The coming days

The week ahead

Another Democratic primary, and other news

• VOTERS in Indiana and North Carolina go to the polls on Tuesday May 6th in the next round of the Democratic presidential nomination process. Hillary Clinton is expected to mop up the support of blue-collar workers and will probably win Indiana. However Barack Obama's chances may be boosted by the fact that the primary is open to independent voters and the state abuts Illinois, his home territory. He should have no trouble winning North Carolina, where blacks account for nearly 40% of the Democratic electorate. The superdelegates, who will ultimately decide the nomination, may have a clearer idea of where to lend their support after these contests.

For background see article

• IN A sign of warming relations China's president, Hu Jintao, begins a four-day trip to Japan on Tuesday May 6th, the first visit by a Chinese head of state for a decade. Despite strong economic ties (China is now the main destination for Japanese exports) political relations have often been strained. But Japan's new prime minister, Yasuo Fukuda, has so far avoided irritating China by visiting a contentious war shrine or bringing up the thorny issue of control of territorial waters between the two countries.

• AFTER eight years of Vladimir Putin’s presidency Russia gets a new leader. Mr Putin's protégé, Dmitry Medvedev, will be sworn in on Wednesday May 7th after winning an election in March. Those expecting a loosening of excessive centralised power or a thaw in Russia’s frosty relations with the West will be disappointed. Mr Medvedev has promised continuity. On Thursday Russia's parliament will confirm Mr Putin as prime minister, a position which he may use to operate the levers of power anyway.

For background see article

• THE Bank of England and the European Central Bank (ECB) meet on Thursday May 6th, although neither institution is expected to cut interest rates this month. The Bank of England recently said that it reckoned that the worst of the credit crunch is over and, although Britain's housing market is wobbling, the economy looks in reasonable shape. The ECB has also shown little sign of wanting to lower rates while euro-zone inflation remains at worryingly high levels.

For background see article

Petrobras Finds Make Stock Most Expensive Oil Company (Update2)

May 2 (Bloomberg) -- The biggest oil discovery in the Western hemisphere in three decades and speculation about an even larger deposit turned Petroleo Brasileiro SA into the world's most expensive energy producer.

Petrobras, as the company is known, trades at 17.2 times profits after rallying 87 percent in the past year. The shares are twice as expensive as Russia's OAS Lukoil and Royal Dutch Shell Plc of the Netherlands, and 50 percent more than Exxon Mobil Corp., as investors focus on the Rio de Janeiro-based company's oil finds rather than its falling profits.

``You just never know when they're going to make the next announcement,'' said William Landers, who oversees $8.2 billion in Latin American stocks at BlackRock Inc. in Plainsboro, New Jersey, including shares of Petrobras. ``You don't want to be on the wrong side of that trade.''

The Brazilian government's controlling stake in Petrobras may add to the stock's allure on speculation the company will get favorable treatment in exploiting oil. President Luiz Inacio Lula da Silva's administration pulled 41 exploration licenses from an auction after Petrobras found the Tupi oil field Nov. 8, a discovery that caused the stock to jump 14 percent, the biggest rise in nine years. Tupi, 155 miles (250 kilometers) off Brazil's coast, may have 8 billion barrels of recoverable oil.

Petrobras shares rose another 5.6 percent on April 14 after the head of Brazil's oil agency said the offshore Carioca prospect may hold the equivalent of 33 billion barrels of crude, large enough to be the world's third-biggest field. Chief Executive Officer Jose Sergio Gabrielli said later Petrobras is still exploring to determine Caricoa's size.

Bovespa's Gain

The oil company helped lead Brazil's Bovespa to a 6.3 percent jump on April 30, making it the world's best-performing equity index this year among the 20 biggest markets, after Standard & Poor's assigned the country an investment grade credit rating. Petrobras added 1.9 percent to 43 reais today as the Bovespa increased 2.2 percent.

Petrobras, now the world's ninth-biggest company, with a market value of $248.3 billion, is still half the size of Exxon, the largest oil producer.

