Asian Stocks Rise As China Data Boosts Hopes

Asian stocks rose on Friday as stronger-than expected economic data from China and the United States boosted confidence in the global economic recovery.

U.S. Treasury prices slipped as investors turned to stocks and the dollar held steady after dropping to an eight-month low against a basket of currencies the previous day.

Chinese manufacturing gathered momentum last month, handily beating market forecasts and providing further evidence that the economy is pulling smoothly out of a second-quarter slowdown.

The MSCI index of Asia Pacific stocks outside Japan (.MIAPJ0000PUS) was up 0.36 percent compared with a rise of 0.24 before the release of China's Purchasing Managers Index. The index gained more than 17 percent in the last quarter.

"This looks like the real deal. It's not just inventory correction. We think that end demand is picking up in China and the economy has stabilized after the summer lull," said Frederick Neuman, co-head Asian economics, HSBC in Hong Kong.

Japan's Nikkei average rose 0.5 percent on Friday, helped by short-covering after sharp falls the previous day and after U.S. economic data provided a degree of optimism.

New U.S. claims for jobless benefits fell last week, a sign of an improving labor market, while Midwest business activity grew more than expected in September. Also, U.S. second-quarter growth was revised a touch higher on firmer consumer spending.

"Japanese stocks are recouping some ground as investors appear to be correcting extreme pessimism triggered yesterday by the yen's advance and worries about European finance problems," said Koichi Nosaka, a market analyst at Securities Japan, Inc.

India is scheduled to release its manufacturing survey data later on Friday.

The dollar held steady at 83.55 yen, backing away from the previous day's low at 83.16 yen and moving further off last month's 15-year low below 83 which had prompted Japanese authorities to intervene for the first time in six years.

The euro paused below a five-month high on the dollar on Friday while the Australian dollar jumped on optimism that the strong data from China augured well for the country's resource exports.

AIG And U.S. Set Faster, Riskier Exit Path

American International Group Inc and the U.S. government agreed on Thursday agreed on a plan that would accelerate the payback of bailout money and could yield a profit for taxpayers but also increase their risk.

The plan comes a little over two years after AIG was first rescued with an aid package that ballooned to $182.3 billion. The plan allows the Federal Reserve Bank of New York to be repaid in full and ends its involvement in AIG, leaving AIG to deal with just the Treasury Department, while simplifying the bailout structure.

The Treasury will convert some of its AIG securities into common shares, raising its stake in the insurer to 92.1 percent from nearly 80 percent. That stake will be sold off over time.

The Treasury also will effectively buy out the Fed's interest in two large AIG units that are being sold.

The plan could lead to a loss for taxpayers if the stock price falls below roughly $30, at which the Treasury will break even, or if the company fails, as common shares sit lower in the capital structure.

AIG shares closed up 4.4 percent, or $1.65, to $39.10.

"Now the debate is how much the government will make on AIG," Chief Executive Robert Benmosche said in an interview. "Is it a billion, is it 10 billion? They are not talking about a $30 billion loss anymore."

A senior Obama administration official said the plan could yield a profit of around $16.5 billion for taxpayers, compared to a previously estimated loss of about $45 billion.

The deal, which is expected to close by the end of the 2011 first quarter, shows the insurer is making progress in disentangling itself from the government and positions the company to tap the capital markets again.

The announcement of the plan comes as the government faces pressure to show it is extracting itself from the financial industry, which was offered more than a trillion dollars of taxpayer support in 2008.

When Americans go to the polls for mid-term elections in November, the state of the financial system and the economy will be a big issue.

The Troubled Asset Relief Program, set up amid the 2008 financial crisis to shore up the industry, expires on Sunday.

Benmosche said the timing of the deal helps AIG avoid another "firestorm of negative publicity."

THE PLAN

The Treasury will get about 1.66 billion AIG common shares, worth $64.9 billion at Thursday's closing share price, in exchange for the $49.1 billion of AIG preferred shares and accrued interest it now holds. The strategy is similar to one the government has been following in exiting Citigroup Inc.

Benmosche said the Treasury took the time to understand the value of AIG's business, book value and earnings potential before making the move, which makes for an easier exit as the market for common shares is more liquid.

The Treasury had estimates ranging from a year to 18 months for selling down its stake in AIG once the exchange is completed, Benmosche said.

