September 21, 2021

Markets Extends Its Rally

Stocks rose on Tuesday, with the Standard Poor’s 500-share index extending its three-day rally to an intraday high, although profit-taking in technology shares capped gains.

In afternoon trading the S.P. was up 8.18 points, or 0.5 percent, to 1,625.68. The Dow Jones industrial average was up 76.91 points, or 0.5 percent, to 15,045.80. The Nasdaq composite Index rose 6.08 points, or 0.2 percent, to 3,398.96.

The tech sector, which had been among the gainers for the past couple of days, turned negative as a decline in Apple weighed heavily on the Nasdaq composite index.

Shares of First Solar and video subscription company Netflix were also down, pressuring the index.

Equities this year have gone without a sustained pullback as investors use any market decline to add to positions. Many analysts expect markets to trend higher, but some see a near-term pullback, citing a lack of positive catalysts and mixed economic data.

“The payroll report indicated that things are better than we were thinking in terms of growth, so until the market finds proof otherwise against the recovery, stocks will continue to move generally higher,” said Andres Garcia-Amaya, global market strategist with J.P. Morgan Funds in New York.

“There are still things to be concerned about, but stocks remain cheap and the biggest risk is to try and time a correction rather than follow the trend.”

Apple shares fell 0.7 percent in volatile trading after rising for the past three sessions. First Solar shares were off 9.2 percent after reporting earnings below Wall Street expectations late Monday. Netflix shares were off 1.9 percent.

Both Fossil and DirecTV reported earnings that surged past expectations. Fossil jumped 9.4 percent as one of the S.P.’s top percentage gainers, followed by DirecTV, up 6.8 percent.

Overseas, European shares rose about 0.3 percent on positive earnings, and the DAX in Frankfurt reached an all-time high after the release of data showing German industrial orders rose in March, confounding expectations of a drop.

Japan’s Nikkei stock market, which had been closed on Monday, jumped in a delayed reaction to Friday’s jobs data in the United States. The Nikkei ended the day up 3.6 percent. In Hong Kong the Hang Seng rose 0.6 percent and the Shanghai composite closed up 0.2 percent.

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Off the Charts: Global Manufacturing Edges Up, Except in Europe

Surveys of manufacturing companies around the world indicated that in December nearly as many companies reported that orders were rising as said that orders were continuing to decline.

The gains were concentrated in developing countries; China reported its best month in nearly two years.

But much of the euro zone remained weak. France reported its worst monthly figure since early 2009, when the credit crisis was at its worst.

The figures are based on monthly surveys of manufacturers begun in the United States by the Institute for Supply Management and later imitated in more than a dozen countries by Markit, a British firm. Companies are asked whether business is better than in the previous month, both over all and by several measurements. The accompanying charts focus on whether companies say the volume of new orders coming in is improving or getting worse.

The I.S.M. numbers use 50 as a neutral point. Any number above that indicates that more companies are reporting good news than are reporting that things are getting worse. In the charts, the numbers are adjusted so that such a neutral reading is shown as zero, with higher figures showing an ever greater proportion of companies reporting good news.

The global figure, compiled by J. P. Morgan based on all the surveys, remained in negative territory in December, but it came closer to breaking even than it had in any month since May.

In the United States, according to the Institute for Supply Management survey, a plurality of companies reported declining orders for three months through September, but since then the figures have been positive, although by very narrow margins in November and December. Export orders appeared to be stronger in December than domestic orders, perhaps indicating some caution from domestic buyers as the so-called fiscal cliff deadline approached.

The weakness in the euro zone has lasted more than a year, but for most of that period it was the peripheral countries that were holding down the reports. In December, though, both Germany and France, the two largest economies in the currency union, had worse order reports than the zone as a whole, something that had happened only once before since the end of 2007.

For much of this year, most of the major developing country exporters were reporting declining levels of new orders. But China and Brazil have shown positive margins for three months as the year ended, and South Korea had a narrowly positive number in December, its first in seven months.

Floyd Norris comments on finance and the economy at

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Japanese Economy Contracts, Suggesting Return to Recession

TOKYO — Japan’s economy shrank at a pace of 0.9 percent in the three months through September, government data showed Monday, as sluggish imports compounded slowing demand and edged the nation’s economy toward recession.

The decline in gross domestic product came to an annualized 3.5 percent contraction. It was a reversal from Japan’s robust performance earlier this year, when it outperformed most of its peers in the Group of 7 industrialized nations.

