Tuesday, November 30, 2010

EU Faces More Bailouts as Euro Contagion Spreads to Portugal: Euro Credit

By John Fraher and James Hertling - Nov 30, 2010 5:20 PM GMT+0800

The failure of the Irish rescue to stem a selloff across euro-region bond markets may spell more bailouts to come, starting with Portugal.

The costs to insure Portuguese debt against default rose to a record today and Spanish bonds slid the most since the euro’s debut for a second day, highlighting investor concerns that officials lack the tools to contain a debt crisis threatening the currency’s survival. The extra yield that investors demand to hold Italian debt over German 10-year bonds rose to the highest in more than 13 years.

“We are barely halfway through the current crisis in the euro zone,” Paul Donovan, deputy head of global economics at UBS AG in London, said in an interview with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” program. “Unless we can see a further significant decline in bond yields in Portugal, the market is going to expect another bailout. And then market attention will turn to Spain.”

Market declines began yesterday less than 24 hours after European Union finance ministers confirmed their second bailout of a euro nation after Greece’s in May, handing Ireland an 85 billion-euro package ($111 billion) to rescue its banks and bolster government finances. While EU officials also agreed on a mechanism to smooth bond restructurings after 2013, investors are speculating that debt-strapped nations won’t be able to cut deficits fast enough before then.

Euro Drops

The single currency dropped for a third day to a 10-week low of $1.3034. The premium on Spanish 10-year bonds over German bunds rose 28 basis points to a euro-era high of 295. The yield on Italy’s 10-year government bond rose 18 basis points to 4.83 percent, about 80 basis points more than Brazil. Portuguese credit-default swaps jumped 11.5 basis points to a record 551, after surging 40 basis points yesterday, according to CMA, a data provider.

The challenge for EU leaders is to stop the crisis without a fiscal union or a clear mechanism to kick profligate members out of the single currency.

Finance ministers found themselves meeting on Sunday, Nov. 28, to calm markets just six months after agreeing to a 750 billion-euro bailout package for the euro region.

While the fund’s size was supposed to head off future speculative attacks, Spanish Finance Minister Elena Salgado arrived at the meeting rejecting talk that she would soon join Ireland in seeking a bailout.

“Speculation exists because it’s part of the fabric of the markets,” she said. “We have certainty that we can control it.”

Focus Turns to ECB

Investors’ attention will soon turn to the European Central Bank, whose 22-member Governing Council will decide on Dec. 2 whether it can afford to stick to a plan to withdraw emergency stimulus at the start of next year.

While the ECB has so far signaled no willingness to deploy new measures, London-based HSBC Holdings Plc says it may provide more help to banks in Spain and Portugal and may even have to conduct broader asset purchases.

“The ECB will once again have a role to play to ensure that financial stability is maintained, albeit reluctantly,” said Janet Henry, chief European economist at HSBC in London. The ECB last week bought the most government bonds in two months.

Investors have also expressed concerns that the European Union’s bailout pot may be smaller than advertised and insufficient to save Spain, whose economy is twice the size of Ireland, Greece and Portugal combined. HSBC’s sums show the country needs 351 billion euros over the next three years.

Enough Cash?

In practice, the EU may only be able to deploy 255 billion euros of the 440 billion-euro European Financial Stability Facility, according to analysts at Nomura International Plc.

That’s because the rescue fund is financed by issuing bonds and in order to secure a AAA rating, governments agreed to set aside a pool of cash, depleting the total amount available to pump into economies. The rest of the bailout pool consists of 60 billion euros from the European Commission and 250 billion euros pledged by the International Monetary Fund.

“There isn’t enough official money to bail out Spain if trouble occurs,” Nouriel Roubini, the New York University professor who predicted the global financial crisis, said yesterday in Prague. While it’s “quite likely that Portugal” will be next in line for financial assistance, “the big elephant in the room” is Spain, he said.

At 9.3 percent of gross domestic product, Spain will have the largest budget deficit in the euro area this year after Ireland and Greece, the European Commission forecast yesterday. Portugal’s shortfall will be 7.3 percent of GDP.