Fourth-quarter profit at Petrobras declined about 3 percent as costs increased faster than sales. The company produced an average 2.34 million barrels of oil, natural gas and natural-gas liquids a day in March, down from 2.35 million barrels a day the month before.

Petrobras isn't earning enough, said Saulo Sabba, who oversees Rio-based Maxima Asset Management's Maxima Participacoes FI em Acoes fund, the best performer among Brazil-based equity and hedge funds last year. Sabba said he's ``very underweight'' Petrobras.

Profits Delayed

``It needs to show production growth today,'' Sabba said. ``This is what's going to influence the results this year and next. To add a long-term position, I don't think this is the time.''

Roberto Koeler, who helps manage the equivalent of $3 billion in assets at Icatu Harford in Rio, has Petrobras as his largest holding even though he says the stock is overpriced. Petrobras's price-earnings ratio was 8.77 a year ago and below 5 in June 2004, according to data compiled by Bloomberg.

The company's valuation surpassed PetroChina Co.'s in November after shares of the Beijing-based oil company posted their biggest monthly retreat ever.

Lukoil, based in Moscow, and Royal Dutch Shell, based in the Hague, trade at 7.77 and 7.6 times earnings, respectively. Irvine, Texas-based Exxon's PE ratio is 11.60. The rest of the world's 10 largest oil producers are also cheaper than Petrobras.

Brazil's biggest company by market value looks less expensive relative to the oil it owns.

Barrel Price

Petrobras trades for the equivalent of 34.91 reais per barrel of proven reserves, or $20.58, according to Bloomberg data. That's cheaper than Exxon's $22.19 a barrel and Royal Dutch Shell's $23.80 per barrel of oil equivalent in reserve. Under this measure, Petrobras is still more expensive than BP and Lukoil, which fetch $14.75 and $4.71 a barrel, Bloomberg data show.

Pumping oil from the Brazilian discoveries, parts of which are 32,000 feet (9,800 meters) below the ocean's surface, will require boring almost twice as far down as the world's deepest offshore well.

``Once Petrobras has the technology to start production on these finds, then we can start looking at the fundamentals,'' Sabba said.

The potential profits make Petrobras a long-term investment and its price relative to potential earnings worth it, said Craig Shaw, who helps manage $6 billion in emerging-market assets at Harding Loevner Management in Somerville, New Jersey.

``It takes a long time to really find out what you got, but early indications are quite striking,'' Shaw said. ``It's a very good company as it stands, and when you throw in the potential of what may be found, yeah, that does add to the valuation.''

Services May Have Cooled, Home Sales Fell: U.S. Economy Preview

May 4 (Bloomberg) -- Service industries in the U.S. probably contracted for a fourth month and pending home resales fell, signaling the real estate slump and credit crisis continue to depress growth, economists said before reports this week.

The Institute for Supply Management's non-manufacturing index, which makes up almost 90 percent of the economy, dropped to 49.1 in April from 49.6, according to the median estimate of economists in a Bloomberg News survey. A separate report may show fewer Americans signed contracts to buy previously owned homes.

Builders, retailers and financial firms are reeling from the worst real estate recession in a quarter century as property values fall and foreclosures rise. Other figures may show the narrowing trade gap remains a source of strength as exports rise and imports slow.

``The economy is not collapsing, it's just weak,'' said Eugenio Aleman, a senior economist at Wells Fargo & Co. in Minneapolis. ``My biggest concern is that it could remain weak for a long time.''

The Tempe, Arizona-based ISM will issue the service-industry report tomorrow. Readings less than 50 signal contraction. The ISM factory index, reported last week, was unchanged at 48.6 in April as manufacturing shrank for the third consecutive month.

A report from the National Association of Realtors on May 7 may show its index of pending home sales fell 1 percent in March, after a 1.9 percent drop the prior month, according to the survey median. The glut of unsold properties is worsening as buyers wait for prices to slide further.

Leading Indicator

Pending sales are considered a leading indicator of resales because they track contract signings. Home-purchase figures reflect closings, which typically occur a month or two later.

