the day ahead - april 12th 2013

7/28/2019 The Day Ahead - April 12th 2013

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THE DAY AHEADREUTERS NEWS North American Edition For Friday, April 12, 2013

Stocks rose for a fourth straight day on Thursday, takingthe Dow and S&P 500 to new all-time highs. Treasuriesedged higher as a three-day rise in yields attracted inves-tors. Gold fell as the dollartraded close to a four-year highagainst the yen . Oil fell as the IEA trimmed its energy de-mand forecast.

MARKET RECAP COMING UP

JPMorgan Chase is expected to post higher quarterly results, butthe numbers may be overshadowed by lingering bad memories ofthe London Whale trading debacle. Earningsper share at the biggest U.S. bank are ex-pected to be up nearly 9 percent from thesame quarter a year earlier. But any apparentgrowth will be tarnished by the fact that theyear-earlier profits were retroactively slashedby nearly 10 percent when the company hadto restate results because its financial controls had failed to pick upthe derivatives loss. In addition, the newest results are expected tobe about flat with fourth-quarter results and show that the companyis still falling short of what executives have said is its potential.

Wells Fargo, the No. 4 U.S. bank by assets, is expected to postincreased quarterly profit, and investors will be closely watching foran update on the mortgage business as a harbinger of what to ex-pect in the rest of the industry.

Federal Reserve Chairman Ben Bernanke speaks in Washingtonat the 2013 Federal Reserve System Community DevelopmentResearch Conference on the topic of "Creating Resilient Communi-ties" before the "Resilience and Rebuilding for Low-Income Com-munities" conference. Atlanta Fed President Dennis Lockhartspeaks at the same event, and Federal Reserve Bank of BostonPresident Eric Rosengren gives remarks before the "Fulfilling theFull Employment Mandate: Monetary Policy and the Labor Market"conference hosted by the Federal Reserve Bank of Boston.

Several data reports are expected to be released, including RetailSales, which likely stalled in March, a possible sign that a tax hikeenacted earlier in the year has had a bigger impact on consumerspending than previous reports had indicated. The Commerce De-partment releases the data. The Labor Department releases theproducer price index report for March, which is expected to showa drop in prices due to lower costs for gasoline.

AT&T is expected to begin sales of the first smartphones pre-loaded with Facebook's new family of "Home" applications.

