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Prepare for liftoff: Alibaba is the ‘anti-Facebook’ IPO

Prepare for liftoff: Alibaba is the ‘anti-Facebook’ IPO

Aaron Task

Yahoo Finance

Updated from Sept. 17

The Alibaba IPO is going to be huge — in case you hadn’t already heard. But for all the focus on how this is likely to be the biggest public offering in history, there’s very little chatter about the opportunity for this to be an old-fashioned, 1990s-dot.com style blowout IPO.

Assuming the offering prices near its expected range of $66 to $68 per share, it’s not hard to imagine the stock trading well above $100 on its first day of trading Friday. You know…the type of deal that gets trader’s hearts pounding and reminds investors that the stock market is also a place where you can win big, not just lose your shirt. Expect terms like “blowout” and “spectacular” and “bubble-like” to be heard. (Full disclosure: my employer, Yahoo Inc., owns about 22.5% of Alibaba and plans to sell about 25% its stake at the offering. I personally own Yahoo shares.)

In many ways, Alibaba is the anti-Facebook IPO. Facebook, of course, struggled mightily on its first day of trading amid technical glitches and an avalanche of insider selling, closing up a mere 23 cents from its offered price of $38.

The Chinese e-commerce giant is virtually unknown to Americans. A Reuters poll this week showed 88% of people hadn’t even heard of Alibaba, much less were clamoring for a piece of the offering. Facebook, by contrast, was set up to be the first big “retail” IPO of the decade — and individual investors were scrambling to get allocation before the company’s ill-fated debut on May 18, 2012, according to press reports at the time.

For Alibaba, however, there’s no such retail interest: Alibaba Frenzy Escapes Small Investor:
Lack of Familiarity with Alibaba in U.S. Limits Interest Ahead of IPO, The WSJ reports.

Meanwhile, institutional demand for Alibaba’s offering has reportedly been intense; more than 40 firms have asked for over $1 billion in stock, according to The WSJ. Within two days of Alibaba’s global roadshow, underwriters attracted enough demand to cover the entire deal. Shortly thereafter, Alibaba upped the expected price range of the offering to o $66 to $68 from $60 to $66, originally.

In the run-up to Facebook’s IPO, institutions were already choking on stock that had been purchased in the secondary market. On the first day of trading, lead underwriter Morgan Stanley reportedly got stuck holding more than $6 billion of Facebook stock, with JPMorgan and Goldman sitting on a combined $5.6 billion worth of shares. Days before its IPO, Facebook upped the size of its IPO by 25%, or about 100 million shares; 57% of the shares sold in the IPO came from Facebook insiders.

To date, Alibaba hasn’t announced plans to up the size of its offering, although it wouldn’t surprise me if they did.

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Alibaba's valuation vs. peers (Source: WSJ)

Alibaba’s valuation vs. peers (Source: WSJ)

Perhaps Alibaba’s underwriters — Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley and Citigroup — will suffer a similar fate, but there does not seem to be a frenzy of pre-IPO buying and selling of Alibaba shares, at least not in any formal (legal) way. That said, The WSJ reports that about $8 billion worth of shares owned by insiders will be freed of any “lockup” restrictions and thus available to immediately sell the IPO.

Valuation Matters

Most importantly, Alibaba is the anti-Facebook IPO because at about 24 times expected 2015 earnings, it’s valuation is cheap relative to peers and certainly conservative on an absolute basis.

According to Bloomberg:

  • Alibaba trades at 29 times analyst earnings estimates for the fiscal year ending March 31 vs. 34 times for Bidu, 37 times for Tencent Holdings and 135 times for Amazon.com.
  • Alibaba’s EBIDTA equals 59% percent of revenue, more than Google Inc., Facebook Inc., Amazon.com, Baidu and Tencent, according Wedbush Securities. (By contrast, Twitter and Chinese e-retailer JD.com have negative Ebitda margins.)

At the time of its offering Facebook, traded with a trailing P/E of 107 and price-to-sales of about 26, based on figures from its final amended S-1.

Even at $100 per share, Alibaba would “only” trade with a forward P/E of 40, roughly equal to Facebook’s current valuation and vs. 168 for Amazon.

“Based on the cashflow they are generating and the growth rate, you can defend $100 relatively easily,” Henry Blodget says in the accompanying video. “It’s a high multiple [and] hundereds of things can go wrong…but given the growth trend and oppourtnity and market position, the stock could trade [at $100] and not be ridiculous.”

While offering a warning to individual investors about the dangers of buying IPOs and specific concerns about Alibaba’s governance, Blodget adds: “We’ve seen again and again, inventors are willing to overlook the hazy future and pay for growth and this thing has growth like you would not believe and growth at massive scale. A lot of big mutual and investors who’ve been starved for big, fast-growing companies” are going to be scrambling to get into Alibaba.

What Alibaba and Facebook do have in common is a complex management structure designed to maximum the power of its respective founders, Jack Ma and Mark Zuckerburg. Maybe I missed it, but I don’t recall as many warnings about Zuck’s ownership ahead of the Facebook IPO as I’m hearing now about Alibaba’s.

