PEP Sweetens its Offer For Bottling Companies
PHILADELPHIA, Aug 4 (Reuters) – PepsiCo Inc (PEP.N) agreed to buy its two largest bottlers, Pepsi Bottling Group Inc (PBG.N) and PepsiAmericas Inc (PAS.N), for $7.8 billion in cash and stock, a source familiar with the situation said on Tuesday. (Reporting by Jessica Hall, editing by Gerald E. McCormick) (For more M&A news and our DealZone blog, go to here)
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Oil prices fell below $71 a barrel Tuesday, as investors booked profits after a big rally fueled by signs of economic recovery in the U.S.
By midday in Europe, benchmark crude for September delivery was down 92 cents to $70.66 a barrel in electronic trading on the New York Mercantile Exchange. Earlier in the session, the contract fell as low as $70.28. On Monday, the contract rose $2.13 to settle at $71.58.
“Oil has rallied to levels seen in June, before the sharp decline of nearly 16 percent,” said analysts at Sucden Financial in London. “Given continuing poor oil fundamentals, current high prices seem difficult to sustain.”
A report Monday from the Institute for Supply Management, a trade group of purchasing executives, said U.S. manufacturing activity should increase next month for the first time since January 2008. Also, the Commerce Department said construction spending rose in June.
The positive economic news has emboldened investors to bid up stocks and oil. The Dow Jones industrial average rose 1.3 percent Monday and most Asian indexes gained Tuesday.
“With the economy seemingly improving each week, oil has felt pressure to go higher,” said Michael Sander, an adviser at Sander Capital in Seattle. “As far as fundamentals go, oil still has very high inventory levels and weak consumer demand, but those just don’t seem to matter.”
A report last week showing U.S. crude inventories jumped the previous week suggested demand remains sluggish, and sent prices below $63 a barrel. Since then, oil has been on a tear as investors anticipate an improving economy will boost demand and whittle away supplies.
“Improving demand amid continued supply tightness should accelerate the pace of erosion of the inventory overhang, lending support to prices,” Barclays Capital said in a report.
Still, the uncertainties about global demand for oil – in parallel with concerns about supplies – continue to prompt some analysts to remain cautious.
“We think that oil prices should head back down towards $50 per barrel rather than remain close to OPEC’s informal target of $75-80,” said London’s Capital Economics. “The rally that we have seen since the spring has been driven mainly by hopes of a strong recovery and is likely to falter as these hopes fade. Final demand is set to remain weak for years.”
In other Nymex trading, gasoline for August delivery was down 2.33 cents to $2.0460 a gallon and heating oil lost 1.18 to $1.8595. Natural gas for August delivery fell 5.6 cents to $3.975 per 1,000 cubic feet.
In London, Brent prices fell 59 cents to $72.96 a barrel on the ICE Futures exchange.
By Jonathan Burgos
Aug. 4 (Bloomberg) — Asian stocks fluctuated as commodities producers climbed on higher oil and metal prices, while Japanese makers of cars and motorcycles fell after Yamaha Motor Co. and Suzuki Motor Corp. reported earnings.
BHP Billiton Ltd., the world’s largest mining company, and Rio Tinto Group both rose more than 2 percent in Sydney. HSBC Holdings Plc, Europe’s biggest bank, gained 7 percent in Hong Kong after profit exceeded analysts’ estimates. Suzuki, Japan’s second-largest maker of minicars, fell 5 percent in Tokyo after earnings were almost wiped out, and Yamaha, the world’s No. 2 maker of motor bikes, sank 9.9 percent after forecasting a loss.
The MSCI Asia Pacific Index added 0.2 percent to 113.29 as of 7:32 p.m. in Tokyo, paring an increase of as much as 1.1 percent after Yamaha’s forecast. Almost as many stocks advanced as declined. The gauge rose in 15 of the last 16 days.
“There are early indications that the economy is bottoming out,” said Ivan Tham, Singapore-based head of fund management at state-backed Kuwait Finance House, which has about $24 billion in assets. “I’m a bit more cautious, as valuations have run ahead of fundamentals following the recent rally.”
The MSCI Asia Pacific advanced to the highest level since Sept. 26 today, swelling average prices to 24.6 times estimated earnings, compared with 18 times at the start of the year, according to data compiled by Bloomberg.