STOCKS Close Change % Chng Yr-high Yr-low

DJ IA 14864.98 62.74 0.42 14887.51 12035.10

Nasdaq 3300.16 2.90 0.09 3299.16 2726.68

S&P 500 1593.30 5.57 0.35 1589.07 1266.74

Toronto 12481.37 -53.54 -0.43 12904.71 11209.55

Russell 947.01 0.92 0.10 954.00 729.75

FTSE 6416.14 28.77 0.45 6533.99 5897.81

Eurofirst 1192.87 6.70 0.56 1209.05 1132.73

Nikkei 13549.16 261.03 1.96 13331.39 10398.61

Hang Seng 22101.27 66.71 0.30 23944.74 21612.05

TREASURIES Yield

10-year 1.7930 4 /32

2-year 0.2340 0 /32

5-year 0.7275 1 /32

30-year 2.9975 5 /32

Price FOREX Last % Chng

Euro/Dollar 1.3099 0.24

Dollar/Yen 99.85 0.08

Sterling/Dollar 1.5383 0.35

Dollar/CAD 1.0106 -0.35

COMMODITIES Price $ change % change

May crude $ 93.43 -1.21 -1.28

Spot gold (NY/oz) $ 1561.26 3.12 0.20

Copper U.S. (front month/lb) $ 3.4280 0.0140 0.41

Reuters/Jefferies CRB Index 290.46 -0.85 -0.29

BIG MOVERS Price $ change % change

Rite Aid 2.12 0.33 18.44

Suntech Power 0.87 0.13 17.57

Primo Water 1.40 -0.14 -9.09

Hewlett-Packard 20.88 -1.44 -6.45

KEY ECONOMICS EVENTS ET/GMT REUTERS POLL PRIOR SOURCE

PPI mm for Mar 0830/1230 -0.2 pct 0.7 pct Labor Department

PPI yy for Mar 0830/1230 1.4 pct 1.7 pct

Retail sales mm for Mar 0830/1230 0.0 pct 1.1 pct Census Bureau

Retail sales Ex-auto mm for Mar 0830/1230 0.0 pct 1.0 pct

ExAuto/gas/bldg for Mar 0830/1230 0.2 pct 0.4 pct

Reuters/UMich prelim for Apr 0955/1355 78.5 78.6 Reuters/University of Michigan

Current conditions prelim for Apr 0955/1355 89.5 90.7

Expectations prelim for Apr 0955/1355 70.0 70.8

Business inventories for Feb 1000/1400 0.4 pct 1.0 pct Commerce Department

ECRI weekly index for w/e 05/04 1030/1430 -- 129.2 Economic Cycle Research Institute

For The Day Ahead - Canada, click here


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MARKET MONITOR

Click on the chart for full-size imageStocks rose for a fourth straight day on Thursday, sending theDow and the S&P 500 to all-time highs as positive data on thelabor market and an encouraging retail outlook assuaged recentconcerns about economic growth. Nevertheless, technologystocks were the day's underperformers, with tech blue chipssuch as Microsoft and Hewlett-Packard sharply lower after an

industry report that showed shipments of personal computershad fallen significantly in the first quarter. The Dow got its big-gest boost from Pfizer, up 2.41 percent. Hewlett-Packard fell6.45 percent and Microsoft shed 4.44 percent. Shares of

Acadia Pharmaceut icals surged 64.37 percent. The Dow wasup 0.42 percent, the S&P 500 Index was up 0.35 percent andNasdaq was up 0.09 percent.

Treasury prices rose as a three-day rise in yields lured investorsto buy government debt both on the open market and at a $13billion auction of 30-year bonds, the final part of this week's $66billion in longer-dated supply. The 30-year bond sale fetchedlukewarm demand, although indirect bidders that include foreigncentral banks accounted for 31.44 percent of the purchases, thelowest in six months. The overall bidding for the second reopen-ing of the bond issue due in February 2043 came in at 2.49, upfrom 2.43 at the March auction but below its long-term average.Benchmark 10-year Treasury notes last traded 4/32 higher toyield 1.79 percent. The 30-year bond last traded 5/32 higher toyield 3.00 percent.

The dollar hovered close to a four-year high against the yen,with a climb above the key 100 yen level highly expected giventhe massive amount of bonds the Bank of J apan plans to buy tobuoy its economy. "I think there's trepidation going above 100because we've gone so quickly ... in the wake of the BoJ deci-sion," said Michael Woolfolk, senior currency strategist at BNYMellon in New York. The dollar was last trading flat at 99.82yen . The euro rose to its highest against the yen in more than

three years, hitting 131.00 yen , and was last trading up 0.29percent on the day at 130.79. Against the dollar, the euro rose0.24 percent to $1.3100, after a session peak of $1.3138.

Oil prices settled lower after the International Energy Agency

trimmed its forecast for energy demand growth this year, thethird of the world's top forecasters to do so at a time of growingsupplies. "The IEA not only lowered their demand outlook, butthey also speculated about the potential for a crude oil bear mar-ket this year. The agency's negative sentiment is weighing onprices," said John Kilduff, partner at Again Capital LLC in New

York. May crude was down 1.26 percent at $93.45 a barrel, wellbelow its 50-day moving average of $94.33.

Gold rose as a drop in the dollar triggered bargain hunting afterthe previous session's sharp drop on news of possible gold saleby Cyprus and uncertainty over Fed's monetary stimulus. Spotgold rose 0.22 percent to $1,561.50 an ounce. U.S. gold forJune delivery was at $1,560.20 an ounce, up 0.1 percent.