Former AIG CEO Maurice "Hank" Greenberg, who has been a critic of the bailout terms, told Reuters Insider he was unhappy with the plan and that the conversion creates "a huge overhang" on the stock.

"What's going to drive the stock up? Their job is not to hold it; it is to sell it," Greenberg said.

The plan also calls for AIG to repay $20 billion under a Fed credit facility, using funds from operations and disposal of assets like its Asian life insurance businesses -- American Life Insurance Co (Alico) and American International Assurance (AIA).

The exchange of the Treasury's preferred stock will not be executed until the Fed credit facility is repaid in full. Morgan Stanley has been advising the Fed throughout the restructuring.

The Fed also owns preferred shares worth about $26 billion in AIA and Alico. AIG plans to draw down up to $22 billion from an existing Treasury equity line to buy out part of that stake, and then transfer the shares to the Treasury.

AIG plans to use the proceeds from future asset sales, including the sale of two Japanese life insurance units, to retire the remainder of the Fed's stake.

Prudential Financial Inc clinched a deal for the Japan units -- AIG Star Life Insurance Co Ltd and AIG Edison Life Insurance Co -- for $4.2 billion in cash.

AIG Credit Facility, formed in January 2009 to hold the government's stake in the company, will be dissolved, further reducing the number of parties at the table.

"As we move into 2011, we will be dealing with one owner in the U.S. government instead of several," Benmosche said.

The plan also has a sweetener for existing shareholders, who will see their holdings diluted. AIG plans to issue them up to 75 million warrants with a strike price of $45 per share.

Benmosche said it was a way to be fair to them, "if it is such a windfall for the government at the expense of the current shareholders."

AIG'S FUTURE

Benmosche, speaking at his office at AIG's headquarters in Manhattan, said the plan creates clarity for clients and employees. Having the Fed out, which took a senior position in the capital structure of AIG, would allow the company to again persuade banks to give it loans.

AIG is already in talks with banks and expects to have about $3 billion of credit lines as the Fed exits, Benmosche said.

AIG also plans a $2.5 billion equity offering, including issuance of new shares, and a small debt sale by March, a source familiar with the situation said.

AIG is also moving forward on asset dispositions, including the $15.5 billion sale of Alico to MetLife Inc by the end of the year, and listing of AIA in Hong Kong next month. It plans to make the domestic life and global property-casualty operations core to the company going forward.

Benmosche said the company expects about $12 billion in proceeds from AIA listing, although the valuation was being worked out. He dismissed concerns about the offering that surfaced after U.S. insurer Liberty Mutual Agency Corp postponed a $1.2 billion IPO, saying the businesses were different.

Greenberg said the asset sales reduced AIG's diversification and added risk, especially because property-casualty business is volatile.

"If I had the choice, I would sell the domestic life business rather than the Asian business (AIA)," Greenberg said.

Benmosche said AIG may at some point consider a partial IPO of other businesses, such as aircraft lessor International Lease Finance Corp and mortgage insurer United Guaranty. It also would be open to a sale of the units at the right time and price.

AIG also plans to absorb whatever is left at AIG Financial Products, the unit behind its near collapse, into the parent company and further reduce the risk, Benmosche said.

"The question becomes more about how do we get AIG to have access to the capital markets and how do we begin to show AIG as a strong investment-grade company that's single A or better," Benmosche said.

AIG's shares have risen 30 percent this year, compared with an 8 percent rise in the S&P Insurance index.

Fed's Bernanke, Pianalto Say Recovery Disappointing

The economic recovery remains disappointingly slow with unemployment too high, two top Federal Reserve officials said on Thursday, as they discussed the role of the U.S. central bank in spurring a stronger economy.

Federal Reserve Chairman Ben Bernanke, in remarks at a town hall event held by the Fed, commented on the pain still felt by many Americans, but spoke only in generalities about the Fed's commitment to stimulate growth.

The president of the Cleveland Fed, Sandra Pianalto, said growth is currently too slow to significantly reduce the "stubbornly high" unemployment rate. She said she is currently assessing the effectiveness of the tools that the central bank could employ if the Fed were to decide the economic recovery needs an extra boost.

