the day ahead - april 11th 2013

7/28/2019 The Day Ahead - April 11th 2013

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THE DAY AHEADREUTERS NEWS North American Edition For Thursday, April 11, 2013

Strong tech shares led stocks higher on Wednesday andthe S&P 500 reached a historic high, while Treasuries fellas Fed minutes fueled fears of a tapered bond-purchaseprogram by year-end. The dollarrallied to a fresh four-yearhigh against the yen, edging closer to the key 100-yen

mark. Gold fell, while oi l rose.

MARKET RECAP COMING UP

A handful of leading U.S. retailers, including Costco, Gap, TJXand L Brands report March sales, with Wall Street expecting mod-est gains, largely because of the timing ofEaster this year that pushed a lot of businessinto April. The details companies provide will

provide a window into consumer sentimentand shoppers' willingness to spend money inthe first real spending occasion since theChristmas holiday season. The monthly re-port is in transition - TJ X and Ross Stores drop out of the monthlysales grind next quarter, shrinking the same-store sales index to 11companies from about 68 six years ago. For a related ReutersInsider video, click here

Results are due from the No. 3 U.S. drugstore chain Rite Aid,which unexpectedly turned a profit for the first time in more thanfive years in the fiscal third quarter. In December, Rite Aid raised itsoutlook for the fiscal year to a range of a net loss of 5 cents to aprofit of 3 cents per share. In September, it had forecast a loss ofbetween 9 cents and 23 cents. Also, expect results from Pier 1

Imports.

The judge in the Macy's/J.C. Penney case is expected to decidewhether to block Penney's from selling Martha Stewart-designedhome goods under the "J CP Everyday" label. Macy's wants thecourt to expand a preliminary injunction banning J .C. Penney fromselling Martha Stewart-branded goods in categories it claims tohave exclusively.

The U.S. National Transportation Safety Board hosts a two-dayforum to examine the design and performance of lithium-ion batter-ies in transportation, a comprehensive review sparked by batteryfailures in J anuary on two ofBoeing high-tech 787 Dreamliners.

The NTSB is leading the investigation of one of the 787 incidentswhich prompted regulators to ground the aircraft.

Federal Reserve Bank of Philadelphia President Charles Plosserspeaks on monetary policy before the Market News InternationalEconomic Seminar in Hong Kong. He's only the second Fed bigwigto speak about winding down the $85 billion a month bond buyingprogram. The key will be whether he changes his opinion given theterrible job numbers in March. Also watch out for any reaction tothe Fed's bungled released of its meeting minutes. Also, St. LouisFederal Reserve Bank President Bullard gives opening remarks ata conference sponsored by the Federal Reserve System Commu-nity Affairs Officers in Washington.

U.S. Treasury Secretary Jack Lew testifies on the President's fis-cal 2014 budget proposal, first before the House Ways and Means

Committee, then the Senate Finance Committee.

The Labor Department releases weeklyjobless claims data.

