Wall Street rises after Alcoa reports earnings

NEW YORK (Reuters) - U.S. stocks rose on Wednesday, rebounding from two days of losses, as investors turned their focus to the first prominent results of the earnings season.
Stocks had retreated at the start of the week from the S&P 500's highest point in five years, hit last Friday, on worries about possible earnings weakness.
Shares of Alcoa Inc were down 0.5 percent to $9.08 after early gains, following the company's earnings release after the bell on Tuesday. The largest U.S. aluminum producer said it expects global demand for aluminum to grow in 2013.
Herbalife Ltd stock rose 4.2 percent to $39.95 in its most active day of trading in the company's history after hedge fund manager Dan Loeb took a large stake in the nutritional supplements seller. Prominent short-seller Bill Ackman had previously accused the company of being a "pyramid scheme," which Herbalife has denied.
Traders have been cautious as the current quarter shaped up like the previous one, with companies recently lowering expectations, said James Dailey, portfolio manager of Team Asset Strategy Fund in Harrisburg, Pennsylvania. Lower expectations leave room for companies to surprise investors even if their results are not particularly strong.
"The big question and focus is on revenue, and Alcoa had better-than-expected revenue," which calmed the market a little, Dailey said.
Overall, corporate profits were expected to beat the previous quarter's meager 0.1 percent rise. Both earnings and revenues in the fourth quarter are expected to have grown by 1.9 percent, according to Thomson Reuters data.
The Dow Jones industrial average gained 61.66 points, or 0.46 percent, to 13,390.51. The Standard & Poor's 500 Index rose 3.87 points, or 0.27 percent, to 1,461.02. The Nasdaq Composite Index gained 14.00 points, or 0.45 percent, to 3,105.81.
Facebook Inc shares rose above $30 for the first time since July 2012, trading up 5.3 percent at $30.59. Facebook, which has been tight-lipped about its plans after its botched IPO in May, invited the media to its headquarters next week.
Clearwire Corp shares jumped 7.2 percent to $3.13 after Dish Network bid $2.28 billion for the company, beating out a previous Sprint offer and setting the stage for a takeover battle for the wireless service provider that owns crucial mobile spectrum.
Apollo Group Inc slid after heavier early losses, a day after it reported lower student sign-ups for the third straight quarter and cut its operating profit outlook for 2013. Apollo's shares were last off 7.8 percent at $19.32.
Volume was below the 2012 average of 6.42 billion shares traded per day, as 6.10 billion were traded on the New York Stock Exchange, NYSE MKT and Nasdaq.
Advancing stocks outnumbered declining ones on the NYSE by 2,014 to 963, while on the Nasdaq advancers beat decliners 1,603 to 859.

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News Summary: Report says SEC probes Herbalife

SEC SEEKERS: The Wall Street Journal reports that the Securities and Exchange Commission has launched a probe into Herbalife Ltd. The newspaper cited an unnamed person close to the inquiry.
TIP OF THE PYRAMID? Herbalife has been facing investor questions about its business model. Last month, Pershing Square Capital Management's William Ackman said he was shorting the stock for several months after concluding that the company is a pyramid scheme.
APPEAL TO ANALYSTS: Herbalife vehemently denies that it is a pyramid scheme. It plans to meet with analysts and investors Thursday to discuss its business model.

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Asia stocks rise on positive start to US earnings

BANGKOK (AP) — A positive start to U.S. corporate earnings season helped boost Asian stock markets Thursday.
Major regional benchmarks rose on the heels of a handful of better-than-expected results that also lifted Wall Street.
Consumer products maker Helen of Troy, whose brands include Dr. Scholl's and Vidal Sassoon, reported a 15 percent profit increase. Electronic payments processor Global Payments said its fiscal second-quarter earnings rose nearly 15 percent, beating Wall Street expectations.
After markets closed Tuesday, Alcoa Inc. predicted rising demand for its aluminum this year and topped revenue expectations for the fourth quarter. Earlier in the day, agricultural products giant Monsanto said its profit tripled and raised its guidance for 2013.
Japan's Nikkei 225 index rose 0.9 percent to 10,677.74. Hong Kong's Hang Seng gained 1 percent to 23,439.46. South Korea's Kospi added 0.7 percent to 2,005.39 and Australia's S&P/ASX 200 advanced 0.4 percent to 4,725.80.
The European Central Bank will meet later Thursday to set monetary policy for the 17 countries that use the euro. It is expected to keep its benchmark interest rate unchanged at the record low of 0.75 percent even though the eurozone economy as a whole is back in recession. Investors are also awaiting the release in the U.S. of weekly jobless claims.
On Wall Street, the Dow Jones industrial average rose 0.5 percent to close at 13,390.51 on Wednesday. The Standard & Poor's 500 rose 0.3 percent to 1,461.02. The Nasdaq composite index rose 0.5 percent to 3,105.81.
Benchmark crude oil contract for February delivery was up 33 cents to $93.44 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell 5 cents to close at $93.10 per barrel on the Nymex on Wednesday.
In currencies, the euro fell to $1.3047 from $1.3053 while the dollar rose to 88.05 yen from 87.75 yen.

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ING Bank may cut more costs as bad loans weigh

Dutch banking and insurance group ING said it may need to cut more costs to cope with new regulations and high provisions for bad loans, highlighting the pressures on banks to shrink their businesses.
Banks globally are facing higher capital requirements to satisfy regulators at a time when a weak economy is reducing demand for investment banking and credit services, forcing them to reduce costs by cutting operations and jobs.
Deutsche Bank in September announced a plan to cut bonuses, axe more jobs and sell assets to meet tougher capital rules, while Swiss bank UBS is cutting 10,000 jobs as it winds down its fixed-income division.
Nomura Holdings Inc , Japan's biggest brokerage, will make cuts in its equities and investment banking businesses, with its loss-making European operations taking the biggest hit.
ING, which is dismantling its banking and insurance model after needing 10 billion euros ($13 billion) of state aid in 2008, said on Monday the weak economy would continue to have an impact on operations.
"Risk costs for the bank have been increasing amid the economic downturn, and we don't foresee an immediate improvement," Chief Executive Jan Hommen said in a New Year's speech to his employees.
Risk costs are provisions for loans that are not expected to be repaid or not repaid fully because borrowers are in financial trouble or are going bankrupt.
"While we have initiated steps to reduce expenses, we are also confronted with headwinds including higher regulatory costs and the Dutch bank tax, and we must continue to align our cost structure to a leaner operating environment," Hommen said.
In November, ING announced a second round of job cuts, axing 2,350 mostly European jobs. That followed a plan in 2011 to cut 2,700 Dutch jobs to cope with deteriorating markets.
ING employed 86,881 people at the end of September.
ING shares were up 2.9 percent at 7.60 euros by 1010 GMT, in line with increases in the share prices of other European banks after regulators eased global bank liquidity rules to enable lenders to issue more credit to help struggling economies grow.

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Japan to compile 12 trillion yen extra budget: sources

TOKYO (Reuters) - Japan's government will compile a 12 trillion yen ($136.30 billion) extra budget with up to 10 trillion yen set aside for economic stimulus, several sources told Reuters on Monday.
The government will sell more than 5 trillion in new bonds to fund the budget, the sources said. The remaining funds will come from unspent money from last fiscal year's budget and money originally allocated to servicing existing debt, the sources said.

