RBA’s Stevens May Lift Rates in Third Quarter: Australia Credit

June 05, 2011, 10:16 AM EDT By Michael Heath

June 6 (Bloomberg) -- The Reserve Bank of Australia may resume lifting the developed world’s highest borrowing costs in July or August to counter inflation fueled by the biggest surge in demand since 2009, rates in money markets show.

Yields on July and August interbank cash rate futures advanced last week for the first time in a month after a gross domestic product report showed demand expanded 1.3 percent in the first quarter, more than twice as much as in the prior period. June contracts show traders are betting RBA Governor Glenn Stevens will leave the central bank’s target interest rate at 4.75 percent tomorrow, where’s it’s been since November.

Household spending accounts for 55 percent of Australia’s economy, and the central bank has sought to restrain consumption with 175 basis points of rate increases between October 2009 and November, letting investment in mining drive growth. A June 2 report showing the biggest increase in retail sales in 17 months signals higher incomes are encouraging consumers to spend more, spurring the first weekly decline for benchmark 10-year notes since April 8.

“The question over the timing of the next RBA move has come down to the propensity to consume,” said Jarrod Kerr, director of Australia rates strategy at Credit Suisse Group AG in Singapore. “The strength of consumption and the surge in income growth suggests the RBA will deliver another rate rise in the coming months.”

Soaring Currency

The RBA has expressed concern that higher consumption will clash with capacity constraints such as skill shortages caused by mining investment that the government estimates will reach A$76 billion ($81 billion) next fiscal year.

Twenty-three of 28 economists surveyed by Bloomberg News predict Stevens will keep rates unchanged tomorrow. Five forecast an increase to 5 percent.

Australia’s currency has soared 27 percent in the past year as surging commodity shipments to China and India underpin investors’ expectations that the RBA will raise rates.

The so-called Aussie reached $1.1012 on May 2, the highest since exchange controls were scrapped in 1983, and closed at $1.0716 on June 3 in New York.

Unemployment has fallen to a two-year low and consumer price growth accelerated last quarter to the fastest pace since 2006 as companies including BHP Billiton Ltd., the world’s biggest mining company, expand output.

Iron Ore, Coal

“Australia’s terms of trade are likely to rise further in the June quarter, to be above the level assumed a few months ago -- and at their highest level in at least 140 years -- boosted in particular by high prices for iron ore and coal,” the RBA said in its quarterly policy statement on May 6, referring to a measure of income earned from exports.

The yield on July cash-rate futures advanced 2.5 basis points to 4.825 percent, while the rate on the August contract climbed 3.5 basis points to 4.875 percent last week. The chances of a July rate increase climbed to 30 percent on June 3 from 20 percent on May 27, while the probability of an advance in August rose to 50 percent from 36 percent.

The current stretch is the fourth time since mid-2007 that Australia’s central bank has held policy for five-straight meetings. The RBA raised rates in November 2010 and October 2009, after ending such a pause in October 2008 with a reduction in the benchmark.

Australia’s economy shrank 1.2 percent in the first quarter, the most since 1991, as floods in the northeast slashed coal exports, a June 1 report showed. Even so, the currency rose and bonds fell the most in almost four months after the data as investors focused on final demand, the broadest measure of spending by government, consumers and businesses, which more than doubled from 0.6 percent in the final quarter of 2010.

Economy Rebounding

A day later, a government report showed April retail sales advanced 1.1 percent from a month earlier, the biggest jump since November 2009 and almost three times more than the median forecast in a Bloomberg News survey of economists.

In the May 6 review, the RBA forecast growth of 4.25 percent this year. Consumer prices will rise 3.25 percent over the period and core inflation will reach 3 percent, it said.

Expectations for consumer-price gains declined for a fourth week, the longest stretch since December, government debt markets show. The gap between yields on five-year inflation- linked notes and similar-maturity bonds that aren’t indexed shrank to 2.98 percentage points on June 3 from 3.01 percentage points a week earlier, according to data compiled by Bloomberg.

The so-called breakeven rate shows investor estimates for annual inflation over the lifetime of the bonds. The RBA aims to keep inflation in a range of 2 percent to 3 percent on average.

RBA’s Pause

The central bank may also have cause to keep rates unchanged as global growth shows signs of weakening, including the economies of some of Australia’s biggest trading partners, and Europe’s debt crisis deepens.

China’s manufacturing expanded at the slowest pace in nine months in May, a survey of companies released last week showed. India’s growth in three months to March 31 was the weakest in five quarters, and Japan’s industrial production rose less than economists forecast in April. Those three countries accounted for 51 percent of Australia’s total exports so far this year.

Greece’s fiscal crisis worsened enough for Moody’s Investors Service last week to raise the probability of a default to 50 percent. Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said June 3 that the European Union will approve a new aid plan for Greece.

U.S. stocks fell last week, sending the Dow Jones Industrial Average to its longest stretch of losses since 2004, after Labor Department figures showed payrolls rosed 54,000 in May, less than the 165,000 median forecast in a Bloomberg News survey, while the jobless rate climbed to 9.1 percent.

