Hedge Funds Sit Out Rally

January 10, 2012, 5:37 AM EST By Nikolaj Gammeltoft

Jan. 10 (Bloomberg) -- Rallying stocks have done little to entice professional money managers back to U.S. equities.

A gauge of hedge-fund bullishness measuring the proportion of bets that shares will rise climbed to 44.5 last week from 43.9 at the end of 2011, holding close to the lowest level since 2009, according to International Strategy & Investment Group. Compared with the price of the Standard & Poor’s 500 Index, managers’ so-called net exposure is close to the lowest since June 2008, the ISI data show.

Speculators have been cutting equities since the index peaked in February 2011 at 54.2, concerned Europe’s credit crisis will spread and curb global economic growth. They stayed bearish after October when the S&P 500 began a 17 percent rally that has restored $2 trillion to the value of American equities.

“Hedge funds have made massive mistakes,” George Feiger, chief executive officer of Contango Capital Advisors Inc., the San Francisco-based wealth management arm of Zions Bancorporation, said in a telephone interview on Jan. 6. He manages $3.3 billion at Contango and Western National Trust Co. “We are less and less willing to invest with these people because at the point when you need them the most, they’re worth the least.”

Investors have struggled to profit amid record stock market volatility. Hedge funds, largely unregulated investment vehicles that aim to make money whether markets rise or fall, lost 4.9 percent last year as fear that the European sovereign-debt crisis would spread deterred them from buying risky assets including stocks, according to the Bloomberg aggregate hedge- fund index.

Stocks Declines

The MSCI All-Country World Index slid 9.4 percent in 2011 while fixed-income securities worldwide returned 5.89 percent last year, Bank of America Merrill Lynch indexes show.

The S&P 500 rebounded from last year’s lowest level on Oct. 3 as data on manufacturing, construction and employment spurred speculation the U.S. economy is accelerating. The benchmark index for American equities fell 0.04 point in 2011, the 10th best performance among the world’s stock markets, data compiled by Bloomberg show. The index lost 7.2 percent in September.

ISI’s index, based on a survey of 35 mostly U.S. hedge funds with about $84 billion under management, tracks net exposure on a zero through 100 scale. Readings of zero show “maximum” short selling, or the sale of borrowed equities with the hope of profiting by buying them at lower prices later, while 100 means “maximum” bullish bets. At 50, hedge funds are deploying a “normal” ratio of long to short investments.

‘It Is Unusual’

“It is unusual for hedge funds in our survey to remain as cautious on net exposure as they have, given the size of the move in stocks since the summer,” Oscar Sloterbeck, managing director at New York-based ISI, said in an e-mail on Jan. 6.

Hedge funds have reason to be cautious as the euro-zone debt crisis and the U.S. budget debate threaten global economic growth, according to Steve Shafer, chief investment officer at Covenant Global Investors.

“It’s very sensible to have this low level of exposure,” Shafer, who helps manage $315 million at the Oklahoma City-based hedge fund, said in a phone interview yesterday. “The problem is that the low exposure creates the potential for whipsaw, which hurt of lot of hedge funds last year. You get pounded in September and then you miss out on October.”

The S&P 500 rose 1.6 percent to 1,277.81 last week, its second-best start of a year since 2006, as reports on manufacturing from America to China bolstered optimism about the global economy. It added 0.2 percent to 1,280.7 yesterday.

Buying of equities by hedge funds that have missed out on gains amid an improving economy and record corporate earnings may help propel stock prices this year, said Tim Hartzell of Houston-based Sequent Asset Management.

“The hedge funds are risk takers and they need to come back,” Hartzell, who oversees about $350 million as chief investment officer at Sequent, said in a phone interview Jan. 6.

--With assistance from Kelly Bit in New York. Editors: Chris Nagi, Michael P. Regan.

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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Geithner Presses China on Currency, Seeks Support on Iran

January 11, 2012, 1:23 AM EST By Ian Katz and Cheyenne Hopkins

(Updates with Geithner comment in third paragraph.)

Jan. 11 (Bloomberg) -- U.S. Treasury Secretary Timothy F. Geithner will urge Asia’s two biggest economies to cut Iranian oil imports and seek to narrow differences with China on trade and currency disputes on a visit to Beijing and Tokyo this week.