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Canada leading indicator edges up 0.1 percent in November

OTTAWA (Reuters) - The composite leading indicator for Canada rose 0.1 percent in November, slowing down from October on a housing market downturn and weak manufacturing as the economy hits a soft patch.
The index rose 0.2 percent in October and was up every month in 2012 except July, said a report on Monday by the Macdonald-Laurier Institute. The think tank developed the modified indicator last year to replace the one discontinued by the country's official statistics agency.
"The marginal gains in the leading indicator augur slow economic growth into early 2013, although the manufacturing sector turned down as uncertainty grew about the global economy," the institute said in a release.
The housing index fell 3.3 percent in November, the fifth consecutive decline as housing starts and existing home sales weakened.
In manufacturing, new orders fell 0.7 percent and the average workweek shrank by 0.3 percent.
Employment insurance claims rose for the first time in eight months in spite of strong employment data in the fourth quarter.
The stock market and commodity prices were the main areas of strength offsetting the weakness elsewhere.

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Private equity pours money into India primary healthcare

MUMBAI (Reuters) - Private equity funds quadrupled their investment in India's primary healthcare, betting the sick and ailing will stop seeing family doctors in often cramped and dingy quarters and check into modern chains sprouting up across Asia's No.3 economy.
Goldman Sachs Group Inc, Warburg Pincus LLC, Sequoia Capital and the Government of Singapore Investment Corp are among investors that pumped $520 million into India's basic healthcare industry this year, compared with $137 million in 2011, according to Thomson Reuters data. Some analysts predict investment will surpass $1 billion in 2013.
Organized healthcare providers including Apollo Hospitals Enterprise Ltd and Fortis Healthcare Ltd are betting that growing numbers of patients will be willing to pay two or three times more for better-equipped clinics - all under a model that can be replicated fast and offers investors the potential for quick returns.
"The family doctor concept is slowly phasing out as migrants in cities look out for a brand rather than visiting a general physician next door," said Santanu Chattopadhyay, CEO of NationWide Primary Healthcare Services, in which U.S.-based Norwest Venture Partners has invested $4.6 million.
The opportunity is vast: India's unorganized primary healthcare system is worth $30 billion and is growing at least 25 percent a year. The challenge will be convincing the sick to give up their trusted family doctors.
The country's primary healthcare sector will draw at least $1 billion annually in private equity investment over the next couple of years, said Shantanu Deb Mookerjea, executive director at Mumbai-based advisory firm LSI Financial Services.
"Single-specialty chains and diagnostic laboratories will be the game changer," he said, adding that they are easy to set up and expand to suit demand.
Another attraction is that primary healthcare providers such as outpatient clinics and diagnostic centers are not capital-intensive, so investors don't have to write out big checks.
Also, unlike many restrictive Indian industries, from insurance to real estate and telecoms, there are no limits on foreign ownership in healthcare.
THINK LIKE RESTAURANTS
Healthcare, like restaurant chains, is a play on rising spending power in India, although valuations tend to be lower than the retail sector. Investors pay single-digit multiples on price-to-earnings in primary healthcare, compared with 15 to 18 for food and other consumer chains.
Valuations could improve if private healthcare operators also adopted a restaurant franchise model.
Under such a model, a healthcare operator would allow a franchisee to use its brand and provide expertise and support in exchange for a fee. The franchisor would avoid forking out money to set up new clinics - investments that will be borne by the franchisee.
"We would prefer to value our company based on our franchisee consumer model like a pizza (chain) rather than as a pill made by a drugmaker," said Atul Bhide, director of finance at Mumbai-based Vaidya Sane Ayurved Laboratories, which operates 160 clinics providing traditional ayurvedic treatment.
As a result, healthcare has been a rare bright spot for private equity in India, where overall investment fell 17 percent this year to about to $3.3 billion.
"From small hospital chains and specialized treatment facilities, we are witnessing increased institutionalized activity, which could attract a lot of institutional investment interest," said Vishakha Mulye, CEO of ICICI Venture, the private equity arm of ICICI Bank Ltd.
Last year, Mulye's fund sold its stake in diagnostic chain Metropolis Healthcare to Warburg Pincus for 3.92 billion rupees ($72 million), a 10-fold return on its 350-million-rupee investment in 2006.
CONVINCING PATIENTS
The biggest challenge will be convincing patients such as Chandrashekhar Khandke, a 30-year-old software professional at IBM in the western city of Pune, who said he has visited modern clinics a few times but still prefers his family doctor.
"If I buy grains from a grocery store or from a supermarket, it doesn't make much of a difference but when it comes to health, a family doctor matters a lot," he said.
Overcoming the draw of a trusted doctor may prove harder than it seems, even in a country where healthcare infrastructure is poor, electronic medical records are rare, and the quality of doctors and other medical professionals is patchy.
"Although branded clinics have potential, they find it tough to pull patients from a strong local doctor. Also, if there is a big hospital in the vicinity, then they lose out on patients," said Deepak Malik, analyst at Mumbai-based brokerage Emkay Global Financial Services Ltd.
While fees at modern clinics range from 150 to 600 rupees for treatment of routine illness, sole general practitioners charge patients anything between 50 and 300 rupees per visit.
"While these chains have a unique brand, a trusted doctor is even a bigger brand," said Anil Advani, a doctor who operates an old but modest 800-square-foot (75-square-metre) clinic in Thane, outside Mumbai.

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Fed's Plosser sees lasting blow to potential growth rate

SAN DIEGO (Reuters) - The United States economy likely suffered a lasting decline in its trend potential growth rate as a result of the severe 2007-2009 U.S. recession, a top official of the Federal Reserve said on Friday.
"Any of you who have looked at the data of the most recent ... recession, it certainly looks like we've had a permanent shock," Charles Plosser, president of the Philadelphia Federal Reserve Bank, told a panel at the annual meeting of the American Economic Association. "The problem is we won't know the answer to that for many years to come."
Fed Chairman Ben Bernanke also recently voiced the possibility that the harm done by the recession might have trimmed the United States' growth potential, which gauges how fast the economy can grow over time without hitting inflationary speed bumps.
Plosser is one of the more hawkish members of the Fed's policy-setting committee and has warned about the inflation risks posed by the U.S. central bank's current aggressive policy to spur the country's growth.
Hawks warn a decline in the rate of U.S. trend potential growth means the Fed ought be careful in trying to push the economy to grow much faster, although some economists say that the dip may only be temporary.
"If it is not permanent, it is very persistent," Plosser told reporters on the sidelines of the meeting, adding, "That has consequences for ... monetary policies' ability to do something about the shock."
The Fed last month voted to maintain mortgage-backed and Treasury bond purchases at an $85 billion monthly pace and to keep expanding its balance sheet via these quantitative easing measures until there is a substantial improvement in the outlook for the labor market.
The Labor Department on Friday reported that U.S. unemployment remained stuck at 7.8 percent in December. The Fed has committed to hold interest rates near zero until unemployment declines to 6.5 percent, provided inflation remains beneath 2.5 percent.
Plosser, who expects unemployment to drop to between 6.8 percent and 7.0 percent by end-2013, said he hoped the Fed would stop buying bonds before the 6.5 percent threshold, implying he anticipated the asset purchases would halt this year.
A danger of guessing wrong about trend growth is that it would throw off estimates about the size of the U.S. output gap, which is used to describe the amount of slack in the economy, and how much faster it can grow without sparking inflation.
The Fed's latest quarterly summary of policymakers' economic projections was for trend growth of 2.3 percent to 2.5 percent, unchanged from their estimate in September.
"One of the reasons we made the mistakes we made in the 1970s...was they mis-estimated the gap. Potential was a lot lower than they thought it was," Plosser said, referring to the period when the Fed accommodated a massive rise in inflation.
One reason that trend growth had slowed, he said, was the collapse of the housing bubble, which destroyed massive levels of U.S. wealth that families are now trying to restore by saving more, dampening their spending.