STOCKS Close Change % Chng Yr-high Yr-low

DJ IA 14802.01 128.55 0.88 14826.66 12035.10

Nasdaq 3297.25 59.40 1.83 3270.30 2726.68

S&P 500 1587.71 19.10 1.22 1573.89 1266.74

Toronto 12534.91 50.86 0.41 12904.71 11209.55

Russell 946.00 16.66 1.79 954.00 729.75

FTSE 6387.37 74.16 1.17 6533.99 5897.81

Eurofirst 1186.17 20.82 1.79 1209.05 1132.73

Nikkei 13288.13 95.78 0.73 13331.39 10398.61

Hang Seng 22034.56 164.22 0.75 23944.74 21612.05

TREASURIES Yield

10-year 1.8069 -16 /32

2-year 0.2341 0 /32

5-year 0.7372 -6 /32

30-year 3.0070 -45 /32

Price FOREX Last % Chng

Euro/Dollar 1.3063 -0.14

Dollar/Yen 99.79 0.78

Sterling/Dollar 1.5326 0.03

Dollar/CAD 1.0144 -0.19

COMMODITIES Price $ change % change

May crude $ 94.55 0.35 0.37

Spot gold (NY/oz) $ 1558.04 -26.66 -1.68

Copper U.S. (front month/lb) $ 3.4140 -0.0240 -0.70

Reuters/Jefferies CRB Index 291.30 -0.20 -0.07

BIG MOVERS Price $ change % change

Suntech Power 0.74 0.12 19.85

Adtran 22.46 2.75 13.95

Spherix 7.80 0.85 12.23

MannKind 4.40 0.34 8.37

Titan Machinery 22.45 -3.67 -14.04

Barrick Gold 24.46 -2.23 -8.36

Taomee Holdings 4.18 -0.37 -8.13

First Solar 36.32 -3.03 -7.70

KEY ECONOMICS EVENTS ET/GMT REUTERS POLL PRIOR SOURCE

Import prices for Mar 0830/1230 -0.5 pct 1.1 pct Bureau of Labor Statistics

Export prices for Mar 0830/1230 0.1 pct 0.8 pct

Initial claims for w/e 06/04 0830/1230 365,000 385,000 Labor Department

4 week average for w/e 06/04 0830/1230 -- 354,250

Continuing claims for w/e 30/03 0830/1230 3.070 mln 3.063 mln

ICSC monthly chain for Mar TIME:TBA -- 1.7 pct International Council of Shopping Centers

For The Day Ahead - Canada, click here
http://reut.rs/14TsVdnhttp://reut.rs/14TsVdn


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MARKET MONITOR

Click on the chart for full-size imageStocks climbed on Wednesday, with both the Dow and the S&P500 ending at historic highs as cyclical shares led the wayhigher for a second straight day. "The path of least resistancefor the market remains higher, and despite some mixed eco-nomic data, investors are concluding that stocks remain a betterplace to be than risk-free assets," said J im McDonald, chief in-

vestment strategist at Northern Trust Global Investments. Ad-tran jumped 13.95 percent. JDS Uniphase added 4.84 percentand Juniper Networks rose 4.72 percent. Facebook jumped3.69 percent. The Dow was up 0.87 percent, the S&P 500 Indexwas up 1.22 percent and Nasdaq was up 1.83 percent.

Treasury prices slumped after minutes from the Federal Re-serve's March policy meeting fueled fears the U.S. central bankmight slow or end its bond purchases by year-end. The marketsell-off picked up speed after the Treasury sold $21 billion worthof 10-year notes at a high yield of 1.795 percent, slightly higherthan the market expected. "We are seeing a bit of a 'risk-on'trade in the market. We are seeing the sell-off partly on theFOMC minutes and partly on the auction set-up," said Larry Mil-stein, head of government and agency trading at R.W.Pressprich & Co. Benchmark 10-year Treasuries notes lasttraded 16/32 lower in price, yielding 1.80 percent. The 30-yearbond was down 1-13/32 in price for a yield of 3.00 percent.

The dollar rose to a four-year high against the yen, edgingcloser to the key 100-yen mark after minutes of the U.S. FederalReserve's March meeting raised expectations it will finish itsbond-buying spree by the end of the year. "Once again, the min-utes have sounded a slightly more hawkish tone and that's reallywhat's benefiting dollar/yen," said Omer Esiner, chief marketanalyst at Commonwealth Foreign Exchange in Washington.After breaking technical resistance at 99.73 yen, the 50 percentretracement of the dollar's drop from its J une 2007 high of124.14 yen to a record low of 75.311 yen set in October 2011,

the dollar rose to a session high of 99.81 yen. It last traded at99.78 yen, up 0.77 percent on the day. The euro last traded0.68 percent higher at 130.41 yen. Against the dollar, the eurowas at $1.3065, down 0.12 percent on the day.

Crude oil rose as traders exploited the so-called "crack spread,"or the differential in pricing between crude oil and the productsthat come from cracking it open during the refining process. TheU.S. government's inventory data arrived after OPEC trimmedits forecast for global demand growth, echoing similarly low de-mand expectations cited earlier this week by the U.S. EnergyInformation Administration in its monthly outlook. May crudesettled up 0.38 percent at $94.56 a barrel.

Gold prices fell after Federal Reserve minutes showed some

policymakers expected to slow the pace of bond purchases andto discontinue them by year end. Shortly after, a European Com-mission report showed Cyprus agreed to sell excess gold re-serves to raise around 400 million euros to help finance its partof its bailout. "I think gold was responding to a little bit of both(news items)," said metals trader David Lee at Heraeus Pre-cious Metals Management in New York. Spot gold was off 1.67percent at $1,558.30 an ounce. Apri l gold futures slid 1.78percent, to $1,558.40 an ounce.