"Even though our economy is stabilized and growing, clearly it is still a very difficult time for many Americans," Bernanke said.

"The unemployment rate is still almost 10 percent, inflation is quite low, and the Federal Reserve has the responsibility ... to do our part to help the economy recover and make sure that jobs come back to the United States," he said.

Pianalto, who addressed an event in New York, in addition to highlighting the high unemployment rate, said inflation was "too low."

She said inflation is below the 2 percent level that she sees as consistent with the Fed's longer-term objective of price stability, and said it is likely to stay low through 2011.

Low inflation is considered a concern, because it could run the risk of tipping into deflation, a vicious cycle of downward prices and slowing economic activity.

Pianalto said the Fed has options if it decides a further boost to the economy is needed.

Pianalto, who is a voter on the Fed's policy-setting panel this year, said that because a stronger economy is a solution to the unemployment problem, policies should aim to support growth. But growth is currently too slow to make much progress in reducing the jobless rate, she said.

The Fed, which has kept interest rates near zero percent since December 2008. recently said it stands ready to help the recovery if necessary. It has promised to keep interest rates exceptionally low for an extended period and has pumped $1.7 trillion into the financial system through purchases of longer-term Treasury securities and mortgage-related debt.

With economic growth expected to be weak in the second half of 2010 and unemployment high, most analysts expect the Fed to start a new round of bond purchases, or quantitative easing, when it meets in early November.

Fed officials in recent days, however, have offered divided views over what should be the catalyst for the U.S. central bank to provide more support to the economy and over the likely impact more asset purchases could have.

Pianalto said she was currently assessing the effectiveness of the tools available to the Fed, which apart from buying more longer-term bonds include strengthening its commitment to easy policy in its policy statement and lowering the interest it pays on excess reserves.

"Because we have less experience in using these unconventional tools, we have to look at the cost and benefits ... at the effectiveness," she told the Women's Economic Round Table.

"That's what I am in the process of doing with my staff. We are trying to get more information on the effectiveness of these tools."

Bernanke fielded questions by video from teachers in each of the Fed's 12 districts. While he did not go into detail about the outlook for the economy or Fed policy, his remarks conveyed concern for the sluggish pace of recovery and a sense the Fed should be active.

Bernanke said it was not uncommon for a recovery following a financial crisis to be slow. Consumers may pull back from spending as they cope with lost wealth or to reduce debt, but growth may come from business investments and exports, he said.

"The economy is moving, perhaps not as quickly as we would like, and we want to make sure that progress continues," he said.

Report To Say Waddell Stoked Flash Crash

A single trade by Waddell & Reed Financial Inc helped spark the cascade of market selling on May 6, said a source familiar with regulators' report on the so-called flash crash.

Waddell, which sold a large order of e-mini futures contracts during the plunge, will not be named in the report, according to the source, who requested anonymity because report has not been made public.

But the report will describe Waddell's trade as a single trade by an entity, the source said.

The May 6 crash sent the Dow Jones industrial average down some 700 points in a matter of minutes before sharply recovering -- an unprecedented breakdown that exposed deep flaws in the electronic marketplace now dominated by high-frequency trading.

Citing an internal exchange document, Reuters on May 14 reported that Waddell & Reed sold a large order of e-minis during the plunge -- identifying the firm that CFTC Chairman Gary Gensler had previously alluded to in congressional testimony.

The Securities and Exchange Commission and Commodity Futures Trading Commission had been expected to release the much anticipated report before October.

But the report must win approval from the majority of the 10 SEC and CFTC commissioners. It is not clear whether all commissioners have had a chance to review the report with two of the SEC commissioners traveling.

Also the CFTC must clear some procedural hurdles so that they are allowed to release information about an investigation.

Top Democratic lawmakers will ask the SEC and CFTC for a copy of the report so that Congress can publicize the findings, a second source familiar with the matter said.

Senate Banking Committee Chairman Christopher Dodd and House Financial Services Committee Chairman Barney Frank will send such letters to the SEC and the CFTC later on Thursday, the source said.

HP Names SAP Ex-chief As Its New CEO, Shares Slide

Hewlett-Packard Co named Leo Apotheker, the former head of German software company SAP, its new chief executive in a surprise appointment.

Hewlett-Packard's shares dropped 3 percent in after-hours trading.