Europe Concerns

“Australian fixed income looks to have been the beneficiary of heightened European concerns and increased uncertainty over the U.S. outlook,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney.

The yield on the Australian government’s benchmark 10-year note advanced to 5.234 percent on June 3 from 5.230 percent on May 27, snapping the longest stretch of declines since 2008. The premium over the rate on similar-maturity Treasuries widened to 225 basis points, or 2.25 percentage point, from this year’s low of 197 on March 3.

A May 31 central bank report showed loans provided by Australian banks and finance companies stagnated in April. Australian employers shed 22,100 workers in April, bringing to 26,300 the number of net new jobs created in first four months of 2011, the weakest for that period since 1999.

Australia’s minimum wage was increased 3.4 percent to A$589.30 a week, the national workplace relations tribunal said June 3. The wage price index rose 3.8 percent in the first quarter from a year earlier, the government reported May 18.

Queensland’s Exports

Stevens has held rates for five meetings to allow the economy in Queensland to recover from floods in January that Prime Minister Julia Gillard called the nation’s most expensive natural disaster.

Further weighing on consumers, the government said last month it will end 23 years of spending growth to help ease inflation pressure and support the return to a budget surplus.

The gap between yields on corporate notes and sovereign debt widened one basis point last week to 162, paring this year’s decline in the spread to 35 basis points, Bank of America Merrill Lynch indexes show.

In a statement after its May 3 policy decision, the RBA said it left rates unchanged as households continue to show caution in spending and borrowing, and are saving more.

Last week’s GDP report showed Australia’s household savings ratio climbed to 11.5 percent in the three months through March from 9.7 percent in the previous quarter, the highest level since 2009.

--With assistance from Candice Zachariahs and Daniel Petrie in Sydney. Editors: Brendan Murray, Garfield Reynolds

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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Bid & Ask: The Deals of the Week

By Ira Boudway

1. Sealed Air, the maker of Bubble Wrap packaging, agreed to buy cleaning products supplier Diversey Holdings for $4.3 billion.

2. Houston-based Marathon Oil gains leases on 141,00 acres of Texas oil and gas fields with the $3.5 billion purchase of Hilcorp Resources, a venture backed by private equity firm KKR.

3. Ashland (ASH), the maker of Valvoline motor oil, agreed to pay $3.2 billion for International Specialty Products, which makes ingredients used in shampoo, pharmaceuticals, and toothpaste.

4. Intact Financial, Canada's largest property and casualty insurer, is buying French insurer AXA's Canadian business for $2.7 billion.

5. South African antitrust authorities approved Wal-Mart's (WMT) $2.4 billion offer for a controlling stake in wholesaler Massmart Holdings on the condition that no jobs are cut for two years.

6. In its biggest deal since acquiring IBM's PC business more than six years ago, China's Lenovo Group is offering $671 million for German electronics manufacturer Medion.

7. Jones Lang LaSalle (JLL) will become the largest real estate broker in the U.K. with the $324 million purchase of London-based firm King Sturge.

8. Boston-based private equity firm Thomas H. Lee Partners is buying a minority stake in First BanCorp for $180 million. The Puerto Rico-based bank, a TARP participant, is selling shares to meet capital requirements.

9. A pair of singing-bird pistols made of gold and inlaid with diamonds and pearls sold for $5.8 million at a Christie's auction in Hong Kong.

10. Taransay, the uninhabited, 3,474-acre Scottish island featured in the BBC reality series Castaway 2000, is for sale at an asking price of $3.3 million.

Boudway is a reporter for Bloomberg Businessweek.

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Funds Boost Bullish Commodity Bets on Global Growth Prospects

June 05, 2011, 12:16 PM EDT By Yi Tian

June 6 (Bloomberg) -- Funds boosted bets on rising commodity prices to the highest in four weeks, led by copper, amid signs that the global economic recovery will remain resilient and boost demand for raw materials.

Speculators raised their net-long positions in 18 commodities by 7.3 percent to 1.26 million futures and options contracts in the week ended May 31, government data compiled by Bloomberg show. That’s the highest since May 3. Copper holdings more than doubled. A measure of bullish agriculture bets also climbed as adverse global weather curbed crop production.

The Standard & Poor’s GSCI Spot Index rose for a fourth straight week as Chinese metal inventories plunged and droughts lingered in the Asian country and Europe, trimming prospects for wheat and cotton crops. The global recovery “is gaining strength,” the Group of Eight leaders said May 27 after a summit in Deauville, France. In the U.S., consumer sentiment rose to a three-month high in May, a private report showed last month.

“We are seeing a reasonable rate of growth in worldwide economic activity,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio Funds in San Francisco. “The supply-demand associated with that growth, combined with a weaker dollar, probably explains the move into commodities.”

Copper prices have jumped 40 percent in the past year while wheat has surged 75 percent and corn has more than doubled amid increasing demand from China and other emerging economies. Raw materials have also gained as investors boosted holdings as an alternative to the dollar, which has slumped more than 6 percent this year against a six-currency basket.