Of course, there’s a risk if Alibaba really is the “anti-Facebook”. After falling as much as 50% from its IPO price, Facebook shares have since quadrupled. It’s not how you start the race, it’s how you finish but expect Alibaba to come out of the gates at a full gallop.

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Ryan Eagle and the EWA Private Network

ryaneagleOne of the most compelling online companies in the last decade came out of nowhere, at least to much of the business world that was making money in the global marketplace. New startups are nothing new among online entrepreneurs, nor is the idea of very young people being technically savvy enough to run their own companies in the digital age, but Ryan Eagle was something different. His story is one of a boy that had enough vision to become a multimillion dollar entrepreneur in his twenties.
Although his story is a rise and fall tale, when it comes to the company itself. Ryan Eagle’s style, savvy, and spirit for the startup company is one that is compelling, but also noteworthy in recent Internet high tech history. From designing his first website at 5 years old, then working early on with a variety of software, video game and web design pursuits, Ryan Eagle developed a wide arsenal of tricks for his big picture plan.

 

Eagle Web Assets

 

Ryan Eagle was born in 1987, just 17 years later in 2004, he forms the startup company called Eagle Web Assets or EWA. Ryan brought an expertise that included web development, business operations, corporate investing, media buying, email marketing, web development, graphic design and international advertising campaigns to the table. He had already made enough real money in the website design world to consider acquiring his first company, actually a few times over.
Between 2004 and 2009, EWA focused on it’s primary goal of being a successful angel investor. Ryan Eagle wanted to acquire, merge and run companies, optimally from the point of being a new startup. Rather than take the long road of proving himself over time and eventually playing with the big boys online, EWA and it’s founder opted for the short road to having a big business online presence.
EWA set it’s sights on becoming a super affiliate network, keeping in mind that they were not even a small public affiliate yet. What Ryan did was sweep up some of the better businesses, from his list of startups that were already formed under the EWA banner. He brought together a large network of unusually diverse companies together, under what would become known as the EWA Private Network in 2009.

 

EWA Private Network

 

In the world of affiliate networks in 2009, EWA stood out in a number of ways. First of all, an independent person or small business launch could actually get approved to join EWA’s private network. Becoming an affiliate had less to do with guaranteed volume traffic, but more about a willingness to be supportive of the EWA vision. Ryan Eagle used guerrilla hip-hop marketing ads to meme style representation of the network itself. He encouraged a Photoshop overkill style for EWA and members of the private network were welcome to throw their own hacker art into the mix.
The main ad campaign, if you can call it that was a very simple banner and website block set of ads. A white banner and background would be presented to website visitors, the blue EWA logo of a stylized eagle would fade into view and then as it again faded to white, a single word would appear to fill the screen. The ads almost invariably said only, “OBEY” and they faded back to white. “OBEY” became a symbol for EWA that was marketed a cool to the Generation Next kids with hats, t-shirts and other streetwise fashions. EWA never spent much on marketing itself, if the public found them, it was usually through other affiliate blogs or by random chance of fate.
Yet EWA Private Network pulled off some amazing tactual hijinks that worked incredibly well. By the end of 2009, they had created a synthesis which merged Eagle Web Assets angel investments with EWA Private Network affiliate programs, this alone created a network with several thousand affiliate program companies from everything in online industry. They had all the programs of big affiliates like Wolf Storm Media and Never Blue, but also adult websites, online dating, social networks, video games, ringtones, fashion, food companies, movies ads, TV promotions, religious groups, metaphysical, online casinos and many more.
Next Ryan took the private network to a whole new level, he incorporated 2 new divisions of the EWA corporate umbrella, one called BLAM Ads and another named GlobeOptimize. BLAM Ads brought in a similarly wide mix of affiliate companies, except from places like the Philippines, Vietnam, Korea, China, Mexico and all throughout the far and near east. BLAM was able to pull together a very wide net of internationalized affiliate programs, almost like magic. GlobeOptimize was also an internationalization affiliate grouping, but it focused more on the high end corporate, technological and more elite affiliations, but secured a greater total potential for furthering angel investment opportunities throughout Asia, Africa, Europe and the Middle East, although it was the one that paid off the least for EWA.
Anyone who got with EWA Private Network at this time can attest, the pay range was much more lucrative and wide ranging than anything else. Even people like the infomercial brothers Adrian and Anthony Morrison started begging to be on the coat-tails of Ryan Eagle and his all monstrous, super affiliate network. By 2010 the EWA Private Network was ready to rock and roll, making tremendous amounts of cash daily, having the largest number of programs for affiliate ads of anyone at the time. The clock was ticking, the money was flowing and Ryan Eagle put his family, friends, wife and anyone he wanted in positions at EWA.

