI BRIC index has dropped to 8.4 times estimated profit from 13 times at the start of the year, valuations are still higher than they were a decade ago. The MSCI India Index trades for 15 times profit, up from 13 times in 2001, according to data compiled by MSCI Inc.

India’s price-earnings ratios have climbed to an 8 percent premium over U.S. stocks from a 63 percent discount 10 years ago, data compiled by MSCI show. The discount on Chinese shares narrowed to 35 percent from 59 percent, while it shrank to 29 percent from 76 percent in Brazil and dropped to 60 percent from 87 percent in Russia, based on MSCI indexes.

Relative Valuations

Compared to the U.S., valuations for BRIC markets don’t look cheap enough, said Ok Hye Eun, a Seoul-based fund manager at Woori Asset Management Co., which oversees the equivalent of $15 billion.

“BRIC markets won’t be an attractive destination for a while because there are still ongoing risks,” said Ok, citing the prospects of a potential collapse in China’s real estate market and the outlook for economic reforms in India. “I see more opportunities in the U.S.”

ICICI Bank Ltd., India’s biggest private lender, trades for 14 times profits, a 42 percent premium over San Francisco-based Wells Fargo & Co., even as analysts predict slower earnings growth at the Mumbai-based bank, according to data compiled by Bloomberg. ICICI Bank profits will increase 10 percent in the current fiscal year, compared with 28 percent at Wells Fargo, the biggest U.S. bank by market value, the estimates show.

Want Want, Redecard

Want Want China Holdings Ltd., a Shanghai-based maker of food and beverages, is valued at 36 times profits and analysts project earnings will increase 7.7 percent this year. The Hong Kong-listed shares are twice as expensive as Northfield, Illinois-based Kraft Foods Inc., which trades for 17 times earnings and may boost profits 13 percent, analyst estimates compiled by Bloomberg show.

Redecard SA, Brazil’s second-biggest card-payment processor, trades for 15 times profits, versus 12 times for New York-based American Express Co. Sao Paulo-based Redecard’s earnings will probably slip 3.8 percent this year while American Express posts a 19 percent gain, analyst projections compiled by Bloomberg show.

Outflows from emerging-market funds may continue next year as economic growth and company results disappoint investors, according to John-Paul Smith, the London-based emerging-market strategist at Deutsche Bank AG. Money managers surveyed by Bank of America Corp. from Dec. 2 to Dec. 8 said their emerging- market holdings are still 23 percent higher than benchmark weightings even after they cut positions from last month.

‘Structural Weaknesses’

“There will be a lot of volatility, but as people realize the underlying structural weaknesses of the BRIC economies, you’ll see money coming out,” Deutsche Bank’s Smith said in a telephone interview on Dec. 19.

China’s economic data have trailed estimates for the past two months, based on Citigroup Inc.’s Economic Surprise Index, a gauge of how much reports are missing economist projections in Bloomberg News surveys. Chinese manufacturing contracted by the most since 2009 in November, while new home prices declined in 49 of 70 cities tracked by the government the same month.

By contrast, U.S. data is beating analyst expectations by the most in nine months, according to the country’s Citigroup surprise index. Manufacturing in America expanded at the fastest pace in five months in November, the Institute for Supply Management said. Initial jobless claims fell to the lowest level since 2008 in the week ended Dec. 10, while U.S. housing starts in November climbed the most in 19 months, government data show.

Per-share earnings in the MSCI BRIC index trailed analysts’ estimates by 13 percent last quarter, according to data compiled by Bloomberg. S&P 500 profits beat projections by 4.4 percent, the data show.

Labor Supply

While Goldman Sachs still expects the BRICs to join the U.S. and Japan as the world’s biggest economies by 2050, the bank predicted this month that the four nations’ contribution to the global expansion will diminish during the next few decades. Economic growth in the BRICs may fall to about 4 percent by 2050 as working-age populations dwindle, Goldman Sachs said.