THE DAY AHEAD For April 11, 2013
http://link.reuters.com/cyj37t


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TOP NEWS

Click on the chart for full-size imageObama budget aims to kickstart deficit-reduction talksPresident Barack Obama proposed a $3.77 trillion budget thatcombines controversial cuts to social safety net programs withtax increases on the wealthy. Obama's budget for fiscal year2014would trim the deficit over three years by requiring peoplemaking more than $1 million annually to pay more in taxes while

enacting spending cuts that would replace the "sequester" re-ductions that went into place last month. The president said hisproposal - particularly the healthcare and pension program cutspainful to his fellow Democrats - meant he had moved in Repub-licans' direction. "When it comes to deficit reduction, I've alreadymet Republicans more than halfway," Obama said in remarks atthe White House. Obama's budget aims to achieve $1.8 trillionin deficit reduction over 10 years. The budget also includes a 10percent tax credit for small businesses that raise wages or hirenew workers.

Divided Fed edges closer to consensus on ending bondbuyingU.S. Federal Reserve officials appeared on course to end theirextraordinary bond buying stimulus by year end at a meeting lastmonth, suggesting a weak March jobs report may have takenthem by surprise. Meeting on March 19-20, before release of the

jobs data, Fed officials took an intellectual deep dive into therisks and benefits of their extraordinary policy stimulus, minutesof the meeting released showed. While they remained sharplydivided on how long their bond purchases should last, the min-utes nonetheless suggested they were nearing a decision tostart winding them down. The minutes revealed an intense dis-cussion and several disagreements among the Fed's 19 policy-makers about carrying on with buying $85 billion in Treasury andmortgage bonds per month to stimulate the economy.

Delayed tax refunds hurt Family Dollar resultsFamily Dollar Stores said that sales have perked up as spring

weather has finally arrived, but reported a weaker-than-expectedquarterly profit which it blamed on a delay in shoppers gettingtheir tax refunds. Still, the discount retailer was cautious aboutits upcoming performance, cutting its annual profit forecast forthe second time due to expectations its customers would hold offon discretionary spending. In the second quarter, net incomerose to $140.1 million, or $1.21 per share, from $136.4 million,or $1.15 per share, a year earlier. Analysts looked for a profit of$1.22 per share. Sales jumped 17.7 percent to $2.89 billion,meeting Wall Street expectations. For the fiscal year, FamilyDollar now sees earnings of $3.73 to $3.93 a share, while ana-lysts, on average, targeted $3.98 a share.

Pfizer cancer drug wins special status; shares jump

U.S. regulators have granted a "breakthrough therapy" designa-tion to an experimental Pfizer treatment for breast cancer, liftingthe company's shares and putting a spotlight on its growing can-cer-drug portfolio. Analysts from J PMorgan and Leerink Swannforecast the oral medicine, called palbociclib, could generateannual sales of $5 billion or more if it is approved for use againstbreast cancer as well as other types of cancer. Pfizer said theU.S. Food and Drug Administration conferred the special statuson palbociclib based on impressive results seen in mid-stagetrials. The drug is now being tested in a larger Phase III study.

GM renews commitment to loss-making European brand

OpelGeneral Motors renewed a commitment to its loss-makingEuropean brand, pledging to invest 4 billion euros in Opel by theend of 2016 to support new model launches. "As a global auto-motive company, GM needs a strong presence in Europe - bothin design and development as in manufacturing and sales," GMChief Executive Dan Akerson told reporters at Opel's headquar-ters in Ruesselsheim. "Opel is key to our success and enjoysthe full support of its parent company," he added.

Constellation Brands' prof it tops Street estimatesConstellation Brands reported a higher-than-expected fourth-quarter profit, as the company benefited from an acquisition andselling a greater number of more expensive products. In the

fourth quarter, Constellation had net income of $81.7 million, or43 cents per share, down from $103.0 million, or 51 cents pershare, a year earlier. Excluding restructuring-related costs and aloss on the write-off of financing costs, earnings were 47 centsper share. On that basis, analysts on average were expecting 45cents per share. Net sales, which exclude excise taxes, rose to$695.9 million from $628.1 million a year earlier.