‘Fiscal Union’

Some economists point out that the euro region may ultimately be strengthened by the current crisis if it forces EU governments to work more on coordinating fiscal policy. The Greek crisis led earlier this year to the creation of the euro region’s first bailout fund and Ireland’s rescue accelerated talks over a permanent crisis resolution mechanism.

“In the next 5 to 10 years there has got to be more of a fiscal union within the euro region than we have today,” said UBS’s Donovan. “One of the things that Europe does well is integrate in a crisis.”

Harvinder Sian, a senior fixed-income strategist in London at Royal Bank of Scotland Group Plc says the crisis needs to threaten Germany and its banks before a long-term solution for the euro region can be found.

Until now, German Chancellor Angela Merkel has been reluctant to spend her taxpayers’ money on bailouts. She sparked the latest stage of the crisis by demanding that bondholders help foot the bill of any future rescues.

“The problems need to hit Germany before more viable solutions such as more fiscal and political integration look likely,” Sian said. “That is, it may take a near death experience for the periphery and core EMU banking systems before this realization dawns.”

Sunday, November 28, 2010

Ireland Wins $113 Billion Bailout as EU Ministers Seek to Halt Debt Crisis

European governments threw debt- strapped Ireland an 85 billion-euro ($113 billion) lifeline and scaled back proposals to saddle bondholders with losses in future budget crises, seeking to reverse the market selloff menacing the euro.

European finance ministers backed a Franco-German compromise on post-2013 bailouts that watered down calls by German Chancellor Angela Merkel for investors to be forced to take losses to share the cost with taxpayers. The ministers agreed that a future crisis-management system won’t automatically cut the value of bond holdings, easing away from a proposal that led investors to dump assets of Portugal, Spain and Italy.

The twin decisions on Ireland and the post-2013 crisis facility “should address the current nervousness in the financial markets,” European Union Economic and Monetary Commissioner Olli Rehn told reporters after an emergency EU meeting in Brussels today.

Ireland, swamped by the bursting of a decade-long real- estate bubble, became the second country after Greece to tap European aid as investors questioned whether Europe has the resolve and financial firepower to stem the panic. Ten-year bond yields soared in Portugal, Spain and Italy last week, in a vote of no-confidence in Europe’s handling of the debt shock that exposed flaws in the euro’s makeup and fueled doubts whether 16 countries belong in the same currency.

“The euro is under threat,” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said before the Brussels meeting. “The market has got it into its head that it is going to pick off one country at a time.”

Fiscal Emergencies

Europe’s bailout of Greece in May and setup of a 750 billion-euro fund for fiscal emergencies drove the euro as high as $1.4282 against the dollar on Nov. 4. It has since fallen to $1.3241.

Germany, which built the euro on the principle of budgetary rigor, unleashed the latest phase of the crisis by demanding a “permanent” system as of 2013 that would enable fiscally troubled countries to restructure their debts cut the value of bond holdings.

The German push ran into criticism from central bankers such as European Central Bank President Jean-Claude Trichet, who warned that it would unsettle current bondholders. Romano Prodi, who as Italian prime minister shepherded Italy into the euro, said in a Nov. 26 Bloomberg Television interview that it was hazy on detail and led to “unthinkable problems” in the markets.

Germany backed away from the call for an automatic penalty on future bondholders, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis. The new proposal would introduce “collective action clauses” for debt sold as of 2013, enabling fiscally hard-hit governments to renegotiate bond contracts. EU governments aim to enshrine it in the bloc’s treaties by mid-2013 and pair it with a new emergency liquidity fund to replace the one expiring then.

‘Useful Clarification’

“I had asked for a clarification,” Trichet said. He saluted the new proposal as a “useful clarification” that paves the way to an EU setup “fully consistent with the global doctrine, fully consistent with IMF policies.” Rehn said: “There’s plenty of herd behavior in the market. We want to clarify any possible confusion.”

Germany last week also muffled talk by the head of its central bank, Axel Weber, that the EU could put more money into the bailout fund if necessary.

Germany’s export-led economy has powered through the euro crisis, with business confidence at a record high in November and the government projecting growth of 3.7 percent this year, the fastest pace in over a decade.

