Financial thoughts

Bo Xilai, whose policies lured billions of dollars in foreign investment and thousands of jobs to China

China’s premier suggested Wednesday the rise of the yuan against the dollar has ended, possibly fueling tensions with the U.S. amid complaints the tightly controlled currency is undervalued and distorts trade.

Frictions over China’s currency are acute at a time when governments are trying to boost exports and avert a new global slowdown. Washington and other nations complain an undervalued yuan gives China’s exporters an unfair price advantage and wipes out jobs abroad.

Premier Wen Jiabao, speaking at a wide-ranging, three-hour news conference at the end of China’s legislative session, said the yuan has gained 30 percent in real terms since 2005 and has moved up and down since September in Hong Kong trading of nondeliverable forward contracts. Such contracts track the movement of currencies that are not freely traded, and are settled in dollars or other hard currencies.

“That shows that the renminbi exchange rate may possibly have reached an equilibrium exchange rate,” said Wen, the country’s top economic official.

Wen pledged to create a more flexible, market-based exchange rate system.

“We welcome greater elasticity of the renminbi exchange rate,” he said.

Wen’s comments are likely to frustrate critics including American lawmakers who are pressing for higher tariffs on Chinese goods.

China’s normally huge trade surplus plunged to a rare $31.5 billion deficit in February. Some commentators took it as a sign the yuan has reached a fair exchange rate. But others said it was a one-time event, noting China often has a trade deficit early each year as factories restock after the Lunar New Year holiday.

On Tuesday, the United States, the European Union and Japan opened a new front in trade disputes with Beijing when they filed complaints with the World Trade Organization challenging its controls on rare earths mining and exports. U.S. President Barack Obama accused Beijing, a WTO member, of going against free-trade rules it promised to follow.

Wen did not mention that case at Wednesday’s news conference but appealed for closer cooperation with Washington to resolve “difficulties and frictions.” He gave no indication of possible concessions on complaints about market barriers and other disputes.

Wen called for U.S.-Chinese collaboration in clean energy, environmental protection, aviation and other technology fields.

The premier also said China plans to invest in U.S. infrastructure _ a possibility first raised in November by the chairman of Beijing’s sovereign wealth fund cash advance today. Wen gave no timetable or possible targets for investment.

“China will make investment in infrastructure construction in the United States, and that will help contribute to the generation of local jobs,” Wen said.

Turning to the domestic economy, Wen announced no new reforms but promised more steps to achieve previously announced goals of making China’s economy cleaner and more efficient after three decades of rapid growth driven by low-cost labor.

Growth slowed to a still-robust 8.9 percent in the final quarter of 2011 after Beijing clamped down on credit and investment to steer the expansion to a more sustainable level from 2010’s double-digit rate. The government lowered its growth target this year to 7.5 percent from the 8 percent level in place since 2005.

“We hope China’s growth will no longer come at the cost of resource consumption and environmental pollution,” the premier said in nationally televised comments.

The World Bank and Beijing’s own researchers say the economy requires sweeping change to curtail the dominance of state companies and promote consumer spending to reduce reliance on exports. They say that if leaders fail to act, they might see growth stall, trapping China’s people at middle income levels.

Leaders appear to be postponing basic changes until a once-a-decade leadership succession is completed this year _ a delay some analysts say might increase the cost and difficulty of rebalancing the economy.

Wen said lending and construction curbs that have started to cool surging housing prices will remain in place despite complaints they might worsen an economic slowdown. Construction and real estate sales are key drivers of China’s growth.

The housing price surge was driven in part by the flood of stimulus spending and bank lending after the 2008 global crisis. Prices eased slightly in the second half of 2011 but are well above levels of recent years.

“Home prices in China are far from coming back to a reasonable level, so we must not slacken our efforts in regulation of the housing sector,” Wen said. “Otherwise, past gains will be lost and there will be chaos in the housing sector.”

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Greece edged closer to fending off bankruptcy Monday, but U.S. markets were mostly underwhelmed.

Stocks struggled for direction after Greece announced it had persuaded its private investors to take deep losses on their bond holdings, which should help Greece avoid default in the short term but could also crimp the country’s ability to borrow money in the future.

The Dow Jones industrial average stayed above its previous close for most of the day, and was up 45 points to 12,967 in the early afternoon. The Standard & Poor’s 500 and the Nasdaq composite index, on the other hand, spent most of the day lower. Trading was even choppier in the early afternoon, with the S&P virtually unchanged at 1,371 and the Nasdaq down 4 points to 2,984.