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U.S. public schools cut 11,000 jobs in December

WASHINGTON (Reuters) - Local U.S. governments cut jobs for the fourth straight month in December, including 11,000 in public schools, dragging down the nation's fragile economic recovery, jobs data showed on Friday.

Local government jobs are now at their lowest level since October 2005, with the bulk of the decline coming from layoffs of teachers and other school employees, according to the Labor Department.

For more than a year, persistent declines in public sector employment - particularly at the city, county and school district level - have stood in contrast to steady job gains in the private sector.

Jan Eberly, the U.S. Treasury assistant secretary for economic policy, said recent improvements in state budgets may start to reverse some of the declines next year.

"There is some expectation that state and local budgets will start to improve as the economy is picking up, and we're seeing improvements in many states, though not in all states," Eberly told reporters on Friday.

Overall government employment in the United States fell by 13,000 last month, the Labor Department said. Those jobs were almost all lost in public schools. Local governments shed 11,000 school jobs, and local agencies outside of schools had 2,200 more job losses.

State governments, meanwhile, added 4,000 jobs while federal government jobs fell by 3,000 in December, according to the report.

State and local government spending grew at a 0.3 percent annual rate in the third quarter, after 11 straight quarters of contraction, the Commerce Department reported last month. But many states, cities and counties are planning to keep spending flat as they continue to face uncertainty about federal funding levels and revenues.

Since August 2008, local governments have shed some 300,000 teaching and other school jobs, raising fears the layoffs could hurt students' education. Typically, schools try to avoid cutting jobs in the middle of the school year, and make most of their staffing changes in the summer.

The figures are also a worrisome sign that local budgets are still stuck in a slump. State governments have added 24,000 jobs since last December, but local governments have cut more than double that number in the past year.

The 2009 federal economic stimulus measure helped offset states' budget gaps resulting from the recession. But with the money now gone, state aid squeezed and tax revenues low, states have chipped away at their public safety and education workforces.

"(We) remain hopeful that President (Barack) Obama and the 113th Congress, as well as governors, will prioritize our students and public education and work hard to stave off further cuts," said Dennis Van Roekel, the president of the National Education Association, the largest U.S. teachers' union.

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Lunch meat maker Hormel orders up Skippy sandwich

 Hormel Foods apparently has a hankering for a peanut butter and bacon sandwich. The company primarily known for Spam and other cured, smoked and deli meats said Thursday that it's buying Skippy, the country's No. 2 peanut butter brand, in its biggest-ever acquisition.
Skippy, which was introduced in 1932 and is a staple in American pantries, is intended to increase Hormel's presence in the center of the supermarket where nonperishable foods are sold. It also gives the Austin, Minn.-based company a stronger footing in international markets. Skippy is sold in about 30 countries and is the leading peanut butter brand in China, where Hormel has been trying to build up its Spam business for the past several years.
Hormel, which also makes canned chili, sausages and pepperoni, currently gets the vast majority of its sales in the U.S., with only about 4 percent of revenue coming from abroad. Now the company is hoping that Skippy, which it's buying from Unilever for $700 million, will help it expand at home and overseas.
In a conference call with analysts, CEO Jeffrey Ettinger noted that peanuts and peanut oil are popular in China. And although peanut butter is not yet a household staple there, he said it is growing rapidly.
Back at home, Ettinger said peanut butter is already regarded as a convenient and affordable source of protein and that Hormel would apply its innovation skills and "take Skippy out of the jar" for use in other products such as packaged snack foods.
For example, he noted that the company recently introduced pepperoni sticks as part of a push to grow its snacks business. With Spam, the company is testing shelf-stable, microwavable meals, such as jambalaya made with Spam. It's also considering a variety of macaroni and cheese made with Spam.
"That concept of taking (Skippy) out of the jar echoes a similar concept we're trying with taking Spam out of the can," Ettinger said in an interview.
For now, there are 11 varieties of Skippy in the U.S., including low-fat and natural varieties. Hormel noted that Skippy is the leading brand in the faster-growing subcategory of natural peanut butter. Overall, Skippy has about 17 percent of the U.S. peanut butter market, according to Euromonitor International. Jif, owned by J.M. Smucker Co., is the largest brand with about 37 percent of the market.
Although Skippy is "a good fit" with its other packaged foods, Ettinger said Hormel still needs to figure out how to handle its merchandising of Skippy in stores, such as whether to display it next to other items.
Swings in peanut butter prices have made growth volatile in recent years, but Skippy sales on average have increased about 4 percent annually on a normalized basis, according to a spokesman for Unilever. The American Peanut Council estimates that Americans eat an average of nearly 4 pounds of peanut butter a year.
Hormel expects annual Skippy sales of about $370 million, with almost $100 million of that from outside the U.S. Ettinger expects Skippy sales to grow in the low single digits domestically and in the high single digits overseas.
The deal includes Skippy manufacturing plants in Little Rock, Ark., and Weifang, China. Hormel Foods Corp. said that it expects the deal to modestly add to its fiscal 2013 results and add 13 cents to 17 cents per share to fiscal 2014 earnings.
The transaction, which still needs regulatory approval, is expected to close in two parts. The domestic closing is expected by the second quarter and the China business is expected to close by the end of the year.
As Hormel continues to grow, Ettinger said future acquisitions could be larger than they have been in recent years. "It's an $8 billion company now. You have to move the needle," he said.
Unilever, based in the Netherlands and the U.K., is one of the largest consumer products companies in the world. It makes Vaseline, Dove soaps and Lipton tea. The company had indicated last year it was considering selling Skippy as part of a strategic review.
Hormel shares rose $1.19, or 3.7 percent, to close at $33.20 Thursday.

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Economy, year-end sales help auto industry in 2012