But growth has since stalled, hit by a slump in exports amid economic woes in Europe and a damaging territorial spat with China, both major trading destinations for Japan. A strong yen has also hurt competitiveness among Japanese exporters.

At home, the pace of reconstruction after the earthquake, tsunami and nuclear disaster of March 2011 appears to be slowing. Private consumption declined at the largest rate since early 2011.

“These are tough numbers,” Prime Minister Yoshihiko Noda told a parliamentary session Monday. He said the government, which has led the post-disaster reconstruction effort with ¥20 trillion, or $252 billion, in spending, would consider further measures “with a sense of urgency.”

Still, some economists say they expect the Japanese economy to continue to shrink in the next quarter, pitching it into recession before conditions improve.

“Japan’s recovery since both the Lehman shock and the Tohoku earthquake appears to have halted lately,” and Japan now appears headed for recession, Masamichi Adachi, economist for Japan at J.P. Morgan Securities, said in a research note after the G.D.P. numbers were released.

“The recession is likely to be short, however, as a resumption of positive growth from the first quarter next year is expected with a pickup in external demand, and associated firming in domestic private demand,” Mr. Adachi said.

Economists at the Mizuho Research Institute in Tokyo also predicted that a recession was probable but would probably be short-lived.

“Although the Japanese economy will face harsh challenges for the time being, the situation is likely to bottom out by the end of the year,” the economists said in a note. “A rebound in economic indicators in the United States and China suggests that Japan’s exports will also bottom out by the year’s end, so the possibility that the economy will continue to retrench in the new year is low.”

If, however, Japan’s rocky relations with China were to worsen, the recovery could take longer, the economists said. A spat over a group of islands in the East China Sea that are claimed by both nations has prompted some Chinese consumers to boycott Japanese brands, casting a pall over Japan’s exports to its neighbor.

The numbers Monday also put renewed pressure on the Japanese central bank to do more to shore up the economy. The central bank, the Bank of Japan, eased monetary policy last month for the second month in a row by expanding an asset lending program, after government officials had urged the bank to take more drastic steps to keep economic recovery on track.

The bank, which has struggled over the past decade in its efforts to kick-start the Japanese economy and tackle persistent deflation, is set to review monetary policy again next week.

“The government must pursue various measures to address fiscal woes, ease regulations and bolster economic growth. But I would also like the Bank of Japan to take powerful monetary easing measures to get the country out of deflation,” Seiji Maehara, the economics minister, told a news conference Monday.

With its mature economy and declining population, Japan, which now has the world’s third-largest G.D.P. behind that of the United States and China, faces being further eclipsed by its Asian neighbors.

In a report published last week on long-term economic trends, the Organization of Economic Cooperation and Development said Japan would continue to grow but at a sluggish rate, and its share of global economic output would fall far behind that of fast-rising China and India over the coming decades.

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DealBook: On Wall Street, a Renewed Optimism for Deals

A Kinder Morgan pipeline in Concord, Calif.Kinder Morgan, via European Pressphoto Agency A Kinder Morgan pipeline in Concord, Calif. Kinder Morgan’s $36.2 billion deal for the El Paso Corporation was one of the largest in 2011.

Before Europe’s debt crisis flared anew last summer, rattling markets and choking off a revival in mergers and acquisitions, huge corporate cash piles and cheap debt had fostered hopes that deal-making would recover strongly last year.

Graphic Graphic (Click to enlarge).

In the first half of 2011, the dollar volume of announced mergers worldwide neared its highest levels since the financial crisis. But that momentum proved fragile as deal volume tumbled 19 percent, to about $1.1 trillion, in the second half of 2011, compared with the same period the year before, according to Thomson Reuters data.

Now, with stock and credit markets steadier, deal makers are growing confident that 2012 will be better for business. Not only do they point to cheap financing and the large amounts of cash on corporate balance sheets, but they say that companies that have already cut costs may decide that they need to make acquisitions to drive growth in the face of a tepid economy.

“The dialogue has gotten back on track,” said Steven Baronoff, chairman of global mergers and acquisitions at Bank of America Merrill Lynch. “If Europe doesn’t go off the rails, you’ll see a return to long-term positive factors.”

According to a recent study by Ernst Young, 36 percent of companies plan to pursue an acquisition this year.

“We’re optimistic that the need and desire for growth will overcome the volatility headwinds, but that’s where the battle will be waged,” said Jim Woolery, J. P. Morgan’s co-head of North America mergers and acquisitions.