German resilience contrasts with recession in Greece and Ireland, splitting the euro region between better-off countries in Germany’s economic slipstream and poorer ones on the continent’s fringes.

Cash Reserves

Ireland said it will pay average interest of 5.8 percent on the package, which breaks down into 45 billion euros from European governments, 22.5 billion euros from the IMF and 17.5 billion euros from Ireland’s cash reserves and national pension fund.

“I don’t believe there were any other real options,” Irish Prime Minister Brian Cowen told reporters in Dublin.

A day after more than 50,000 protesters marched through Dublin to denounce Cowen’s budget cuts to stave off financial ruin, the EU gave Ireland an extra year, until 2015, to get its budget deficit to the euro limit of 3 percent of gross domestic product.

Including the bill for propping up Irish banks, the deficit is set to reach 32 percent this year, the highest in the euro’s 12-year history.

Banking System

Cowen has overseen the collapse of Ireland’s banking system and public finances, leading to recession and unemployment of close to 14 percent. Cowen’s government is also unraveling. The Green Party, a junior coalition partner, wants January elections and some lawmakers from his own party are slamming his leadership.

Close banking links led Britain, a non-euro user that didn’t contribute to Greece’s 110 billion-euro rescue in May, to contribute 3.8 billion euros to Ireland’s package.

““That is money we fully expect to get back,” Chancellor of the Exchequer George Osborne told reporters in Brussels. “It’s in everyone’s national interest and it’s in Britain’s national interest that we get some economic stability in Ireland and indeed across the euro zone,”

The deal for Ireland shifted attention to Portugal, which last week passed the deepest spending cuts in more than three decades with the goal of getting back under the EU’s deficit limits by 2012.

Housing Boom

While Greece let the budget get out of hand and Ireland fell prey to a housing boom that turned to bust, Portugal suffers from a lack of competitiveness that kept average economic growth below 1 percent in the past decade.

Like Ireland, Portugal doesn’t immediately need money to run the government. It has completed this year’s bond sales and doesn’t face a redemption until April. The government debt agency plans to hold an auction of 12-month bills on Dec. 1.

“Portugal doesn’t see a need to ask for help,” German Finance Minister Wolfgang Schaeuble said.

Spain, the fourth-largest economy in the euro region, doesn’t need a bailout, Spanish Economy Minister Elena Salgado said.

Tuesday, November 23, 2010

Ireland Long-Term Sovereign Rating Lowered by Standard & Poor's

By Christopher Anstey - Nov 24, 2010 9:34 AM GMT+0800

Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the nation’s bailout of its banking system is set to escalate the government’s borrowing needs.

“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement. Putting the rating on “CreditWatch with negative implications” reflects risk of a further downgrade if talks on a European Union-led rescue fail to stanch capital flight, it said.

The downgrade risks worsening an investor exodus from Irish bonds that has sparked contagion through the euro region, with Spanish bonds tumbling yesterday, pushing the 10-year yield premium over German bunds to a euro-era record. Ireland is hammering out an aid package with the EU and the International Monetary Fund to rescue its banking system.

S&P cut Ireland’s long-term sovereign rating to A from AA- and the short-term grade to A-1 from A-1+, today’s statement said. The reduction leaves its long-term grade five steps above junk, or high-risk, high-yield status, and five steps higher than Greece. It’s now on a par with foreign currency ratings of Israel, the Czech Republic and South Korea, according to data compiled by Bloomberg.

‘Lots of Risks’

“There are lots of risks in the European markets,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “The flight to quality is supporting Treasuries.”

U.S. Treasuries have advanced the past three days, with 10- year notes slipping today in Asian trading. Yields on 10-year notes were at 2.787 percent as of 9:34 a.m. in Tokyo. The euro was up 0.3 percent at $1.34 after two days of losses.

Moody’s Investors Service said two days ago a “multi- notch” downgrade in Ireland’s credit rating was “most likely” because the bailout would increase its debt burden. Moody’s has an Aa2 long-term rating for the government, three steps higher than S&P’s new grade. Fitch Ratings has an A+ grade, one above S&P, data compiled by Bloomberg show.