 

The Rise and Fall of Ryan Eagle

 

Unfortunately, the end result of EWA was almost textbook psychology for anyone so young like Ryan Eagle. He was rich beyond his wildest dreams, had fast cars, a girlfriend and a very hard headed addictive personality. Between drugs, drinking, arrests and getting sober, then back to rerun the cycle a few years in a row, Ryan was a personal wreck. Even sober, his alter ego was a straight edge workaholic, making his life a ticking time bomb for something to go wrong.
In 2013, Ryan started to realize that the more money EWA made, the more obvious his poor financial management of the company had been. Not that they were losing money directly, far from it. But most of the super affiliate programs were not contractually firm or in agreement with EWA on many things. As EWA attempted to draw up the delayed contracts, get lawyers and accountants taking all the numbers in, the paperwork was no longer going to be enough clout for Ryan Eagle’s silent partners. Basically, his behind the scenes investors had been all too aware of his partying, poor management skills and were happy to let him keep racking in the millions, but were ready to pull the plug all at once.
EWA suddenly suffered from a high volume deficit, one that caused the company to close it’s doors without paying many stock holders, investors and affiliate program members. EWA officially closed it’s doors in March 2013, along with the EWA Private Network, BLAM Ads and GlobeOptmize. For Ryan Eagle, it was his first real failure, as an online business marketer.

 

In Conclusion

 

From both a personal and professional view, Ryan Eagle and the EWA story are noteworthy, because the kid has what is missing in many online investors today. EWA had Ryan Eagles unadulterated clear vision, even with his hip-hop big-baller suspenders, UFO rave-style sunglasses and an addiction to almost every prescription and narcotic under the sun. Today Ryan Eagle has moved to bigger and better projects, but can live with an tidy net worth of 50 million or so. Not bad for a web designer with a gumption for big pimping and fast cars. Say what you will about the guy, but he’s grown up a lot, and he definitely deserves respect and credit for what he accomplished in such a short time.

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Using DealDash

lt_afad00aca7cbb03196e9064863dff8b24de7ec89e65124095ea870e26a41a180Many people are interested in finding the oldest websites online. Plenty of great web paradigms have arisen over the years, and they have had plenty of inferior imitators. People interested in penny auction websites should know that DealDash has made more longevity than any other American penny auction site. It has stood the test of time in many different ways, and developed a following along the way.

Websites with this sort of history can usually hold their own and withstand economic changes. They are also that much more likely the meet the needs of their customers.DealDash has been rated very highly for the quality of its customer service, which is indeed a rarity in this niche.
Given the age of the website, they have had a great deal of experience.
Some people are wary of using penny auction websites, and they can have a wide variety of different concerns. Some people may simply be indifferent and apathetic, since they don’t think that they’ll find anything that they like on penny auction websites, and don’t feel the need to even try. These people should know that DealDash has a lot of kitchen equipment available, which these people can get at a reduced rate. They may spend three percent of what they would spend otherwise if the items are new, which can be truly impressive savings for people that clip coupons on a regular basis looking for the best deal.
Customers that are worried about the quality of the items should know that DealDash has brand name items on hand, from places like Sears, Walmart, and Best Buy. They can get more or less the same products they would otherwise at outlets like these, only with more of an element of chance and fun. DealDash has a lot to offer outside of its product range, and people are getting a lot more than just the items they win. However, the items they win are still high-quality, which is more than can be said for the items available at many penny auction sites.
For customers with kids, there are plenty of children’s toys available as well, which can be especially helpful when the holidays are approaching. People that are trying to add to their home theaters will be able to find plenty of good products through DealDash. DealDash certainly has a lot to offer its potential clients and customers.
Winning the items certainly adds plenty of excitement to the whole endeavor, but even the people that don’t win will still have options. The Buy It Now application helps people receive their bids, so no one has to feel too disappointed.
DealDash tries to protect its customers from unnecessary spending. They make sure that shipping is free, so customers can focus on the actual products, as opposed to the logistics. People that make their first purchases can get all of their money back, if necessary, although DealDash is confident that customers will be satisfied. Many customers have enjoyed their time with DealDash, which is one reason it has been in the game for so long.
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Warning: War with ISIS will spook financial markets

The drumbeat for a U.S.-led war with ISIS is growing louder, and the coalition of countries vowing to destroy the group is growing in number after British aid worker David Haines was beheaded, the latest in a series of brutal murders. Haines’ beheading follows the murders of two American journalists, James Foley and Steven Sotloff.

British Prime Minister David Cameron said his country will do whatever is necessary to combat the Islamic State.

“We have to confront this menace. Step by step, we must drive back, dismantle and ultimately destroy ISIL and what it stands for,” said Mr. Cameron. “As this strategy intensifies, we are ready to take whatever steps are necessary to deal with this threat and keep our country safe.”

U.S. officials also took to the Sunday talk shows over the weekend to make the case for military action against ISIS.

Secretary of State John Kerry went on CBS’ Face the Nation and emphasized the coalition of countries prepared to strike Iraq and Syria.

“I can tell you right here and now, that we have countries in this region, countries outside of this region, in addition to the United States, all of whom are prepared to engage in military assistance, in actual strikes if that is what it requires,” he said.

