States face growing pension gaps

Reuters, WASHINGTON, April 26: U.S. states are short $1.26 trillion in paying for public employee pensions and other retirement benefits, a gap that grew 26 percent in one year and will take many more years to wipe out, according to a report released on Tuesday.

A total of 31 states had pensions that were underfunded in fiscal 2009, the latest year for which data is available, up from 22 states a year earlier, the Pew Center on the States reported.

The financial crisis in 2008 crushed many pension funds' investments, just as historic budget woes forced governments to cut contributions to those funds.

The combination "made a serious problem even worse," said Susan Urahn, the Pew Center's managing director.

In fiscal 2009, which for most states began in July 2008, states were short $660 billion for future pension payments and $604 billion for other retiree benefits, namely healthcare.

Growing unfunded pension liabilities on top of still daunting state budget gaps are a top concern of Wall Street rating agencies and investors in the $2.9 trillion municipal bond market. Most states are legally bound to pay retirees benefits, and they must make up for any investment loss from their already depleted treasuries or by borrowing.

Pensions are deemed "underfunded" when they are unable to pay at least 80 percent of liabilities.

Preliminary data for fiscal 2010 shows that pension funding levels of 10 states deteriorated further, while just three registered increases, Pew found.

"Overall, these results suggest that while states benefited from better returns in fiscal year 2010, the legacy of the financial crisis ... will remain an issue for years to come," Pew said in the report.

Last year, Pew found states were short $1 trillion in fiscal 2008 on promises to retirees, using data that came from before the financial crisis.

States typically assume an 8 percent annual return and their pension plans suffered a median 19.1 percent drop in their assets' market value in fiscal 2009, Pew said. One critic said the lagging data does not reflect the improvement in current conditions.

"Given where we are in time now, talking about 2009 numbers just isn't useful. The world has changed in the last 18 months," said Hank Kim, executive director of the National Conference of Public Employee Retirement Systems. "The market has come roaring back."

On Monday, Kim's group released a survey of 216 public pension funds showing the average return over the last year was 13.5 percent.

Illinois consistently has had the lowest pension funding level among states, one that worsened to 51 percent in fiscal 2009 from 54 percent in fiscal 2008, according to the Pew report. In fiscal 2010 and 2011, the state sold $7.16 billion of taxable bonds to raise money for its annual pension payments.

A year ago, Governor Pat Quinn signed into law a pension reform measure reducing benefits for new state workers, which he said would save more than $200 billion over nearly 35 years. The U.S. Securities and Exchange Commission is looking into "communications" by the state regarding potential savings or reduced contributions to pensions resulting from the law.

Five other states, including cash-strapped Rhode Island, have funding levels of less than 60 percent, according to Pew. Conversely, New York's pension is 101 percent funded, followed by Wisconsin at 100 percent and Washington at 99 percent.

States must increase their contributions when returns are low. From 2000, when the systems were well funded, to 2009 these payment requirements grew 152 percent, putting pressure on states to take dollars away from other spending areas.

Of late, Republicans in the U.S. Congress have pressed states to assume investment return rates closer to 4 percent, which they consider "riskless."

Using assumptions that private pension plans rely on, which are linked to returns on corporate bonds of about 5.22 percent, Pew found the pension shortfall for states could be as much as $1.8 trillion. By relying on a rate based on a 30-year Treasury bond, Pew found the states' shortfall could be $2.4 trillion.

Netflix profit rises, but outlook disappoints

Reuters, NEW YORK, April 26: Netflix Inc (NFLX.O), the top movie rental service, issued an earnings outlook that fell short of expectations and provided fresh ammunition to critics of its sky-high stock price.

Shares of Netflix fell 5 percent after its report, a sign that anything less than perfect performance will not suffice for a company whose stock has nearly tripled over the past year and become a target of short-sellers.

Netflix reported first-quarter earnings and revenue that surpassed expectations -- and it built up its subscriber base to more than 23 million customers -- but it was the company's earnings outlook that caught the attention of investors. [nN25211548]

"Netflix is very much a momentum stock," said Brett Harriss, an analyst with Gabelli & Co. "We didn't get a blockbuster quarter and guidance was a little light."