THE DAY AHEAD For April 12, 2013
http://link.reuters.com/xew34t


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TOP NEWS

Click on the chart for full-size imageJobless claims data calms jitters over U.S. labor marketThe number of Americans filing new claims for unemploymentbenefits fell more than expected last week, easing fears of amarked deterioration in labor market conditions after a surprisestumble in job growth in March. Initial claims for state unem-ployment benefits dropped 42,000 to a seasonally adjusted

346,000, the Labor Department said. Employers added only88,000 workers to their payrolls in March after a solid 268,000increase in February. Economists said the claims data sug-gested the slowdown in job creation reflected seasonal hiringbeing brought forward rather than underlying weakness in thelabor market. A second report from the Labor Departmentshowed little sign of inflation, which should allow the Fed to keeppolicy very accommodative. Import prices slipped 0.5 percentlast month after rising 0.6 percent in February.

U.S. retailers have ho-hum start to spring, see better AprilCold weather and lingering concerns about the job marketdampened U.S. shoppers' enthusiasm and hurt early spring sell-ing at several retailers in March, but some executives and ana-lysts said they expected business to improve slightly in April.Several top U.S. retailers, including Costco Wholesale and T.J .Maxx parent TJX Cos, reported weaker-than-expected Marchsales. Costco's sales at stores open at least a year were up 4percent, less than the 5.2 percent jump analysts expected. TJ Xreported a 2 percent decline in March same-store sales, deeperthan the 1 percent drop analysts were projecting. But the com-pany said business improved as the weather warmed up, andCEO Carol Meyrowitz said April "was off to a good start."

Burger King stock up on prof it view, CEO going to HeinzBurger King Worldwide forecast a slightly higher quarterlyprofit than Wall Street expected, even though spending amongfast-food diners remains weak. The hamburger chain also saidChief Executive Bernardo Hees will leave to take over at H.J.

Heinz Co. Burger King expects first-quarter adjusted earnings of17 cents per share - a penny higher than the average analystestimates. The company expects sales at restaurants open atleast 13 months to fall 1.5 percent globally and 3 percent in theUnited States and Canada in the first quarter, slightly more thanWall Street's average estimates. But it said sales were up inMarch after it found the right recipe for value food offers.

Three more top executives leave J.C. PenneyThree more top executives at J.C. Penney have left the ailingretailer, the New York Post reported, following the ouster ofChief Executive Ron Johnson. Chief Operating Officer MikeKramer, Chief Talent Officer Daniel Walker and Chief CreativeOfficer Mike Fisher exited the retailer on Wednesday, it said.

Citing a source close to the retailer, the newspaper said Kramerresigned but added it was not clear whether Walker and Fisherleft voluntarily.

Rite Aid posts quarterly and annual profi ts, shares upRite Aid posted its second consecutive quarterly profit, toppingWall Street's expectations, as the drugstore chain filled moreprescriptions and sold more generic drugs, which carry higherprofit margins. Adjusted EBITDA rose to $340.3 million from$274.3 million a year earlier. On a net basis, Rite Aid earned$123.1 million, or 13 cents per share, for the fourth quarter, com-pared with a year-earlier loss of $161.3 million, or 18 cents ashare. Fourth-quarter revenue fell to $6.46 billion from $7.15billion a year earlier. Analysts, on average, had expected a lossof 2 cents per share and $6.43 billion in revenue.

Rosneft, Exxon reveal plans for $15 bln Russia LNG projectRosneft and ExxonMobil unveiled details of a $15 billion lique-fied natural gas project to supply Asia-Pacific markets that wouldchallenge Gazprom's monopoly on Russian gas exports. TheRussian and U.S. energy majors have agreed to study the possi-bility of building the plant to liquefy gas from their joint Sakhalin-1 oil and gas project off Russia's Pacific coast. Production couldstart in 2018 - the same year that Gazprom plans to commissionits own LNG plant near the Pacific port of Vladivostok - pittingthe state energy giants against each other in a battle for market

share in China, J apan and South Korea.

China bird fl u threatens KFC parent's winning streakYum Brands, the biggest foreign fast-food chain operator inChina, is in danger of breaking its 11-year streak of double-digitprofit growth as it scrambles to deal with food scares and bird fluin its most lucrative market. The company said in a filingWednesday that the latest deadly avian flu outbreak would havea "significant, negative impact" on sales at KFC stores in Chinain April. Analysts said the company's problems in China - whichaccounts for more than half its global sales - were deeply rooted,and that sales which started slowing before the chicken scarewould need more than a flu-jab to revive.