The recruitment of the long-time software industry veteran and Silicon Valley outsider -- who left SAP abruptly after just seven months at the helm amid a wave of customer complaints -- disappointed some who worried about his ability to steer a diverse, $130 billion hardware and services company.

Apotheker, a multi-lingual salesman schooled in economics and international relations, succeeds Mark Hurd, who quit amid a scandal involving a female contractor. Apotheker also was named to HP's board.

Ray Lane, a well-known venture capitalist and former top executive at software giant Oracle Corp, will fill the chairman's post that Hurd also had occupied.

The top job at HP offers a unique opportunity to lead a technology icon but comes with big challenges and expectations. Unlike in 2005, when Hurd took over an HP in disarray, Apotheker will be at the helm of a well-run company whose investors will not be sated with another round of cost cuts.

HP said Apotheker helped transform research and development at SAP, while driving expansion.

In an interview with Reuters, Apotheker said he would focus on innovation and growth. He acknowledged the challenge of HP's size and complexity, but underscored the company's "deep and talented" management team.

Apotheker -- who helped steer the first major round of job cuts at SAP -- said under his stewardship HP would not relent in its efforts to drive efficiency.

"You're never done with efficiency, and at HP we'll continue to drive efficiency," he said. "However, we will also want to continue to have a real focus on growth. So we'll do both." For a closer look at Apotheker:

But Fort Pitt Capital analyst Kim Caughey expressed doubt about Apotheker moving from a software company to HP, a behemoth with more than 300,000 employees and a commanding presence in the personal computer, server, IT services and printer markets.

"SAP is a very different sort of company than HP, and that is my biggest concern," Caughey said. "The scope of SAP is very different, as are the customers. What does he know about hardware? That's the question."

Wedbush Securities analyst Kaushik Roy said, "He can be an agent of change. Investors were focused on 'how do you bring back R&D, how do you bring back innovation?'"

GOING OUTSIDE

The appointment of an outsider -- the third straight external hire after Carly Fiorina and Hurd -- surprised some observers who had bet on a promotion from within.

Many had expected Todd Bradley, PC division chief, or Ann Livermore, who heads its enterprise arm, to take on the role. Cathie Lesjak, who had served as interim CEO, remains CFO.

However, a source familiar with the matter has said some on the board were concerned about Bradley's strategic vision and that Hurd had been a major supporter of his.

HP's board cast a wide net in search of a new CEO, reaching out to two senior IBM executives, who quickly declined to pursue the position, according to two sources.

Apotheker had spent more than two decades at SAP. He was named SAP co-chief executive in April 2008, and became its sole leader in July 2009.

His tenure was marked by criticism of SAP's lack of direction, and customers raged when SAP instituted its first maintenance fee increases in a decade. During his term, SAP made its first-ever major round of job cuts.

"Leo is a very bright guy. He has a bad rap because he got handed the wheel of the Titanic five minutes after it hit the iceberg," said Peter Goldmacher at Cowen and Co.

HP's board named Lane as non-executive chairman -- marking the separation of the chairman and CEO roles. Lane is managing partner at venture capital firm Kleiner Perkins Caufield & Byers, and previously served as president and chief operating officer at Oracle.

Both appointments are effective November 1, and come nearly two months after the controversial August 6 departure of Hurd, which sent shock waves through Silicon Valley and upset investors who credited him with turning the company around.

Hurd may be a tough act to follow. He transformed the company into a diversified IT powerhouse, the largest technology company in the world on a revenue basis.

"The investment community wanted an outsider to be named CEO," said Gleacher & Co analyst Brian Marshall. "They view HP internally as a little bit dysfunctional in terms of all the issues they had in senior management in the last couple of years."

Analysts said Apotheker and Lane could serve to deepen its growing rivalry with Oracle, which is a bitter rival of SAP's.

Oracle CEO Larry Ellison lashed out at HP over Hurd's departure, and then hired him as president, drawing HP's wrath. The companies have publicly reconciled.

SAP co-CEO Bill McDermott called Apotheker's hiring "great news. ... This move only sets the stage for an even deeper relationship between our two companies."

HP shares fell 3 percent to $40.80 in extended trading, after closing at $42.07 on the New York Stock Exchange.