Geithner, who today holds talks with Premier Wen Jiabao, Vice President Xi Jinping and Vice Premier Li Keqiang, arrived in Beijing yesterday and met Chinese Vice Premier Wang Qishan. In Japan, he is due to meet with Prime Minister Yoshihiko Noda and Finance Minister Jun Azumi tomorrow.

“On economic growth, financial stability around the world, on nonproliferation, we have what we view as a very strong cooperative relationship with the government and we are looking forward to building on that,” Geithner said at the start of his meeting with Xi.

Wang, appearing with Geithner yesterday, said the two countries “have a lot of issues to talk about in the areas of economy, finance, trade and investment.”

“Apart from the bilateral aspect, we are also having important cooperation in the multilateral and global arena in the areas of economy, finance, trade policies and also G-20 related affairs,” Wang said.

Geithner will probably encounter resistance in China, which disagrees with U.S. assertions that its currency is undervalued and is sparring with the Obama administration over trade in goods from chicken to steel. At the same time, he may seek to avert a public split at a time when a likely European slide to recession is already clouding the global economic outlook.

Treasury Bills

“These are the world’s second- and third-largest economies and the two biggest holders of Treasury bills,” said Stephen Myrow, a U.S. Treasury official during the administration of George W. Bush and now managing director of ACG Analytics Inc., a Washington investment research firm. “These are relationships that need to be continually nurtured.”

China is the largest foreign holder of U.S. government securities, with $1.13 trillion in October. Japan is second among foreign nations with $979 billion.

A plea to cut back on Iranian oil, tied to the Obama administration’s sanctions last month aimed at that country’s nuclear program, may not resonate with Chinese officials, intelligence and foreign-affairs analysts said.

“China will be less OK with it than Japan,” Matthew Levitt, a former financial intelligence official at the Treasury Department who is now at the Washington Institute for Near East Policy, said in an interview. “But neither wants to be seen as rogue.”

Iranian Oil

The two countries are the largest importers of Iranian oil, with China accounting for 22 percent and Japan buying 14 percent of Tehran’s crude oil exports during the first half of last year, according to the U.S. Energy Information Administration. As a group, the European Union buys 18 percent of Iran’s oil exports.

Wen, China’s premier, will visit Saudi Arabia, the United Arab Emirates and Qatar from Jan. 14 to Jan. 19, China’s foreign ministry said yesterday.

Wen will attend a conference in Abu Dhabi and make a speech about China’s energy policy, Foreign Ministry spokesman Liu Weimin said in a statement on the ministry’s website. Wen will hold talks with leaders of the three nations during his six-day visit and “promote the development of China-Arab relations and relations with the Islamic world,” Liu said.

Trade Rules

In China, Geithner may tell officials that they need to follow through on pledges to shift the world’s second-largest economy more toward domestic demand and away from exports, William Cline, a senior fellow at the Peterson Institute for International Economics in Washington, said in an interview Jan. 9. The real value of the yuan “needs to rise by 10 to 20 percent,” he said.

President Barack Obama plans to form a government task force to monitor China’s compliance with U.S. trade rules, the Wall Street Journal reported yesterday, citing unidentified people familiar with the matter.

The panel will include officials from the Treasury, Commerce and Energy departments, and the U.S. Trade Representative’s office, it said. An announcement of the enforcement task force is expected later this month, the newspaper said in its online edition.

Substantially Undervalued

The Treasury Department said Dec. 27 in its twice-yearly report on global currencies that the yuan is substantially undervalued and the U.S. will “press for policy changes that yield greater exchange-rate flexibility.” China’s state-run Xinhua News Agency replied in a commentary that the U.S. should move beyond the “useless, meaningless” quarrel over the exchange rate.

The yuan closed at 6.3150 in Shanghai yesterday, little changed from 6.3146 on Jan. 9, according to the China Foreign Exchange Trade System. The currency is allowed to trade 0.5 percent on either side of the daily fixing. In Hong Kong’s offshore market, the yuan slipped 0.03 percent to 6.3159.

China’s growth may slow to 8.5 percent this year, down from 9.2 percent in 2011, according to the median estimate of economists in a Bloomberg News survey. The central bank lowered the required reserve ratio for banks for the first time in almost three years in December to encourage lending, a shifting of its stance from fighting inflation as price pressures ease.