Google submits formal concessions to EU in antitrust caseGoogle has formally submitted a package of concessions toEuropean Union competition regulators, signalling that the com-pany may be able to settle a two-year antitrust investigationwithout a fine. "In the last few weeks, the Commission com-pleted its preliminary assessment formally setting out its con-cerns. On this basis, Google then made a formal submission ofcommitments to the Commission," said Antoine Colombani, theCommission's spokesman on competition policy. "We are nowpreparing the launch of a market test to seek feedback frommarket players, including complainants, on these commitmentproposals," he said, declining to provide details.

http://link.reuters.com/dex34t


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TOP NEWS (continued)

PIC OF THE DAY

Female North Korean soldiers patrol along the banks of Yalu River, nearthe North Korean town of Sinuiju, opposite the Chinese border city ofDandong.

Goldman explores sale of Metro metals warehouse busi-nessGoldman Sachs has explored a sale of its metals warehousingbusiness Metro International, three sources with knowledge ofthe matter told Reuters, just three years after the investmentbank bought the firm for $550 million. The sources say the bank

has been happy with Metro's performance. It has proven to be alucrative money-spinner as stockpiles of aluminum havemounted in its global warehouse network. Goldman may stilldecide to keep Metro, the sources said, but the bank has indi-cated it is ready to listen to any offers having already earned asizeable return on its investment in the business.

Acadia says data from Parkinson's tr ial enough to fi le fo rapproval

Acadia Pharmaceut icals said data from an initial late-stage trialwould be sufficient to file for approval for its experimental antip-sychotic drug for Parkinson's disease patients, and that it wouldnot need to conduct an additional trial as planned earlier. TheU.S. Food and Drug Administration agreed with the companythat data from the late-stage trial 020, along with supporting datafrom other studies, was sufficient to support its marketing appli-cation for the drug pimavanserin to treat Parkinson's diseasepsychosis.


Company Name Action

Adobe SystemsEvercore started coverage with overweight rating and set target price of $52, says well positioned to monetize theexplosion in digital content and demand for digital marketing tools.

AdtranUBS raised target price to $19 from $17 on expectations the company has booked some orders from a key customer, with

revenue to ramp in the second-half of the year.

Bed Bath & BeyondNomura raised target price to $72 from $65.50 citing stabilizing trends in the housing sector, says the company will benefitas the sector recovers more fully.

MicrosoftGoldman Sachs cut rating to sell from neutral to reflect worsening PC trends and a lack of traction in tablets andsmartphones.

Toll BrothersSusquehanna raised rating to neutral from negative and raised target price to $33 from $25 on valuations and acceleratingland prices.

ANALYSTS RECOMMENDATIONS


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THE DAY AHEAD - CANADA For April 12, 2013

COMING UP MARKET MONITOR

Dollar-store operator Dollarama is scheduled to report fourth-quarter earnings. Analysts expect an earnings of C$1.02 pershare, compared to a profit of 55 Canadian cents a share in

the year-ago quarter.

Cable company Shaw Communications will report second-quarter earnings. Analysts expect a profit of 36 Canadiancents per share, compared to a profit of 38 Canadian cents ashare, a year earlier.

Canada's main stock index fell for the first time in four sessionson Thursday as energy and mining stocks were hurt by decliningprices and weak investor sentiment, while BlackBerry plungedon doubts about the company's recovery plan. The TorontoStock Exchange's S&P/TSX composite index was down 0.43percent at 12,481.37. Suncor Energy was down 1.46 percent.Shares ofBlackBerry fell 7.43 percent.

The Canadian dollarwas down 0.38 percent at $1.0102.BIG MOVERS Price C$ % Change

Centerra Gold 5.39 -0.26 -4.60

Paladin Energy 0.95 -0.04 -4.04

Aquila Resources 0.14 0.02 12.50

Sandvine 2.15 0.10 4.88

TOP NEWS

Canada new housing prices up 0.2 percent on strength inCalgaryNew home prices in Canada rose by 0.2 percent in February,the 23rd consecutive month-on-month increase, pushed up by abuoyant market in the western city of Calgary, Statistics Canadasaid. The advance matched analysts' expectations. Calgaryprices rose 1.0 percent from January - the largest month-over-month increase since May 2007 - on higher material and laborcosts.