Specifically, Netflix said it would likely earn between 93 cents and $1.15 a share in the second quarter, compared with analyst expectations of $1.19 a share.

One concern analysts pointed to was Netflix's international business, considered critical to its growth over the next several years. So far, it has entered Canada, where it now has just over 800,000 subscribers after seven months of business.

But expansion in Canada -- and plans to move into other markets -- comes at a cost. The company expects to post a $50 to $70 million operating loss in its international business during the second half of the year, steeper than the $50 million it previously forecast.

Atul Bagga, an analyst with ThinkEquity, said concerns about Netflix's outlook and the money it is investing in its international business were overblown. "In my view, that opportunity is just getting going," he said.

Netflix has raised expectations by producing out-sized subscriber additions quarter after quarter. Netflix ended the first quarter with 23.6 million subscribers, more than Comcast Corp(CMCSA.O), the largest U.S. cable company.

In the first quarter of 2011 it added 3.3 million domestic subscribers, nearly double the number added during the period a year ago, highlighting its success in its transition from a mail-order business to one that increasingly delivers its movies and TV shows over the Web.

To attract more customers, Netflix has built its streaming offerings through a rush of content agreements. Recent ones include a Lionsgate deal for "Mad Men," a Fox deal for "Glee," and a pact with CBS that adds shows such as "Cheers and "Frasier."

Netflix made an aggressive move into securing its own content, purchasing the rights for the original series "House of Cards," starring Kevin Spacey. The company said that it planned two to three more "similar but smaller deals."

The cost of buying content to stream online is perhaps the biggest worry around Netflix; it could quickly erode margins. The company said U.S. operating margins would be about 14 percent in the second quarter -- its stated target number -- but predicted that spending on streaming content would "increase substantially."

Chief Executive Reed Hastings acknowledged that competition to secure content for online distribution is heating up. "There is a substantial level of competition, as you would expect, not only among online players but against cable networks."

He also said that negotiations for content were civilized, despite barbs thrown at Netflix by the high-profile media executives such as Time Warner Inc's (TWX.N) Jeffrey Bewkes [nN01172027].

"There isn't any animosity -- it's only a question of is our check big enough?" Hastings said during a call following earnings.

Netflix posted earnings of $60.2 million, or $1.11 a share -- up from $32.3 million, or 59 cents per share, in the period a year ago. The earnings were 3 cents better than analysts' average forecast of $1.08 a share.

Revenue rose 46 percent to $719 million, which again surpassed analysts expectations of $703.6 million, according to Thomson Reuters I/B/E/S.

Netflix shares fell to $238.20 following the earnings report, after closing at $251.67, down 55 cents, during the regular Nasdaq session.

Canon Q1 profit declines 5 percent, cuts annual outlook

Reuters, TOKYO, April 26: Canon Inc (7751.T) reported a 5 percent fall in quarterly operating profit and cut its annual outlook to below market expectations as it copes with the effects of Japan's earthquake, which has hit suppliers and hobbled production.

Profits at Canon, which competes against Sony Corp (6758.T) and Nikon Corp (7731.T) in cameras and Xerox Corp (XRX.N) and Ricoh Co Ltd (7752.T) in copiers, have been under pressure as it has been unable to resume full production at some plants.

Canon, the world's largest maker of digital cameras, said on Tuesday its operating profit came to 82.5 billion yen ($1.0 billion) in January-March, against 86.84 billion yen in the same quarter a year earlier.

That is above an average estimate of 77.1 billion yen in a poll of three analysts taken after the quake by Thomson Reuters I/B/E/S.

Canon lowered its operating profit forecast for the business year to end-December to 335 billion yen from its earlier estimate of 470 billion. This is below an average estimate of 396.5 billion yen in a poll of six analysts taken after the quake by Thomson Reuters I/B/E/S.

By Monday's close, the company's shares had fallen about 7 percent since the quake versus a nearly 6 percent decline in the benchmark Nikkei average (.N225).

Shares of Canon closed 0.9 percent lower at 3,495 yen before the results announcement, tracking a 1.2 fall in the Nikkei.

