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The Star Online: Business

At big-ticket dinners, a blunt Bernanke sounds theme of low rates

Posted: 16 May 2014 07:36 PM PDT

NEW YORK/BOSTON: In a series of quarter-million-dollar dinners with wealthy private investors, Ben Bernanke has been clearer than he ever was as chairman of the Federal Reserve on his expectations that easy-money policies and below-normal interest rates are here for a long time to come, according to some of those in attendance.

Bernanke, who retired from the U.S. central bank in January, has predicted the Fed will only very slowly move to raise rates, and probably do so later than many forecast because the labor market still has a lot more room to recover from the financial crisis and recession.

The accounts of the discussions come from attendees as well as those who heard second-hand what was said at the dinners, where hedge fund managers and others willing to foot the roughly $250,000 bill for each event asked the former Fed chairman questions in a free-flowing round-table fashion over recent weeks.

Bernanke has no constraints on expressing his views in public or private, providing he does not talk about confidential Fed matters. He declined to comment on any of his remarks at the private events.

The demand for Bernanke's time shows that many of Wall Street's highest-profile brokers and investors see him as holding rare insight on how the Fed will react in the months and years ahead - and are prepared to pay big bucks to get private access to those views.

At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed's main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke's lifetime, one source who had spoken to the guest said.

Under his direction, the Fed took the fed funds rate, its key policy lever, to near zero in late 2008 as the financial crisis raged. The central bank has held it there ever since in a bid to stimulate a stronger rebound in the world's largest economy.

Another dinner guest was moved when Bernanke said the Fed aims to hit its 2 percent inflation target at all times, and that it is not necessarily a ceiling.

"Shocking when he said this," the guest scribbled in his notes. "Is that really true?" he scribbled at another point, according to the notes reviewed by Reuters.

The sources requested anonymity because the dinners were private and they were not authorized to discuss the material publicly.

The Washington Speakers Bureau, which organizes the events and advertises the former chairman's availability on its website, did not return calls.


Since leaving the Fed at the end of January after serving eight years as chairman, Bernanke has taken a position as a distinguished fellow at the Brookings Institution, a think tank in Washington.

He kept a low profile for the first month after his departure, delivering his first public remarks to a banking conference in Abu Dhabi on March 4 and earning a $250,000 speaker's fee. His annual paycheck from the Fed was $199,700 last year - an amount that he would have already exceeded many times over from the fees he has earned in the past couple of months.

By contrast, his predecessor at the Fed, Alan Greenspan, waited only a week after his departure before addressing a private dinner hosted by Lehman Brothers, the investment bank whose collapse in 2008 sent the financial crisis into high gear.

That also brought in a reported $250,000, while a private telechat with investors in Japan that same day in 2006 was worth about half of that, each drawing criticism for giving high-paying investors a leg up on others who didn't have access to Greenspan.

Bernanke's private dinners began near the end of March, roughly two months after his retirement.

"It's not atypical for what other former Washington big shots do," said Jan Baran, a partner and head of the election law and government ethics group at law firm Wiley Rein LLP.

"He's being paid ... for sharing his wisdom and predictions, and presumably not to exert his influence on the Fed," he added. This will go on "until he's proven to not be all that clairvoyant."


The baseline fee for a private get together is $250,000, and more if Bernanke needs to travel from his home in Washington, though the price has dropped some as he has done more events, the sources said. The size of that decline could not be immediately learned.

He is known to be close with his successor, Janet Yellen, adding to perceptions that he should know what the thinking is at the Fed months after his departure. It is a particularly sensitive time as Yellen works to reverse the biggest monetary stimulus experiment ever - and investors who understand how the Fed is going to proceed have an advantage over those who don't.

Hedge fund attendees have included Paul Tudor Jones of Tudor Investment Corp and David Einhorn of Greenlight Capital. Others have included Michael Novogratz of Fortress Investment Group, and Larry Robbins of Glenview Capital, as previously reported in other media. All declined to comment to Reuters.