“The market is going to continue to feel very schizophrenic,” said Carol Pepper, CEO of founder of Pepper International, a money management firm in New York. “Some days it’s depressed, some days it’s excited, some days it’s terrified.”

Monday’s news out of Europe appeared to only add to the fogginess of predictions on where the market is heading. Greece’s new deal with its investors should help the country avoid bankruptcy later this month by lightening its crushing debt load. But the country remains in a serious recession even as the country moves toward making spending cuts being demanded by its lenders.

Jeff Sica, president and chief investment officer of SICA Wealth Management in Morristown, N.J., said Greece is only a distraction from other deep-rooted problems throughout Europe, including brewing debt burdens in Portugal and Italy. Presidential elections in France add another layer of uncertainty because a new leader could backpedal on fiscal commitments made by President Nicolas Sarkozy.

The struggling European countries also can’t cut spending, which they’ll likely need to do to avoid bankruptcy, without angering their citizens. On Sunday, hundreds of thousands of people in Spain took to the streets in dozens of cities to protest cuts in government spending.

Greece has “become a touchstone for people to say, `Okay, things are getting better,’” Sica said. “But they had to force private investors to take losses, the European Central Bank has swelled their balance sheet, it’s going to be impossible to impose austerity on these countries. They haven’t really accomplished a single thing except buying time.”

News about the U.S. economy has also been opaque, with every sign of economic recovery met with another sign of economic slowdown. While the unemployment rate falls, some analysts raise questions about the quality of the new jobs being created, and others worry that the high price of gas will prevent people from the spending needed to fuel the economy. The average price for a gallon of gasoline jumped nearly a nickel over the weekend, to $3.80. China, the superpower that has pushed the world economy forward even as other countries flagged since 2008, announced that its growth slowed at the end of last year.

The knee-jerk nature of the market has been on display in the past two weeks. The Dow powered higher on positive news headlines when it closed over 13,000 on Feb. 28, a milestone it hadn’t reached since May 2008. But it’s failed to close above that line again. On one day last week, it plummeted more than 200 points over concerns about Greece, more than double its second-biggest loss so far this year.

“Everybody is stepping back and assessing whether the ride is over,” Sica said. “It’s almost as if investors get to a point where they scratch their head and say, `Does the market deserve to be here?’”

The 10 industry groups in the S&P 500 also failed to provide a clear direction, evenly split between gainers and losers in the afternoon. Utilities, which tend to attract nervous investors because of their relatively stability and generous dividends, rose the most. Markets in Europe were also divided. Germany did better than others, rising 0.3 percent. Greece fell 2.5 percent.

Companies making big moves included:

_ Defibrillator maker Zoll Medical Corp. jumped 24 percent to $92.76 after its board agreed to a buyout offer of $93 per share from Japan’s Asahi Kasei Corp.

_ Mattress maker Sealy Corp. climbed 6 percent after its second-largest shareholder, an investment firm called H Partners Management, asked the company to shuffle its board and blamed the company’s problems on the largest shareholder, private equity firm KKR & Co.

_Harley-Davidson Inc. climbed 2.5 percent after Citigroup analyst Greg Badishkanian raised his price target on the stock $4 to $50, saying he expects higher sales in the first quarter.

_Luxury retailer Michael Kors fell 4 percent to $47.75. The company, purveyor of $950 high heels, announced late Friday that some of its major shareholders would be selling their shares earlier than expected.

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Right after a Delaware state judge issued his ruling last week in a shareholder lawsuit contesting Kinder Morgan Inc.’s purchase of El Paso Corp., the public finger-wagging aimed at Goldman Sachs Group Inc. began.

Goldman, some pundits wrote, had emerged as the biggest loser of the bunch. The bank’s conflicts of interest in advising El Paso on the deal had been castigated by an esteemed jurist as breathtakingly over the top. Once again, Goldman had sullied its precious reputation. And so on, critics said.

While it’s always fun to fantasize about Goldman losing at anything, one gnawing question stands out: What exactly did the company lose? The answer is nothing, as far as I can tell. Actually, it won big.

Consider these facts: El Paso’s board knew that Goldman owned a 19 percent stake in Kinder Morgan worth about $4 billion when the companies’ buyout talks began last year. The directors knew Goldman controlled two seats on Kinder Morgan’s board. They were aware that Goldman had every incentive to maximize its own investment and fleece El Paso’s shareholders. Yet they turned to Goldman anyway for advice on responding to Kinder Morgan’s takeover overtures.

El Paso probably could have gotten a better price from Kinder Morgan had its representatives, including Goldman, been more faithful and less conflicted, Delaware Chancery Court Judge Leo Strine said. The difficult question he faced was whether to do anything about it. He decided he shouldn’t, concluding that any remedy he tried to fashion would do more harm than good.