An Irish finance ministry spokesman didn’t immediately respond to a call and e-mail seeking comment on S&P’s decision.

EU officials estimate that a rescue package for Ireland may amount to about 85 billion euros ($114 billion), according to two officials familiar with the talks.

Financing Breakdown

The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on Nov. 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government.

“With domestic demand unlikely in our view to recover until 2012, gross debt to GDP at end-2011 looks set to exceed our previous projections of 120 percent,” S&P said today. Ireland’s gross domestic product has contracted for three consecutive years, and Irish Central Bank Governor Patrick Honohan has declared his country’s fiscal deterioration “worse than almost any other country.”

Ireland’s Finance Minister Brian Lenihan will today lay out a four-year deficit-cutting program, a proposal endangered by the ruling party’s coalition partner announcing it will exit the government next month. Opposition parties are calling for Prime Minister Brian Cowen to agree to an immediate election.

Risk Premium

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened 45 basis points to 589 basis points yesterday on concern that the budget may not pass and the government will fall. The yield spread reached a record 652 basis points on Nov. 11.

Irish banks forced the government to seek the bailout after loan impairments surged following the collapse of the country’s decade-long real estate boom in 2008. That year, the government pledged to back most liabilities, including all deposits in Irish banks, a promise that led the government to inject 33 billion euros to support the lenders.

As loan losses climbed, the government put the cost of the rescue at 50 billion euros in September this year, fueling investor doubts that Ireland could afford the rescue.

Allied Irish Banks Plc may be 99.9 percent state controlled after the government uses external aid to boost its capital levels, and Bank of Ireland Plc may be majority state controlled after the injection, broadcaster RTE said yesterday, without citing anyone.

Irish lenders core tier 1 capital level may be raised to 12 percent from 8 percent, according to the broadcaster.

The government may seek to share losses with Allied Irish’s subordinated bondholders, though senior debt would be honored, RTE also said.

Monday, November 8, 2010

G-20 Spat Risk Eases as U.S. Eschews Pushing Targets

By Shamim Adam and Aki Ito - Nov 8, 2010 4:19 PM GMT+0800

U.S. Treasury Secretary Timothy F. Geithner refrained from pushing for current-account targets and China hailed the potential effect of Federal Reserve easing at a finance ministers’ meeting days before the Group of 20 summit.

The Fed’s move to buy $600 billion of Treasuries could contribute “tremendously” to global growth, Vice Finance Minister Wang Jun said after Asia-Pacific Economic Cooperation forum finance chiefs met in Kyoto, Japan, Nov. 6. At the same gathering, Geithner said current-account deficits or surpluses aren’t “something that is amenable to limits or targets.”

Policy makers from Asia to South America have warned that the Fed’s decision to pump liquidity into the U.S. will depress the dollar and spark flows of capital to emerging markets that threaten asset-price bubbles. China’s Vice Foreign Minister Cui Tiankai said Nov. 5 the U.S. step may hurt global confidence, while rejecting state-planning style targets for trade deficits.

“It looked like there was going to be quite a lot of conflict or lack of agreement going into the G-20 but this suggests there may be a bit more accord,” said Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole CIB in Hong Kong. “There is some toning down of the rhetoric on the Fed’s policy but in return, the U.S. will be looked upon to tone down” its push to shrink trade and investment imbalances.

Summit Agenda

Geithner said G-20 leaders, who meet in Seoul Nov. 11-12, are poised to approve last month’s agreement among finance ministers to avoid long-term current account surpluses or deficits, “assessed against indicative guidelines to be agreed.” The G-20 includes the largest developed and emerging nations, from the U.S. and Germany to Japan, China, India and Brazil.

While the Treasury chief said last month that 4 percent of gross domestic product was “likely to emerge as the basic benchmark countries look to,” he refrained from repeating that guideline in Kyoto. He instead noted policy makers have tried to address persistent trade and investment imbalances since the 1940s, and “it’s a process that’s going to take some time.”

China’s response to the Fed’s quantitative easing continued today, with Vice Finance Minister Zhu Guangyao saying it will provide a “shock” to the global economy and increase “hot money” flows to emerging economies. Zhu told reporters in Beijing the U.S. hasn’t “fully realized” the possible impact of the policy, which China hopes will help the global economy.