CarMax profit rises, but used-car sales momentum dropsCarMax reported a 13 percent higher fourth-quarter profit, butcomparable used-car sales grew at a slower pace than the pre-vious quarter. Comparable used-car sales grew 6 percent, downfrom 12 percent in the third quarter. Net income rose to $107.2million, or 46 cents per share, in the quarter, from $95 million, or41 cents per share, a year earlier. Revenue rose to $2.83 billionfrom $2.48 billion. Analysts on average expected a profit of 46cents per share on revenue of $2.73 billion.

St. Jude wins European OK for b rain implant to treatDystoniaSt. Jude Medical said it received European regulatory approvalfor a brain implant to treat an incurable neurological disorder thatcan leave its victims wheelchair-bound. It said European regula-tors approved its Brio, Libra and LibraXP deep brain stimula-tion systems for managing symptoms of primary and secondaryDystonia.

http://link.reuters.com/fuh37t


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TOP NEWS (continued)

W.R. Grace estimates lower profit as customers delay pur-chasesChemicals maker W.R. Grace estimated quarterly earnings be-low analysts' expectations and lowered full-year profit forecastafter some customers reduced their inventory and some othersdelayed purchases. The company said it expected to earn $52

million to $53 million, or 68 cents to 69 cents per share, in thefirst quarter ended March 31. After adjustments, it expectedearnings of 80 cents to 81 cents per share. Analysts on averagewere expecting 88 cents per share.

Thermo bids for L ife Tech; PE firms finalizing offerThermo Fisher Scientific made a binding offer for Life Tech-nologies on Tuesday as private equity firms raced to finalize aconsortium to take the genetic testing equipment maker private,several people familiar with the matter said. Thermo Fisher meta bid deadline on Tuesday but private equity firms working on a

joint bid missed it and were working late into the evening to se-cure the equity required to support an offer, the people said.Blackstone Group, Carlyle Group and Singapore's state investor

Temasek Holdings were in talks with KKR & Co about securingthe required equity and finalizing a buyout consortium, the peo-ple said.


Company Name Action

Blackstone GroupBMO raised target price to $26 from $25 on valuation of corporate private equity fund given better-than-expected marketperformance during the quarter and peer disclosures.

First Solar Piper J affray raised price target to $40 from $28 after the company gave 2013 outlook ahead of expectations.

Icahn EnterprisesJ efferies started coverage with buy rating, says addition to a diversified set of investments, as a holding company, IEPoffers investors an opportunity to access the investment ideas of Carl Icahn.

Northern TrustCredit Suisse raised price target to $47 from $40, sees modest signs of encouragement for the trust banks as client riskappetite has begun to improve and asset prices continue to trend higher.

PfizerBernstein raised target price to $32 from $30, says with Lipitor generics moving into the background, the companys busi-ness has become cleaner and should revert to earnings growth in 2013 vs. a decline in 2012.

ANALYSTS RECOMMENDATIONS

PIC OF THE DAY

A member of the "red shirt" movement joins her hands in prayer during agathering near the Democracy Monument, the site of bloody clashes

with Thai security forces, in Bangkok, Thailand.


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THE DAY AHEAD - CANADA For April 11, 2013

COMING UP MARKET MONITOR

Media and telecom company Cogeco and its main unitCogeco Cable will report second-quarter earnings. For Co-geco Cable, the profit is expected to be C$1.11 per share,

compared to a profit of 63 Canadian cents a share in the year-ago quarter.

Corus Entertainment is scheduled to report second-quarterresults. Analysts expect a profit of 36 Canadian cents pershare, compared to a profit of 38 Canadian cents a share inthe year-ago quarter.

Network equipment maker Sandvine is likely to post a first-quarter profit on higher orders. Analysts expect the companyto earn 1 cent, on revenue of $24.1 million.

Astral Media, which is waiting for regulators to rule on its re-vised proposal to be acquired by BCE, will report second-

quarter earnings. Analysts expect a profit of 70 Canadiancents per share, compared to a profit of 69 Canadian cents ashare in the year-ago quarter.

Canada's main stock index extended its gains for a thirdstraight day on Wednesday, hitting a one-week high, as positivetrade data from China lifted financial and energy shares andoffset weakness in Barrick Gold Corp and other gold shares.