Results at Canada's Astral, Corus take divergent paths

Two of Canada's biggest independent media companies handedin very different second-quarter earnings report cards, with prof-its plunging at Corus Entertainment while rivalAstral Mediasearnings jumped 9 percent. Astral Media reported a 9 percentrise in second-quarter profit on higher television revenue. Netearnings before acquisition and other costs, and Bell-Astraltransaction costs rose 8 percent to C$41.2 million. Revenuerose 2 percent to C$237.1 million. For Corus, adjusted income,which does not include the cost of its debt refinancing, wasC$24.4 million, or 29 cents a share. Analysts on average ex-pected Corus to earn 36 cents a share on revenue of C$199.7million.

Hudson's Bay expects sales growth to slow in 2013

Canadian department store operator Hudson's Bay said salesin its first quarter have been below its expectations so far andadded that growth would slow down for the full year as a lateonset of spring hit sales at its Lord & Taylor's stores in the U.S.

The company expects sales to rise 1.5 percent to 3.5 percent in2013. Sales rose 5.9 percent to C$4.0 billion last year. In thefourth quarter, sales rose 6.7 percent to C$1.39 billion. Net in-come from continuing operations fell to C$93.6 million, or 81

Canadian cents per share, from C$99.2 million, or 95 Canadiancents, a year earlier. Same-store sales rose 6.1 percent at thecompany's namesake Canadian stores but fell 2.9 percent in theU.S. as superstorm Sandy hampered sales at Lord & Taylorstores.

Rio Tinto adds $87 mln Ivanhoe Australia stake to auctionblockGlobal miner Rio Tinto's list of assets up for sale has length-ened, with its unit, Turquoise Hill Resources, looking to sell itsA$83 million majority stake in Ivanhoe Australia. Ivanhoe said ina statement it was aware Turquoise Hill had begun a "review ofits options in relation to its shareholding in Ivanhoe Australia",after Dow J ones reported Turquoise Hill had appointed Citi toadvise on a sale of the stake.

Click on the chart for full-size image
http://link.reuters.com/nep62t


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ANALYSIS AND INSIGHT

DEALTALKBanks find new niche as activist campaigns growBy Jessica ToonkelU.S. investment banks, many of which have reduced headcountin the face of shrinking profits, have found new opportunities inan unusual place, the growth in shareholder activism.

Goldman Sachs Group Inc has long been the go-to firm forcompanies defending against activists ever since the days whenthey were called corporate raiders.But over the past few years, big banks like Credit Suisse andBarclays Plc as well as investment bank Houlihan & Lokey,which focuses on the middle market, have formed practices of-fering the services.

The banks help companies with everything from writing pressreleases to analyzing the costs of a breakup or countering activ-ists' demands, bankers said. They are also aid companies inidentifying where they could be vulnerable, even before activistinvestors show up on their doorsteps."The level of receptivity from companies has definitely in-creased," said Daniel Kerstein, head of the strategic financegroup at Barclays. "In some cases the proposed medicine maybe worse than the problem, but you are still going to listen."Companies are increasingly coming under fire from activists.

There were 241 activist campaigns in 2012 targeting a change incompany strategy or board, up from 187 in 2009, according toFactSet SharkWatch.Over the past three years, activist hedge funds have outper-formed more traditional hedge funds, according to Chicago-based Hedge Fund Research (HFR). Its activist index has re-turned 3.80 percent on an annualized basis, compared with itsglobal hedge fund index, up only 0.25 percent.