U.S. Responsibility

In Kyoto, Wang highlighted language in the APEC finance chiefs’ statement that nations with reserve currencies must be “vigilant against excess volatility disorderly movements.” The dollar has a majority of global foreign-exchange reserves, according to the International Monetary Fund.

“We pay close attention to the U.S. quantitative easing policy,” Wang said two days ago. “Quantitative easing policy that’s aimed at boosting the U.S. economy will help the revival of the global economy tremendously.”

Wang’s comments contrasted with those of Vice Foreign Minister Cui, who demanded an explanation from the Fed in a Nov. 5 press briefing in Beijing because “many countries are worried about the impact of the policy on their economies.”

Officials from China, Germany and Japan opposed a set target for current accounts in the past month even as Canada and Australia indicated openness to the idea. Among the G-20 nations, Saudi Arabia, Germany, Russia and China all run surpluses larger than 4 percent, and Turkey and South Africa have deficits bigger than that, according to the International Monetary Fund.

Geithner Objective

“We’re trying to make sure as the world economy recovers, that future growth is sustainable and we don’t see re-emerge the kind of excess imbalances on the trade side, either surpluses or deficits, that could threaten future growth and the future financial stability,” Geithner said at a joint press conference after the Kyoto meeting.

Thai Finance Minister Korn Chatikavanij said in a Nov. 5 interview with Bloomberg Television that while Geithner’s push to discuss global imbalances in trade and investment flows is a “constructive approach,” Southeast Asian nations oppose setting specific targets.

“We didn’t discuss a specific number,” Japan’s Finance Minister Yoshihiko Noda said after the APEC meeting. “However, both surplus and deficit countries must address these imbalances. We hold the same understanding that there is a need for multi- faceted cooperation to ensure that current accounts are sustainable.”

Capital Flows

Underlying the U.S. push to address the imbalances is the assessment by the Fed that a surfeit of Asian savings helped spark the credit boom earlier this decade, which ended in the biggest financial crisis since the 1930s. Now, officials from Asia to Latin America counter it’s the American central bank’s liquidity injections that are warping global capital flows and driving down the dollar.

Brazilian Finance Minister Guido Mantega escalated the international rhetoric in September, saying a “currency war” had begun, with nations seeking to cheapen their exchange rates to bolster exports. G-20 finance ministers and central bank governors then aimed to defuse the tensions with their Oct. 23 communique pledging to avoid “competitive devaluation.”

China has kept its currency’s advance against the dollar to less than 3 percent since mid-June, a strategy that’s contributed to other currencies rising and nations taking steps to prevent an “unfair disadvantage,” Geithner said last month.

Todd Elmer, a Singapore-based currency strategist, wrote today in a note to investors that Geithner’s “shift in rhetoric represents a modest dollar negative since it suggests the status quo which has resulted in trend dollar weakening is likely to remain in place.”

‘Strong Dollar’

Geithner told reporters in Kyoto two days ago that the U.S. views a “strong dollar” as in its interest and “we will never use our currency as a tool to gain competitive advantage.” The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, slid last week to the lowest level since December 2009.

Geithner’s plan was in part designed to broaden discussions beyond China’s exchange-rate policy, blamed by U.S. lawmakers and companies for keeping the yuan artificially low in a subsidy for local exporters.

“The fact that the Fed is undertaking quantitative easing has made it very difficult for U.S. officials to accuse other countries” of manipulating their currencies “when they are indirectly debasing the dollar,” Kotecha said.

CEOs Most Optimistic on U.S. Profits in Bull Signal for S&P 500

By Lynn Thomasson and Whitney Kisling - Nov 8, 2010 6:39 PM GMT+0800

More U.S. executives than ever are increasing earnings forecasts compared with those lowering them, helped by almost $2 trillion of Federal Reserve spending and a recovery in the global economy.