David Tepper, the hedge fund manager who earned $3.5 billion in 2013 to rank as the industry's best paid investor, said at an industry conference this week that he attended the first private dinner and peppered Bernanke with questions. But Tepper said he didn't make the best use of the information, a lapse he now regrets. "I screwed up that trade," he said.

At the same conference, Novogratz from Fortress said many hedge funds that bet on big interest rate and currency movements missed a hint from Bernanke at the dinner and failed to buy long duration Treasuries.

Bernanke's last major act as Fed chairman was to announce, in December, plans for the winding down of the central bank's huge stimulus, a bond-buying program called "quantitative easing," which should end by this fall.

That was greeted by a sell-off in the bond market, where expectations for future interest rate levels are particularly important, because many investors believed the Fed would move on to raising interest rates in fairly short order. The yield on the benchmark 10-year Treasury note ended the year just above 3 percent, the highest since the summer of 2011.

To the surprise of many, however, bonds have rallied back hard this year, driving the 10-year yield down by half a percentage point. The shift comes as more and more investors come to embrace a view Bernanke has been sharing with his dinner guests: There is just too much slack remaining in the economy to support a rise in interest rates.

Still, not every guest believes they came away from a Bernanke dinner with an exclusive insight.

"People can try all they want to feel that they got him to say something extra to them, but he never does," said one person who attended one of the dinners.


Financial institutions, including JPMorgan Chase & Co <JPM.N> and institutional brokerage BTIG, have hosted at least four Bernanke dinners for their clients since March, the sources said. Venues included Manhattan's Eleven Madison Park and Le Bernardin, where the four-course prix fixe menu is $135 a plate. More are expected, the sources said.

JPMorgan and BTIG declined to comment.

The investors have asked Bernanke about everything from how the Fed will shrink its $4.3 trillion balance sheet to why exactly it didn't start to cut bond purchases last September, when expectations were high.

By most accounts, Bernanke has been candid and sometimes feisty, defending his eight-year record of steering the U.S. economy through the deepest recession in decades. Often using the pronoun "we" to describe the Fed, he has been careful not to contradict Yellen's public comments, in which she too has stressed that the labor market is far from fully healed.

In its first policy statement under Yellen, in March, the central bank said the federal funds rate may need to stay below average even after it reaches its goals for employment and inflation.

In one dinner-table exchange with investors, Bernanke argued that fiscal tightening, constrained financial markets and lower U.S. productivity all point to lower real rates than would be considered normal for a long time to come.

Based on trading in the massive Eurodollar futures market, investors have in recent months tempered expectations of rate rises in the years ahead; as it stands, they don't expect the fed funds rate to return to 4 percent until 2022. As recently as last September, futures markets signaled they thought this would happen by the end of 2018.

At the dinners, Bernanke has also argued the Fed would want to delay raising rates if the tighter financial conditions created could threaten to harm the economy. He has also stressed that financial stability concerns would more formally be considered in policy-making, according to the sources.

For hedge fund managers who have big bets riding on when exactly the Fed will raise rates, dining with Bernanke is part ego and part professional necessity.

The average U.S. hedge fund has returned only 0.9 percent in the first four months of the year after two consecutive months of losses in March and April, leaving many top managers on edge.- Reuters

Don&#39;t leave US small-cap stocks for dead

Posted: 16 May 2014 07:22 PM PDT

NEW YORK: There are many reasons for the sharp underperformance of small- cap stocks in the past six weeks, but the recent correction may be winding down, which means investors worried about a broader selloff might be able to breathe more easily.

The Russell 2000 briefly dipped into correction territory - down 10 percent from its March peak - two days after the Dow Jones industrial average and the S&P 500 closed at record highs.

That divergence is uncommon. It has caused some to fear that a strong selloff in large-cap stocks will follow, painting an all-around dire picture for equities. Some investors don't see it that way, though. They believe that improved economic growth and rising merger-and-acquisition activity should halt the decline in smaller-cap names.

"Growth in small-cap business is still intact, and they will continue to do well," said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas.

"Large-caps are flush with cash, and we think there's going to be a lot of acquisitions out of small-caps."