Record Earthquake

The Treasury secretary arrives in Japan as that nation copes with a fading rebound from the aftermath of a record earthquake in March 2011. Gross domestic product probably shrank 0.1 percent in the three months through December, the third contraction in four quarters, according to estimates by the Japan Center for Economic Research, an independent analysis group in Tokyo.

Prime Minister Noda’s administration has overseen record sales of yen to counter exchange-rate appreciation that has prompted companies including Nissan Motor Co. and Panasonic Corp. to plan shifting some operations abroad. The U.S. Treasury criticized the currency intervention in a report last month, saying Japan should instead focus on domestic policy initiatives.

“Geithner may be looking for input from America’s key trading partners in Asia on how to promote a sustainable recovery in world economic demand,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., said in an e-mail. “He may want to hear directly as well in face-to- face meetings on just how worried are China and Japan officials about the outlook for their own domestic economies.”

WTO Panel

Commerce may also be on the agenda. The U.S. Trade Representative asked the World Trade Organization last month to establish a panel that will seek a settlement in a conflict with China over duties on American poultry.

China set a duty of as much as 105.4 percent last year on U.S. broiler-chicken products. About 300,000 workers and farmers have been hurt by China’s actions, Trade Representative Ron Kirk said in September.

The chicken-import dispute may add to tensions between the world’s two largest economies, which have clashed over access to each others’ markets for products including steel pipes, tires, movies and music. The WTO rejected in September China’s appeal of a ruling that backed U.S. duties on Chinese tire imports.

Geithner hasn’t been to China since March 2011 and to Japan since November 2010. Treasury officials traveling with him include Lael Brainard, undersecretary for international affairs; Robert Dohner, deputy assistant secretary for Asia; and David Loevinger, senior coordinator for China affairs.

Foreign Sanctions

Obama signed into law Dec. 31 a defense-spending bill that includes a provision that would impose sanctions on foreign financial institutions that conduct transactions with the Central Bank of Iran.

The law gives the administration flexibility by allowing it to waive sanctions for as long as 120 days at a time if the president determines they would threaten national security. Iran threatened last month to shut the Strait of Hormuz, a transit point for one-fifth of oil traded worldwide, if sanctions are imposed on its crude exports.

“The regular economic and trade relations and energy cooperation between China and Iran has nothing to do with the nuclear issue,” Chinese Vice Foreign Minister Cui Tiankai told reporters in Beijing Jan. 9. “We should not mix issues with different natures.”

Chinese officials aren’t “as committed to a unified position with the United States, don’t philosophically agree the sanctions should hurt the Iranian people or the Iranian economy,” said Kenneth Katzman, an Iran specialist for the nonpartisan Congressional Research Service.

--With assistance from Hans Nichols, Indira Lakshmanan, Michelle Jamrisko and William McQuillen in Washington, Kevin Hamlin in Beijing. Editors: Kevin Costelloe, Gail DeGeorge

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Cheyenne Hopkins at Chopkins19@bloomberg.net.

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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Twinkie Maker on Verge of Bankruptcy Filing

Zynga IPO Outlook July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at

July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at YCMNet Advisors, Bob Rice, general managing partner at Tangent Capital Partners LLC, Paul Martino, managing director at Bullpen Capital, and Paul Bard, director of research at Renaissance Capital LLC, talk about Zynga Inc.'s plan to raise $1 billion in an initial public offering and the outlook for the company. (Excerpts. Source: Bloomberg)

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Merkel, Sarkozy to Move Forward on Euro Rescue Plan

Zynga IPO Outlook July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at

July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at YCMNet Advisors, Bob Rice, general managing partner at Tangent Capital Partners LLC, Paul Martino, managing director at Bullpen Capital, and Paul Bard, director of research at Renaissance Capital LLC, talk about Zynga Inc.'s plan to raise $1 billion in an initial public offering and the outlook for the company. (Excerpts. Source: Bloomberg)

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Treasury PR Omits Projected TARP Losses

January 11, 2012, 12:05 AM EST By Noah Buhayar

(Updates with daily report on website in fifth paragraph.)