The data showed that Chinese imports of key commodities re-bounded in March as hopes of a strengthening economy encour-aged end-users to ramp up production and cautiously replenishstocks. The Toronto Stock Exchange's S&P/TSX compositeindex was up 0.41 percent at 12,534.91. Barrick Gold fell 8.65percent, while Royal Bank of Canada gained 1.99 percent.

The Canadian dollarwas down 0.20 percent at $1.0143.

BIG MOVERS Price C$ % Change

GMP Capital 6.40 0.35 5.79

Canaccord Financial 6.80 0.24 3.66Romarco Minerals 0.68 -0.07 -9.33

Barrick Gold 24.81 -2.35 -8.65

TOP NEWS

Chile court suspends Barrick's Pascua-Lama projectA Chilean court has temporarily suspended the construction ofBarrick Gold Corp's $8.5 billion Pascua-Lama gold and silvermine after indigenous communities said the project was destroy-ing glaciers and harming their water supply. The appeals court inthe northern town of Copiapo said it will analyze the communi-

ties' complaints of "environmental irregularities" against Barrick'sproject, which has already been plagued by soaring costs andstiff opposition from environmental groups. The suspension ofone of Chile's largest mining projects is the latest in a series ofsetbacks to key metal and energy projects that threaten to deraila massive pipeline of investment in the world's top copper pro-ducer.

Israel finance minister opposes Israel Chem sale to PotashCorpIsrael's new finance minister Yair Lapid came out against thesale of fertiliser maker Israel Chemicals to Potash Corp, send-ing shares in ICL and its parent company lower. "Lapid advisedhis ministry's senior officials he intends to wage a belligerent

policy to preserve the natural treasures of the State of Israel,"Lapid's spokeswoman said in a statement. Potash Corp is seek-ing to raise its stake in ICL from 14 percent but Israel's govern-ment has a golden share in ICL, giving it a veto right.

Small Canadian wireless players hang up on industry g roupThe three companies that entered Canada's wireless marketafter a 2008 auction of airwaves have pulled out of the industry'smain trade group, complaining that it is biased in favor of estab-lished competitors that dominate the sector. The trio - Vimpel-com Ltd's Wind Mobile, and privately held Public Mobile and

Mobilicity - said that as a result of their withdrawal, the Cana-dian Wireless Telecommunications Association could no longerclaim to speak on behalf of the entire industry.

DragonWave amends deal wi th Nokia SiemensTelecom network equipment maker DragonWave said itamended its deal with Nokia Siemens Networks to reduce op-erating costs and cut three senior management positions. Thecompany cut 116 jobs in Ottawa and Israel in 2012. According tothe renewed deal, Nokia Siemens will make an immediate cashpayment of 10.6 million euros to DragonWave, clearing the con-tingent receivable on the Ottawa-based company's balancesheet.


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ANALYSIS AND INSIGHT

DEALTALKIntelsat to test investors' love for leverageBy Olivia OranIntelsat Global Holdings S.A. plans to test investors tolerancefor financial leverage in a proposed $500 million IPO next week,as the satellite operator tries to take advantage of a stock mar-

ket rebound that has increased the appetite for new offerings.Luxembourg-based Intelsat, which is owned by European pri-vate equity firm BC Partners and Menlo Park, California-basedSilverlake Partners, carries a debt load of more than $15.9billion, giving it a leverage multiple of around 7.8 times.

That compares to an average debt to EBITDA multiple of 4 to 5times for other recent sponsor-backed IPOs like NorwegianCruise Line Holdings Ltd and Bright Horizons Family SolutionsInc."It's a sign of the times in the marketplace that you're seeingdeals like this come," said Matt McCormick, a portfolio managerat Cincinnati-based Bahl & Gaynor Inc. "People in general arebeing more receptive to deals with risk, but they need to under-stand that it's not all about reward, they need to be cautious."

The companys debt level is slightly higher than it was after its$16.6 billion buyout in 2008, which ranks as the largest takeoverof a PE-owned company by another private equity firm, accord-ing to Thomson Reuters data. Intelsat carried $15.3 billion indebt after the deal closed.

The companys hefty debt load has resulted in high interest ex-pense which, in turn, caused a string of net losses.Over the last three years, Intelsat has racked up combined netlosses of $1.1 billion, according to a company prospectus. Lastyear, it devoted $1.3 billion, or about half its revenue, to paydown its interest expense.Intelsats growth prospects may also be of concern to investors.Intelsats revenue rose just 3 percent to $2.6 billion in 2012, andthe portion of those revenues that come from new business hasfallen since 2009.