The number of people aged 15 to 64 in Russia has already started to drop, while Chinese workers may peak at around 1 billion and begin falling by 2020, according to estimates by the United Nations. Brazil’s peak may come by 2040, with India’s topping out by 2060, the New York-based United Nations said. The U.S. will keep adding workers through 2100, the forecasts show.

“In the last decade, simply recognizing that the BRICs were the story was largely enough to propel outsized investment returns,” Goldman’s Wilson wrote in this month’s outlook report. “It is much harder to accept that simply believing in their long-term growth dynamics can be a sufficient investment thesis now, if it ever was.”

--With assistance from Saeromi Shin in Seoul. Editors: Darren Boey, Laura Zelenko.

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Shiyin Chen in Singapore at schen37@bloomberg.net.

To contact the editor responsible for this story: Laura Zelenko at lzelenko@bloomberg.net

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Japan Budget’s Dependence on Bonds to Rise to Record Next Year

December 25, 2011, 12:32 AM EST By Toru Fujioka

Dec. 25 (Bloomberg) -- Japan’s budget for the year starting April showed the government more dependent than ever on bond sales to fund spending as Prime Minister Yoshihiko Noda struggles to tame the world’s biggest public debt burden.

The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s dependence on debt to an unprecedented 49 percent, a plan approved by the Cabinet in Tokyo yesterday showed. Spending will shrink for the first time in six years after the government delayed appropriations for the nation’s pension fund and used supplementary expenditure packages to pay for earthquake reconstruction.

Noda’s first budget may fail to reassure credit-rating companies and analysts monitoring his efforts to control public debt twice the size of annual economic output. The government trimmed 2.6 trillion yen from the package by allocating special bonds to delay pension funding until a planned sales-tax increase boosts revenue.

“The government is trying to maintain surface appearances by playing with the numbers,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “This budget clearly shows Japan’s fiscal situation is worsening.”

Noda will submit the budget bill to parliament next year.

The primary deficit will narrow to 24.1 trillion yen, the Finance Ministry said, equivalent to about 5.1 percent of gross domestic product. Noda aims to post a primary balance, achieved when revenue matches spending, excluding bond sales and interest payments, by 2020.

Tax Revenue

New bond issuance will surpass tax revenue for a fourth year, the government predicts. Receipts from levies have shrunk about a third after peaking at 60.1 trillion yen in 1990.

“It’s very regrettable that bond sales will exceed tax revenues and that debt dependence rose to 49 percent,” Azumi told reporters in Tokyo yesterday. “I think the reliance on bonds to compile budgets is reaching its limit.”

Non-tax revenues including surplus from foreign exchange reserves halved to 3.7 trillion yen. The budget plan includes a 3.8 trillion yen special account for reconstruction spending.

Expenditures in the current fiscal year’s initial budget totaled a record 92.4 trillion yen. The government had planned to cap new bond issuance at 44.3 trillion yen next year.

An aging population and reduced growth since an asset bubble popped in the early 1990s have left the nation with debt projected at a record 1 quadrillion yen this fiscal year. The economy is smaller than a decade ago and remains mired in deflation.

Social-Security Spending

Social-security expenses, which have become 2.5 times more than that of two decades ago, will account for 52 percent of general spending next year.

The Bank of Japan said Dec. 21 that activity in the world’s third-biggest economy is looking “flat,” downgrading its assessment. The government estimated that the economy will shrink 0.1 percent this fiscal year on supply-chain disruptions from the record temblor in March, the strengthening of the yen and the European debt crisis.

Gains in the yen are weighing on growth by eroding exporters’ profits, a factor cited by Moody’s Investors Service in cutting the rating outlook for Toyota Motor Corp. on Dec. 22.

The Japanese currency traded at 78.09 per dollar on Dec. 23 after touching a post-World War II high of 75.35 on Oct. 31. The government allocated 21.9 trillion yen for debt servicing costs on the premise that benchmark 10-year yields will remain below 2 percent. Japan’s debt burden hasn’t impeded the government’s ability to borrow, with the 10-year bond yield at 0.97 percent on Dec. 23.