DONE DEAL

He didn’t block the proposed $21.1 billion transaction between the two Houston-based pipeline operators. The sale will go through. Goldman, the world’s top-ranked takeover adviser based on deals announced last year, still gets its $20 million fee from El Paso. In all likelihood, nothing about this episode will stop anyone else from hiring Goldman in the future. Plus, Strine said it’s doubtful Goldman could be held liable for any damages, based on the facts known so far.

Maybe Goldman’s reputation did take a hit. Yet after so many scandals the past few years, including the company’s $550 million fraud-claim settlement with the Securities and Exchange Commission in 2010, you have to wonder if this new one matters.

Nobody was fooled last year when Goldman’s chairman and chief executive officer, Lloyd Blankfein, made a spectacle of unveiling a new set of fluffy business principles pledging to put clients’ interests first. It’s not the principle that counts in this business. It’s the money. And on this occasion, Goldman got a sweet deal.

Nothing was left to chance, it seems. Steve Daniel, the lead Goldman banker advising El Paso, personally owned $340,000 of stock in Kinder Morgan. This point wasn’t disclosed to El Paso, although it’s hard to imagine its directors would have cared much. They already knew he was horribly conflicted, because of his employer’s $4 billion stake in Kinder Morgan. What would their complaint have been? That he was really, really conflicted?

Not surprisingly, Goldman’s analyses of El Paso’s options pointed toward accepting Kinder Morgan’s offer. Goldman supposedly set up a “Chinese wall” to keep its bankers conflict-free. And a second bank, Morgan Stanley, was brought in to advise El Paso. The judge said the wall wasn’t effective, though. (As if these things ever are.) Goldman made sure the terms were set so that Morgan Stanley got paid only if Kinder Morgan bought the company, Strine wrote.

A deal benefiting Kinder Morgan may have been what some of El Paso’s bosses wanted. As Strine explained, El Paso’s CEO and chairman, Douglas Foshee, didn’t tell his board that he and other El Paso managers wanted to buy back El Paso’s energy exploration-and-production business from Kinder Morgan for themselves, after the deal was negotiated.

WARPED INCENTIVES

Foshee’s incentive was to limit the sale price that El Paso got, not maximize it. “Not forcing Kinder Morgan to pay the highest price possible for El Paso was more optimal than exhausting its wallet, because that would tend to cause Kinder Morgan to demand a higher price for the E&P assets,” Strine wrote. The board had given Foshee sole responsibility for negotiating the company’s sale from the outset. As for Kinder Morgan, it drove a hard bargain, as it was entitled to do.

So what did Goldman do wrong? Its bankers seem to have behaved like sharks. Guess what? Investment bankers are sharks. Goldman’s reputation was reinforced, not damaged.

If El Paso’s shareholders dislike the deal, they can vote against it. The vast majority won’t. There is no competing bidder, because El Paso’s board didn’t seek one. What El Paso shareholders lost was the possibility that another company might have offered a higher premium than Kinder Morgan did. There’s no way to know if anybody would have.

While the conflicts here may have been extreme, managers and buyout advisers at big companies pull similar escapades all the time, skimming corporate resources for themselves at the expense of passive shareholders. (Foshee stands to receive about $90 million once the sale is completed.) There usually isn’t much outsiders can do about it, which is something everyone should understand before they buy stock in a public company.

As for the notion that Goldman lost? Come on. It was paid $20 million for advising a client in a deal where Goldman itself was on the other side. What’s amazing is that El Paso let Goldman pull this off.

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Cambridge police on Friday arrested two people ahead of a speech by Dominique Strauss-Kahn, the former International Monetary Fund chief whose career collapsed after he was charged with sexual assault.

Cambridgeshire Constabulary spokeswoman Sarah Redman said a man and a woman, both in their early 20s, were arrested on suspicion of vandalizing the university’s debating society building with messages critical of the 62-year-old French politician.

The Cambridge News website displayed photos showing the walls of The Cambridge Union Society defaced with messages including “DSK GO AWAY” and “WOMEN DESERVE BETTER.”

Strauss-Kahn was scheduled to speak at the society later Friday despite protesters’ calls for the event to be canceled.

Strauss-Kahn resigned as head of the IMF after allegations last May that he sexually assaulted New York hotel maid Nafissatou Diallo. Prosecutors later dropped criminal charges against Strauss-Kahn, but Diallo has brought a civil case against him.

Her lawyer, Douglas Wigdor, was scheduled to speak on Diallo’s behalf at a rival event Friday.