DETROIT (AP) — A steadily improving economy and strong December sales lifted the American auto industry to its best performance in five years in 2012, especially for Volkswagen and Japanese-brand vehicles, and experts say the next year should be even better.
Carmakers on Thursday announced their final figures, which totaled 14.5 million — 13 percent better than 2011.
More than three years after the federal government's $62 billion auto-industry bailout, Americans had plenty of incentive to buy new cars and trucks in the year just ended.
Unemployment eased. Home sales and prices rose. And the average age of a car topped 11 years in the U.S., a record that spurred people to trade in old vehicles. Banks made that easier by offering low interest rates and greater access to loans, even for buyers with lousy credit.
"The U.S. light vehicle sales market continues to be a bright spot in the tremulous global environment," said Jeff Schuster, senior vice president of forecasting for LMC Automotive, a Detroit-area industry forecasting firm.
Sales were far better than the bleak days after the U.S. economy tanked and GM and Chrysler sought bankruptcy protection. Back then, sales fell to a 30-year low of 10.4 million, and they are still far short of the recent peak of around 17 million set in 2005.
The best part of 2012 came at the end, when special deals on pickup trucks and the usual round of sparkling holiday ads helped December sales jump 9 percent to more than 1.3 million, according to Autodata Corp. That translates to an annual rate of 15.4 million, making December the strongest month of the year.
Volkswagen led all major automakers with sales up a staggering 35 percent, led by the redesigned Passat midsize sedan. VW sold more than five times as many Passats last year as it did in 2011.
Jesse Toprak, vice president of industry trends for TrueCar, said VW has the right mix of value and attractive vehicles and called the company "the force to watch in the next several years in the U.S. market."
Toyota, which has recovered from the earthquake and tsunami in Japan that crimped its factories two years ago, saw sales jump 27 percent for 2012. December sales were up 9 percent. Unlike 2011, the company had plenty of new cars on dealer lots for most of last year.
Honda sales rose 24 percent for the year. Nissan and Infiniti sales were up nearly 10 percent as the Nissan brand topped 1 million in annual sales for the first time. Hyundai sales rose 9 percent for the year to just over 703,000, the Korean automaker's best year in the U.S.
Chrysler, the smallest of the Detroit carmakers, had the best year among U.S. companies. Its sales jumped 21 percent for the year and 10 percent in December. Demand was led by the Jeep Grand Cherokee SUV, Ram pickup and Chrysler 300 luxury sedan.
But full-year sales at Ford and General Motors lagged. Ford edged up 5 percent and GM rose only 3.7 percent for the year. For December, Ford was up 2 percent and GM up 5 percent.
GM executives said the company has the oldest model lineup in the industry, yet it still posted a sales increase and commanded high prices for cars and trucks. The company plans to refurbish 70 percent of its North American models in the next 18 months and expects to boost sales this year.
North American President Mark Reuss said the company won't give away cars and trucks with discounts like it has in the past, especially in the midst of its biggest product update ever.
"Give us 18 months and you're going to see the whole portfolio turned," Reuss said.
Even though the congressional deal to avoid the fiscal cliff deal raised tax rates on the wealthiest Americans, Ford said it doesn't see a huge impact on auto sales.
Its chief economist, Ellen Hughes-Cromwick, said only 2 percent of new-vehicle buyers have income in that upper tax bracket, and they tend to purchase even if there is a change in after-tax income.
She said Ford is more concerned about an increase in the payroll tax, which is scheduled to climb to 6.2 percent this year from 4.2 percent in 2011 and 2012. That amounts to a $1,000 to $1,500 tax increase per household, she said.
"We will look at that closely because it will crimp spending in the months ahead," she said.
December featured year-end deals on GM's big pickup trucks. The company offered discounts up to $9,000 to help clear growing inventory, and it worked. GM cut its full-size pickup supply by more than 20,000 in December to about 222,000.
Overall, though, analysts said the industry eased up on promotions such as rebates and low-interest financing. Car and truck buyers paid an average of $31,228 per vehicle last month, up 1.8 percent from December 2011.
The Polk auto research firm predicted even stronger U.S. sales for 2013, forecasting 15.3 million vehicle sales as the economy continues to improve. Polk, based in Southfield, Mich., expects 43 new models to be introduced, up 50 percent from last year. New models usually boost sales.
The firm also predicts a rebound in sales of large pickups and midsize cars. All eight of the top manufacturers are introducing new vehicles, and that should bring competition and lower prices in those segments, according to Tom Libby, lead North American analyst for Polk.
But the firm's optimistic forecasts hinge on Washington reaching an agreement on government debt limits and spending cuts.

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IMF's economist: budget cuts may hurt growth less now

WASHINGTON (Reuters) - Belt-tightening in advanced economies may not be as harmful to growth now as it was during the height of the financial crisis, but governments should still be careful about drastic cuts, an International Monetary Fund research paper found on Thursday.
The IMF came under heavy criticism in October when it conceded that austerity programs it recommended during the global economic crisis were more costly than expected, causing economic damage that was as much as triple the amount forecast.
In a follow-up paper by the IMF's chief economist, Olivier Blanchard, and his colleague, Daniel Leigh, stood by their initial conclusions but said the harshest impact of those programs may be fading as economies start to recover.
The paper in October fueled critics of steep budget cuts in debt-burdened European economies, and prompted the IMF to soften its own recommendations for austerity in the euro zone crisis.
It said that now it believed forcing Greece and other debt-burdened countries to reduce their deficits too quickly would be counterproductive.
"For example, in Portugal, we have relaxed fiscal deficit targets," said Blanchard, the IMF chief economist.
But Germany said at the time that back-tracking on debt-reduction goals would only hurt market confidence.
Some economists also questioned the methodology the IMF had used in its initial research, saying the findings may have been exaggerated, or only applied to certain countries or times.
In the follow-up paper on Thursday, Blanchard and Leight said their research held-up for most advanced economies during the height of the financial crisis in 2009-10. While their views do not represent those of the Fund, the chief economist has a heavy hand in shaping the IMF's economic thinking.
"Forecasters have underestimated fiscal multipliers, that is, the short-term effects of government spending cuts or tax hikes on economic activity," the paper wrote.
The paper found that every dollar of deficit reduction subtracted "substantially" more than a dollar from economic growth, as much at $1.70. Economists had previously estimated that a dollar in government cuts would drain only 50 cents from the economy.
But during the past two years, the negative effect of government cuts on growth may have shrunk as the economy improved and people and businesses were able to borrow more money, making government spending less crucial, the researchers found.
"A decline in actual multipliers ... could reflect an easing of credit constraints faced by firms and households, and less economic slack in a number of economies relative to 2009-10," the paper said.
Blanchard and Leigh said the effect of government spending on the economy could vary depending on the country and the state of the economy. They cautioned that governments should not necessarily delay austerity, but should take into account its negative impact on growth.

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Transocean to pay $1.4 billion for role in BP oil spill