EBay Inc., United Parcel Service Inc. and 196 other companies raised profit estimates above analysts’ projections last month as 130 firms cut them, the biggest gap since Bloomberg began tracking the data in 1999. Shipping companies and computer makers boosted forecasts the most, pushing the Morgan Stanley Cyclical Index of businesses most tied to the economy up 27 percent since July 2. That beat the 20 percent rally in the Standard & Poor’s 500 Index.

Companies are raising the outlook for U.S. profits at the same time the Fed is trying to prevent deflation and reduce unemployment by purchasing an additional $600 billion in Treasuries. The last time executives were this optimistic, stocks climbed 39 percent over the next 3 1/2 years, data compiled by Bloomberg show.

“It’s important for the rally and for the general health of the market that investors continue to anticipate higher earnings,” said Dean Gulis, who manages $3 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan. “That companies themselves are expecting better profits is very positive. As we see rising earnings, we’ll see improving stock prices.”

GDP Growth

About 1.5 U.S. companies boosted earnings estimates above analysts’ forecasts for each that cut projections in October. That’s about three times the average of 0.59 in the past 10 years, data tracked by Bloomberg show. The ratio fell to a record low of 0.1 in December 2008, three months after New York- based Lehman Brothers Holdings Inc. filed for bankruptcy. When it reached 1.1 in March 2004, the S&P 500 rose from 1,126.21 to a record 1,565.15 in October 2007, Bloomberg data show.

The S&P 500 has gained 203 points since falling to a 10- month low on July 2 after companies from Baltimore-based T. Rowe Price Group Inc. to Google Inc. in Mountain View, California, topped analysts’ estimates and investors speculated the Fed would act to boost growth. The benchmark measure of U.S. stocks rose 3.6 percent to 1,225.85 last week, the fifth-straight gain. S&P 500 futures expiring in December slipped 0.4 percent to 1,218.3 at 10:37 a.m. in London.

Earnings at EBay, the owner of the second most-visited e- commerce site, are getting a boost as consumers make more purchases online and use its PayPal service to handle money transfers. The San Jose, California-based company forecast more fourth-quarter sales and earnings than analysts estimated on Oct. 20, spurring the biggest gain in the shares in nine months.

Credit Expansion

Consumer borrowing in the U.S. unexpectedly increased in September by the most in two years, led by a surge in non- revolving credit such as college loans and auto financing, the Federal Reserve said on Nov. 5. The report was released the same day the Labor Department said employers added 151,000 jobs in October, more than twice the median economist prediction.

“We have outperformed our expectations through the first three quarters of the year, and enter the holiday season with confidence in our payments business,” said Bob Swan, EBay’s chief financial officer, on a conference call following the earnings release. “From a business standpoint, our global footprint is expanding.”

Rising international demand for everything from transportation services to tobacco and power tools is helping drive profits at companies such as UPS, Philip Morris International Inc. and Danaher Corp. While forecasts for U.S. gross domestic product in 2011 have fallen to 2.4 percent from 2.9 percent in July, the biggest emerging markets are expected to expand at least twice as fast, based on economist estimates and International Monetary Fund forecasts compiled by Bloomberg.

Freight Traffic

UPS, the world’s largest package-delivery company, raised its estimate for 2010 income on Oct. 21 and projected growth of 51 percent to 53 percent for the year. That would be the biggest annual earnings increase for the Atlanta-based firm since before 2000, data compiled by Bloomberg show.

Freight-train traffic has risen 16 percent since July 9, according to the Association of American Railroads. The index of carloads at the largest U.S. lines plunged 31 percent from its highest level in 2008 to May 2009, Bloomberg data show.

“Looking towards peak season, customer sentiment is mixed, but leaning towards cautious optimism,” UPS CFO Kurt Kuehn told investors and analysts on Oct. 21. “We’re expecting a good, strong fourth quarter, and I’m extremely confident we’re on our way back to the high levels of profitability that we’ve demonstrated in the past.”

Overseas Edge

Investors are betting profits at S&P 500 companies with the most sales outside the U.S. will beat the market. Corporations getting at least 50 percent of their revenue from foreign sources rose 10 percentage points more than American-focused stocks since July 2.