Builders, which are included in the ISM services index, have been cutting back. Investment in residential construction projects fell at an annual rate of 27 percent in the first quarter, the most since 1981, the Commerce Department reported last week. Declines in homebuilding have subtracted from growth since the first three months of 2006.

The economy grew at a 0.6 percent annual rate in the first quarter, matching the pace in the last three months of 2007. Consumer spending rose at the weakest pace since 2001, hurt by a decline in purchases of long-lasting goods such as cars.

Lower home values, credit restrictions and higher fuel prices continue to depress demand for services, pushing firms to pare expenses. Payroll figures last week showed the economy lost 20,000 jobs in April, while the unemployment rate dropped. Service providers added 90,000 workers, while builders trimmed staff by 61,000, the most since February 2007.

Decline in Shipments

YRC Worldwide Inc., the biggest U.S. trucking company by sales, reported a first-quarter loss on costs to shut terminals and cut jobs as freight demand weakened. The steps will help YRC return to profitability in the second quarter even as demand remains weak, Chief Executive Officer Bill Zollars said.

``We're not planning on seeing any improvement in the economy for the rest of 2008,'' Zollars said in an April 25 interview. ``Most people have given up on the second-half- recovery theory.''

A slowdown in worker efficiency is prompting businesses to limit hiring. Productivity rose at a 1.5 percent annual rate in the first quarter following a 1.9 percent increase from October through December, according to the survey median. The Labor Department will report the figures on May 7.

Strength in overseas markets is lifting exports, preventing American factories from collapsing. The gap between exports and imports shrank to $61.4 billion in March, from $62.3 billion the prior month, according to the Bloomberg survey median ahead of a May 9 report from Commerce. A narrowing of the trade gap added 0.2 percentage point to economic growth in the first quarter.

                        Bloomberg Survey

=================================================================
                      Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
=================================================================
ISM NonManu Index         5/5      April      49.6      49.1
Productivity QOQ%         5/7        4Q       1.9%      1.5%
Labor Costs QOQ%          5/7       4Q P      2.6%      2.6%
Pending Homes MOM%        5/7      March     -1.9%     -1.0%
Cons. Credit $ Blns       5/7      March      5.2       6.0
Initial Claims ,000's     5/8      4-May      380       370
Cont. Claims ,000's       5/8      27-Apr     3019      3020
Whlsale Inv. MOM%         5/8      March      1.1%      0.5%
ICSC Chain Store Sales    5/8      April     -0.5%      1.4%
Trade Balance $ Blns      5/9      March     -62.3     -61.4
=================================================================

Microsoft Walks Away From Yahoo After Fight on Price (Update2)

May 4 (Bloomberg) -- Microsoft Corp., the world's largest software maker, walked away from its bid for Yahoo! Inc. after a disagreement on the price, a setback to Chief Executive Officer Steve Ballmer's efforts to catch Google Inc. in the online advertising market.

Microsoft said it offered to raise its $44.6 billion bid by about $5 billion, to $33 a share. Yahoo demanded $37, Microsoft said yesterday in a statement.

``After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal,'' Ballmer said in the statement.

Microsoft, whose Internet business lost $228 million last quarter, now faces the challenge of finding alternatives to buying Yahoo, a purchase that would have tripled its share of the U.S. Web search market. The decision also leaves Yahoo CEO Jerry Yang, 39, to prove he can revive sales growth and the stock price by keeping the company independent.

Ballmer and deputy Kevin Johnson met yesterday in Seattle with Yahoo co-founders Yang and David Filo, two people familiar with the talks said. Yang and Filo refused to accept less than $37 a share and flew back to California. Ballmer called Yang to inform him of the decision just before it was announced, the people said.

``Unbelievable,'' said Laura Martin, an analyst at New York-based Soleil Securities Corp. ``This is management putting its employees and its job security ahead of current Yahoo shareholders' interest.''