That has drawn the attention of investors. Assets under man-agement in activist funds doubled to more than $65 billion in2012 from $32 billion in 2008, according to HFR.Successful activist campaigns, and the pressure to outperform

index funds in a low-return environment, have made pensionand mutual funds more willing to join up with activist investors,giving them more allies in their campaigns.With the U.S. economy recovering, it is also easier to discernwhich companies are underperforming, making them more visi-ble targets."The numbers are not going to retreat," said Chris Young, headof contested situations at Credit Suisse. Once investors see thatactivist campaigns are successful, "then that tool is identified asone of the tools in their toolbox," he said.For the investment banks, offering defense advice can help so-lidify relationships at the most senior level, such as a board ofdirectors or top management, bankers said.Barclays has grown its shareholder defense services over the

past few years as an outgrowth of its equity restructuring busi-ness, which helps with non-distressed corporate breakups. Theteam sits within the bank's mergers and acquisitions practice,Kerstein said.Credit Suisse hired Young, the former director of M&A and proxyfight at influential proxy adviser Institutional Shareholder Ser-vices, to head its takeover defense practice in J une 2010."As a firm we've been devoting more resources and more head-count to this subject matter in an environment where banks ingeneral have been decreasing headcount," Young said, declin-ing to elaborate.Houlihan & Lokey, which focuses on mid-sized corporations, hasexpanded its business advising on activist defense over the pastcouple of years, said Gregg Feinstein, managing director and co-head of M&A. Unlike larger peers Goldman and Credit Suisse,Houlihan works with both activist funds as well as companies.Being proactive is key, said Bill Anderson, head of the defense

practice at Goldman. For example, companies are increasinglyassessing potential vulnerabilities, even before activists showup.Communicating with other shareholders - not just the activistinvestors - is also crucial, bankers said."Companies need to make sure they are talking to all of their

shareholders on a regular basis," Kerstein said. "You want yourshareholders to be brutally honest with you."

COLUMNEquities in a sweet rutBy J ames Saft

The record-breaking rise of the stock market is in part a functionof the lousy jobs picture, which ensures an ongoing prescriptionrefill of Federal Reserve medicine.

The S&P 500 index hit a record high on Wednesday, risingmore than 1 percent to as much as 1588. Since data showed onFriday that the economy added just 88,000 jobs in March, theS&P has added a cool 2.3 percent. And while the jobless ratefell to 7.6 percent this was largely thanks to almost 500,000 peo-ple falling out of the workforce, taking the labor force participa-tion rate to its lowest since 1978.

This state of play isnt indefinitely sustainable, but there is abso-lutely no contradiction between a spluttering economy and alevitating stock market.

The Fed is boxed in unless they see signs of a rapid improve-ment in jobs, the debate theyve been having among themselvesabout tapering quantitative easing later this year is going to benothing more than a historical curiosity. And why that rapid im-provement should happen as the effects of sequestration are feltthrough the year, I could not tell you.It is likely that a strong jobs number would have actually under-mined equities, raising the prospect that complaints about QEfrom those outside of Chairman Bernankes tightly knit consen-sus would get a better hearing.

Minutes from the Federal Open Market Committees rate-settingmeeting in March, released on Wednesday, bear this out. At themeeting, held before the jobs figures were compiled, there wasnotable debate, with a few participants wanting to bring theprogram to an end relatively soon and a few others seeingquickly increasing risks and wanting tapering before too long.

Those views are probably more hawkish than the consensusamong those members who actually get to vote this year, andalso dont seem to reflect the consensus at the Bernanke-ledcore.What seemed to get no hearing at all by the Fed were alterna-tives to asset purchases which might work better. All of the focusis on the risks and the rewards of QE, with consensus comingdown that the latter justify the former. The critics position is

weakened by the fact that the un-enunciated alternativeamounts to admitting the limits of Fed power and waiting to seewhat happens.ROSY OUTLOOK, WEATHER TO REMAIN DREARY

That would be ugly if it happened, and precisely because of thisit wont any time soon. The Fed will very likely continue QE forthe rest of this year, at least, and will try to plug the dyke ofdoubt by making thoughtful and sober comments about how it isworking through mitigating the risks.