A statement posted Friday on the debating union’s website states that the invitation was made before Strauss-Kahn’s controversial departure from the IMF.

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U.S. stocks bounced back Wednesday, a day after the biggest one-day sell-off of 2012, as investors were heartened by the latest economic reports.

A labor market report signaling that private sector hiring is picking up steam helped bolster sentiment.

Gas prices also declined for the second day in a row, after a long streak of continuing increases. The pullback is helping to ease some concerns over what higher gas prices could mean for the American consumer.

The Dow Jones industrial average () added 80 points, or 0.7%. The S&P 500 () jumped 8 points, or 0.7%. The Nasdaq () jumped 26 points, or 0.8%, signaling a rebound from U.S. markets’ worst day of the year.

Still, the gains were modest as investors are largely waiting to see what the deal between Greece and its private-sector bondholders will look like. Greece and its private bondholders must officially agree to a crucial restructuring of the nation’s debt this week, in order for Greece to avoid defaulting on its debt.

"If something goes wrong with Greece’s deal, I can say with total certainty that the market will react negatively," said Dan Greenhaus, chief global strategist at BTIG. "Today investors are saying what’s the harm in waiting a day to see what’s going to happen."

Meanwhile, investors are also waiting for Friday’s release of the February jobs report to get a more detailed reading on the health of the U.S. economy.

Apple iPad event: Live blog

Separately, Apple unveiled details of the third version of its iPad at a presentation in San Francisco. Shares of Apple (, Fortune 500) are up 47% over the past year.

Stocks fell Tuesday as markets were under pressure from weak economic data out of Europe, and rising yields on euro-area government bonds — all three indexes suffered their worst day in 2012.

Economy: Hiring in the private sector picked up in February, according to a report released Wednesday by payroll processor ADP. The private sector added 216,000 jobs in the month, which was roughly in line with forecasts.

A report on consumer credit for January was released. It show that credit grew by $17.8 billion for the month, beating expectations of a $12 billion increase.

Commodities: Oil for April delivery added $1.46 to $106.16 a barrel.

Gas prices: If you can’t beat ‘em, join ‘em

Gas prices declined for the second day in a row, falling three-tenths of a cent to $3.76 a gallon, according to motorist group AAA. Gas prices are up 14.7% so far in 2012.

Gold futures for April delivery rose $14.00 to $1,686.10 an ounce.

The dollar was little changed against the euro and Japanese yen, but rose slightly versus the British pound.

Companies: Shares of online radio service Pandora () slumped more than 20%, after the company narrowly missed analyst expectations on quarterly earnings and revenue.

Netflix () shares dropped in late afternoon, after an earlier run up on reports that CEO Reed Hastings is seeking a partnership with a cable company, and has held meetings with several providers in recent days.

Sears CEO: Faring better than Sears

Children’s Place Retail Stores () shares dropped, after the company reported a miss on quarterly revenue. The company attributed the results to warmer-than-expected weather that forced sharp markdowns on winter apparel.

Bonds: The price on the benchmark 10-year U.S. Treasury slipped, pushing the yield up to 1.97% from 1.94% late Tuesday.

World markets: European stocks closed higher. Britain’s FTSE 100 () ticked up 0.6%, the DAX () in Germany added 0.7% and France’s CAC 40 () rose 0.6%.

Asian markets ended lower. The Shanghai Composite () dropped 0.7%, while the Hang Seng () in Hong Kong slipped 0.9% and Japan’s Nikkei () was off 0.7%. 

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The biggest inflows into India

Egyptian lawmakers are meeting in Cairo to decide who will write the country’s new constitution, a debate focusing on the role of Islamists in constructing the document.

The Saturday parliament meeting is supposed to decide who will be on the 100-member panel tasked with drafting the first constitution after the overthrow of Hosni Mubarak.

Debate preceding the session has focused on the role Islamists will have in drafting the crucial document.

The Muslim Brotherhood and ultraconservative Salafist, who scored the strongest in the country’s first parliamentary elections, say 40 percent of the panel should come from parliament payday advance lender.

Liberals, fearful their role in writing the constitution will be minimal, demand that only 20 percent of the panel come from parliament.

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Americans spent $50.96 billion on their pets in 2011.

That’s an all-time high and the first time in history more than $50 billion has gone to the dogs, cats, canaries, guppies and the like, the American Pet Products Association said in a report issued Thursday.

Food and vet costs accounted for about 65 percent of the spending. But it was a service category — one that includes grooming, boarding, pet hotels, pet-sitting and day care — that grew more than any other, surging 7.9 percent from $3.51 billion in 2010 to $3.79 billion in 2011.