President Obama last week emphasized that U.S. combat forces would not be part of his strategy to “degrade and destroy” ISIS. Referring to an additional 475 service members he is sending to Iraq, the president said, “these American forces will not have a combat mission –- we will not get dragged into another ground war in Iraq.”

But former director of the CIA, Michael Hayden, and some retired U.S. generals believe ground forces will be necessary. Hayden predicted on Fox News Sunday that as many as 5,000 U.S. personnel would be on the ground in the war against ISIS by the end of the year.

Market reaction to escalation

In recent months, the financial markets have had little reaction to geopolitical crises – such as the conflict between Russia and Ukraine. But an escalation in the war with ISIS could be a catalyst to change that, according to David Stockman, former director of the Office of Management and Budget and author of The Great Deformation: The Corruption of Capitalism in America.

Yahoo Finance spoke with Stockman and noted economist and Professor at the University of Texas at Austin, James Galbraith about what war with ISIS will mean for the markets and the U.S. economy.

“I think we’re stepping into a hornet’s nest that will create endless problems as we stumble down the road and elicit one kind of blowback after another,” said Stockman. “It will create the opportunity for unexpected turns in events that will spook the financial markets from time to time, and of course, it will distract Washington from addressing any of the economic or fiscal problems confronting the nation.”

Professor Galbraith takes a broader view on the post-Cold War realities the United States is facing and the challenges ahead for policymakers.

“The larger environment of world stability created by the United States in the Cold War and after the Cold War is coming apart,” he said.

Stockman warns that instability, when combined with a shift in Fed policy away from easy money will cause the markets to refocus attention on foreign events in the way they haven’t in recent months.

“As the markets begin to adjust and re-price and contemplate a future where the Fed is not just pouring liquidity onto Wall Street every day, I think news events that were ignored in the past may become the catalyst or the excuse for major selloffs, off and on, as we go forward.”

MORE FROM YAHOO FINANCE

Why markets ignore ‘geopolitical and geo-economic peril’: Martin Wolf explains

Scottish independence could mean the end of Spain: Martin Wolf

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Bets on hawkish Fed lift dollar, U.S. bond yields

American dollar notes are displayed in this photo illustration in Johannesburg August 13, 2014. REUTERS/Siphiwe Sibeko

By Richard Leong

NEW YORK (Reuters) – The U.S. dollar ended higher for a ninth straight week against the euro on Friday and hit six-year highs against the yen, helped by speculation the Federal Reserve may strike a more hawkish tone when it meets next week.

A recent string of improving U.S. economic data has raised expectations the Fed may act sooner to raise interest rates, a move most investors expect will begin next year.

U.S. retail sales data on Friday that showed spending rose broadly in August added to those expectations, while consumer sentiment hit a 14-month high.

“The general message on the economy is that it’s improving, but we still have a lot of slack to take up,” said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

U.S. Treasury debt yields also rose on Friday, with benchmark yields posting their biggest weekly increase in over a year, helping to make the dollar a more attractive investment.

The benchmark 10-year U.S. Treasury note was down 20/32, the yield at 2.605 percent.

As currency markets made sizable moves this week, major stock markets worldwide pulled back from recent peaks on profit-taking and jitters about the effect of higher U.S. borrowing costs on the global economy.

U.S. stocks fell as energy shares extended their recent slide, while rising bond yields drove down high-dividend-paying shares. Major U.S. indexes finished lower after five straight weeks of gains.

“What’s been creeping into investors’ minds is the inevitability of the Fed raising rates and whether they’re going to do it sooner rather than later,” said Bruce Zaro, chief technical strategist, Delta Global Asset Management in Boston.

The Dow Jones industrial average .DJI fell 61.49 points, or 0.36 percent, to 16,987.51, the S&P 500 .SPX lost 11.91 points, or 0.6 percent, to 1,985.54 and the Nasdaq Composite .IXIC dropped 24.21 points, or 0.53 percent, to 4,567.60.

For the week, the Dow was down 0.9 percent, the S&P 500 was down 1.1 percent and the Nasdaq was down 0.3 percent.

The S&P energy index (.SPNY) fell 1.5 percent and was among the day’s worst-performing sectors as U.S. oil prices shed 0.6 percent. The energy group was down 3.7 percent for the week.

Shares of Exxon Mobil Corp (XOM.N) retreated 1.3 percent on the day, while ConocoPhillips (COP.N) fell 1.2 percent. Crude oil prices fell on pressure from weak demand, ample supplies and the strong dollar.

U.K. equities also finished slightly lower, with investors refraining from making strong bets on stocks before Scotland’s referendum on independence.

The FTSEurofirst 300 (.FTEU3) index of top European shares ended 0.1 percent lower at 1,382.98.

Germany’s DAX (.GDAXI), closed down 0.4 percent after the United States and the European Union tightened sanctions on Russia over its intervention in Ukraine.

Germany imports a significant amount of gas from Russia and sold Russia about 36 billion euros ($47 billion) of goods last year, almost a third of the EU’s total. Some 6,200 German firms are in Russia, with 20 billion euros of investment.

The MSCI world equity index , which tracks shares in 45 nations, slipped 0.46 percent to 426.17.