The limit here is definitely being tested," said Dave Stepherson,senior portfolio manager at Hardesty Capital Management inBaltimore. "The cash flow is strong until the economy goessouth and the company has no flexibility to meet its debt obliga-tions. To me, the level of debt is bordering on insanity."

The company will use the IPO to pay down debt and is alsoplanning a $700 million mandatory convertible bond deal concur-rent with its IPO.PUSHED TOO FAR?Intelsat is trying to come to market at a time when a slew ofsponsor-backed companies taken private during the buyoutboom of 2006 to 2007 are also looking to list.In March, packaged foods maker Pinnacle Foods, backed byBlackstone Group LP, raised $580 million in its IPO.

Other private equity-backed companies that have gone publicthis year include child care operator Bright Horizons Family So-lutions Inc, backed by Bain Capital; cruise line operator Norwe-gian Cruise Line Holdings Ltd, backed by Apollo Global Manage-ment LLC and TPG; and communications technology companyWest Corp, backed by Thomas H. Lee Partners and QuadrangleGroup."Youre seeing some of these more mature companies with lessapparent growth that couldnt have gone out a year ago begin tocome to market," said J onathan Crane, a senior managing direc-tor at Keybanc Capital Markets. "Now the market is so muchstronger that companies that perhaps dont have the growthprofile but do have other characteristics can get done today."But that willingness to shoulder debt can be pushed too far.Last month, private equity-backed communication services com-pany West Corp had a weak opening on the Nasdaq during itspublic debut. West, which priced below its expected range, saw

shares open at $19 which was $1 below its IPO price. Sincethen, shares have rallied slightly to close Tuesday at $20.75.

The markets reaction to West, which has a leverage ratio ofroughly 5 times, could raise questions about the future of com-panies like Intelsat, which have even higher leverage.Still, Intelsat and its backers are hoping that the companys high

margins and predictability will make its heavy debt load andmoderate growth rate tolerable.

The company posted EBITDA margins of roughly 77 percent lastyear and its backlog, or expected future revenue from existingcustomers, stood at $10.7 billion. This enables Intelsat to havevisibility into nearly 80 percent of its revenue each year.

The company is selling 21.7 million shares at a range of $21 to$25 per share. It would be valued at $2.4 billion at the midpointof its range.

The IPOs lead underwriters include Goldman Sachs Group Inc,J P Morgan Chase & Co, Morgan Stanley and Bank of AmericaMerrill Lynch.Intelsat could not be reached for comment.

How Goldman's dollar-store bet reaped a fortuneBy Lauren Tara LaCapra and Carrick MollenkampGoldman Sachs Group Inc has likely generated around $1.2billion of revenue over six years from its dealings with discountretailer Dollar General Corp, a Reuters review shows. J ustdon't expect the investment bank to boast about it.Much of the revenue stems from an equity investment that islumped into a catchall earnings segment called "Investing andLending." Goldman created the segment in 2011 to shine somelight on how much money it makes from investing its ownmoney, but it still confounds analysts and investors because thebank does not provide details on the performance of individualassets.

The segment can have a large impact on Goldman's results inany given quarter. In the fourth quarter, Goldman reported

nearly $2 billion in revenue from Investing and Lending, or 21percent of overall revenue. Analysts expect the area to boostprofits again when Goldman reports first-quarter results nextweek. Forecasts for the segment's revenue differ widely, from $1billion to $2.2 billion."When you look at investment banking, it's very easy to breakout how they will do quarter to quarter," said Rick Scott, chiefinvestment officer at wealth-management firm L&S Advisors,which has about $25 million invested in Goldman shares. "Butwhen it comes to Investing and Lending, what can you say? Youcertainly don't have the transparency."

The revenue the bank has earned from Dollar General alsohelps explain why Goldman, perhaps more than rivals, is ag-gressively looking for ways to continue its principal investing

activities without running afoul of regulations such as the Volckerrule, which restricts how much of their own money banks can putat risk. It has lobbied regulators to preserve its merchant bank-ing business and has come up with new structures for invest-ments that are exempt from the rule's provisions.Goldman is not required to provide details on individual invest-ments when it reports earnings, and the bank declined to con-firm or deny Reuters' calculations.Unlike many of Goldman's investments, Dollar General is a pub-licly traded company, which means both the bank and the re-tailer have to disclose more information. A Reuters review of sixyears of filings with the U.S. Securities and Exchange Commis-sion offers a rare - albeit limited - window into how Goldmanprofits from betting its own money.

