Europe Central Banks May Be Forced to Print Money

Central banks in Europe are increasingly reluctant to pump more money into markets after already massive liquidity injections intended to kick-start economic growth but, according to analysts, they may have no choice.

The minutes of the Bank of England’s Monetary Policy Committee (MPC), released on Wednesday, showed that the bank was worried about inflation in the medium term and that Adam Posen, a long-time dove, dropped his call for the bank to do more quantitative easing (QE).

“This 8-1 vote in favor of no additional QE in an environment where consumer price inflation has edged higher, business surveys are pointing to growth and today’s labor report shows employment rising 53,000 in the past three months and unemployment falling 35,000 suggest more QE is looking unlikely,” ING Bank analyst James Knightley wrote immediately after the data was released.

Also on Wednesday, European Central Bank policymaker Jens Weidmann told Reuters that Spain should take the recent spike in its bond yields as a sign it must tackle the root cause of its problems, not wait for the central bank to boost liquidity further.

He also said that none of the ECB’s policymakers were in favor of using the bank’s bond-buying program to target specific interest rates on sovereign bonds and that he saw no reason to discuss a third long-term refinancing operation (LTRO).

The central bank injected over 1 trillion euros ($1.30 trillion) into the markets via two unlimited, two-year loans at its record-low interest rate of 1 percent and for a while, yields on the bonds of periphery countries fell.

But recently yields on Spanish bonds jumped back to the worrying 6-percent level, with some analysts calling on the ECB to do more to keep them in check. 

Inflation Danger

However, inflation figures in the euro zone have given rise to new concerns, making the ECB’s task even harder as the sole mandate written in its statute is maintaining price stability.

Data out on Tuesday showed euro zone inflation was revised up to 2.7 percent for March from a figure of 2.6 percent estimated by Eurostat and versus market expectations of a flat reading of 2.6 percent.

“Overall, we continue to think that inflation risks are skewed to the upside and that they mainly relate to higher-than-expected pass-through of energy commodity prices to consumer prices and also potential further increases in indirect taxes and administered prices amid the need to correct budget deficits across various euro area economies,” Barclays Capital analyst Fabio Fois wrote in a research note.

Inflation is a problem for the UK as well, with the figure rising for the first time in six months in March, according to data released on Tuesday. 

Vicky Redwood, chief UK economist at Capital Economics thinks that the Bank of England’s minutes show that quantitative easing may be halted for now, but it is not out of the cards completely.

“We still think that more asset purchases are likely later this year as the economic recovery disappoints again. But the chances that the MPC will pause in May are increasing,” Redwood said.

The weak economy but also the debt crisis showing no signs of abating as austerity brings worse recessions to euro zone periphery countries will likely make the ECB think again about its tough stance on fighting inflation and force it to loosen its purse strings once more, analysts said.

Euro Zone Not Out of the Woods

Portugal’s prime minister wrote in an editorial in the Financial Times that the country may not return to capital markets in 2013 as previously expected.

Italy may delay by one year its plan to balance its budget and raised its budget deficit forecast.

In a worrying development that shows how deep Spain’s predicament is, Spanish banks’ bad loans in February rose to 8.2 percent of their portfolios, the highest level since October 1994, amid falling home prices, data released on Wednesday showed.

Even countries that are not in the eye of the storm are likely to suffer, analysts warned. In France, labor costs are the highest among the large euro zone economies and non-wage costs of employment – such as social security taxes – are “double those in Germany and since 2000 unit labor costs have risen by 20 percent relative to those in Germany,” analysts at Credit Suisse wrote in a market note.

“France is the second most closed economy in the euro-area after Greece, and thus benefits less from a weaker euro or a global upturn,” they added.

Barclays Capital’s analyst Julian Callow noted that the International Monetary Fund, in its recent World Economic Outlook, saw the risk of “another acute crisis in Europe” and that it called for further easing from the ECB and a continuation of its LTROs and bond-buying program.

“In our view, such proposals (which echo some recommendations we have made previously) would be a sensible way to allay some risks in the euro area,” Callow said.

Article source: http://www.cnbc.com//id/47084600

Buffett’s Successor: Who Are the Leading Candidates?

Warren Buffett

Warren Buffett tells our own Becky Quick that his recently diagnosed Stage One prostate cancer hasn’t changed Berkshire Hathaway’s succession plans at all.

For several years now, the board has had someone in mind who would step in to run the company if Buffett was suddenly unable to do the job, and that someone doesn’t know he’s waiting in the wings. The board also has two or three other people in mind if needed.

While Buffett and his doctors are confident the cancer is treatable and not life threatening, the development is once again fueling the long-running guessing game on who will be running Berkshire Hathaway in the (Buffett hopes) far future.

Here are some of the leading candidates.