 Transocean Ltd agreed to pay $1.4 billion to settle U.S. government charges over BP Plc's massive Gulf of Mexico oil spill in 2010 and the rig contractor admitted that its crew on the Deepwater Horizon was partly responsible.
Transocean, which employed nine of the 11 workers killed in the accident, had set aside $1.5 billion for the U.S. Department of Justice out of a $1.95 billion Macondo loss provision. The settlement, unveiled on Thursday by the DoJ, includes $1 billion in civil penalties and $400 million in criminal penalties.
Still looming is a settlement with the plaintiffs committee that represents more than 100,000 individuals and business owners claiming economic and medical damages. So the ultimate cost of Macondo to Transocean could end up being more than $4 billion, UBS analyst Angie Sedita said. Last year, BP reached a $7.8 billion plaintiffs liability settlement.
The shares of Switzerland-based Transocean rose 6.4 percent to close at $49.21 in New York on the lower-than-expected DoJ payout, with Barclays having expected a settlement of $2.5 billion. The cost of insuring Transocean debt fell sharply.
"The bottom line to me is they now can put away the big black cloud that has been hanging over them," said Phil Weiss, an oil analyst at Argus Research.
BP and its contractors have sought to push blame on to each other since the 2010 well explosion caused the largest-ever U.S. offshore oil spill. Lawyers and analysts see the federal settlements with BP, and now Transocean, as a solid legal framework to start putting the disaster behind them.
Halliburton Co, which performed cementing work on the Macondo well, remains the only one not to have settled. Daniel Becnel, a Louisiana lawyer representing spill-related claimants, believes that settlement is merely a matter of time because none of the three really wants to fight it out in court.
The BP-contracted Deepwater Horizon was drilling the mile-deep well on April 20, 2010, when a surge of methane gas caused a blowout. The accident led to a months-long U.S. deepwater ban and intense scrutiny of the offshore drilling industry, which is now booming worldwide despite lingering public concerns.
Of the $400 million in Transocean criminal fines, $150 million will help protect the Gulf of Mexico, while another $150 million will fund spill prevention and response efforts there, the DoJ said. Transocean must also implement court-enforceable measures to improve safety and emergency response on U.S. rigs.
"From what I have read, they (Transocean) played a part, but BP is the lion's share and ought to pay $15 billion dollars." said Tony Kennon, mayor of Orange Beach, Alabama.
The U.S. Chemical Safety Board found that BP and Transocean both had "safety management system deficiencies that contributed to the Macondo incident," and neither had adequate safety rules.
The DoJ said that in agreeing to plead guilty to violating the Clean Water Act, Transocean admitted that members of its crew, acting at BP's direction, were negligent in failing fully to investigate indications that the Macondo well was not secure.
"Unfortunately, Halliburton continues to deny its significant role in the accident, including its failure to adequately cement and monitor the well," BP said in a statement.
Halliburton said it had substantial legal arguments against any liability, including an indemnity in its contract with BP. Halliburton shares closed 1.7 percent higher at $36.31.
BP agreed in November to a DoJ settlement of its own worth $4.5 billion, including the largest criminal fine ever at $1.256 billion. The London-based oil company also agreed to plead guilty to obstruction of Congress, a felony.
New York-traded shares of BP closed 2 percent higher on Thursday.
Attention now turns to any possible settlements ahead of a Macondo-related trial due to start on February 25 in New Orleans, including for Clean Water Act (CWA) violations that may cost BP $21 billion if it is found grossly negligent.
"That's where fairness will be found - or lost," National Audubon Society CEO David Yarnold said of BP's CWA case, since most of the fines would go toward restoring the Gulf of Mexico.

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U.S. ends long Google probe with only mild reprimand

WASHINGTON (Reuters) - In a major victory for Google Inc, U.S. regulators on Thursday ended their investigation into the giant Internet company and concluded that it had not manipulated its Web search results to hurt rivals.
The Federal Trade Commission did, however, win promises from Google that it would end the practice of "scraping" reviews and other data from rivals' websites for its own products, and to allow advertisers to export data to independently evaluate advertising campaigns.
Google also agreed to no longer request sales bans when suing companies which infringe on patents that are essential to ensuring interoperability, also known as standard essential patents, the FTC said on Thursday.
Microsoft Corp and other Google competitors have pressed the FTC to bring a broad antitrust case against Google similar to the sweeping Justice Department litigation against Microsoft in the 1990s.
Meanwhile smaller Internet companies such as Nextag have complained about Google tweaking its Web search results to give prominence to its own products, pushing down competitors' rankings and making them more difficult for customers to find.
At a press conference, FTC Chairman Jon Leibowitz anticipated criticism of the agency's decision to not further pursue Google on the so-called subject of search bias.
"Even though people would like us to bring a big search bias case, the facts aren't there," he said.
"The changes Google have agreed to make ensure that consumers continue to reap the benefits of competition in the online marketplace and in the market for innovative wireless devices they enjoy," said Leibowitz.
The commission voted 4 to 1 to settle the patent investigation into Google's injunction requests. It voted 5 to 0 to end the probe of Google's search practices.
The news had little impact on Google shares, which closed up 42 cents at $723.67, as most investors had expected the FTC probe to conclude without inflicting major damage.
"I never saw any real likelihood that the feds were going to insert themselves between one of the most popular brands in the world and the constituency that adores it," said Whit Andrews, an analyst for Gartner Inc.
RIVALS DISAPPOINTED
Yelp, which operates the social networking/user review website yelp.com, had complained about scraped reviews, and said it was disappointed with the result of the FTC probe.
"The closure of the commission's investigation into search bias by Google without action ... represents a missed opportunity to protect innovation in the Internet economy," wrote Yelp spokesman Vince Sollitto in an email. "We look for the regulatory bodies continuing their investigation to have greater success."
Microsoft had no immediate comment, but Dave Heiner, its deputy general counsel, complained in a blog post on Wednesday about "Google's misconduct," specifically blocking a fully featured YouTube, which Google owns, from the Windows Phone.
Gary Reback, who represents a group of Google's critics including Nextag, said he thought the investigation was inadequate since the FTC failed to respond to his clients' assertions that they had been hurt by Google and asked few questions in its civil subpoenas.
"They talked about how thorough and exhaustive the investigation was but that's really rubbish," said Reback, who is with the law firm Carr & Ferrell LLP and is best known for his work against Microsoft in the 1990s. "I've never seen anything as shallow and incomplete as this was."
Microsoft was embroiled in antitrust probes and litigation from 1990 when the FTC began an investigation until 2011, when the final consent decree finally expired.
Leibowitz defended the commission's investigation into Google, saying the agency had scoured through some 9 million pages of documents and taken sworn testimony from key Google executives. "This was an incredibly thorough and careful investigation by the commission, and the outcome is a strong and enforceable set of agreements," he said.
Google's David Drummond, the company's chief legal officer, said the FTC announcement on Thursday meant that "Google's services are good for users and good for competition."
Thomas Rosch, who is leaving the commission this month, suggested the investigation fell short.
"After promising an elephant more than a year ago, the commission instead has brought forth a couple of mice," said Rosch, a Republican.
The FTC broke with its usual practice of requiring a consent decree to settle an investigation. Instead it allowed Google to write a letter pledging to implement the agreed-upon changes in the search portion of the probe.
That prompted some sharp questions about whether Google would live up to its pact.
"I have no reason to think that Google won't honor their commitment; I think they will," said Leibowitz, noting financial penalties if Google failed to do so.
One Google competitor seemed to think the FTC agreement with Google would be a small boon to competitors.
"The concessions that the FTC extracted on review scraping, patents, and data are real, but not game changers by any means," said Oren Etzioni, co-founder of Decide.com, a product website that advises shoppers when prices may change or new versions of gadgets may come out.
Some of Google's critics, anticipating a weak conclusion to the FTC's investigation, said in December that they may be ready to take their grievances to the Justice Department.
The European Union, based in Brussels, is conducting a parallel probe of Google. It announced on December 18 that it was giving the company a month to come up with proposals to resolve its probe.
The European Commission has been examining informal settlement proposals from Google since July but has not sought feedback from the complainants, suggesting it is not convinced by what Google has put on the table so far.
Google is also being looked at by a group of state attorneys general, led by Texas.
In August, Google was forced to pay $22.5 million to settle charges it bypassed the privacy settings of customers using Apple Inc's Safari browser. The practice was in violation of a 2011 consent decree with the FTC over a botched rollout of the now defunct social network Buzz.