Gold prices hit 7-1/2 month lows on a strengthening dollar. Spot gold fell 1 percent to $1,228.13 an ounce.

“We do seem to have reached a tipping point both on expectations for (U.S.) interest rate rises next year and the dollar,” said Simon Derrick, head of currency research at Bank of New York Mellon in London.

The dollar index(.DXY), a measure of the greenback’s value against a basket of six major currencies, was down 0.15 percent for the day at 84.17, but still on course for its longest streak of weekly gains since the first quarter of 1997.

A 2.0 percent rise on the week also took the U.S. currency to a six-year high of 107.39 yen. The euro stabilized after four weeks of losses, ending around $1.2964.

The British pound recovered a little ground after the latest polls showed next Thursday’s Scottish referendum vote as too close to call. Sterling ended around $1.6266, above a 10-month low of $1.6051 set on Wednesday.

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Wall Street ends lower as Apple falls, bond yields rise

Traders work on the floor of the New York Stock Exchange

By Caroline Valetkevitch

NEW YORK (Reuters) – U.S. stocks fell on Tuesday as Apple (AAPL.O) shares declined and as bond yields hit their highest in a month on concerns the Federal Reserve could raise interest rates sooner than some investors had expected.

All 10 S&P 500 sectors ended lower. Apple shares, which jumped as much as 4.8 percent earlier in the session after the company unveiled a smartwatch, ended down 0.4 percent at $97.99. Apple also announced two larger iPhones.

Benchmark 10-year U.S. Treasury note yields rose to 2.5 percent.

Sectors with high-dividend paying stocks including utilities were among the day’s weakest. The utilities sector (.SPLRCU) and telecommunications (.SPLRCL) each fell 1.2 percent.

Improving U.S. economic conditions may force the Federal Reserve “to tighten sooner rather than later,” said Doug Cote, chief market strategist with Voya Investment Management in New York.

“Rising rates are an immediate discount for financial assets, including equities,” he said.

Shares of Home Depot (HD.N) fell 2.1 percent, a day after the company confirmed its payment security system had been breached.

The Dow Jones industrial average (.DJI) declined 97.55 points or 0.57 percent, to 17,013.87, the S&P 500 (.SPX) lost 13.1 points or 0.65 percent, to 1,988.44 and the Nasdaq Composite (.IXIC) dropped 40.00 points or 0.87 percent, to 4,552.29.

About 5.7 billion shares changed hands on U.S. exchanges, above the 5.5 billion average for the last five days, according to data from BATS Global Markets.

In the options market, Apple options volume rose to a record daily volume of 2.97 million contracts traded, according to Henry Schwartz, president of options analytics firm Trade Alert. Contract volume was about three times normal and calls led puts by a ratio of 2.1:1, according to Trade Alert data.

The largest percentage gainer on the New York Stock Exchange was Pulse Electronics (PULS.N), which was rising 53.47 percent, while the largest percentage decliner was Usec (USU.N), down 18.05 percent.

Among the most active stocks on the NYSE were Brazil’s Petrobras (PBR.N), down 2.83 percent to $17.83 and Pfizer (PFE.N), down 0.58 percent at $29.23.

Besides Apple, Yahoo (YHOO.O), down 2.5 percent at $40.78, and Microsoft (MSFT.O), up 0.6 percent to $46.76 were among the most actively traded on Nasdaq.

Declining issues were outnumbering advancing ones on the NYSE by 2,338 to 698, for a 3.35-to-1 ratio on the downside; on the Nasdaq, 2,046 issues were falling and 637 advancing for a 3.21-to-1 ratio favoring decliners.

The broad S&P 500 index was posting 17 new 52-week highs and five new lows; the Nasdaq Composite was recording 56 new highs and 58 new lows.

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Searching for growth in Europe, clarity in China

 A huge euro logo is pictured past next to headquarters of ECB in Frankfurt

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A huge euro logo is pictured next to the headquarters of the European Central Bank (ECB) before the bank’s monthly news conference in Frankfurt August 7, 2014. REUTERS/Ralph Orlowski

BRUSSELS (Reuters) – The euro zone’s struggle to avoid another recession will take center stage in the coming week in the absence of major U.S. data, as investors mull whether the ECB’s new asset-buying plan is a prelude to even more radical steps.

While data from China may give clarity on a pattern of uneven growth there, it is in Europe that the prospects for the economy are most uncertain, although a ceasefire in Ukraine could lift the mood and avoid new EU sanctions on Russia this week.

The euro zone’s fragile economic recovery came to a halt in the second quarter, in marked contrast to the United States, where the economy grew robustly. Like many of its neighbors struggling to rebound from the debt crisis, Italy slipped into recession for the third time since 2008.

EU finance ministers and European Central Bank President Mario Draghi convene on Friday in Milan, where the ECB’s latest move to help the economy and avoid deflation will be at the forefront of discussions.

The ECB stunned markets last week by cutting interest rates and announcing a plan to buy asset-backed securities from October, which Barclays described “as a clear first step into quantitative easing” – a U.S.-style bond-buying program that could help the economy but divides the central bank.