Jan. 10 (Bloomberg) -- The U.S. Treasury Department has highlighted projected gains while omitting estimated losses in press releases about federal bailouts, according to the U.S. Government Accountability Office.

Treasury statements from the past two years that discuss the $700 billion Troubled Asset Relief Program’s profitable investments sometimes include the projected gains for taxpayers, according to a report yesterday from the GAO, a watchdog that works for Congress. The expected costs have been omitted from statements about TARP investments that may be unprofitable, including the government’s stake in insurer American International Group Inc., according to the GAO.

“This inconsistent disclosure of lifetime cost estimates raises concerns about the consistency and transparency of Treasury’s press releases and suggests a selective approach that focuses on reporting program lifetime income and not lifetime costs,” according to the GAO report.

The overall projected cost for TARP has declined since the program was authorized in 2008, as banks including Goldman Sachs Group Inc. and Citigroup Inc. repaid rescue funds at a profit for taxpayers. The Treasury, led by Secretary Timothy F. Geithner, predicted a $70 billion cost as of Sept. 30, down from $78 billion a year earlier, according to the GAO.

Future press releases on TARP investments will link to Treasury’s monthly reports about estimated lifetime costs and gains, Tim Massad, the department’s assistant secretary for financial stability, wrote in a letter to the GAO. The department’s website also includes a daily report on TARP disbursements and income and annual financial statements.

Some Treasury press releases have noted costs to taxpayers. A June statement detailing the government’s exit from Chrysler Group LLC cited the automaker’s repayment of more than $11.2 billion and said that Treasury was unlikely to fully recover the remaining $1.3 billion of funds committed to the company.

--Editors: Dan Kraut, Dan Reichl

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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Wall Street Said to Weigh Junior Banker Pay Freeze

Zynga IPO Outlook July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at

July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at YCMNet Advisors, Bob Rice, general managing partner at Tangent Capital Partners LLC, Paul Martino, managing director at Bullpen Capital, and Paul Bard, director of research at Renaissance Capital LLC, talk about Zynga Inc.'s plan to raise $1 billion in an initial public offering and the outlook for the company. (Excerpts. Source: Bloomberg)

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Wall Street Weighs Pay Freeze for Junior Bankers

January 11, 2012, 12:46 AM EST By Jeffrey McCracken and Christine Harper

Jan. 10 (Bloomberg) -- Wall Street’s biggest firms, facing a slump in investment-banking revenue, are considering freezing compensation levels for some junior bankers, according to people familiar with the deliberations.

Credit Suisse Group AG is likely to suspend its practice, an industry norm, of boosting pay automatically each year for analysts, associates and vice presidents within the investment- banking division, a person with direct knowledge of the decision said. While those employees will get their regular annual salary increases, bonuses probably will be lowered to keep total pay flat from a year earlier, said the person, who requested anonymity because the plan isn’t public.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are being watched by competitors for signs the companies are planning similar moves, said people at four other firms. Cutting pay can be perilous if your rivals don’t because it’s easier for junior bankers to defect, draining a future generation of talent. Wall Street firms may make the change en masse only if one or more of their biggest rivals act first, the people said.

“There’s always the risk that people may go across the street for a better deal,” said Joseph Sorrentino, a managing director in New York at Steven Hall & Partners, an executive- compensation consultancy. Among junior bankers “you have some potential future stars and you want to make sure you keep them engaged and keep them happy and performing.”

JPMorgan, which doesn’t plan to alter its practices, may change course if other firms do so, a person briefed on its decisions said.

Starting Salaries

Base pay for junior bankers typically increases automatically by about 15 percent to 20 percent, akin to a unionized salary scale, as they work a year and move up a so- called class. Younger bankers, who typically comprise about 75 percent of the investment-banking workforce of the biggest Wall Street firms, often start with a $200,000 annual salary and can expect $240,000 or $250,000 in the second year, said two senior bankers.

JPMorgan’s investment bank, which includes equity and fixed-income trading, had 26,615 employees as of Sept. 30. Goldman Sachs, with 34,200 employees, doesn’t break out how many work in each division.

A banker typically spends three to four years as an associate and then three years as a vice president before he can be named director. Top-producing vice presidents in their third year, sometimes called a VP-3, could get $600,000 to $700,000 in total compensation, said a senior Wall Street banker.