Reconstruction Demand

“Japan will barely grow by the middle of next year,” Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo, said before the budget announcement. “The negative impact of a global slowdown centered on the European debt crisis will probably surpass the positive impact of demand from reconstruction at home.”

In a step unseen since 1947, Japan’s Cabinet has approved a fourth extra budget, to rebuild devastated northeast regions and spur growth. The nation has compiled about 20 trillion yen of the supplementary packages after the March 11 earthquake.

Japan is on “a dangerous path” as the government relies on an increased sales tax that is not certain to be enacted, said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo.

The ruling coalition plans to raise the sales levy to 8 percent in October 2013 and 10 percent in 2015, Kyodo News reported Dec. 21, citing government sources. The Finance Ministry estimates each 1 percentage point increase will reap about 2.5 trillion yen of revenue.

Rating Warning

Noda faces opposition to raising the tax from the public and within his Democratic Party of Japan, even as Standard & Poor’s considers further cutting the nation’s credit rating, reduced in January to AA-.

About 53 percent of voters oppose an increase, with a third saying Noda should call an election before such legislation, news service Jiji Press said last week, citing a Dec. 9-12 survey of 2,000 people.

The ruling Democratic Party of Japan lost its majority in the upper house of the parliament last year after then-Prime Minister Naoto Kan campaigned on a pledge to cut spending and raise the sales tax. DPJ members including Ichiro Ozawa, a former party leader, are opposed.

Noda’s popularity has fallen since he took office in September, with his approval rating dropping to 32.4 percent this month from 35.5 percent in November, Jiji Press reported Dec. 16.

--Editor: Ken McCallum, Jim McDonald

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Singapore Syndicated Lending Surges 91% to Record $38 Billion

December 06, 2011, 5:05 AM EST By Katrina Nicholas

Dec. 6 (Bloomberg) -- Syndicated lending in Singapore has almost doubled to a record this year, driven by demand from property developers and a surge in commodity trading.

Loans surged 91 percent to $38.3 billion this year from the same period of 2010, beating the previous record of $30.7 billion in all of 2008, according to data compiled by Bloomberg. The total doesn’t include a S$5 billion ($3.9 billion) loan sought by Temasek Holdings Pte and Khazanah Nasional Bhd., the state-owned investment companies of Singapore and Malaysia, to fund S$11 billion of hotels, apartments, offices and shops.

“Growth for the Singapore market has been boosted by a huge increase in financings for commodity sector,” said Boey Yin Chong, managing director of syndicated finance at DBS Bank Ltd., Singapore’s biggest arranger of syndicated loans. “From a $500 million base in 2007 we’ll probably hit $9 billion plus by the end of 2011.”

The economy in Singapore, home to the world’s second- busiest container port and Asia’s largest oil-trading, refining and storage center, is forecast to expand 5 percent this year after growing 14.5 percent in 2010. While slowing, that’s still better than the 1.9 percent predicted by the Organization for Economic Cooperation and Development for its 34-member nations in 2011.

Shrinking Rate Margins

Borrowing costs fell to an average 73 basis points over benchmark rates since June 30 from 105.5 in the first half of the year, Bloomberg data on 46 loans show. Average loan margins in Asia, excluding Japan, for U.S. dollar-denominated borrowings increased to 243 from 204 in the same period.

As growth in Asia outstrips Europe and the U.S., the region is becoming a more important source of funding for energy traders and suppliers of commodities such as edible oils, grains and sugar, according to Eugene Szeto, HSBC Holdings Plc’s head of Southeast Asia loans syndicate.

Syndicated loans in Europe, the Middle East and Africa fell to $120.5 billion this quarter versus $260.4 billion in the three months to Sept. 30, Bloomberg data show. Commodities have returned 4.9 percent this year versus a loss of 8.2 percent for global equities.