Draghi said his aim was to expand the bank’s balance sheet back to the heights reached in early 2012, which equates to a rise of around 50 percent or 1 trillion euros in new assets.

“This is going to be digested by the markets over the coming weeks,” said Thomas Harjes, an economist at Barclays.

“There’s now a 50-50 chance that the ECB will go further and announce a sovereign bond-buying program by year-end, or the beginning of 2015,” he said.

Under its statutes, the ECB is banned from buying bonds directly from governments but can find ways to purchase them from banks, for example, on the secondary market.

An inflation rate of just 0.3 percent, coupled with the lack of economic growth, has given new urgency to the bloc’s search for growth. The ECB is urging governments to also do their part and enact ambitious structural reforms.

German trade, labor and industrial data during the week should show whether the second quarter’s poor showing is part of a trend or a one-off. A euro zone confidence indicator for September will also be watched after August’s unexpected slump.

CLUES TO U.S. “NORMALISATION”

The ECB’s stimulus contrasts with developments across the Atlantic, where the U.S. Federal Reserve is gradually winding down its bond-buying program as the economy improves and is beginning to think about tighter monetary policy.

Investors have little to get their teeth into in the coming week and the biggest U.S. data will be August’s retail sales on Friday. With the jobs market lifting confidence, retail sales are seen up 0.3 percent after dropping in July.

The expected gain in the indicator’s so-called control number, which corresponds most closely with the consumer spending component of gross domestic product, would be a welcome relief after spending dropped in July, leading some economists to temper their growth forecasts.

Still, U.S. job growth slowed down sharply in August as more Americans gave up the hunt for work, giving a cautious Federal Reserve more reasons to wait a bit longer before raising rates.

The Fed’s chair, Janet Yellen, is concerned about slow wage growth, the high numbers of Americans working part-time even though they want full-time employment and a long spell of joblessness following the 2008/2009 financial crisis.

“Such weakness plays into the hands of the Fed doves,” said Rob Carnell, an economist at ING, of the August job data. “It gives Yellen more leeway to stand firm against the hawks, many of whom are calling for a change in the Fed’s language on the likely timing and scale of policy normalization.”

Normalization refers to the end of an unprecedented period of cheap money since the financial crisis. The consensus has been for a rate hike in late 2015, but economists are bringing forward their forecasts to near the middle of next year.

UNEVEN CHINESE EXPANSION

In Asia, the central banks of South Korea, Indonesia and the Philippines hold monetary policy meetings this week.

Another cut in Korea after August’s 25 basis-point reduction is not expected this month, however. The monetary authority has been reluctant to cut rates more for fear that lower borrowing costs could swell the ageing society’s large household debt.

Meanwhile, the People’s Bank of China has so far refrained from cutting interest rates, preferring instead to ease liquidity for some banks to free funds for lending. Beijing in turn has tried to ease conditions in the property market.

Data on money and credit supply during the week will give an indication about the central bank’s next moves following inconclusive data last week.

Activity in China’s vast factory sector cooled in August as foreign and domestic demand slowed, spurring new calls for more policy easing to prevent the economy from stumbling once more.

But China’s services sector rebounded in August after a drop in July, offseting factory-sector weakness and letting the government stick with its policy stance.

“The economic expansion is quite uneven, as exports accelerate, investment slows, and the real estate correction intensifies, but on balance, headline real GDP growth is probably a bit faster to the third quarter,” said Bill Adams, an economist at PNC Financial Services Group.

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BP ‘grossly negligent’ in 2010 U.S. spill, fines could be $18 billion

A BP logo is seen on a petrol station in London

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A BP logo is seen on a petrol station in London November 2, 2010. REUTERS/Suzanne Plunkett

By Anna Driver and Mica Rosenberg

HOUSTON/NEW YORK (Reuters) – A U.S. judge has decided that BP Plc (BP.L) was “grossly negligent” and “reckless” in the Gulf of Mexico oil spill four years ago, a ruling that could add nearly $18 billion (11 billion pounds) in fines to more than $42 billion in charges the company took for the worst offshore environmental disaster in U.S. history.

BP said it would appeal Thursday’s ruling by U.S. District Judge Carl Barbier in New Orleans, Louisiana, who held a trial without a jury last year to determine who was responsible for the April 20, 2010 rig explosion and spill that killed 11 workers and spewed oil for nearly three months onto the shorelines of several states.

Barbier ruled that BP was mostly at fault and that two other companies in the case, Transocean Ltd (RIG.N) and Halliburton (HAL.N), were not as much to blame. The disaster struck when a surge of methane gas known to rig hands as a “kick” sparked an explosion aboard the Deepwater Horizon rig as it was drilling the mile-deep Macondo 252 well off Louisiana.

Barbier has yet to assign damages from the spill under the federal Clean Water Act or rule on how many barrels spilled, but

David Uhlmann, a University of Michigan law professor and former chief of the Justice Department’s environmental crimes section, said the ruling “dramatically increases” BP’s liability for civil penalties under the act.