That leaves equities, if not job seekers, in a sweet spot.Not only will money flow to riskier assets via the Feds own QEprogram, the really quite large one recently announced by theBank of J apan will also help. J apanese institutions and saverswill doubtless flee the yen and the single-buyer J apanese gov-ernment bond market, with some of the money flowing to theU.S., supporting asset prices here.In the meantime, corporate profitability is helped by the fact that



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ANALYSIS AND INSIGHT (continued)

there is a large core of highly employable people who are seeingdecent wage growth and whose assets, like houses and stocks,are going up in value.

There are also signs of a nascent consumer credit loosening,verging on a bubble, which will also support stocks, though obvi-ously not in a sustainable way. Reuters Carrick Mollenkamp had

a great report last week detailing the surge in subprime autoloans, up 18 percent last year, and the Wall Street J ournal thisweek detailed a trend towards longer-term auto loans, of asmuch as eight years.I could tell you about how its not a great idea to devote a hugechunk of your take-home pay to a high-rate auto loan, or for thatmatter of the questionable wisdom of financing a rapidly depreci-ating asset with long-term debt, but that is all beside the point.

These loans are being made, officialdom seems unlikely to inter-fere, in fact QE is a prime support, and for a while at least, thiswill keep the merry-go-round spinning.

The main risks to equities, other than a worsening in conditionsin Asia or Europe, are all at what must seem a safe distance.

The Fed wont pull back soon, and it will take a while for the im-pact of sequestration to be felt.

This rally wont go on forever, but, like the last two stock marketbooms, will probably last longer and go further than it merits.

(J ames Saft is a Reuters columnist. The opinions expressed arehis own. At the time of publication, he did not own any directinvestments in securities mentioned in this article. He may be anowner indirectly as an investor in a fund. )

PayPal hopes to break U.S. shoppers' swipe habit in storesBy Alistair BarrPayPal will soon be ubiquitous in U.S. retail stores, but just be-ing there may not be enough.

The online payment service will take a giant step beyond itsInternet roots on April 19, when a partnership with Discover Fi-

nancial Services officially kicks in. The deal means that, by theend of this year, PayPal will be accepted as a payment option inroughly 2 million retail stores that already take Discover creditcards.For parent eBay Inc, PayPal's expansion is crucial. The 13-year-old payment service accounts for about 40 percent of eBay'srevenue and its growth is slowing. A foothold in physical pay-ments, a $10 trillion market roughly 10 times the size of onlinetransactions, could power longer-term growth.But a nagging question hangs over PayPal's push to checkoutcounters: how can it convince consumers to try its new paymentmethod when swiping a credit or debit card is so easy?"Consumers need to be convinced they need a single digitalwallet or card that links to all their other cards," said Rick

Oglesby, a payments industry analyst at Aite Group, which pro-vides research to financial services clients. "That's a huge mind-set shift and the average consumer wonders why they wouldneed it."PayPal has been testing its physical payments service at HomeDepot Inc stores since early 2012. At the checkout counter,shoppers can use PayPal by typing in a mobile phone numberand a four-digit PIN that has to be set up online beforehand.

They can also use a PayPal card that links to their account.PayPal's uphill battle becomes clear from interviews with em-ployees at the Home Depot store in San Carlos, California, oneof the first to test the new service. Cashiers there said very fewcustomers chose to use PayPal - and some who did soon gaveup because they found keying in a bunch of numbers was not asconvenient as swiping a credit card."I ask at my local Home Depot and I get the same response not many people have used it," said Brian Kilcourse of RSR Re-

search, a consulting firm focused on retail technology. "Unlessthere are specific benefits that consumers can touch and feel,they're unlikely to adopt something new."Don Kingsborough, the PayPal executive overseeing the offlinepush, said the company will soon be releasing an updatedsmartphone app that makes it easier for consumers to enroll in