Top Tier

At Deutsche Bank AG, senior executives are evaluating whether to cut or freeze pay for the top tier of vice presidents as a way to pare all junior-banker pay, said a person familiar with the matter.

Jennifer Zuccarelli, a spokeswoman for JPMorgan, declined to comment, as did Lucas van Praag at Goldman Sachs, Victoria Harmon at Zurich-based Credit Suisse and John Gallagher at Deutsche Bank, based in Frankfurt. JPMorgan and Goldman Sachs are both based in New York.

The review of junior-banker pay focuses on investment- banking divisions and not lower-level employees in equity or fixed-income trading departments, the people said.

Associate compensation continued to rise in the wake of the financial crisis, the executives said. Starting pay for each position also increased, so a first-year associate job that paid $200,000 a year rose to $210,000 for the next person to fill the slot. With compensation pools down this year at almost all Wall Street banks, climbing associate pay has caused a squeeze on pay for senior managers, said a banker involved in such decisions.

More Transparent

Pay among junior bankers tends to be more transparent and aligned with peers at competing firms than it is for senior bankers, the people said, partly because the newest employees still talk with former classmates. Word of lower entry-level pay at one bank can hinder recruiting at top business schools, which is why the biggest banks rarely consider such pay freezes.

A plunge in trading revenue last year, stagnating economic growth and Europe’s sovereign-debt crisis have forced Wall Street’s most senior bankers to rethink their pay practices as they seek to cut costs. Part of the calculus is determining whether the downturn in bank profits represents a permanent shift or a temporary phenomenon tied to the 2008 financial crisis and recession.

Compensation at the biggest banks may fall 20 percent to 60 percent this year, depending on the firm and the job, senior bankers said. Mergers-and-acquisitions bankers may face pay cuts at the lower end of that range and those in fixed income or trading could see higher reductions, senior bankers said.

Dimmed Prospects

Most of the biggest U.S. banks will inform employees about bonuses and compensation at the end of this month. Bank of America Corp., for example, will tell employees their compensation starting Jan. 26, said a person familiar with the matter. The new pay rates typically take effect in February.

Goldman Sachs and Morgan Stanley, the major U.S. banks most reliant on trading, had their earnings estimates cut this month as a weak fourth quarter dimmed prospects for a capital-markets rebound in the first half of 2012.

JPMorgan Cazenove analysts led by Kian Abouhossein cut earnings outlooks for investment banks for 2011, 2012 and 2013, citing worsening conditions in fixed income and equities. In a Jan. 6 note to clients, the analysts lowered their Goldman Sachs 2012 earnings estimate by 19 percent and Morgan Stanley’s figure by 17 percent.

Investment-banking and trading revenue probably has dropped in each of the past two years. In 2011, global stock offerings plunged 29 percent from 2010 and U.S. bond issuance fell 6.7 percent as companies delayed plans to raise capital, according to data compiled by Bloomberg.

Final Decisions

Fixed-income trading revenue at U.S. banks may fall 12 percent from the third quarter, minus accounting adjustments, while equities drop 10 percent and investment-bank revenue remains unchanged, David Trone, an analyst at JMP Securities, wrote in a Dec. 16 report.

Some large European banks won’t make final decisions on bonuses and compensation until early next month, allowing them to tweak plans based on what their rivals determine in January, executives at those firms said.

Pay increases have traditionally been automatic because “there are traditionally very long hours in terms of the amount of work and this is another way to try to boost their morale and signify that they’re a strong part of the firm and that they’re appreciated,” said Steven Hall’s Sorrentino.

Deutsche Bank won’t announce internally in North America its bonus and compensation decisions until at least the first week of February, said a person familiar with the matter, who predicted bonuses to be down there 30 percent to 50 percent. Barclays Capital, a unit of London-based Barclays Plc, is likely to hold off until the second or third week of February, a person familiar with the matter said.

Kerrie-Ann Cohen, a Barclays Capital spokeswoman, declined to comment.

--With assistance from Dawn Kopecki in New York. Editors: Peter Eichenbaum, Steve Dickson

To contact the reporters on this story: Jeffrey McCracken in New York at jmcracken3@bloomberg.net; Christine Harper in New York at charper@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; David Scheer at dscheer@bloomberg.net

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