$130 Million

Investors poured $130 million into commodity funds in the week ended June 1, the second straight increase, according to EPFR Global, a Cambridge, Massachusetts-based researcher. The previous week had inflows of $702.8 million.

Managed-money funds and other large speculators boosted bullish bets on New York copper prices by 4,604 contracts to 7,304. The jump was the biggest since October 2009. Stockpiles of the metal monitored by Shanghai Futures Exchange have plunged 51 percent since mid-March.

“Destocking cannot continue indefinitely, and market participants will have to return to the market at the latest in the fourth quarter, if not for re-stocking then at least for spot purchases,” Bank of America Merrill Lynch said in a report last week.

Agriculture Bets

Speculators raised their net-long positions in 11 U.S. farm goods by 4.6 percent to 756,629 contracts as of May 31, the second straight increase. Holdings of wheat jumped 14 percent, and bets on a cotton rally gained up 12 percent, the most since August.

“It has basically been a year of the wrong weather at the wrong time, starting with the Russian droughts and then most recently excessive rains in the U.S.,” said Nic Johnson, who helps manage about $24 billion in commodities at Pacific Investment Management Co. in Newport Beach, California. Agriculture “prices could move materially higher because of low inventories and if we have below-trend yields of crops like corn.”

--With assistance from Debarati Roy in New York. Editors: Millie Munshi, Patrick McKiernan

To contact the reporter on this story: Yi Tian in New York at ytian8@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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Buyout Firms Seek New Horizons

Bloomberg

By Cristina Alesci and Jason Kelly

Stephen A. Schwarzman, David M. Rubenstein, Henry R. Kravis, and George R. Roberts became billionaires by engineering leveraged buyouts. Now they're transforming their companies into asset managers that run everything from hedge funds to strip malls as fresh capital and takeover targets become scarce.

Schwarzman's Blackstone Group (BX), the biggest private equity firm, is earning twice as much from owning property, including office buildings in India and seniors communities in Oregon, as from buyouts. Kravis and Roberts's KKR (KKR) owns a stake in a 5,500-mile U.S. fuel pipeline and lends to distressed companies. "The large-cap leveraged buyout business has become mature," says Colin C. Blaydon, director of the Center for Private Equity & Entrepreneurship at Dartmouth College's Tuck School of Business. In the future, private equity firms will look "more like the large money-management enterprises, with a big emphasis on assets under management."

The firms have little choice if they want to grow. For one thing, the increase in the number of buyout funds—to 470 today from 60 in 1990—has made raising money harder. "As the business exploded, more and more people rushed into private equity, which made competition for money fierce," says Richard I. Beattie, chairman of law firm Simpson Thacher & Bartlett, who helped KKR with its $30 billion takeover of RJR Nabisco in 1989 and remains an adviser to many private equity firms.

Stock prices have doubled in a two-year rally, making takeover candidates more expensive. And while deal activity is increasing, private equity firms are encountering more competition from corporate buyers with lots of cash. Blackstone, which is raising a $15 billion fund, committed only $550 million to private equity deals in the first quarter.

Blackstone's largest investment in the last 12 months was the $9.4 billion deal to buy 593 U.S. shopping centers in 39 states from Australia's Centro Properties Group. It would be the largest cash purchase of real estate in the world since the collapse of Lehman Brothers in 2008, Schwarzman, 64, said during an April conference call with investors.

Co-founder Rubenstein has steered Washington-based Carlyle Group, ranked second by assets under management, into the fund-of-funds business by taking over AlpInvest, a Dutch company that spreads money for investors among buyout funds. Rubenstein, 61, also agreed to buy a majority stake in Claren Road Asset Management, a hedge fund that trades debt. "We're building new products and adding new geographies and people to give our clients more choice and asset-diversification options," he says.

KKR, created in 1976 by Kravis, Roberts, and Jerome Kohlberg, has ventured into underwriting stock and bond offerings, investing in infrastructure deals, making and buying loans, and, most recently, operating hedge funds.

Leon D. Black's Apollo Global Management, which completed a $565 million initial public offering in March, has been scouring European banks for what it calls "stranded assets," including $2 billion of nonperforming commercial loans, President Marc A. Spilker told investors on May 12. Another $240 million is earmarked for "longevity-based assets"—a bet on the value of life insurance policies Apollo is buying from banks.

These private equity managers are trying to boost returns by going where rivals can't because they lack the firepower, or by taking advantage of distressed sellers. "In virtually all recent transactions, Blackstone has faced limited competition due to the magnitude of capital required and the complexity of the transactions," Schwarzman told investors in April.

Even so, private equity firms may not find asset management and real estate as profitable as buyouts. Private equity firms typically collect a 1.5 percent to 2 percent fee on assets under management and incentive fees equal to 20 percent of any profit. While the new businesses may produce comparable management fees, they can offer little or no incentive fees.

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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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