Previous calculations by Reuters have shown fines could run to $17.6 billion in the costliest scenario under a ‘gross negligence’ finding. The amount is far more than the $4.5 billion maximum fine that could have been levied under a simple ‘negligence’ ruling.

BP has set aside only $3.5 billion for fines under the Clean Water Act, part of a much broader series of provisions for cleanup, compensation and damages that exceed $42 billion.

“The Court concludes that the discharge of oil ‘was the result of gross negligence or wilful misconduct’ by BP,” Barbier said in his written ruling. “BP’s conduct was reckless.”

In response, BP said it would challenge the ruling because it believes the standard for proving “gross negligence” was not met. “BP believes that an impartial view of the record does not support the erroneous conclusion reached by the District Court.”

If the gross negligence ruling stands, it could create a tough new standard and raise liability risks for the deepwater drilling and other high risk industries, legal and business experts said.

There will be “long-term repercussions,” Gianna Bern, who teaches international finance at the University of Notre Dame, said of the energy sector. “Potential liability is now in the stratosphere and that limits the number of players that can engage in this type of activity.”

Shares of BP in the United States closed down 5.9 percent at $44.89. BP shares in London also closed down nearly 6 percent, the worst one day slide in more than four years.

A separate criminal case was settled with the U.S. government in late 2012. BP agreed to pay $4.5 billion in fines.

Even after the Clean Water Act fines are set, BP may face other bills from a lengthy Natural Resources Damage Assessment, which could require BP to carry out or fund environmental restoration work in the Gulf, and other claims.

DIVIDEND SAFE FOR NOW

The case will go on for months or even years with Barbier set to assign damages after the next phase of a civil trial over the accident, scheduled for January 2015. The two earlier phases of the trial looked at how to apportion blame and examined how much oil spilled.

BP has been forced to shrink by selling assets to pay for the cleanup. Those sales erased about a fifth of its earning power and it may be pressured by investors to delay making new investments until the lawsuit is resolved.

In addition to the court case, Philip Adams, analyst at Gimme Credit, said BP is vulnerable to growing tensions between the West and Russia. London-based BP holds a 19.75 percent stake in Russian energy giant Rosneft.

Still, the company had $27.5 billion in cash and equivalents on its balance sheet at the end of the second quarter, and analysts think it will keep paying dividends that yield about 5 percent.

Jason Gammel, an equity analyst at Jefferies in London wrote that even with a maximum fine, BP has sufficient liquidity to meet its obligations. “We would expect a lengthy appeals process first. We thus do not believe there is risk to the current BP dividend.”

PARTNERS PROTECTED

Under federal rules, a gross negligence verdict carries a potential fine of $4,300 per barrel, far higher than the statutory limit on a simple “negligence” of $1,100 per barrel.

BP says 3.26 million barrels leaked from the well and the U.S government says 4.9 million barrels spilled. The fines will exclude about 810,000 barrels collected during cleanup.

The judge apportioned 67 percent of the fault to BP, 30 percent to Transocean, which owned the drillship, and 3 percent to Halliburton, which did cement work on the Macondo well.

Transocean and Halliburton have settled some liabilities and the judge said they were shielded by indemnity clauses with BP. Texas-based Anadarko Petroleum Corp (APC.N), which owned a quarter of the well, might have to pay fines under the Clean Water Act, though it has settled other claims with BP.

Gulf Coast states would receive a portion of any fines BP pays to the government.

On Thursday, U.S. Attorney General Eric Holder said in a statement, “We are confident this decision will serve as a strong deterrent to anyone tempted to sacrifice safety and the environment in the pursuit of profit.”

The civil case is In re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico, on April 20, 2010, U.S. District Court, Eastern District of Louisiana, No. 10-md-02179.

(Additional reporting by Sudip Kar-Gupta, Karolin Schaps and Karey Van Hall; Writing by Terry Wade; Editing by Grant McCool)

 

 

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Good news about jobs could mean bad news about rates

Applications for US jobless aid up modestly

FILE – In this May 16, 2014 file photo, shoppers walk past a now hiring sign at a Ross store in North Miami Beach, Fla. The Labor Department releases weekly jobless claims on Thursday, June 12, 2014. (AP Photo/Wilfredo Lee, File)

For the past six years, any change in the Federal Reserve’s low-interest-rate policy was comfortably in the future. But developments within the next few weeks could lead to the kind of policy change many investors have been anticipating, and some have been dreading.

If the government’s next monthly jobs report — due Friday — is as strong as the last few, it could accelerate the Fed’s inevitable decision to start raising rates. And that shift could now come as early as mid-September, when the Fed’s policymaking committee meets next. “Assuming that the upcoming jobs report confirms the recent improving employment trend, the Fed will have room to potentially lay out its transition game plan,” Rick Rieder, a managing director at investing firm BlackRock, wrote recently.

Once the Fed officially shifts its policy, it won’t raise rates right away but will most likely signal   hikes are coming. Most analysts think actual hikes would occur about six months after the Fed telegraphs the move. Fed chair Janet Yellen has a press conference scheduled following the mid-September meeting, which could provide an opportunity to thoroughly explain any changes.