Singapore-based Wilmar International Ltd., the world’s biggest palm-oil processing company, increased a $1.3 billion loan signed in November 2010 to $1.5 billion in October, according to an Oct. 28 regulatory filing.

Geneva-based Vitol Group, the world’s largest independent oil trader, signed a $1.585 billion facility due in 2012 in June for its Asia unit. Vitol has tapped the Asian bank loan market for funds every year since 2006, Bloomberg data show.

Asian Growth

“If Asia is a company’s growth market it makes sense for them to raise funds and build bank relationships here as well,” said Szeto, who is based in Singapore. “Companies are also keen to tap pockets of liquidity in Asia because aside from being an additional funding source, Asian bank market liquidity is seen as relatively more stable and reliable than in parts of the western world.”

Loans to agriculture and mining companies jumped 320 percent in October from October 2010, according to figures from the Monetary Authority of Singapore released Nov. 30. Loans to manufacturers rose 52 percent while building and construction lending increased 23 percent.

As economies in Europe face possible recession, gross domestic product in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam will expand an average 5.6 percent from 2012 to 2016, the OECD said in a Nov. 29 report.

Singapore, ranked by the World Bank as the easiest place to do business, was among the top 20 destinations for international investment last year, according to the United Nations Conference on Trade and Development.

Bookrunner Rankings

HSBC is the third-largest arranger of loans in the city- state, with an 8.9 percent market share, behind DBS at 10.2 percent and Oversea-Chinese Banking Corp. at 9.9 percent, Bloomberg data show. United Overseas Bank Ltd., Singapore’s third largest by market value, is fourth at 8.6 percent.

London-based HSBC, which makes more money in Asia than anywhere else, ranks higher for banks involved in arranging loans and then selling the debt to other lenders. The top five so-called bookrunners for loans this year are DBS, HSBC and OCBC, Sumitomo Mitsui Financial Group Inc. and Standard Chartered Plc.

Bookrunners are responsible for issuing invitations, disseminating information to interested lenders and reporting to the borrower on progress. A bank with the title of mandated lead arranger isn’t always a bookrunner.

Olam, Temasek

“There’s a perception the market is dominated by Singapore banks but that’s not the case despite Singapore banks being active in arranging deals,” DBS Bank’s Boey said. “Having a robust market also means lenders are able to sell down more in syndication.”

Olam International Ltd., the commodities trader part-owned by Temasek, signed a $1.25 billion facility in August with about 30 banks including lenders from the Middle East and India, Bloomberg data show. The 10 banks committing funds to Temasek and Khazanah included Melbourne-based Australia & New Zealand Banking Group Ltd. and Japanese lenders Bank of Tokyo-Mitsubishi UFJ Ltd. and Sumitomo Mitsui Banking Corp., two people familiar with the matter said last month.

Of the $37.1 billion of syndicated loans this year, $31.4 billion have been to property, energy or resource companies, Bloomberg data show.

“Government incentives for commodity companies to open their regional offices here has helped Singapore to corner much of the market for commodity refinancing,” Boey said. “Last year there was about $5 billion done. This year it’s been double that as these global houses seek to diversify funding as well as increase their investment in the region.”

--With assistance from Shamim Adam and Jake Lloyd-Smith in Singapore. Editors: Ed Johnson, Shelley Smith

To contact the reporter on this story: Katrina Nicholas in Singapore at knicholas2@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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Banks Have Record $1.45 Trillion to Buy Treasuries on Savings

June 19, 2011, 12:05 PM EDT By Masaki Kondo, Yoshiaki Nohara and Saburo Funabiki

June 20 (Bloomberg) -- Japan’s biggest bond investors see increasing parallels between the nation’s government debt market and Treasuries, indicating that historically low yields in the U.S. have room to fall.