The review shows that Goldman affiliates have nearly quintupledan initial $605 million cash investment in Dollar General, whichpeddles everything from $1 packs of Snickers bars to $5 packs



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ANALYSIS AND INSIGHT (continued)

of toilet paper. The investment was made as part of a $7.3 billionKKR & Co LP -led buyout in 2007.Goldman has not only helped to turn around the retailer and sellmost of its affiliates' holdings at a profit but has also earnedmoney from serving as Dollar General's banker.

The broader KKR-led private-equity group - dubbed "Buck Hold-

ings" in a nod to Dollar General's bargain-basement brand - tookthe retailer public again in November 2009 for $21 a share.Since then, Goldman affiliates have generated roughly $2.5 bil-lion of proceeds from stock sales and $77 million in manage-ment fees as private-equity sponsors, the analysis shows.It is impossible from the outside to calculate precisely how muchmoney Goldman itself has made from its Dollar General deal-ings, because some information is not public. While Goldmanearned money from lending to Dollar General, for instance, it isunclear if it held onto that debt or sold it, and whether it bookedgains or losses related to such sales.Publicly available information on its Dollar General dealings nev-ertheless adds up to $1.2 billion in revenue.Goldman earned money on Dollar General stock sales through aprivate equity fund called GS Capital Partners VI, which investsa mix of client money, employee money and Goldman's ownmoney.

The investment bank represents about 25 percent of that fund -meaning that for the Dollar General buyout, Goldman contrib-uted about $151 million in capital and has generated about $650million in revenue from stock sales and management fees. Gold-man's share of the fund's remaining stake in Dollar Generalamounts to about $70.6 million.In addition, Goldman has also received at least $58 million ofinvestment banking and underwriting fees for taking the com-pany private and then public again; $479 million of interest pay-ments and repurchase commissions from making a loan to thecompany; and $56 million for a derivatives trade pegged to thatloan, according to filings. It has also earned fees from clients for

managing the private equity fund."In this transaction, Goldman kind of nailed it they've done itall," said Michael Driscoll, a former Bear Stearns executive whonow teaches finance at Adelphi University.UNPREDICTABLE SWINGSGoldman does not run the Investing and Lending segment as asingle operation. Businesses whose earnings flow into the seg-ment do not share a common management team, and their in-vestment strategies vary widely.

The segment holds standard financial investments like corporatebonds and stocks but has also made a slew of more unusualinvestments, from a coal mine in Cesar, Colombia, to a 50 per-cent stake in the crime drama television series "CSI," which itsold in March.

Profits from an elite team called the Special Situations Groupalso flow into Investing and Lending. That group has a history ofmaking big, profitable bets on troubled assets, including a J apa-nese golf course and the pizza chain Sbarro Inc.Not all investments have been a success. Goldman was a spon-sor of the $45 billion buyout of Texas utility TXU, which turnedinto a terrific flop.Over the long run, Goldman's principal investment has been abig moneymaker, but it also causes unpredictable swings in itsfortunes from one year to the next because the bank marks itsassets to market. Over the past five years, Investing and Lend-ing has ranged from a pretax loss of $13.5 billion in 2008 to apretax profit of $4.2 billion in 2010."Obviously it brings more volatility to earnings, and that causessome investors and regulators and politicians to be concerned,"said David Stowell, a former Goldman executive who teachesfinance at the Kellogg School of Management. "But, on balance,

I think that Goldman has some talented people I know themquite well who run that, and I expect that they are making gen-erally wise decisions."

The opacity of the segment has made the job of analysts andinvestors harder.