Earnings for the 30 companies in the Morgan Stanley index of economically sensitive shares will grow 25 percent next year, almost twice the rate of the S&P 500, according to analyst estimates compiled by Bloomberg. The cyclicals gauge trades for 12.2 times estimated 2011 earnings, or 0.5 point lower than the S&P 500, Bloomberg data show.

Philip Morris said on Oct. 21 that currency fluctuations, lower taxes and rising sales in countries from Algeria to Indonesia led the New York-based company to increase its 2010 income projection. The biggest publicly traded tobacco maker has advanced 30 percent since July 2.

“We have strong business momentum going into the fourth quarter and will benefit from higher margins in Japan as well as price increases in Argentina, France, Indonesia, Italy, Poland, Portugal, Russia and the U.K.,” said Hermann Waldemer, the CFO, in a conference call. “We have market leadership and are growing volume and overall share in emerging markets.”

Craftsman Tools

Danaher cited faster growth in emerging markets as one of the reasons for increasing its 2010 profit forecast on Oct. 21 to between $2.25 and $2.30 a share, the highest since at least 1999, up from a range of $2.16 to $2.23. The Washington-based maker of Craftsman tools said on Nov. 4 that it gets about 20 percent of revenue from developing nations.

Increased regulation of the financial and health-care industries is leading businesses to outsource computer services, Cognizant Technology Solutions Corp. said on Nov. 1. The Teaneck, New Jersey-based provider of data systems support raised its 2010 earnings forecast and beat analysts’ third- quarter estimates. The shares are up 28 percent since July 2.

“Clients continue to search for cost savings in order to fund growth and innovation in other areas,” Chief Executive Officer Francisco D’Souza said on the call after the quarterly profit report.

Already Rallied

Stock prices have already risen to account for higher corporate earnings and shares will require a strengthening economy to climb more, said Trym Riksen, chief investment officer for the private-banking division of DnB NOR ASA. The valuation for the companies in the S&P 500 has climbed to 15.4 times reported profit from the past year, from a 14-month low of 13.7 in July, according to data compiled by Bloomberg.

“This huge wave of positive guidance has already been priced into the market,” said Riksen, whose Oslo-based firm oversees the equivalent of about $391 billion. “It would be very surprising if that huge wave were to be prolonged.”

Rising raw-material prices are reducing profitability for Clorox Co., a maker of household-cleaning products, and apparel company Jones Group Inc. Earnings are being squeezed as companies struggle to pass costs onto shoppers at a time when year-over-year gains in the consumer price index have averaged 1.8 percent in 2010, compared with a 10-year average of 2.5 percent, data compiled by Bloomberg show.

Record Cotton

Clorox lowered its annual profit forecast on Nov. 2, citing weakening U.S. growth and higher commodity costs. Shares of the Oakland, California-based company fell the most in almost two years. Jones Group cut its 2010 sales projection on Oct. 27 amid soaring cotton prices, which reached a record $1.446 a pound on Nov. 5. Shares of the New York-based clothing maker are down 6.9 percent this year.

Gains in U.S. GDP are trailing the average pace following a contraction, according to data compiled by the National Bureau of Economic Research and Bloomberg. NBER said the worst recession since the 1930s ended in June 2009, and Bloomberg data show GDP growth will average 2.5 percent a quarter through June 2011, or half the average rate in the two years following contractions since 1949.

Most companies are earning more than analysts expected. More than 70 percent in the S&P 500 beat profit forecasts in the July-to-September period for the sixth straight quarter, the longest streak in Bloomberg data going back to 1993. S&P 500 earnings since Oct. 7 were 7 percent higher than analysts predicted, the data show.

Biggest Nations

Brazil, Russia, India and China, the biggest developing nations, are forecast to expand more than the U.S. next year. Their growth will average 6.6 percent, according to the median economist forecasts in a Bloomberg survey and IMF projections.

“Earnings have been phenomenal out of corporate America,” Robert Doll, who oversees $3.45 trillion as chief equity strategist at New York-based BlackRock Inc., said in a Nov. 3 interview on Bloomberg Television’s “First Up” with Susan Li. “They’ve delivered versus expectations, yet again outshining the tepid economic recovery. I think that’s the real story.”