Nasdaq and ICE doubt NYSE-D.Boerse cost savings

Reuters, NEW YORK, April 26: Nasdaq OMX Group and IntercontinentalExchange warned NYSE Euronext investors to be "highly skeptical" of the additional cost savings that the NYSE says will result from its friendly merger with Deutsche Bourse.

Nasdaq (NDAQ.O) and ICE (ICE.N) are hoping to thwart the Deutsche Boerse (DB1Gn.DE) deal, having offered $11.2 billion to buy NYSE (NYX.N) after Deutsche Boerse and NYSE agreed to a $9.9 billion merger.

NYSE Euronext Chief Executive Duncan Niederauer raised the estimate of potential cost savings from the Deutsche Boerse deal by about a third, to some 400 million euros ($580 million), a spokesman said on Sunday.

Twice this month, NYSE's board of directors have rejected the bid by Nasdaq and ICE as too risky and lacking value, and backed the German bourse's lower offer on grounds it will produce a better strategic fit.

Nasdaq and ICE said on Monday that the newly found cost savings were not the result of "sharpening a pencil, but an unexplained shift in strategy."

The U.S.-based exchange operators also noted that shareholders have not been offered an increase in price.

Niederauer's new estimate puts the cost and revenue benefits in the NYSE Euronext-Deutsche Boerse deal closer to the $740 million in synergies that Nasdaq and ICE see in their rival bid for NYSE.

The struggle for control of the iconic Big Board and the NYSE's handful of bourses across Europe could redraw ownership of many of the world's key stock and futures markets, as a merger frenzy grips the exchange industry.

Also on Monday, Nasdaq and ICE also came under fire from a prominent U.S. lawmaker worried about job losses that would come with their proposed cost cuts.

The impact of the proposed deal on jobs in the New York City area would be "a major consideration in judging any potential transaction," U.S. Sen. Charles Schumer of New York wrote in a letter to Nasdaq CEO Robert Greifeld and ICE CEO Jeffrey Sprecher.

Schumer said NYSE officials had privately told him that a merger with Nasdaq and ICE would result in a loss of 1,000 to 1,100 U.S. jobs, including roughly 800 in the New York City area.

When Nasdaq and ICE unveiled their unsolicited bid on April 1, Greifeld did not say how severe the job losses would be, though he said he would keep the NYSE trading floor on Wall Street.

Also on Monday, the U.S. Department of Justice, which will need to sign off on the merger and is reviewing it, asked Nasdaq for more information and documentary material. Justice Department spokeswoman Gina Talamona declined to confirm or comment on the government's second request for information from Nasdaq but said "our investigation is ongoing."

The tug-of-war for NYSE Euronext has raised questions about which deal is better for shareholders given the price disparity between the two proposals and the antitrust hurdles that could yet derail each of them.

NYSE shareholders are meeting on Thursday for their annual vote on the company's directors. The shareholder vote on the NYSE-Deutsche Boerse deal is expected on July 7.

NYSE Euronext shares closed regular trading on Monday down 0.7 percent at $38.76 and Nasdaq OMX Group shares ended down 1.1 percent at $27.23.

Nintendo CEO: alliances with other firms may be needed

Reuters, TOKYO, April 26: Nintendo said on Tuesday that alliances with other companies may be necessary, a day after the game maker reported its second straight fall in annual profit and said it would launch a successor to its aging Wii console.

"I now regret that we didn't tie up with someone outside the company to market the Wii. If we had done that, the fate of the Wii might have been different," Chief Executive Satoru Iwata said at a conference for investors and analysts.

"Now I am aware that we should not rely too much on ourselves. You will see what I mean by this when we market the 3DS and the Wii in the future."

UBS sees money pour back in as rebuilds trust

Reuters, April 26: UBS (UBS.N)(UBSN.VX) appeared to put the financial crisis behind it, with money pouring back into its core wealth management arm in the first quarter, although its investment bank struggled to regain momentum.

The Swiss bank, whose client inflows of 11.1 billion Swiss francs ($11.55 billion) far outstripped forecasts after they were flat the previous quarter and following big outflows in the first half of 2010, acknowledged it still had more to do.