the program. PayPal will also be sending out new PayPal cardsto users who still prefer to swipe.Kingsborough said he expects the cards to be used a lot at first,but they will be slowly replaced by the app as more stores set upmobile payments and shoppers get comfortable using theirsmartphones to make purchases."An average credit card user uses the card 18 to 20 times aweek. For us to get to those kinds of levels will take time," hesaid in an interview. "But by Christmas PayPal will start to be amore prevalent way to pay."RIVALSPayPal's offline initiative is in part a response to stiffening com-petition in the payments market.Square, a mobile payments start-up headed by Twitter co-founder J ack Dorsey, is used by more than 300,000 merchantsand has struck a partnership with Starbucks. Credit card giantsVisa Inc and MasterCard Inc are working on their own digitalwallets. These companies declined to comment on PayPal'sexpansion.When people pay with PayPal, the purchases are often fundedby credit cards. That means PayPal pays huge amounts of feesto Visa and MasterCard, making it a valuable partner. However,as PayPal expands into physical stores it will be more of a rivalbecause it can forge closer ties to consumers and distance themfrom the credit card networks and card issuers.Morgan Stanley analyst Scott Devitt told investors on Thursdaythat he was not increasing his PayPal estimates because of thisnew business. In his best-case scenario, Devitt estimates theinitiative could boost the value of eBay by $5 a share, assuming

about 5 percent of PayPal U.S. customers would complete abouthalf of their offline transactions via the service."The road to merchant ubiquity is clear; consumer adoption isless so," Devitt wrote in a research note.Ebay shares were trading at $57.94, up 64 cents or 1.12 per-cent. Devitt's price target for the shares remained $62.PayPal originally caught on online because it offered users aneasy way to pay for goods without having to type in personalinformation, like credit card numbers and addresses.In the physical world, this advantage no longer applies. Thatforces PayPal to attract customers through a mix of financialincentives and small fixes for what it calls "consumer painpoints," or irksome shopping experiences.For example, Home Depot and PayPal have run several promo-

tions in recent months, offering $5, $10 or $25 rewards to userswho spend a certain amount in-store with PayPal. One suchpromotion was expected to last two weeks but proved so popu-lar that it lasted only 30 minutes before the budgeted rewardmoney ran out, Kingsborough said.Home Depot is also working with PayPal to improve customerservice. One possible solution would help contractors track themoney they give plumbers and other specialists to buy equip-ment for a project.At J amba J uice, customers can use PayPal smartphone apps toorder and pay for smoothies, then pick them up from a dedicatedline. PayPal ran a similar test with McDonald's in France lastyear.

The new smartphone app will also let diners order and pay with-out waiters approaching their table. And another solution PayPalis testing allows users at stadium events to order and pay forfood and drinks from their seats.



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

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KEY RESULTS vs. THOMSON REUTERS I/B/E/S ESTIMATESCompany Name Quarter EPS Estimates Year Ago Rev Estimates (mln)

J PMorgan Chase Q1 $1.39 $1.19 $25,861

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


ANALYSIS AND INSIGHT (continued)

Retailers are interested in working with PayPal because it maygive them leverage to negotiate better terms with the likes ofVisa and MasterCard. PayPal is also offering to share morevaluable customer data with merchants.Kingsborough said he hopes to turn PayPal into a kind of digitalSwiss Army knife: "It solves so many of your problems that

you're willing to carry it."J URY IS OUTIt remains to be seen if these tactics will win over enough cus-tomers to give PayPal a significant physical footprint. Wall Streetis largely optimistic - shares of eBay are up about 75 percentsince mid-2011, when PayPal revealed its offline plans.Home Depot Treasurer Dwaine Kimmet said he had low expec-tations about the initial use of PayPal in its stores and the ex-perience so far has confirmed such caution. But when PayPal ismore widely available in other stores and enrollment gets easier,adoption should increase, he said.

"The real killer app comes when PayPal rolls all the incrementalfunctionality around the transaction and the shopping experi-ence," Kimmet told Reuters.Guitar Center, the world's largest musical instruments retailer,began to accept PayPal at its stores on Oct. 15 last year andsays the service still accounts for less than than 1 percent of in-

store payments. But that number is growing, said Wes Muddle,vice president of finance at Guitar Center.Although a February promotion was not successful in boostingPayPal usage, Guitar Center is not giving up because it believesthe partnership would help the retailer know its customers andmarket better to them over the long term."Would we have preferred the promotion move the needlemore? Yes," he said. "There's no silver bullet for switching peo-ple from credit cards to PayPal. It will just take some time."

the day ahead - april 12th 2013

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