Manufacturing Outlook
The Nikkei 225 Stock Average rose 0.2 percent to 10,375.01 in Tokyo, and most Asian benchmarks advanced. Kawasaki Kisen Kaisha Ltd., Japan’s third-largest shipping line, climbed the most in the Nikkei on speculation higher commodity prices and improving economic prospects will boost global trade. Hong Kong property developers retreated, led by China Overseas Land & Investment Ltd., on concern revenue from China will fall.
Futures on the Standard & Poor’s 500 Index fell 0.8 percent today. The gauge advanced 1.5 percent and closed above 1,000 for the first time since November in New York yesterday. The MSCI World Index added 2 percent yesterday, its steepest increase in almost three weeks, after reports from China, Europe and the U.S. showed an improved outlook for manufacturing.
BHP Billiton gained 2 percent to A$38.84. Rio Tinto Ltd., the world’s third-largest mining company, climbed 4.3 percent to A$62.88. Mitsubishi Corp., a Japanese trading house that gets about half its profit from commodities, advanced 2.1 percent to 1,956 yen.
A gauge of six metals in London gained 4.9 percent to a level not seen since Oct. 3. Crude oil rallied 3.1 percent to $71.58 a barrel in New York yesterday, the highest settlement since June 12.
Shipping Lines Gain
Shipping lines advanced the most of 33 industries in Japan’s Topix index. Mitsui O.S.K. Lines Ltd., the world’s largest operator of iron-ore vessels, added 1.4 percent to 597 yen. Kawasaki Kisen Kaisha rose 5.9 percent to 375 yen. China Shipping Container climbed 6 percent to HK$3.53 in Hong Kong.
“Government spending and looser monetary policies worldwide will bring the global economy and company earnings to a clear recovery in 2010,” said Masayuki Kubota, a senior fund manager at Daiwa SB Investments Ltd., which manages $37 billion in assets. “The recovery will be short-lived after authorities tighten budgets and monetary policies.”
The MSCI Asia Pacific Index has climbed 16 percent in the past three weeks as earnings from Apple Inc. and Lafarge SA to Nissan Motor Co. and Samsung Electronics Co. exceeded analysts’ estimates. Of the 969 companies in the gauge, 159 are scheduled to report earnings this week, according to Bloomberg data.
Asia Outpaces World
The gains have brought the MSCI Asia Pacific within 2.5 percent of its level before Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15, while the MSCI World Index is down more than 15 percent.
Five of the world’s 10 biggest companies by market value — PetroChina Co., Industrial & Commercial Bank of China Ltd., China Mobile Ltd., China Construction Bank Corp. and China Petroleum & Chemical Corp. — are based in Asia, and a sixth — U.K.-based HSBC — gets the bulk of its earnings in the region.
Yamaha had the steepest drop today in the MSCI World, slumping 9.9 percent to 1,096 yen after forecasting a first-half net loss that’s four times wider than its previous projection.
Suzuki sank 5 percent to 2,300 yen after saying first- quarter net income dropped 92 percent. Transportation companies had the steepest decline of any industry group in the Topix.
Hong Kong developers retreated after the Shanghai Securities News said transactions in Shanghai declined for the first time in seven months in July, and purchases dropped in Guangzhou and Shenzhen for two consecutive months.
China Overseas Land & Investment slipped 4.6 percent to HK$18.52, the sharpest decline on the Hang Seng Index. Hang Lung Properties Ltd. slid 3 percent to HK$27.45…..
European Markets Fall Along With U.S. Futures
By Sarah Jones
Aug. 4 (Bloomberg) — European stocks slipped after the Dow Jones Stoxx 600 Index traded at its highest level relative to profits since 2003. U.S. index futures dropped, while Asian shares fluctuated.
Standard Chartered Plc fell 4.7 percent after the U.K. bank announced a plan to raise $1.7 billion in a share sale. Yamaha Motor Co., the world’s second-largest maker of motor bikes, sank 9.9 percent in Tokyo after forecasting a wider loss. UBS AG lost 6.1 percent after Switzerland’s largest bank by assets reported a third straight quarterly loss.
Europe’s Stoxx 600 slipped 0.9 percent to 226.5 at 12:05 p.m. in London. The measure has climbed 43 percent since March 9 as companies from Goldman Sachs Group Inc. to Roche Holding AG posted better-than-estimated earnings. The rally has left the Stoxx 600 valued at 35.6 times the profits of its companies, the highest level since September 2003, weekly data compiled by Bloomberg show.