First, it’s almost certainly someone who is already running a Berkshire subsidiary.

In his annual letter to shareholders in February, Buffett wrote the Berkshire board is enthusiastic about his successor, “an individual to whom they have had a great deal of exposure, and whose managerial and human qualities they admire.”

A few days later, in a live CNBC interview, Buffett said, “The person who’s going to become CEO of Berkshire is probably a CEO of some operation within Berkshire Hathaway.”

Our leading candidate: Greg Abel, chairman and CEO of Berkshire’s MidAmerican Energy.

Quick, our Buffett expert, her producer Lacy O’Toole, and I all have his name at the top of our lists. Abel’s been working for MidAmerican for many years and became its CEO in 2008. Like other managers, he has been singled out for praise in several of Buffett’s annual letters.

Of course, Buffett’s insurance chief, Ajit Jain, also gets glowing praise from Buffett and he has long been seen as one of the leading contenders. CNBC’s “Squawk Box” co-anchor, Andrew Ross Sorkin, also a long-time Buffett-watcher, tells me he’s not sure who the successor is, but he thinks it should be Jain, because he’s the smartest person in the group. Andrew thinks Ajit is “closest in mindset” to Buffett, but he’s more of an insurance guru than an operating manager.

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Another possibility from Berkshire’s insurance side is Tony Nicely. He runs the GEICO auto insurance business and has also been lavished with praise by Buffett.

Burlington Northern Santa Fe CEO Matthew Rose and Lubrizol CEO James Hambrick are also possibilities, but they’re relative newcomers to the Berkshire family. Burlington Northern was acquired in 2010 and Buffett bought Lubrizol in 2011.

In that February live interview with us, Buffett said the person the board has in mind now is the same person they had in mind at least five years ago.

That means, and Buffett has confirmed, that former MidAmerican Chairman James Sokol was never the name in the board’s envelope — even before he left Berkshire after it was revealed he had bought Lubrizol shares while he knew Berkshire might acquire the company.

That underlines just how difficult this guessing game has become, because Sokol was widely seen as the leading CEO contender until he resigned in disgrace.

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Article source: http://www.cnbc.com//id/47085571

Citigroup’s Rebuff on CEO Pay: ‘It’s Definitely a Wake-Up Call’

In a stinging rebuke, Citigroup shareholders rebuffed on Tuesday the bank’s $15 million pay package for its chief executive, Vikram S. Pandit, marking the first time that stock owners have united in opposition to outsized compensation at a financial giant.

Vikram Pandit

The shareholder vote, which comes amid a rising national debate over income inequality, suggests that anger over pay for chief executives has spread from Occupy Wall Street to wealthy institutional investors like pension fund and mutual fund managers.

About 55 percent of the shareholders voting were against the plan, which laid out compensation for the bank’s five top executives, including Mr. Pandit.

“C.E.O.’s deserve good pay but there’s good pay and there’s obscene pay,” said Brian Wenzinger, a principal at Aronson Johnson Ortiz, a Philadelphia money management company that voted against the pay package. Mr. Wenzinger’s firm owns more than 5 million shares of Citigroup

While the vote at Tuesday’s annual meeting in Dallas is not binding, it serves as a warning shot to other banks that have increased the pay of their top executives this year despite middling performance.

After the vote, Richard D. Parsons, who is retiring as Citigroup chairman, said that he takes the vote seriously and Citi’s board will carefully consider it.

Mike Mayo, an analyst with Credit Agricole Securities, said: “This is a milestone for corporate America. When shareholders speak up about issues on which they’ve been complacent, it’s definitely a wake-up call. The only question is what took so long?”

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Shareholders rarely vote against compensation plans. The votes are part of the Dodd-Frank financial overhaul that mandates that public companies include “say on pay” votes for shareholders to express opinions about compensation. Last year, only 2 percent of compensation plans were voted against, according to ISS Proxy Advisory Services. In some instances, boards responded by reducing executives’ pay.

In Citigroup’s case, ISS itself recommended that shareholders vote against the pay proposal, citing concerns that the compensation package lacked “rigorous goals to incentivize improvement in shareholder value.” At Tuesday’s meeting, 75 percent of the shareholders voted.

Excessive pay has been a long-running problem at Citigroup, dating to well before Mr. Pandit became chief executive in 2007, analysts said. Citigroup has had the worst stock price performance among large banks over the last decade but ranked among the highest in terms of compensation for top executives, Mr. Mayo said.

Citi shares closed at $35.08 Tuesday, up 3.18 percent amid a market rally. Citigroup shares remain down more than 80 percent since the financial crisis.

Last year, Mr. Pandit’s compensation included a $1.67 million salary and a $5.3 million cash bonus. In addition, he received a retention package valued at $40 million, to be awarded through 2015. In 2009 and 2010, as Mr. Pandit struggled to pull the bank back from the brink, he accepted only a $1 annual salary.