The only investment Goldman details is an equity stake in the

Chinese lender Industrial and Commercial Bank of China Ltd,which is big enough to warrant disclosure. The rest of Investingand Lending revenue goes into three buckets: equities, debt andthe vague category "other."In raising estimates for Goldman's first-quarter profits over thepast week, analysts have cited Investing and Lending as a bigdriver. J MP Securities' David Trone said he doubled his estimatefor those gains, to $2.2 billion, based on broad market trends,not any specific investments.On a J an. 16 conference call to discuss fourth-quarter earnings,six analysts asked Chief Financial Officer Harvey Schwartz forclarity on the segment.Schwartz said the "idiosyncratic nature" of different portfolioscan affect how they are managed but gave few other details."In some quarters (the segment) will perform well; in some quar-ters, we won't perform as well, relative to the marketplace," hesaid. "But the market will drive that."Adding to confusion are Investing and Lending's expenses,which typically run $2 billion to $3 billion a year, even thoughGoldman says it has few employees. Dane Holmes, head ofinvestor relations, said in an March interview that those ex-penses come from paying people as well as from operating ex-penses of investments like power plants and mines.As for Dollar General, it has grown since its leveraged buyout.It has hired new management, closed 400 unprofitable locations,kept tighter controls on inventory and changed the layout atstores to encourage customers to spend more, turning the com-pany around. Earnings have soared from $138 million in 2006 to$953 million last year, while sales have climbed from $9.2 billion

to $16 billion.And the stock is up 137 percent since its relisting.

BREAKINGVIEWSAckman's retai l obsession is elusive white whaleBy Agnes T. CraneBill Ackman's retail obsession is proving to be an elusive whitewhale. J.C. Penney is just the latest mishap in the sector for thehedge fund manager. Bets on Borders and Target ended badly.Spurning a major buyout firm's interest in J .C. Penney a fewyears ago now looks increasingly foolish.Selling wares in hundreds of stores is hard under the best ofcircumstances. Layer in an industry being rapidly reshaped bythe Internet and it takes a certain amount of hubris to even think

about pursuing riches in a stodgy outfit like J .C. Penney. Butsuccess stories like those of Spain's Amancio Ortega, who hasspun billions out of Zara and other Inditex holdings, serve as abeacon for Ackman and others chasing riches of a similar scale.For all the success, though, Ackman keeps coming up short inretail. His $12 billion Pershing Square Capital Management helda big stake in Borders when it went bust and shareholders in

Target ignored Ackman's pleas for a shakeup of the companysboard, eventually costing the hedge fund boss and his investorsa fortune.Even Ackman concedes J .C. Penney is "very close to a disas-ter" after his handpicked chief executive, Ron J ohnson, tried tobring Silicon Chic to the dowdy chain long dependent on dis-count shoppers. As a result, revenue has plummeted and J ohn-son was ousted on Monday.Worse, Ackman might have made a bundle for himself, his in-vestors and J .C. Penney shareholders if instead of wielding his



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The Day Ahead - North American Edition is compiled by Karan Khemani, Benny Thomas and Chandrashekhar Modi in Bangalore; Franklin Paul and Meredith Mazzilli inNew York.

THE DAY AHEAD - North American Edition is produced by Reuters News

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KEY RESULTS vs. THOMSON REUTERS I/B/E/S ESTIMATES

Company Name Quarter EPS Estimates Year Ago Rev Estimates (mln)

No major companies are scheduled to report.

** Includes companies on S&P 500 index. Estimates may be updated or revised.


ANALYSIS AND INSIGHT (continued)

retail harpoon he had taken the company private when thechance presented itself. Ackman disclosed last year that a pri-vate equity shop was interested in paying well north of $30apiece for shares that now fetch less than $14. Being out of thepublic eye also might have given J ohnson's plan more time totake hold.

Ackman has proven he can make money oodles of it. His aver-age annual return is over 20 percent. Pershing Square was evenup 6 percent in the first quarter. That success has come fromsuccessful campaigns at the likes of General Growth Properties,Canadian Pacific Railway and Fortune Brands. Retail has hurtnot helped. His investors can only hope that Ackman is done

playing Ahab and that Pershing doesn't become the Pequod.CONTEXT NEWS

J .C. Penney shares tumbled over 12 percent on April 9, a dayafter the company brought back former Chief Executive MikeUllman to replace Ron J ohnson.Same-store sales at the retailer are down more than 10 percent

so far in the fiscal first quarter that ends in April, Dow J ones re-ported on April 9, citing unnamed sources.

(The author is a Reuters Breakingviews columnist. The opinionsexpressed are her own.)

the day ahead - april 11th 2013

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