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China official factory PMI points to steady growth revival

 China's official manufacturing purchasing managers' index held steady in December at 50.6, matching November's seven-month high, as growth in new orders was unchanged and the pace of output softened marginally.
With the main index above 50 for three straight months, the survey indicates that China's vast factory sector is expanding. The official PMI was released a day after a similar survey by HSBC suggested manufacturing activity at its strongest since May 2011.
Together the surveys support a growing consensus that economic activity in China revved up during October to December, after GDP growth had slowed for seven consecutive quarters to 7.4 percent in the third quarter. That provides a welcome sign for a global economy where both the euro area and Japan are in recession and the United States is struggling for significant growth.
"Output has stayed above the 50-mark, showing that the manufacturing industry appears to maintain growth expectations, but the rate of growth has weakened," the National Bureau of Statistics, which released the data, said in a note.
The official PMI reading was slightly below expectations in a poll of economists by Reuters last week that predicted a rise in the PMI to 51.0.
The survey showed output in oil processing, quarrying and tobacco industries slipped while food processing, auto manufacturing, textiles, steel and electronics all expanded, the bureau said.
A new export orders sub-index fell to 50 from 50.2 in November. A PMI reading below 50 suggests growth slowed, while a number above 50 indicates accelerating growth.
HSBC said its China PMI, which gathers more data from smaller, privately held firms with a strong export focus, rose in December to 51.5, its highest since May 2011.
The HSBC survey showed strong output despite a retreat in a sub-index tracking new export orders. China's export sector, a major source of growth for the economy, must combat slowing demand in its biggest markets and rising wages and costs at home.
China's official PMI generally paints a rosier picture of the factory sector than the HSBC PMI because it focuses on big, state-owned firms. The HSBC PMI targets smaller, private firms. There are also differing approaches to seasonal adjustment between the two surveys.
INVESTMENT
Some analysts caution that the pickup in economic activity in recent months may reflect renewed investment spending, rather than the consumer activity that policymakers acknowledge is needed to rebalance the economy.
"It's pretty clear that it's more driven by infrastructure and increasingly housing, that's driving heavy industry," said Zhang Zhiwei of Nomura International, speaking on Monday.
Rising land prices have prompted widespread expectations that the real estate market will be revived by an investment-driven recovery that would offset weak export markets, even though the central government had pledged to maintain investment and purchasing restrictions to try to control prices.
Railway spending delayed from earlier in 2012 was being rushed out before the end of the year, and rising prices for land purchased by state-owned developers could point to a relaxation in property market curbs that has yet to be made official, Zhang argued.
Steel futures recently hit a five-month high, after a dismal year in which lackluster demand contributed to overcapacity at debt-ridden mills and traders.
China was expected to achieve economic growth of 7.7 percent in 2012, forecasts in a benchmark Reuters poll show. That would mark the slowest full-year expansion since 1999.
While that is way above the world's other major economies, it is below the roughly 10 percent annual growth in China seen for most of the last 30 years.
The government has relied on fine-tuning its policy settings to try to combat the worst downturn China has faced since the 2008-2009 global financial crisis, studiously avoiding any hint of repeating a 4 trillion yuan ($640 billion) stimulus package it launched back then, which led to a debt-fuelled spending binge by local governments.
Measures to boost growth included reducing bank reserve levels and interest rates. More lately, they included injecting liquidity into the financial system through money market operations and accelerating approval of infrastructure projects.
The head of the influential Development Research Centre called for appropriate base money growth in 2013, including more cuts in banks' reserve requirement ratios (RRR), and a wider floating range for the yuan to make it more flexible, in comments published on Monday.
The central bank reiterated on Monday that China would stick with a prudent monetary policy in 2013, the latest sign that Beijing will not change policy direction when the new government takes over this year.

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FDA approves 1st new tuberculosis drug in 40 years

The Food and Drug Administration on Monday approved a Johnson & Johnson tuberculosis drug that is the first new medicine to fight the deadly infection in more than four decades.
The agency approved J&J's pill, Sirturo, for use with older drugs to fight a hard-to-treat strain of tuberculosis that has not responded to other medications. However, the agency cautioned that the drug carries risks of potentially deadly heart problems and should be prescribed carefully by doctors.
Roughly one-third of the world's population is estimated to be infected with the bacteria causing tuberculosis. The disease is rare in the U.S., but kills about 1.4 million people a year worldwide. Of those, about 150,000 succumb to the increasingly common drug-resistant forms of the disease. About 60 percent of all cases are concentrated in China, India, Russia and Eastern Europe.
Sirturo, known chemically as bedaquiline, is the first medicine specifically designed for treating multidrug-resistant tuberculosis. That's a form of the disease that cannot be treated with at least two of the four primary antibiotics used for tuberculosis.
The standard drugs used to fight the disease were developed in the 1950s and 1960s.
"The antibiotics used to treat it have been around for at least 40 years and so the bacterium has become more and more resistant to what we have," said Chrispin Kambili, global medical affairs leader for J&J's Janssen division.
The drug carries a boxed warning indicating that it can interfere with the heart's electrical activity, potentially leading to fatal heart rhythms.
"Sirturo provides much-needed treatment for patients who have don't have other therapeutic options available," said Edward Cox, director of the FDA's antibacterial drugs office. "However, because the drug also carries some significant risks, doctors should make sure they use it appropriately and only in patients who don't have other treatment options."
Nine patients taking Sirturo died in company testing compared with two patients taking a placebo. Five of the deaths in the Sirturo group seemed to be related to tuberculosis, but no explanation was apparent for the remaining four.
Despite the deaths, the FDA approved the drug under its accelerated approval program, which allows the agency to clear innovative drugs based on promising preliminary results.
Last week, the consumer advocacy group Public Citizen criticized that approach, noting the drug's outstanding safety issues.
"The fact that bedaquiline is part of a new class of drug means that an increased level of scrutiny should be required for its approval," the group states. "But the FDA had not yet answered concerns related to unexplained increases in toxicity and death in patients getting the drug."
The FDA said it approved the drug based on two mid-stage studies enrolling 440 patients taking Sirturo. Both studies were designed to measure how long it takes patients to be free of tuberculosis.
Results from the first trial showed most patients taking Sirturo plus older drugs were cured after 83 days, compared with 125 days for those taking a placebo plus older drugs. The second study showed most Sirturo patients were cured after 57 days.

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US hits borrowing limit, moves to avoid default

The U.S. government is running up against its $16.4 trillion borrowing limit and is taking steps to avoid default.
Reaching the limit Monday sets up another dispute between the White House and Congress over taxes and spending in the new year.
Treasury Secretary Timothy Geithner says the government will take a series of accounting measures to avoid defaulting on its debt. On Monday, it suspended the issuance of new debt for two government retirement funds. That step won't impact current retirees.
Last week, Geithner said the measures would save about $200 billion. That would typically avoid default for about two months. But Geithner said it is difficult to predict how long default can be avoided this time because of ongoing budget talks.