APPA President Bob Vetere said 2012 should be another banner year for services, predicting it would grow 8.4 percent to an estimated $4.11 billion in 2012.

Owners are taking care of their pets, said Dr. Jessica Vogelsang, a San Diego veterinarian and author of pawcurious.com. “They are planning ahead. When they go on vacation, they want to make sure their pets are well cared for,” she said.

Spending in 2011 was up 5.3 percent from 2010, when it totaled $48.35 billion, Vetere said. He estimated 2012 sales would total $53 billion.

In 2011, people spent $19.85 billion on food, $13.41 billion on vet care, $11.77 billion on supplies and over-the-counter medicines, $3.79 billion on other services and $2.14 billion on live animal purchases.

In 2010, they spent $18.76 billion on food, $13.01 billion on vet care, $10.94 billion on supplies and over-the-counter medicines, $3.51 billion on other services and $2.13 billion on live animal purchases.

Food sales did slow, Vetere said, even though the 5.8 percent growth exceeded projections of 4.1 percent growth.

APPA numbers indicate that animal sales and adoptions are flattening out and the number of people who switched over to high-end food products is topping out.

Pet ownership is becoming less of an impulse decision, Vogelsang said. “I am seeing a lot of people saying, ‘This isn’t the time for us.’ People are more interested in pets than ever before but they are taking their time, once they make the commitment, to do it right.”

“I don’t think this is a bad thing. I am proud of the owners,” she said.

Pet insurance is another area that is expected to grow briskly, Vetere said. Included in the veterinary care category, insurance was estimated to be $450 million in 2011 and expected to grow to more than $500 million in 2012.

The pet industry is also a major attraction for entrepreneurs and investors looking for creative and innovative products, Vetere said.

Vogelsang believes the trend is toward “very specific items geared to the specific needs of pets. We are seeing a lot of puzzle feeders for dogs — not just toys but ones that are geared toward the mental needs of the animal. Then there are bionic toys for destructive chewers, a lot of very niche items,” she said.

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Victoria’s Secret parent Limited Brands Inc (LTD.N: Quote, Profile, Research, Stock Buzz) reported a large sales gain for February, leading a charge of retailers that benefited from rising consumer confidence to beat Wall Street forecasts.

Limited, which also owns Bath & Body Works, said on Thursday that sales at stores open at least a year rose 8 percent last month, above the analysts’ average forecast of 6.2 percent compiled by Thomson Reuters.

So far six retailers, including Stage Stores (SSI.N: Quote, Profile, Research, Stock Buzz), and teen-oriented The Buckle Inc (BKE.N: Quote, Profile, Research, Stock Buzz) and Zumiez Inc (ZUMZ.O: Quote, Profile, Research, Stock Buzz) have reported February sales that have come in above Wall Street forecasts.

Improving consumer confidence is one reason analysts expect February same-store sales to be up 3.4 percent for the 21 companies tracked in Thomson Reuters’ same-store sales index.

Other chains, including Macy’s Inc (M.N: Quote, Profile, Research, Stock Buzz), Kohl’s Corp (KSS.N: Quote, Profile, Research, Stock Buzz) and Target Corp (TGT.N: Quote, Profile, Research, Stock Buzz), will report later on Thursday morning.

The housing market appears to be stabilizing, and the unemployment rate fell to 8.3 percent in January from 9.1 percent in August. The University of Michigan’s consumer confidence survey rose for the sixth straight month in February payday lenders.

And the surging stock market, which this week hit its highest levels since May 2008 financial meltdown, has been a boon for upscale chains like Saks Inc (SKS.N: Quote, Profile, Research, Stock Buzz) and Nordstrom Inc (JWN.N: Quote, Profile, Research, Stock Buzz) in recent months.

But the rising price of gasoline is casting a pall on consumer spending. As of Thursday, a gallon of gas in the United States cost $3.74, up 35 cents from a year earlier, according to the American Automobile Association.

On Wednesday, Costco Wholesale Corp (COST.O: Quote, Profile, Research, Stock Buzz) said its same-store sales had risen 8 percent in February, outpacing the 7.6 percent rise that analysts expected, according to Thomson Reuters data. Much of the warehouse club chain’s gains in the past year have come from shoppers seeking cheaper gasoline.

Wet Seal (WTSLA.O: Quote, Profile, Research, Stock Buzz) was one of the few chains to report a decline in sales, but the fall of 5.8 percent was less steep than expected.

Home decoration and furniture chain Pier 1 Imports Inc (PIR.N: Quote, Profile, Research, Stock Buzz) said its same-store sales for the full holiday quarter rose 10.3 percent.

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