Just as in Japan, deposits at U.S. banks exceed loans, reaching a record $1.45 trillion last month, Federal Reserve data show. As recently as 2008, there were more loans than deposits. The gap is also at an all-time high in Japan, where banks use the money to buy bonds, helping keep yields the lowest in the world even though the country has more debt outstanding than America and a lower credit rating.

While none of the more than 40 economists surveyed by Bloomberg expect the U.S. will see two decades of stagnation like Japan, they are paring growth estimates as unemployment remains above 9 percent and the housing market struggles to recover. The International Monetary Fund cut its forecast for U.S. growth in 2011 for the second time in two months on June 17, bolstering the appeal of fixed-income assets.

“I’ve seen what happened in Japan, so when looking at the U.S. now, I think, ‘Ah, the same thing is going on,’” said Akira Takei, the Tokyo-based general manager of the international fixed-income investment department at Mizuho Asset Management Co., which oversees about $41 billion.

Savings Increase

In the decade before credit markets seized up in 2008, U.S. deposits exceeded loans by an average of about $100 billion, Fed data show. The worst recession since the 1930s led consumers to trim household debt to $13.3 trillion from the peak of $13.9 trillion in 2008, and increase savings to 4.9 percent of incomes from 1.7 percent in 2007, Fed and government data show.

Banks pared lending amid more than $2 trillion in losses and writedowns, according to data compiled by Bloomberg. Instead of making loans, financial institutions have put more cash into Treasuries and government-related debt, boosting holdings to $1.68 trillion from $1.08 trillion in early 2008, Fed data show.

Yields on 10-year Treasuries -- the benchmark for everything from corporate bonds to mortgage rates -- have fallen to less than 3 percent from the average of 6.79 percent over the past 30 years even though the amount of marketable U.S. government debt outstanding has risen to $9.26 trillion from $4.34 trillion in 2007, Treasury Department data show.

Ten-year yields fell 2.5 basis points, or 0.025 percentage point, last week to 2.94 percent in New York, the fifth straight weekly decline, according to Bloomberg Bond Trader prices. The price of the 3.125 percent security due in May 2021 rose 7/32, or $2.19 per $1,000 face amount, to 101 17/32.

Lending Drop

Loans dropped and savings rose in Japan, too. Lending has declined 27 percent from the peak in March 1996, while bank holdings of government debt surged more than fivefold to a record 158.8 trillion yen ($1.98 trillion) in April, according to the Bank of Japan. The difference in deposits and loans, known domestically as the yotai gap, is 165 trillion yen, or more than Spain’s annual economic output.

Yields on Japanese bonds due in 10 years dropped to 1.115 percent last week from 3.46 percent in 1996 and have remained at about 2 percent or lower since 2000.

The U.S. and Japan are “beginning to look similar because of the fact that we’ve had very low interest rates for a very long time now” Charles Comiskey, the head of Treasury trading at Bank of Nova Scotia in New York, said in an interview. “This is going to be 10 years of pain to de-lever ourselves from the mess of a debt-ridden society that we’ve become.”

Rates Outlook

Futures traded on the Chicago Board of Exchange indicated in January that the Fed would raise its target rate for overnight loans between banks from a record low of zero to 0.25 percent in 2011. After reports this month showed that the jobless rate rose back above 9 percent, consumer confidence fell, the housing market weakened and manufacturing slowed, traders now see no increase until late 2012 at the earliest.

The IMF said the U.S. economy will grow 2.5 percent this year and 2.7 percent in 2012, down from the 2.8 percent and 2.9 percent projected in April.

Further declines in Treasury yields may be limited because the inflation rate is higher than in Japan, where consumer price changes have been mostly negative since 2000.

U.S. prices rose 3.6 percent in May from a year earlier, according to the Labor Department. That means 10-year Treasuries yield 62 basis points less than the inflation rate. So-called real yields in Japan, where consumer prices rose 0.3 percent in April, are a positive 82 basis points.