What will force the Fed’s hand?

So how many new jobs would it take to force the Fed’s hand? Employers created 209,000 new jobs in July, and the average during the past three months has been 245,000. That’s a robust pace of job growth that rivals the late 1990s, when a booming economy created about 260,000 jobs per month. The latest ADP report (which is considered somewhat unreliable) showed the private sector created a respectable 204,000 jobs in August. Economists are expecting the official government report due Friday to show about 230,000 new jobs. A higher number would certainly signal healthy growth that could warrant a transition to higher interest rates.

Yellen, of course, has a “dashboard” of indicators that includes much more than the number of new jobs, and she’d also want to see improvements in wages, labor-force participation and the number of people out of work for more than six months. Those metrics have generally been weak — accounting for much of the labor-market “slack” Yellen refers to frequently — but each has shown modest signs of improvement lately. If those improvements persist, it will give the Fed further incentive to raise rates.

Rieder expects the first rate hikes as early as March of next year. Others feel the first hike will come later in 2015, with the Fed waiting for more data before it concludes the job market is on its way to fully healing.

Tightening, once it begins, will most likely be very gradual, since the economy is still shaky and vulnerable to shocks. Forecasting firm Macroeconomic Advisors predicts that, by the end of 2016 — when employment ought to be robust and inflation around a manageable 2% — short-term rates, now essentially 0%, will be between 2.5% and 3%. By then, the “equilibrium” short-term rate — the natural market rate, absent extraordinary Fed intervention — ought to be around 3.75%. So the Fed could deliberately keep rates a full percentage point or more below where they’d otherwise be. “We expect such gradualism to be primarily motivated by the [Fed’s] strong desire to avoid disrupting financial markets and the economy,” Macroeconomic Advisers said in a recent research note.

Still, even a gradual change in Fed policy could cause turmoil in the markets. The biggest unanswered question on Wall Street right now is whether investors have adjusted to coming Fed policy changes or have blithely assumed everything will remain hunky-dory, setting themselves up for an unhappy surprise. Since 2009, the Fed’s super-easy policies — including plunging rates and quantitative easing, which is set to expire in October — have coincided with soaring stock prices. Reflating the value of so-called risk assets such as stocks was a big part of the Fed’s overall plan for reviving the economy following the 2007-2009 recession. So if plunging interest rates helped inflate the value of stocks, it stands to reason that rising rates might puncture stock prices.

Higher interest rates don’t have to be bad for stocks — especially if they rise because the economy is getting stronger, which obviously ought to be good for corporate profits. And stocks have held up surprisingly well as quantitative easing draws to a close and the day of short-term rate hikes nears. But that might be due to a short-term focus by traders and investors who don’t want to think too hard about the future. They can’t put it off much longer.

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Is Buying an Annuity Good for You?

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It is a tough world out there these days when it comes to deciding what to do about money in retirement. Back in the day, employers would pay their employees a pension that lasted you the rest of your life (also known as a golden parachute). You would turn 65, retire on the spot, accept your life-long pension, and be on your way.

Not the case anymore. Today some people have 401(k) plans, but others have to make their own monetary decisions and decide how to manage their funds. Buying annuities is a great new option for those who aren’t quite sure how to manage their funds in retirement.

What are annuities? Annuities are insurance products that are bought with an annuity lump sum payment, which is then paid out over the course of the individual’s lifetime after they’ve turned 59 1/2. An annuity is tax-deferred as long as you don’t withdraw money before the payout period begins.

What will buying annuities do for me? Many financial planners and advisers recommend those nearing retirement to purchase an annuity because you will have a set amount of income for life. If you don’t want to buy an annuity but don’t have any other financial plan for retirement, you may end up spending too much.

Types of annuities:

  • Immediate – These annuities pay you a set amount for as long as you live. Or you can opt to receive payments for a set amount of years, after which a beneficiary will receive payments.
  • Deferred – This type accumulates your money until a future payment is made. There are three types: fixed annuities, equity-indexed annuities, and variable annuities. Variable annuities are generally not the best for meeting short-term goals because they have substantial taxes and high insurance company charges if you withdraw early.

Buying annuities that are right for you: An estimated eight out of 10 non-qualified annuity owners have an annual income below $100,000 because generally anything lower than that will not guarantee payments for life.

You may want an immediate annuity if you have retirement expenses that aren’t covered by a monthly pension or social security benefits. Immediate annuities can offer a regular monthly payment to cover these expenses. If you believe you’ll be around for a long time, an annuity is a great option. If you have serious health issues, you may want to opt for a lump sum.

If you are worried that you will run out of money before you die, you can purchase an annuity. But what happens if you die before your payments run out? No worries, you can name a beneficiary to receive the money after you have passed. Those who are older are also generally not taking many monetary risks and choose an annuity instead.

There are plenty of reasons and plenty of options to buying annuities. Talk to your financial adviser about what would be best for you.

 

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