“Valuations have become a little more challenging,” said Adrian Darley, who helps oversee about $101 billion as head of European equities at Ignis Investment Services Ltd. in London. “It doesn’t mean that market can’t go higher from now into year end but we have moved very far, very fast so a small correction would be healthy.”
Futures on the Standard & Poor’s 500 Index declined 0.7 percent after the benchmark gauge for U.S. equities climbed above 1,000 for the first time since November yesterday.
‘Sell in May’
The MSCI Asia Pacific Index added 0.2 percent today, paring a gain of as much as 1.1 percent as Suzuki Motor Corp. said profit was almost wiped out.
Global equity investors who follow the Wall Street axiom to “sell in May and go away” are missing out on the biggest gains in at least four decades. The MSCI World Index climbed 19 percent from May 1 through yesterday, the steepest advance for that period in the 23-country measure’s history stretching back to 1970, according to data compiled by Bloomberg.
Standard Chartered fell 4.7 percent to 1,368 pence. The British bank that earns almost all of its income in emerging markets plans to raise 1 billion pounds ($1.7 billion) in a share sale to take advantage of “strategic opportunities.” The bank’s first-half profit rose to $1.88 billion, compared with $1.79 billion a year earlier. That beat the $1.82 billion median estimate of five analysts surveyed by Bloomberg…..
Big Banks Come Up Short on Mortgage Modifications
By Dawn Kopecki
Aug. 4 (Bloomberg) — The largest U.S. banks have found it more difficult to meet demand for loan modifications than their smaller rivals, a Treasury Department report will show today.
The inability of some mortgage servicers to keep up with demand has limited the pace and effectiveness of the government’s anti-foreclosure programs, a U.S. Treasury official said in An interview yesterday, without naming the companies.
Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. are likely to show the poorest levels of homeowner assistance among the 31 companies participating in President Barack Obama’s $75 billion loan modification program, said David Sisko, the head of default management services for Deloitte & Touche LLP. The government said it wants to create transparency about which companies are doing the most to help.
“No one wants to be on the bad side of that list just because of the public scrutiny that comes from it,” Sisko said.
Obama’s Making Home Affordable loan modification program was crafted this year to help as many as 4 million borrowers save their homes. So far, about 200,000 trial loan modifications have begun, and the Obama administration said last month that it’s setting a goal of starting at least 500,000 by Nov. 1.
“The biggest servicers certainly have the biggest ships to turn,” Seth Wheeler, a deputy assistant Treasury secretary for federal finance said in an interview. “Some of the strongest performers are smaller servicers, but it’s not a uniform correlation.”
Wheeler wouldn’t discuss specific data or names in the report.
Nimbler Companies
“Our intention once this data has been collected and processed is for there to be transparency so that people can see it in a numerical way, who’s been good and what performance has been,” Lawrence Summers, director of the National Economic Council, said in a July 20 interview with Bloomberg News.
Many banks don’t yet have the capacity to process the volume of loan modifications being demanded, according to Sisko. He said modification specialists have gone from processing an average of 50 to 100 loans a month to 200 to 300.
“The smaller banks and servicers are probably a little nimbler,” Sisko said.
Bank of America modified 150,000 loans through other programs in the first half “as we ramped up to make” Obama’s Making Home Affordable program operational, said Dan Frahm, a spokesman for the Charlotte, North Carolina-based company.
“Just as you can’t judge a student’s performance for the semester by looking at their grade for one class, Making Home Affordable is one component of a comprehensive program Bank of America has in place to support homeowners,” Frahm said.
Creating Transparency…..
Bank Regulators To Speak Out On Reform
By Patrick Rucker and Kevin Drawbaugh
WASHINGTON (Reuters) – Top U.S. bank regulators will speak out on Tuesday against some key elements of the Obama administration’s plan to reshape financial regulation, saying parts of it were unneeded or could be disruptive.
The officials’ defiance, in prepared congressional testimony obtained by Reuters, came despite a warning given to them on Friday by Treasury Secretary Timothy Geithner.
In private remarks punctuated with expletives, Geithner urged the regulators to end their turf battles and show support for President Barack Obama‘s plan, according to a person familiar with the situation on Monday.
But that seemed to have little impact on John Bowman, acting director of the Office of Thrift Supervision (OTS), an agency slated for closure under the Obama plan.