Still, investors say that it is too soon for the bank to start giving out generous pay packages again. “The company has been flatlining,” said Mike McCauley, a senior officer at the Florida State Board of Administration, which voted its 6.4 million shares against the plan. “The plan put forth reveals a disconnect between pay and performance.”

Calpers, the California state pension fund, also voted against the plan. The issue was whether pay was linked to performance and whether those targets were spelled out and sustainable over the long term, said Anne Simpson, director of corporate governance for Calpers, which owns 9.7 million Citigroup shares.

“Citi was found wanting on both,” she said. “If you reward them for focusing on high-risk, short-term profits, that’s what you get, and that’s how the financial crisis caught fire.”

Not all institutional investors are unhappy. Bill Ackman, the head of Pershing Square Capital Management, which owns more than 26 million shares, said he thinks that “Vikram Pandit is doing an excellent job and the bank has made tremendous progress during his tenure.”

Noting that Mr. Pandit received just $1 a year in 2009 and 2010, Mr. Ackman called the current package “an appropriate level of compensation.”

In justifying the pay package, the company noted in its proxy filing that Citigroup net income was $11.1 billion in 2011, up 4 percent from 2010 and that it paid back the federal government billions in bailout loans and deferred cash awards to “limit incentives to take imprudent or excessive risks.”

Even as Citigroup’s earnings and capital cushion have improved, the bank has struggled to make up for lackluster revenue. Citi was dealt a further blow in March when the Federal Reserve

[cnbc explains]

rejected the bank’s proposal to buy back shares and increase its dividend. While Citi intends to submit a revised plan to the central bank this year, shareholders say that with a quarterly dividend of one cent, Citi’s top executives shouldn’t be rewarded.

“Citigroup was terribly managed and whatever could be done wrong, they did wrong,” said David Dreman, whose money management firm owns about $400,000 worth of Citigroup shares. While many of those mistakes predated Mr. Pandit, he said, it was way too early to start handing out generous pay packages. “Shareholders have finally done something constructive on the whole C.E.O. pay problem,” he said.

Mr. Pandit’s compensation is higher than some more successful rivals, according to proxy filings. Lloyd C. Blankfein, the chief executive of Goldman Sachs
, received $3 million less than Mr. Pandit’s $15 million, while James P. Gorman, the chief of Morgan Stanley
, had a pay package of $10.5 million.

Still, disapprovals are rare. Last year, shareholders at 42 companies — out of more than 3,000 firms — voted against pay plans. In one of the most visible renunciations, shareholders at Hewlett-Packard, which has struggled with lackluster returns, voted against the pay for the technology company’s top executives, including the chief executive, Meg Whitman.

Companies should brace for more shareholder denunciations, said James D. C. Barrall, an executive compensation lawyer at Latham Watkins. The nation’s other major banks have their annual meetings in the coming weeks.

Bank of America, whose shares have also struggled, could be the next bank to feel shareholders’ wrath when it holds its annual meeting May 9, executive compensation consultants said. Its chief executive, Brian T. Moynihan, received $7 million for 2011, down from $10 million the previous year.

“There could be a real disconnect between pay and performance at Bank of America,” said Frank Glassner, a partner with Meridian Compensation Partners, an executive consulting firm.

Article source: http://www.cnbc.com//id/47085015

Whitney Reverses Citigroup Call: Is Financial Crisis Over?

Meredith Whitney, who made the prescient call in 2007 that Citigroup would cut its dividend, has now upgraded the very stock that brought her celebrity status among equity analysts during the credit crisis.

Shares of Citigroup
Tuesday rallied as news of the upgrade to a “hold” from “underperform” spread beyond Whitney’s direct clients. The stock is up 34 percent so far on the year.

“C shares continue to trade well below tangible book value (70%), despite relatively lower mortgage and European exposures than its large-cap bank brethren,” wrote Whitney, who founded Meredith Whitney Advisory Group in 2009. “On the capital question, we believe C will handily make its capital target of +8% by the end of 2012.”

Whitney had a “Sell” or “Underperform” rating on Citigroup since starting coverage on the stock at her new firm in April 2009.

At the end of October 2007, while working for Oppenheimer Co., Whitney made waves by predicting that Citigroup might have to cut its dividend payout to raise capital.

The call drew the scorn of the company and fellow analysts, but turned out to be right after Citigroup cut its dividend in January of 2008 as more of the subprime mortgage securities that Whitney had warned about went sour on the company.

The stock would go on to lose more than 95 percent of its equity value before bottoming at the depths of the credit crisis following a series of government injections of capital that ultimately saved it.

Citigroup reported better than expected earnings and revenue on Monday, which was the catalyst for Whitney’s call.