The slide in small-cap companies' stocks might be more related to valuation than any bigger signal on the economy or a sudden aversion to equities. The small caps had an outstanding run in 2013 that made them look vulnerable, and this past earnings period made that all too clear.

At the end of 2013, the difference between the forward price-to-earnings ratio on the Russell 2000 and the S&P 500 was near its highest going back to at least 1978, according to data from Citi. The Russell's forward P/E ratio was 24 then and the S&P 500's was 15.7.

Now the Russell's forward P/E ratio is 21.5 and the S&P 500's is 15.3. That's still a substantial difference.

Looking at earnings, large caps have performed better. Just 25 percent of S&P 500 components have missed expectations for per-share earnings in the first quarter.

By comparison, a Thomson Reuters index of nearly 2,000 companies in the small- and mid-cap space showed 44 percent have missed earnings forecasts so far, according to StarMine data.

"The most pronounced divergence I am seeing this year relates to quality and consistency of earnings," said Brad Lipsig, senior portfolio manager at UBS Financial Services, speaking of small- and large-cap stocks.

Fear has been part of the equation as well. Investors have shied away from hyper-growth companies since February as biotechnology and Internet stocks slumped. That drove flows away from the iShares Russell 2000 exchange-traded fund <IWM.P>, which in turn pressured the underlying stocks.

But the tide may be changing. Weekly inflows into the IWM ETF in the week ended Wednesday were the highest in dollar terms in four years, according to Lipper data.

"If this does stabilize, we could see a turn, with small caps holding up better," Steven DeSanctis, small-cap strategist at Bank of America Merrill Lynch, told clients in a Friday note.- Reuters

Apple, Google settle smartphone patent litigation

Posted: 16 May 2014 07:18 PM PDT

SAN FRANCISCO: Apple Inc and Google Inc's Motorola Mobility unit have agreed to settle all patent litigation between them over smartphones, ending one of the highest-profile lawsuits in technology.

In a joint statement on Friday, the companies said the settlement does not include a cross license to their respective patents.

"Apple and Google have also agreed to work together in some areas of patent reform," the statement said.

Apple and companies that make phones using Google's Android software have filed dozens of such lawsuits against one another around the world to protect their technology. Apple co-founder Steve Jobs called Android a "stolen product."

Google and Apple informed a federal appeals court in Washington that their cases against each other should be dismissed, according to filings on Friday. However, the deal does not apply to Apple's litigation against Samsung Electronics Co Ltd.

Apple has battled Google and what once were the largest adopters of its Android mobile software, partly to try to curb the rapid expansion of the free, rival operating system.

But it has been unable to slow Android's ascendancy, which is now installed on an estimated 80 percent of new phones sold every year. Motorola, the U.S. company that pioneered the mobile phone, no longer ranks among the biggest smartphone makers.

Both Motorola and HTC Corp have been eclipsed by Chinese Android adopters such as Lenovo Group Ltd - which is buying Motorola - and Huawei and Xiaomi.

The most high-profile case between Apple and Motorola began in 2010. Motorola accused Apple of infringing several patents, including one essential to how cellphones operate on a 3G network, while Apple said Motorola violated its patents to certain smartphone features.

The cases were consolidated in a Chicago federal court. However, Judge Richard Posner dismissed it in 2012 shortly before trial, saying neither company had sufficient evidence to prove its case. Last month, the appeals court gave the iPhone manufacturer another chance to win a sales ban against Motorola.

Apple's biggest victory against Android came against Samsung, where U.S. juries have awarded Apple more than $1 billion in damages. Those verdicts are on appeal, and despite years of court challenges to Android, Apple has not been able to win a crippling sales injunction.

Google acquired Motorola Mobility in 2012 for $12.5 billion, and this year announced it was selling Motorola Mobility's handset business to Lenovo, while keeping the vast majority of the patents.

The case at the U.S. Court of Appeals for the Federal Circuit is Apple Inc vs. Motorola Mobility, case number 2012-1528, -1549.- Reuters

Kredit: www.thestar.com.my

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