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Deal will prevent spike in milk prices

A potential doubling of milk prices will be averted as part of the compromise that White House and congressional bargainers reached on wide-ranging legislation to avert the "fiscal cliff," a leading senator said late Monday.
Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich., told reporters that negotiators had agreed to extend portions of the expired 2008 farm bill through September. She said that includes language keeping milk prices from rising, but excludes other provisions like energy and disaster aid for farmers.
Stabenow said she considers the slimmed-down extension to be "Mitch McConnell's version of a farm bill." She was referring to the Senate Republican leader from Kentucky, who she said forced bargainers to accept the version of the farm bill that appeared in the deal.
McConnell spokesman Michael Brumas responded: "Sen. McConnell put forward a bipartisan, responsible solution that averted the dairy cliff and provided certainty to farmers for the next year without costing taxpayers a dime."
Just a day earlier, Stabenow said leaders from both parties on the House and Senate agriculture committees had agreed to extend the entire farm bill.
Stabenow and House Agriculture Chairman Frank Lucas, R-Okla., announced Sunday that they had agreed on a last-minute move that would extend the entire farm bill and replace dairy programs that expire at midnight Tuesday. Expiration of those dairy programs could mean higher milk prices at the grocery store within just a few weeks.
But the House GOP had not endorsed the committees' extension agreement.
The nonpartisan Congressional Budget Office estimated Sunday that extending the entire bill through September, including disaster assistance for farmers affected by drought, could cost more than $1 billion this budget year.
House Speaker John Boehner, R-Ohio, has pushed back on passage of a new five-year farm bill for months, saying there were not enough votes to bring it to the House floor after the House Agriculture Committee approved it in July. The Senate passed its version of a farm bill in June. The bill, generally passed every five years, includes food stamps, farm subsidies and other help for rural areas.
But the prospect of higher milk prices prompted some action. Agriculture Secretary Tom Vilsack has said Americans face the prospect of paying $7 for a gallon of milk if the current dairy program lapsed and the government returned to a 1948 formula for calculating milk price supports.
Extending the entire agriculture bill would have included an overhaul of dairy programs that was included in both the Senate and House committee bills. The new dairy programs include a voluntary insurance program for dairy producers, and those who choose that new program also would have to participate in a market stabilization program that could dictate production cuts when oversupply drives down prices — an idea that hasn't gone over well with Boehner.
In July, he called the current dairy program "Soviet-style" and said the new program would make it even worse. Large food companies that process and use dairy products have backed Boehner, saying the program could limit milk supplies and increase their costs.
One of the reasons Boehner has balked at bringing up a farm bill is disagreement among House Republicans over how much money should be cut from food stamps, which make up roughly 80 percent of the half-trillion-dollar bill's cost over five years. Lucas has unsuccessfully pushed his leadership for months to move on the legislation despite the disagreement over food aid.

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Insight: How Colombian drug traffickers used HSBC to launder money

 When several Colombian men were indicted in January 2010 on money-laundering charges, the case in Brooklyn federal court drew little attention.
It looked like a bust of another nexus of drug traffickers and money launderers, with mainly small-time operatives paying the price for their crimes.
One of the men was Julio Chaparro, a 48-year-old father of four who owned three factories that made children's clothing in Colombia.
But to U.S. authorities the case was anything but ordinary. Chaparro, prosecutors alleged, helped run a money-laundering ring for drug traffickers that took advantage of lax controls at UK-based international banking group HSBC Holdings Plc. It was one of the most important leads for U.S. investigators pursuing a case against the bank that eventually led to a $1.9 billion settlement on December 11.
Chaparro was "basically putting the orchestra together" and investigators saw "him as a major player in terms of cleaning a lot of money," said James Hayes, special agent in charge of Homeland Security Investigations at U.S. Immigration and Customs Enforcement in New York. Known as ICE, the agency and its task force led the probe.
The Colombian's lawyer, Ephraim Savitt, said Chaparro was a middleman in the operation, but disputed the extent of his client's role, saying he was the "page turner of sheet music for the conductor."
Chaparro, who was arrested in Colombia in 2010 and extradited to the United States in 2011, pleaded guilty to a money-laundering conspiracy count in May and is awaiting sentencing in 2013.
An HSBC spokesman declined comment.
Much about the trail that drug traffickers used to move U.S. dollars - the proceeds from drug sales - through HSBC and other banks remains unclear. By design, the process is layered to evade detection.
But a review of confidential investigative records that originate from two U.S. Attorney office probes and federal court filings in New York and California, as well as interviews with senior law-enforcement officials, shows how investigators tracing the activities of people who allegedly worked with Chaparro were able to expose large-scale money laundering at one of the world's biggest banks.
The federal law-enforcement task force - named after El Dorado, the mythical city of gold in South America - used wire taps, email and computer searches, information from at least one inside source, and old-fashioned surveillance, to piece together the ring's operations.
SMUGGLED ACROSS BORDER
Drug cartels sold narcotics in the United States and routed the cash to Mexico, often using couriers to smuggle it across the border. That cash would then be put into bank accounts at HSBC's Mexico unit, where large deposits could be made without arousing suspicion, according to U.S. Department of Justice documents.
In one filing, U.S. prosecutors said, Chaparro and others allegedly utilized accounts at HSBC Mexico to deposit "drug dollars and then wire those funds to ... businesses located in the United States and elsewhere. The funds were then used to purchase consumer goods, which were exported to South America and resold to generate ‘clean' cash."
In a typical transaction, a middleman in a drug cartel would offer to deliver consumer goods, such as computers or washing machines, to Colombian businesses on favorable terms. Another person in the United States would buy the goods from firms using funds from drug trafficking, and fulfill those orders.
Money launderers exploited the laxness of HSBC in policing shadowy money flows, the Department of Justice said earlier this month. Failures included not conducting due diligence on customers, not adequately monitoring wire transfers or cash shipments and not having enough employees to run anti-money laundering systems. U.S. Assistant Attorney General Lanny Breuer called the lapses "stunning failures of oversight."
The situation was so bad, according to the Department of Justice, that in 2008, the head of HSBC's Mexican operations was told by Mexican regulators that a local drug lord described the bank as "the place to launder money."
The Chaparro probe, led by ICE and the Justice Department, converged over the past two years with two other investigations - led by federal prosecutors and investigators in West Virginia and by the Manhattan district attorney - resulting in this month's settlement with HSBC.
HSBC and its employees avoided criminal indictments, as the bank agreed instead to a deferred-prosecution deal that forces it to strengthen controls and accept a compliance monitor.
Today, Chaparro sits in a federal detention center in Brooklyn, reading the Bible and awaiting sentencing, said Savitt, a former U.S. prosecutor in Brooklyn, who submitted a list of questions to Chaparro for Reuters.
"He is contrite, regretful and ashamed about his crimes," Savitt said. "He wants to serve his time and rejoin his family. He understands that a prison term could prevent that from happening for many years."
Under federal guidelines, he could face 15 to 18 years in prison.
ON CHAPARRO'S TRAIL
The El Dorado federal task force, based in a building on the west side of Manhattan near Chelsea Piers, serves as an umbrella organization for some 250 law-enforcement officials from state, local and federal agencies.
One of the task-force supervisors is Lieutenant Frank DiGregorio, a former New York detective who spent years tracking the so-called Black Market Peso Exchange, which is used to convert dollars to Colombian pesos through trading in goods. DiGregorio along with two younger investigators - Graham Klein and Carmelo Lana - led the HSBC case.
The overall probe began in 2007 when investigators analyzed how courier companies ferried cash through airports in Miami and Houston, a person familiar with the case said. They ultimately tracked that to HSBC's operations in Mexico and then connected it to funds moving through New York.
A tipping point in the investigation came in 2009 when El Dorado agents arrested a man named Fernando Sanclemente. Two sources familiar with the case say Sanclemente was an operative in Chaparro's network.
Sanclemente, who was charged with allegedly conducting financial transactions tied to narcotics trafficking, is free on bail with a $200,000 bond, according to the latest court docket entry, which dates to January 2012. His lawyer, James Neville, declined to discuss the status of the case.
According to a criminal complaint filed against him by Lana, the El Dorado agent, on June 30, 2009, task force agents followed Sanclemente for more than two hours as he drove around Queens in New York to ferry cash from drug sales.
Sanclemente first met with a person for about "30 seconds" on one street corner, and left with a yellow plastic bag. Later that night, he drove to a Dunkin' Donuts near LaGuardia Airport, where a black livery cab pulled up and the driver handed him a black bag.
The El Dorado team followed Sanclemente to Laurel Hollow, New York, some 40 minutes away, where the investigators stopped and searched him, finding about $153,000 in the two bags. At Sanclemente's apartment, investigators said they found ledgers and documents consistent with money laundering.
With the arrest, investigators gained insight into Chaparro's alleged transactions. At one point, investigators set up undercover bank accounts where they were able to get Chaparro's network to wire proceeds that could be traced back to HSBC's Mexico operations, according to people familiar with the situation and a Department of Justice filing in the HSBC case.
Federal agents would ultimately home in on $500 million that had moved from HSBC Mexico to HSBC's operations in the United States, according to the confidential investigative records.
Between October 6, 2008 and April 13, 2009, Chaparro and others conducted money laundering transactions totaling $1.1 million tied to narcotics trafficking, the indictment against Chaparro alleged.