Pimco Avoids

“Treasury bonds at the current valuation would likely disappoint long-term investors with low or even negative real returns,” Tomoya Masanao, the head of portfolio management for Japan at Pacific Investment Management Co., wrote in an e-mail to Bloomberg News. “The global economy seems more tilted to inflation than deflation over the next three to five years.”

Pimco, based in Newport Beach, California, had $1.28 trillion under management as of March 31, including the world’s biggest bond fund, the Total Return Fund. Bill Gross, the firm’s co-chief investment officer, has said mortgages, corporate bonds and sovereign debt of nations such as Canada are more attractive.

The median estimate of more than 50 economists and strategists surveyed by Bloomberg is for 10-year Treasury yields to rise to 4 percent over the next 12 months.

Those forecasts fail to take into account the weak U.S. housing market, which makes up the bulk of Americans’ net worth, according to Akio Kato, the team leader for Japanese debt in Tokyo at Kokusai Asset Management Co., which runs the $31.1 billion Global Sovereign Open fund.

Housing Tumble

“U.S. home prices won’t rebound unless household debt” is reduced, Kato said. “As long as the situation remains the same, bank lending won’t grow. U.S. banks will tighten criteria for borrowers."

House prices in 20 U.S. cities are 14 percent below the average of the past decade, according to the S&P/Case-Shiller index of property values. The gauge dropped in March to the lowest level since 2003. Japan’s land prices are still at less than half the level of two decades ago.

Japan has endured two decades of economic stagnation with nominal gross domestic product about the same as it was in 1991. Government debt is projected to reach 219 percent of GDP next year, the Organization for Economic Cooperation and Development estimates. That compares with about 59 percent in the U.S., government data show.

BOJ Nullified

The economy has struggled to recover even though the BOJ buys government securities monthly to lower borrowing costs and stimulate the economy. The efforts have been nullified as banks use BOJ funds to buy bonds rather than lend.

‘‘With no prospects for Japan’s economic growth, funds from the widening loan-deposit gap flow to bonds rather than stocks,” said Katsutoshi Inadome, a strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of the nation’s largest listed-bank.

That’s similar to the U.S., where economists are cutting growth forecasts even though the Fed has pumped almost $600 billion into the financial system since November by purchasing Treasuries under a policy known as quantitative easing. The program is due to end this week.

Mizuho’s Takei said there is a “very high chance” that lenders will continue to funnel deposits to the bond market, helping to push Treasury 10-year yields toward 2.4 percent within a few months. Takei said he favors longer-maturity securities.

“Eventually, yields in Japan and the U.S. will converge,” said Mizuho’s Takei. “This is just the beginning.”

--Editors: Philip Revzin, Rocky Swift

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Saburo Funabiki in Tokyo at sfunabiki@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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Can Coke Surpass Its Record High of $88 a Share?

By Duane Stanford

Coca-Cola (KO) Chief Executive Officer Muhtar Kent will tell you he doesn't pay any attention to the company's share price. "We do the right thing, and our share price manages itself," he says. His predecessor, E. Neville Isdell, often said the same thing. Today, Isdell, who stepped aside as CEO in 2008, admits that he obsessively checks the stock on his BlackBerry.

The stock's $87.94 high-water mark on July 14, 1998, still haunts company headquarters in Atlanta. The five-year decline that brought shares to $37 in March 2003 reflected the turmoil within, as the company struggled with bloated costs, management upheaval, and a loss of focus on its core product, soda pop. Coca-Cola has been addressing those problems, and after a setback during the recent global recession, its shares on May 19 hit $68.46, the highest level in more than a decade. Yet even as it improves operations, the company is unlikely to generate the exuberant support from investors that propelled the stock in the 1990s, and some money managers who own the shares say it will be two years or more before they surpass the high established 13 years ago.