"Taking into account the state of the market, our result... was satisfactory. Nevertheless, it falls short of our overall ambitions for the firm," Chief Executive Oswald Gruebel and Chairman Kaspar Villiger said in a letter to shareholders.

Gruebel said on Tuesday the increase in net new money confirmed "the return of client trust and confidence" in the world's second-largest wealth manager. The bank has seen clients withdraw nearly 400 billion francs in recent years after it was bailed out following huge writedowns on toxic assets and was hit by U.S. charges that it helped wealthy Americans dodge tax.

"It looks like a high quality set of numbers," said Matthew Clark of Keefe Bruyette & Woods. "In wealth management it looks like things are back to normal. UBS has caught up with its peer group in terms of gross margin and net inflows."

UBS said it had had strong inflows in the Asia Pacific region and emerging markets as well as from the ultra wealthy, although it continued to see outflows in Europe, where countries have been chasing tax evaders using secret Swiss accounts.

UBS said wealth management's gross margin on invested assets rose by 6 basis points to 98 basis points.

FOCUS ON FICC

UBS reported a pretax profit of 835 million francs at its investment bank, up from 100 million the previous quarter, but down 30 percent year-on-year as revenues from fixed income currencies and commodities (FICC) fell 17 percent.

Gruebel's plans to turn around the investment bank -- which made the massive losses that almost felled UBS -- is under scrutiny after an exodus of top bankers and an admission he underestimated the challenge of reviving fixed income.

UBS said it expected to see some improvement in a number of business lines in the investment bank, despite constraints imposed on some of the FICC businesses by a focus on controlling risk. It also noted the competition for talent and recent base salary increases will put some pressure on the cost base.

At U.S. rival Morgan Stanley (MS.N) investment banking was the biggest reason for a steep earnings decline in the first quarter, with fixed-income trading the main source of that drop.

UBS said the disaster in Japan, unrest in North Africa and the Middle East and the ongoing euro zone debt crisis had dampened usually strong first-quarter client activity.

Some analysts have said Gruebel will have to revise his target for a pretax profit of 15 billion Swiss francs from late 2012, but he said last month he would only review the figures once there was more clarity on new capital rules.

Chief Financial Officer John Cryan told journalists on a conference call UBS was not deviating from those targets today although the bank would monitor the regulatory environment.

Gruebel has said stiff Swiss standards -- which the government sent to parliament last week and could be approved this year -- could force UBS to move units abroad.

"We remain concerned that the international regulatory environment increasingly lacks consistency," Villiger and Gruebel said, adding they would monitor the effect of rules on the corporate structure and take appropriate action when needed.

UBS is not paying a dividend for 2010 or for some time to come as it retains earnings to meet the tough new requirements.

China raises capital requirement for top five banks

Reuters, BEIJING, April 26: China has increased capital requirements for its five biggest banks above the minimum 11.5 percent mark to guard against risks in the banking sector, Bloomberg reported on Tuesday.

Citing three sources with knowledge of the matter, Bloomberg said Industrial & Commercial Bank of China (601398.SS) (1398.HK), the world's biggest bank by stock market value, was told last month to have a capital adequacy ratio of at least 11.8 percent.

Three other rivals of Industrial & Commercial Bank of China were told the same, with Agricultural Bank of China (601288.SS) (1288.HK) as the exception -- it was told to have a ratio of 11.7 percent.

The three other top Chinese banks are China Construction Bank (601939.SS) (0939.HK), Bank of China (601988.SS) (601988.SS)(3988.HK), and Bank of Communications Co Ltd (3328.HK) (601328.SS).

An official in the press office at the China Banking Regulatory Commission, contacted by Reuters on Tuesday, denied that capital adequacy ratios had been raised for the banks.

A document obtained by Reuters in February showed China's banking regulator could raise the capital adequacy ratio for banks to as high as 14 percent.

A 14-percent level would be 250 basis points above the minimum 11.5 percent mark, and would be implemented as an additional counter-cyclical requirement if the regulator thinks credit growth is abnormally strong.