Yahoo Shares

She estimated Yahoo shares will fall $8, or 28 percent, tomorrow as Microsoft's withdrawal, combined with concern about the economy and the advertising market, weigh on investors. The stock has gained 49 percent since Microsoft's bid on Feb. 1.

Yahoo, the second most popular Internet search engine, rose $1.86, or 6.9 percent, to $28.67 May 2 in Nasdaq Stock Market trading as investors bet a deal was coming. Talks intensified and Microsoft was willing to raise the bid, a person familiar with the matter said May 2. Microsoft fell 16 cents to $29.24.

Yahoo's stock had declined 32 percent in the year before Microsoft's offer as Google won more Web users and advertisers switched to social-networking sites such as Facebook Inc. and News Corp.'s MySpace.

``The shareholders will wake up tomorrow morning or tonight and say `Jerry, what are you doing?''' RBC Capital Markets analyst Robert Breza in Minneapolis said yesterday. ``They weren't doing the best job, and Microsoft put a fair offer on the table. And for them to up the bid and for these guys to not want to engage -- I think Microsoft's being smart here.''

Yahoo Chairman Roy Bostock reiterated yesterday in a statement that Microsoft's offer wasn't enough. The company will continue to expand search advertising sales while improving its display advertising business, he said.

Not Hostile

``With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history,'' Yang said in the statement.

Ballmer, 52, spent a week considering the price after Sunnyvale, California-based Yahoo let pass his April 26 deadline to come to terms. He had pledged to abandon the bid before he would overpay, saying May 1 that he wouldn't go ``a dime above'' Yahoo's value.

Yang had argued the company's rank in the U.S. search market and its Asian operations warranted a higher bid. He considered a combination with Time Warner Inc.'s AOL and tested advertising software from Google. This week, a person familiar with the matter said Yang might agree to a broader deal with Google.

As the days passed after Ballmer's deadline, it seemed possible he would take the offer straight to Yahoo investors. Yesterday, Ballmer said he won't do that. That approach would result in a ``protracted proxy contest,'' and Yahoo indicated it would make decisions that Microsoft would find ``undesirable,'' Ballmer said in a letter to Yang that was released by Microsoft.

Chasing Google

If Yahoo agrees to use Google's search advertising, it would lose its own ad customers and engineers who work in that field, Ballmer said. Yahoo already had a ``poison pill'' anti- takeover defense and a severance plan that would compensate any employee displaced by an acquirer.

Microsoft couldn't make a good enough return on the purchase if it would have paid more than $35, Charles Di Bona, an analyst at Sanford C. Bernstein & Co. in New York, said yesterday.

``It was to their credit that they weren't just chasing this deal at all costs,'' Di Bona said. ``On the other side, I think this does mean that they have to really come out and articulate what their Internet strategy now looks like.''

Yahoo and Microsoft remain a distant second and third behind Mountain View, California-based Google in Web search queries. Google outsold Microsoft in Web ads 7-to-1 in its last fiscal year and handles six times as many search queries in the U.S., according to ComScore Inc. in Reston, Virginia.

Ballmer's Plan

Microsoft will continue to improve the relevance of its search results and build its advertising program, expand investments in engineering, and pursue partnerships to win more users, Ballmer wrote in an e-mail to employees yesterday.

The company could buy AOL and then go after MySpace, Di Bona said in an April 25 note. That would give Microsoft a substantial presence on the Internet, probably at a much lower cost than buying Yahoo, he said. UBS AG's Heather Bellini, the top-ranked software analyst by Institutional Investor magazine, has said that Microsoft could come back and look to buy Yahoo later on if it walked away this time.

Oracle Corp., the third-biggest software maker, initially abandoned its bid for BEA Systems Inc. after BEA asked for 24 percent more than Oracle's $17-a-share bid. Oracle called the asking price ``impossibly high'' and said a deal couldn't be done with the current board. The two companies agreed to the buyout three months later at $19.38 a share.

``Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services, I remain confident that we can achieve our goals without Yahoo,'' Ballmer wrote in the e-mail.