This Summer's Stock Market Rally

Here's a look at some third-quarter performance data for various market indexes and economic indicators:

STANDARD AND POOR'S 500 STOCK INDEX

Beginning: 1,030.71.

End: 1,141.20

Percentage change: 10.7 percent (up 2.3 percent overall in 2010).

DOW JONES INDUSTRIAL AVERAGE

Beginning: 9,774.02.

End: 10,788.05

Percentage change: 10.4 percent (up 3.5 percent overall in 2010).

UNEMPLOYMENT RATE

Beginning: 9.7 percent in May.

Most recent: 9.6 percent in August.

CONSUMER CONFIDENCE INDEX

Beginning: 54.3 in June.

End: 48.5 in September.

_Source: The Conference Board. (Based on a monthly survey of 5,000 U.S. households. Baseline of 100 in the index was set in 1985.)

VOLATILITY INDEX (the market's "fear gauge")

Beginning: 34.54

End: 23.78

Historical average: 19

Medicaid Enrollment Spikes to 48M In Weak Economy

A record number of Americans signed up for Medicaid last year, as the recession wiped out jobs and workplace health coverage.

A report released Thursday by the nonprofit Kaiser Family Foundation found that enrollment in the safety-net medical insurance program jumped to more than 48 million — a record 15.7 percent share of the U.S. population. With the economy barely improving, states are forecasting a 6 percent increase in the rolls next year, meaning another strain on their cash-depleted budgets.

The Medicaid numbers are the latest piece to emerge in a grim statistical picture of the recession's toll. The ranks of the working-age poor climbed to the highest level since the 1960s last year, according to a recent Census report. Nearly 12 million households received food stamps, a record.

Rising Medicaid enrollment also underscores the growing role of the government in health care, a polarizing issue in this year's midterm congressional elections after President Barack Obama and Democrats pushed through a massive overhaul of the nation's health care system.

Since the start of the recession in December 2007, nearly 6 million people have signed up for Medicaid, according to Kaiser. That period includes the biggest 12-month increase since the program's early days: 3.7 million new enrollees from December 2008 to December 2009.

"There seems to be no end in sight to the fiscal pressure on the Medicaid program," said Vernon Smith, who co-authored the Kaiser report.

Starting in the fall of 2008, the federal government provided more than $100 billion in additional Medicaid funding to help states cover growing numbers of people in need.

The last of that money will run out in June of next year, and states will face a jump of 25 percent or more in their share of costs, although they are still likely to be financially strapped. If Republicans win control of Congress, they may find it difficult to turn down requests for more aid from the states.

With or without Obama's overhaul, government is becoming the dominant player in health care. Federal, state and local government spending will overtake private sources in 2011, three years before the new law's major coverage expansion, Medicare economists said in a recent report.

Medicaid is a federal-state partnership created with Medicare in 1965 under President Lyndon Johnson. It covers low-income families and many elderly in nursing homes, with Washington paying about 60 percent of the cost on average. Medicaid has also been assigned a major role under the new health care law, which expands the program to cover an estimated 18 million additional low-income adults starting in 2014.

For now, states are cutting Medicaid to try to curb costs.

Nearly every state — 48 in all — took some action to limit Medicaid spending this year, and most plan more cuts next year. Although they didn't reduce eligibility, Kaiser found that states took steps to restrict the scope of coverage:

• A record 20 states placed restrictions on benefits, and 14 plan new restrictions next year. Arizona, California, Hawaii and Massachusetts eliminated some or all dental coverage. Other states limited medical imaging, therapies, supplies and personal care.
• Thirty-nine states cut or froze payments to hospitals, doctors and other service providers, and most plan another round next year. Medicaid payment rates are already so low that in many states it's hard to find doctors who will accept the coverage. Yet 20 states lowered payments to doctors this year, and 12 plan to do so next year.
• Eighteen states placed limits on long-term care services, and 10 plan additional limits next year.

The recession officially ended in mid-2009, but the Kaiser study indicates its ill effects will take a while longer to wear off. Meanwhile, states will have to gear up for the major Medicaid expansion under the health care law.

"We're on a teeter board," said Carol Steckel, president of the National Association of Medicaid Directors, and head of Alabama's program. "Every now and then that teeter board balances. But it's going to be rare. There's always something else."