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Analysis: Japan's yen offensive may give Toyota an edge over Hyundai

TOKYO (Reuters) - When Toyota Motor Corp President Akio Toyoda visited northern Japan in July last year and announced a $24 million engine plant expansion, some analysts saw it as evidence of a flawed strategy that put patriotism above profitability.
At the time, Toyota was struggling to rebuild its supply base after the March 2011 earthquake and tsunami and the yen was climbing toward a post-war record high against the dollar.
But the Miyagi Taiwa plant began assembling engines for the small hybrid Aqua, exported as the Prius C, this month with a welcome wind at Toyota's back: a weakening yen and a government-in-waiting determined to drive it lower.
Analysts say a continued slide in the Japanese currency could tip the competitive balance on pricing back in favor of Toyota and away from its toughest and fastest-rising global competitor, Hyundai Motor - a new dynamic that would likely be repeated across other Japanese export industries.
Since early October, the yen has weakened about 8 percent against the dollar and 10 percent against the Korean won. Over the same period, shares in Toyota have jumped by 30 percent as investors reacted to the prospect of higher profitability on cars built in Japan for export, including Lexus luxury models.
"As the yen weakens, that very tight cost structure they have put in place to maximize profitability in an appreciated yen position allows them now to make a lot more profit," said Larry Dominique, an analyst at TrueCar.com and former Nissan executive.
"With the Korean currency appreciating, I would expect that what you would see (for Hyundai) is some of the same issues that the Japanese faced over the past several years."
Whether the strategy of driving down the yen works to slow the "hollowing out" of Japanese manufacturing will be key for Japan's new government under Liberal Democratic Party chief Shinzo Abe, who is pushing for super-easy monetary policy to weaken the yen and lift pressure on exporters like Toyota.
The yen's rise in recent years has hurt Japan's exporters across the board, including industries like electronics and shipbuilding where competition with Korean rivals is also fierce. The number of Japanese factory workers fell 13 percent to about 10.4 million between 2002 and 2011.
But Toyota has been the slowest to abandon production in Japan - a conservative position that would make it the biggest beneficiary if the yen were to drop sharply now.
For his part, Toyoda has showed no signs of budging from a vow to make at least 3 million vehicles a year in Japan. Toyota engineers say the strategy allows them to keep suppliers close and drive innovations at "mother plants" in Japan which can provide guidance on cost-cutting for overseas plants.
By contrast, Nissan under Chief Executive Carlos Ghosn has been aggressively moving production offshore.
Under Ghosn, Nissan shifted production of its "March" subcompact - one of its top-sellers in Japan - to Thailand from Japan and has scrambled to buy more parts made overseas, including South Korea. Just 20 percent of Nissan's global production now originates in Japan, down from 50 percent five years ago. For Honda, Japan accounts for 26 percent of its total production, down from 34 percent in 2007.
For Toyota, the comparable figure is 40 percent, down from 50 percent in 2007.
As a result, Toyota is much more sensitive to the yen exchange rate than its Japanese rivals. Toyota operating profits fall by 35 billion yen for every one-yen drop in the value of the dollar. For Nissan, that comparable figure is 20 billion yen and for Honda 16 billion yen, the companies have said. Gains of the same proportion could be expected from a weakening yen.
"Toyota is the one that is hit the hardest when the yen is high," said Koji Endo, an autos analyst at Advanced Research in Tokyo. "But it is also the one that benefits the most when the yen is low."
'HOW DID HE DO THAT?'
Analysts point to Hyundai's recent success as an example of how a smart manufacturer can use the pricing power of a weak currency to undercut rivals.
A video that went viral at the Frankfurt auto show in 2011 caught Volkswagen Chairman Martin Winterkorn in candid admiration at Hyundai's quality gains. The video, which was widely circulated among auto executives, shows Winterkorn admiring the interior of a Hyundai i30.
Speaking to an entourage, Winterkorn notes that the windshield wipers are hidden from view - as they would be on a more expensive car - and that the steering wheel makes no sound when adjusted. "How did he do that?" Winterkorn asks about Hyundai. Off camera, a VW engineer can be heard to chime in: "We had a solution but it was too expensive."
Similarly, Hyundai has used a weaker won to help target Toyota's luxury Lexus brand. That is similar to what Lexus did to Mercedes and BMW in 1990 when it went from nowhere to become the top-selling U.S. luxury brand. At the time of the Lexus launch, the dollar was trading near 130 yen.
But in recent years, Hyundai has become the value leader. The top-of-the-line Hyundai Equus starts at $67,150 for 2013, an increase of just 1 percent over the previous year.
The sedan built at Hyundai's Ulsan plant also comes packed with features like 19-inch chrome wheels and a massage unit for the VIP seat in the rear as well as for the driver. Hyundai also promises that anyone who buys an Equus will never have to visit a dealer for service. Staff pick up the car at a home or business and replace it on the spot with a loaner.
By contrast, the strong yen forced Toyota to hike the price of the competing Japan-built Lexus LS 460L by 8 percent on the all-wheel-drive model for 2013 to $82,670.
Toyota could take advantage of a weaker yen now to address those pricing gaps and to add features where it has skimped. The Prius C built in Iwate in northern Japan, for example, was designed to be priced about $4,000 below a full-size Prius in the United States, Toyota's largest and most profitable market.
But Consumer Reports panned the hybrid for what it called a cheap-looking plastic interior and bad road noise.
A stronger won now could force tougher choices on Hyundai and its affiliate, Kia Motors , analysts and executives say. In recent years, Hyundai Motor's operating margin averaged 8.1 percent when the won weakened against the yen compared with a leaner 6.5 percent when it was strengthening, according to Thomson Reuters calculations.
A study by researchers at the Korea Automotive Research Institute released this month found South Korean auto exports shrink by 1.2 percent annually with every 1 percent decline in the value of the yen against the won.
"We are agonizing over the firming won," said one Kia executive, who asked not to be named because he was not authorized to speak about strategy.
But for the currency changes to have deep and lasting effects, they would need to be sustained, analysts and executives said. Automakers need four to five years to design a new model and shift suppliers. And in the end, every automaker has the same goal - to neutralize the impact of exchange rates by building more vehicles in the markets where they sell.
At the same time, a weaker yen remains more speculative than real, industry executives caution.
"It is wrong to say the yen is weak," Toyoda said last week. "The yen is still super strong at the current level."

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