Coke began the slow climb out of its hole in 2004, when the directors lured Isdell, who had held high-ranking positions at the company, out of retirement to be CEO. In a strategy that came to be known as "Red, Black, Silver," Isdell refocused the company—which had been giving priority to noncarbonated drinks—on its core products, Coke (Red), Diet Coke (Silver), and, starting in 2005, Coke Zero (Black). Executives pushed supermarkets to give them prominent display and more shelf space. Isdell also put in place a succession plan that led to Kent taking over as CEO in July 2008.

Kent, 58, got to work on Coca-Cola's U.S. operations. He introduced 7.5-ounce minicans that sell for about $3.50 for an 8-pack, aimed at people who want to control their soda portions, and 16-ounce bottles priced at 99?. Both sizes fetch higher per-ounce prices than the standard 20-ounce bottles in convenience stores and 2-liter bottles in supermarkets, where competition keeps prices low. Last year, Kent purchased the company's largest franchised bottler, giving the company control of 90 percent of its U.S. and Canadian distribution.

Kent also reconfigured serving sizes globally to meet shifting consumer demands and boost profit margins. Since March 2009, he's promised to spend at least $27 billion through 2020 for new plants and distribution facilities in emerging markets, including Mexico and China. Coca-Cola gets nearly 80 percent of its sales outside the U.S.

The moves are having an impact. The company has posted four consecutive quarters of sales growth by volume in North America. Last year, Diet Coke surpassed Pepsi-Cola as the second-best-selling soft drink in the U.S., according to data from trade newsletter Beverage Digest. Coca-Cola remained No. 1. The company's profit margin grew to 22 percent in 2009, up from 18 percent in 2008. By comparison, PepsiCo's (PEP) profit margin was about 14 percent in 2009, up from 12 percent the previous year.

Coca-Cola's stock rose 30 percent in the year ended May 31, outpacing PepsiCo's 13 percent and the Standard & Poor's 500 Consumer Staples Index's 23 percent. Coca-Cola's price-earnings ratio stands at about 19, modest by historical standards. At the 1998 high, Coca-Cola's shares were trading at almost 48 times the company's annual earnings, reflecting investors' willingness to pay a premium to own what they saw as a reliable growth stock. "It had a p-e that turned out to be unjustified," says Douglas Lane, president of New York-based Douglas C. Lane & Associates, whose clients hold more than 600,000 Coke shares.

So when will Coca-Cola get back to $88, a 31 percent climb from $67, its May 31 closing price? In the short term, Coca-Cola faces volatile commodity costs that could force it to raise prices at a time when consumers may balk, says Lauren Torres, an analyst for HSBC Securities. She estimates Coca-Cola will trade at $71 a year from now.

Lane says a new high will come in two to three years. He expects Coca-Cola's profit to rise 10 percent to 12 percent annually during that time—respectable, but below the rates the company enjoyed in the mid-1990s. Assuming Coca-Cola's p-e ratio stays at 19, the earnings gains would imply a stock price of $90 in 2013. "It's still a relatively inexpensive stock," Lane says. "It has broad positions globally, it's broadened its product line, and it's got a really top-notch fellow running the company now."

Donald Yacktman, whose Yacktman Asset Management holds 11.9 million Coca-Cola shares, estimates it will take five years for the stock to reach a new high. "It's just a matter of grinding it out," he says. Carlos Laboy, an analyst for Credit Suisse (CS), is far more optimistic. In a note to clients in May, he estimated Coca-Cola's shares will hit $95 in a year. "We believe KO's U.S. business is reaching an inflection point," he wrote, referring to the company by its stock symbol.

Isdell, retired again and traveling the globe speaking about corporate sustainability, smiled recently when asked for his best estimate of when the stock would surpass its 1998 high. "Eighty-eight is a funny number," he said. "What you have to do is look at the fundamentals, and I think eventually you're going to get there."

The bottom line: While Coca-Cola stock has rallied 30 percent over the past year, some analysts and investors predict a slow climb to its 1998 record.

Stanford is a reporter for Bloomberg News.

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