“Management also reaffirmed guidance for 2012 expenses, stating that operating expenses should be $2.5-$3.0B lower than the 2011 total of $50.7B,” wrote Whitney. “We continue to believe that expense management is key for C, as continued positive operating leverage will be an important support for the stock.”

This week’s call marks a sort of milestone for the credit crisis, given that Whitney was one its most outspoken prognosticators.

“The financial crisis is over,” said Rosecliff Capital’s Michael Murphy in response to the Whitney call. “There is a lot of money to be made if you can take your emotions out of the equation and focus on company valuations. Big banks will continue to cut spending, manage costs, make money.”

Right or wrong, the media spotlight that followed Whitney in the wake of the crisis brought with it a ton of scrutiny of her current calls. The analyst didn’t help herself by making a controversial prediction in 2010 that “billions” in municipal bond defaults were ahead, a forecast that has yet to come true.

Whitney was still negative on Citigroup in her most recent television appearance a month ago, which you can see above.

CNBC’s Maria Bartiromo asked the analyst what it would take for her to invest in Citigroup.

“A new brain,” answered Whitney.

For the best market insight, catch ‘Fast Money’ each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:00 ET on CNBC. Follow @CNBCMelloy on Twitter.


John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team. Click here to see his full bio.

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Article source: http://www.cnbc.com//id/47074311

Market Rebound: ‘Earnings Have Really Driven Stocks’

Despite the recent stock pullback, corporate earnings are expected to continue giving the market some short-term momentum.

“There’s a huge tug of war between Europe and earnings and right now, earnings are winning,” said Burt White, CIO of LPL Financial on CNBC’s Power Lunch.

Stocks spiked sharply Tuesday, logging their strongest rally in a month, boosted by a handful of positive earnings reports from heavyweights such as Goldman Sachs
, Johnson Johnson
and Coca-Cola
. (Click here to track the results.)

Eighty-six of the SP 500 companies are scheduled to report earnings this week, marking the first heavy earnings week of the season. Abbott Labs
, BlackRock
, Ebay
and Yum Brands
are scheduled to post results on Wednesday.

“Two weeks after report, earnings have really driven stock prices and we’re sitting right in the middle of that,” White explained. “Eleven of the last 12 quarters we’ve seen positive gains for the market in the two weeks after Alcoa
we’re only five days post, so we have another week of this going.”

Some experts extended their bullish views, saying they expect a favorable environment for equities to last for the rest of the year.

“I do think this market moves substantially higher over the course of the next year,” said Carmine Grigoli, chief investment strategist at Mizuho Securities. “Earnings will rise by 8 to 10 percent, you also have an increased appetite by the corporate sector…and the valuations of the equity market relative to interest rates have not been this low in over 50 years, so what’s not to like?”

And Joe Bell, senior equities analyst at Schaeffer’s Investment Research has a 1,525 year-end price target on the SP 500.

“The strong price action, coupled with decline expectations and the overall negative market sentiment is all going to be a positive for stocks going forward,” he said.

But a handful of tepid economic news, ongoing euro zone debt woes and worries over a soft landing in China prompted a selloff in the last two weeks, leaving investors to wonder whether a bigger correction is on the horizon.

While stocks are taking a pause from the pullback, some experts say the global worries will continue to spook the markets for the foreseeable future.

As a result, Todd Schoenberger, managing principal of The BlackBay Group said he remains bearish.

“Going forward, housing is going to be bad, jobs growth is going to be disappointing and so the poison is still there for investors,” he said. “I predict we’re going to finish lower for the year.”

Follow JeeYeon Park on Twitter: @JeeYeonParkCNBC

Article source: http://www.cnbc.com//id/47077966

Warren Buffett: My Succession Plans Have Not Changed

Berkshire Hathaway Chairman and CEO Warren Buffett said Berkshire Hathaway’s succession plans have not changed, despite his diagnosis of stage 1 prostate cancer.

Warren Buffett

Buffett put out a release informing shareholders of his condition after the market’s close on Tuesday. In the release, Buffett said a CAT scan, bone scan and an MRI all showed no cancer elsewhere in his body, adding “I feel great — as if I were in my normal excellent health — and my energy level is 100 percent.”

In an interview with CNBC in late February, Buffett said Berkshire’s board had chosen his successor, but that the individual was not aware he had been chosen as the next CEO of the company.

On Tuesday, Buffett said that nothing had changed and the chosen successor was still unaware of the board’s decision.

Buffett said he and his doctors have decided to begin a two-month treatment of radiation beginning in mid-July.

The timing was chosen to keep from interfering with previous commitments Buffett has made, including travel for Allen Co.’s annual Sun Valley retreat, which takes place in early July.

When he is undergoing radiation, he won’t be able to travel because his treatments will take place daily.

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Article source: http://www.cnbc.com//id/47079344

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