“We do not support the administration’s proposal to establish a new agency, the National Bank Supervisor (NBS), by eliminating the Office of the Comptroller of the Currency … and the OTS,” Bowman said in written remarks to be given to the Senate Banking Committee at a hearing.
In addition, he said, “The OTS does not support the provision in the administration’s proposal to eliminate the thrift charter and require all federal thrift institutions to change their charter.”
Such words marked a retrenching of regulators’ opposition to portions of Obama’s plans to tighten oversight of banks and capital markets amid the worst financial crisis in generations and with the economy mired in a stubborn recession.
“We do not see merit or wisdom in consolidating federal supervision of national and state banking charters into a single regulator,” FDIC chairman Sheila Bair said in her remarks ahead of the hearing on regulatory reform.
TENSE MEETING
At a tense, hour-long meeting on Friday, Geithner told Bair, Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Mary Schapiro to end recent public criticism of the administration’s plan and stop airing concerns over their potential loss of authority.
The Wall Street Journal, which first reported the meeting, said Geithner vented frustration over the plan’s slow progress and told regulators that “enough is enough.”
Citing people familiar with the meeting, the newspaper also said Geithner used obscenities and took an aggressive stance in his dressing down of the regulators.
Treasury spokesman Andrew Williams said, “We planned this meeting as a venue to deliver a tough message to regulators that we should work together to get reform done – and focus less on protecting turf.”
Under the plan conceived by Treasury, banking supervision would be significantly consolidated.
But Bair, whose populist tone has won allies in Congress, in her prepared remarks for the banking committee hearing, said: “Prudent risk management argues strongly against putting all your regulatory and supervisory eggs in one basket.” Continued…
A Visual of Better Than Expected Earnings
Taking a big picture view of the current earnings environment shows just how much “better than expected” the current earnings have been. Despite having predicted the current rally, I am highly skeptical of the quality of the rally. The following graph shows the timeline of analyst’s Q2 estimate changes. As you can see, the estimates have been slashed by nearly 50%. Could the analysts have gotten it more wrong? And why is anyone now surprised that they were so far off again? All of this has to make you wonder just how important “better than expected” really is. Reader Robert in Chicago elaborates:
These numbers are for S&P 500 “operating earnings,” which exclude the allegedly one-time items; GAAP earnings, which can’t be gamed as much, are literally half as much this quarter, the largest divergence ever apart from 4Q08 — 44% below 2Q08 and 68% below 2Q07.
A Look @ Inflation & The Markets
So we have this monster debt overhang in the US, and the answer is to just print up more money, right?
Of course, nobody would ever admit to that. Ben Bernanke will insist that the Fed is devoted to sound money practices. Tim Geithner talks about getting spending and taxing and borrowing under control (eventually). But come on, you know the printing press is part of the plan.
Unfortunately it won’t work says UBS economist Paul Donovan, in a report picked up by FT Alphaville.
While most investors today acknowledge that deflation is likely to be a feature for the OECD economies during the second half of 2009, inflation pessimists cling resolutely to the belief that inflation will inevitably return. “Fiscal deficits are rising dramatically” goes the argument. “Governments will have to create inflation to reduce debt:GDP ratios, as they have done in the past.”
The problem with the idea of governments inflating their way out of a debt burden is that it does not work. Absent episodes of hyper-inflation, it is a strategy that has never worked. Government debt: GDP burdens tend to be positively correlated with inflation. Market mythology has created the idea that inflation will help reduce government debt ratios. The facts do not support the myth. OECD government debt rises as inflation rises. Meaningful reductions in government debt will require a low inflation future.
As this chart shows, instances of declining debt-to-GDP rarely coincide with periods of inflation. If it did If it did, we’d see more dots in the lower right-hand quadrant.
The bad news for central bankers is that creating currency isn’t like, say, diluting shareholders in a company. You’re always rolling your debt, and the market’s response to an inflationary strategy is (not surprisingly) higher interest rates. It’s a treadmill, and it’s extremely hard to get ahead.
So why do we have this mythology, as Donovan calls it, of inflating our way out of debt? It’s probably because on the surface there’s some simple logic to it, though more importantly it’s a myth borne out of necessity. The opposite idea, that we’d actually have to cut spending and raise taxes (which is to say, actually pay off our debts) is just too painful to contemplate.