And there is pent-up demand among buyout shops. After a long stretch of tempered activity, many private equity firms are still feeling the pressure to deploy capital or engineer exits.

Still, companies that explore potential deals will most likely tread cautiously. For one, it remains unclear whether European leaders have done enough to ensure that the financial system remains stable on the Continent. And in the United States, 2012 is a presidential election year. With the White House at stake, companies in businesses like finance and health care may not pursue transactions until the outlook for regulation in those industries is clearer.

Many bankers expect to see notable deal activity in energy, industrials, retail, health care and technology. The energy and health care industries produced some of the largest transactions of 2011, like Express Scripts’ $34.3 billion purchase of Medco Health Solutions, Duke Energy’s $25.9 billion takeover of Progress Energy and Kinder Morgan’s $36.2 billion deal for the El Paso Corporation.

The outlook for mergers and acquisitions worldwide varies sharply by region, bankers say. The Americas, where deal volume rose 14.7 percent in 2011, will remain a bright spot, according to Mr. Baronoff of Bank of America Merrill Lynch.

Opinion is more divided over Europe, however. While economic and market woes will lead to some bargains and opportunities, deal-making may still be largely stifled by the persistent sovereign debt crisis.

“Europe is still a mess,” said David A. DeNunzio, vice chairman of Credit Suisse’s mergers and acquisitions group. “People thought there would be more divestiture activity as companies try to get more liquid, but that hasn’t happened yet.”

The disparities among regional economies is expected to fuel more cross-border transactions in 2012. While it is not a new trend for United States businesses to seek growth in emerging markets, bankers are starting to see a reverse in deal flow. After a string of strong quarters, cash-rich corporations in markets like Brazil and China are now bargain-hunting for established brands in developed markets.

“We weren’t having these conversations even three years ago,” said Mr. DeNunzio, who expects an increase of 10 to 15 percent in cross-border transactions.

“Many companies in China and Brazil see this as a once-in-a-lifetime opportunity to acquire world-scale brands at pretty attractive prices,” he said.

At the same time, companies are paying more attention to potential regulatory hurdles, whether their transaction plans are cross-border or domestic. The biggest setback in mergers and acquisitions of 2011 was ATT’s aborted $39 billion purchase of T-Mobile USA from Deutsche Telekom, which met opposition from the Obama administration.

A deal announced early in 2011, the merger of NYSE Euronext and Deutsche Börse, remains in regulatory limbo as European authorities seek additional concessions.

Though signs point to a stronger mergers and acquisitions market, there is at least one class of deals not ready for a comeback: the highly leveraged buyout.

In 2011, the private equity titans pursued more modest-size transactions, compared with the go-go years of 2005 to 2007.

Blackstone’s largest acquisition last year was the software maker Emdeon for $3 billion. Kohlberg Kravis Roberts’s biggest deal was even smaller, a $2.4 billion buyout of Capsugel. According to deal makers, buyout shops are still shopping, but banks are less willing to finance huge leveraged buyouts and boardrooms are hesitant to take on the risk. In the aftermath of the financial crisis, boardrooms are still worried that their companies will be left in the lurch if another Lehmanesque event happens.

“Boards used to say, ‘Yeah, go to lunch with L.B.O. firms when they call.’ Now they say, ‘No, you don’t have to do that,’ ” Mr. DeNunzio of Credit Suisse said. “Corporate directors have long memories.”

In 2011, the number of private equity deals announced was roughly flat, but the dollar volume fell 19 percent to $138.1 billion, according to a December report by Ernst Young.

“And as much as we and our brethren walk with a lot of swagger, the reality is, these institutions and their risk managers need to shed risk-weighted assets, and that makes these types of transactions more difficult,” Mr. DeNunzio said.

Nevertheless, deal makers have been encouraged by the evidence that investors look favorably on mergers and acquisitions as a growth strategy.

In the first six months of 2011, several acquirers recorded healthy gains in their stock prices on the day that deals were announced.

Notably, even Valeant Pharmaceuticals — which began a $5.7 billion hostile bid for the drug maker Cephalon in March — soared 10 percent on its announcement, a rare feat for a hostile buyer.

Over all, the global volume of mergers and acquisitions rose 7.6 percent last year, to $2.54 trillion, from 2010, according to Thomson Reuters.

“We have fragile momentum,” J. P. Morgan’s Mr. Woolery said. “We believe the market will reward prudent acquisitions; the market wants this capital deployed to achieve growth.”

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Apple Disappoints Despite 54% Rise in Profit

For any other big company, a 54 percent increase in profit and a 39 percent jump in revenue would be enviable. For Apple though, weak sales of its star product — the iPhone — were enough to overshadow everything else when it reported fourth-quarter results on Tuesday, sending the company’s shares tumbling nearly 7 percent in after-hours trading.

In a rare disappointment, the company missed Wall Street forecasts for its iPhone business. The company reported big increases in the sale of the iPad and of Mac computers, and even said the number of iPhones it sold in the quarter jumped 21 percent from a year ago. But investors fixated on a 16 percent decline in iPhone sales from the third quarter. Apple shares fell 7 percent after the release of the results at the close of normal trading hours.

Apple executives blamed the shortfall in iPhone sales on unusually heated rumors that the company would release a new phone in the fall, leading consumers to delay their purchases so they could get the latest version. That new phone — the iPhone 4S — did, indeed, come out earlier this month, to what Apple said was the best initial sales of any iPhone yet. But it was too late to benefit the fourth quarter, which ended Sept. 24.

Investors and analysts largely accepted Apple’s explanation, in part because of the sales of the iPhone 4S. Apple said that during the first weekend it was available, more than four million were sold, which is more than double the sales of its predecessor in the first days after its introduction.

Mark Moscowitz, an analyst at J.P. Morgan, said he and others on Wall Street “got too excited” in predicting blow-out iPhone sales, which should have been tempered by the increasing levels of speculation that Apple would come out with a new phone. While Apple has long had to contend with rumors about coming devices that can potentially freeze current product sales, analysts believe that customers have become more sophisticated about when Apple releases new devices, typically in the summer or early fall.

“Consumers are a lot smarter, and they’re going to wait,” said Mr. Moscowitz, who had estimated that Apple would sell 20.6 milion iPhones in the quarter. The company reported sales of 17.07 million iPhones.

David Rolfe, chief investment officer for Wedgewood Partners, a money management firm whose biggest holding is Apple, said the company’s financial forecast of $37 billion in revenue for the next quarter was strong enough that he thinks demand for the company’s products remains robust.

“There’s no way you get to $37 billion unless the iPad, iPhone and Mac franchises are really healthy,” Mr. Rolfe said.

Apple said its net profit for the quarter was $6.62 billion, or $7.05 a share, up from $4.31 billion a year ago, or $4.64 a share, a 54 percent increase. Revenue rose to $28.27 billion from $20.34 billion, a 39 percent increase. Those results were well ahead of the $5.50 a share in earnings and $25 billion in revenue that Apple had forecast for the fourth-quarter.

The period was Apple’s first officially under the leadership of Timothy D. Cook, who was named chief executive after Steven P. Jobs, Apple’s co-founder, resigned from the helm of the company on Aug. 24. Mr. Jobs died on Oct. 5 after a long battle with pancreatic cancer.

The death of Mr. Jobs has stirred deep emotions inside and outside Apple and raised concerns about whether the company can, in the long run, continue its remarkable streak of hits.

In a conference call with analysts, Mr. Cook said the “world has lost a visionary” with the death of Mr. Jobs. “That spirit will forever be the foundation for Apple, and we’re dedicated to continuing the amazing work he loved so much,” he said.

Despite the disappointing iPhone sales, Mr. Cook said he was confident that Apple would set “an all-time record” for iPhone sales in the current holiday quarter. He added that the company had a product pipeline that’s “unbelievable.”

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Bucks: For Those Still Wary of the Stock Market

Paul Sullivan, in his Wealth Matters column this week, went back to the strategists and advisers he spoke to in January, to see how their predictions have fared this year. Even considering all the turmoil in the Middle East and the Japanese earthquake and nuclear problems, they are all sticking with their forecasts that equities will grow this year.

One of the advisers, Richard Madigan, chief investment officer for J.P. Morgan Private Bank’s global access portfolios, suggested that one reason the financial markets didn’t fluctuate too wildly in the first three months of the year was that many investors were still sitting on the sidelines, holding on to their cash.

Are you among those investors — the ones who lost a lot of money in the financial crisis of 2008 and are wary of getting back in? What are you doing with your money now?

Or did you lose so much back then that you now don’t have the money to invest? Tell us your views in the comments section below.

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