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• REVIEW & OUTLOOK

• DECEMBER 31, 2011

The Spenders Won 2011 Republicans fell for Obama's backroom budget trap.

 Amid this month's payroll tax fracas, few noticed that Congress passed a 1,200-page, $1 trillion omnibus spending bill for fiscal 2012. Maybe no one in

 Washington boasted because it's a victory for spending as usual. Republicans—in the House and Senate—need a better strategy.

The news is that after accounting for last-minute unemployment insuranceextensions, "emergency" spending and higher Medicare physician payments,

total federal outlays are estimated to be $3.65 trillion in fiscal 2012, up slightly from $3.6 trillion in 2011. The last year has seen no major reforms in any of the

 big entitlement programs—Medicare, Medicaid or Social Security. Spending onfood stamps alone is scheduled to reach $80 billion in 2012, more than doublethe amount as recently as 2007.

Associated Press

Speaker of the House John Boehner (R., Ohio)

Republicans had promised to roll back discretionary spending to 2008 levels, tosave $100 billion. But the August debt deal lowered the savings to $7 billion—or

a 2012 target for appropriations of $1.043 trillion. Even that target was missed because appropriators tacked on roughly $10 billion in disaster relief—hurricanes this summer—and so the new total is $1.054 trillion. That's $4

 billion more than the 2011 baseline of $1.050 trillion, although savings fromtroop withdrawals in Iraq may reduce that.

 What about killing programs? Well, only 28 programs out of the thousands of line-items contained in the omnibus budget were terminated. The list includesmostly minor programs such as $12.5 million spent on something called

"adolescent family life," $1.2 million for civic education, and $1.4 million foreconomics education (not for members of Congress).

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The one major domestic program of more than $100 million that got the axe was the Energy Department loan guarantee program for the likes of Solyndra.The total domestic savings from program terminations come to less than $0.5

 billion.

Meanwhile, scores of programs that have long been GOP targets survived: Amtrak, the Legal Services Corp., National Public Radio, the United Nationspopulation program, mass transit grants, and even funding for the U.N. ClimatePanel. Spending increased for many programs, such as the National Institutes of Health, the Consumer Product Safety Commission, Indian Health Service andBureau of Land Management.

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Many readers will look at all this and blame House Republicans, and there's nodoubt they failed to meet expectations. Yet believe it or not, a flat overall budgetis a vast improvement over the years 2007 to 2011, when overall spendingincreased 32%, or $868 billion. (See the nearby table.) Voters elected a GOP

House to pull the Democratic credit card, and Republicans at least stopped the blowout of the Pelosi-Obama years.

The real failure of GOP leaders is that Senate Democrats and the White Housefoiled Republican attempts to cut spending further. The GOP fiscal high point

 was the passage of Paul Ryan's budget in the spring, with $4.5 trillion of savingsover a decade, numerous program cancellations, the most ambitiousentitlement reform since the GOP budget of 1995 (vetoed by Bill Clinton), andan outline for pro-growth tax reform.

From that moment on, Democrats went into a prevent defense. Senate Majority Leader Harry Reid refused to pass a comparable budget outline, a Democraticabdication that has now reached more than 900 days. Democrats offered nospending cuts or budget reforms in public. None. Instead, they attacked Mr.Ryan for daring to reform the structure of Medicare to introduce morecompetition, which takes some nerve after Democrats cut Medicare by $500

 billion over a decade to fund ObamaCare.

 As for the White House, Mr. Obama joined the assault on Mr. Ryan, but he alsoclaimed to favor some fiscal discipline and he invited GOP leaders to work out acompromise behind closed doors. This let him posture as a spending cutter

 without having to make a decision on any specific budget cuts or reforms. Hegulled Speaker John Boehner in particular with promises of sincerity, only todemand $1 trillion in tax increases that House Republicans could never pass

 without violating their own campaign promises.

This was the big GOP mistake. Mr. Boehner and Majority Leader MitchMcConnell both fell for Mr. Obama's backroom political trap. Mr. Boehner

privately insisted that Mr. Obama really wanted a deal, while Mr. McConnell, who never liked the House budget, was looking for political cover on Medicare.But whatever their motives, their strategy failed by letting Mr. Obama set theterms of debate. They failed to make Senate Democrats and the White Housedeclare themselves in public where voters would notice.

*** 

There has to be a better way. Tea party expectations of major reforms werealways unrealistic with Democrats controlling the Senate and White House. But

that's no reason that Republicans in Congress can't use their power to fight fortheir priorities.

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They need to draw contrasts with Democrats on taxes, spending, regulation andreform that at least educate the public about what's at stake. Pick someprograms and make them budget-cutting showcases. Use the savings to financetax cuts that promote growth. Or simply vote for tax reform whether or not it is

"revenue neutral" under Congress's silly budget rules. Follow votes in the House by bringing pro-growth bills to the Senate and forcing Democrats to vote up ordown, as they did with the Keystone XL pipeline.

GOP Congressional leaders will be tempted to play it safe and wait for theirPresidential nominee. And inevitably the Presidential race will dominate publicdebate as 2012 unfolds. But before it does, Republicans need to do far more toshow their own supporters and independent voters that they are the party of reform and change in Washington. If voters want spending as usual, they'll elect

Democrats.==============================================================

Natural Gas Ends 2011 at 27-Month Low By DAN STRUMPF And RYAN DEZEMBER

U.S. natural gas prices fell to their lowest point in more than two years,underscoring how the nation's booming energy business is becoming a victim of its own success.

Minneapolis Star Tribune/Zuma Press

Natural gas is burned off at a well in North Dakota. Mild weather and oversupply have pushed the

fuel's price below $3.

Prices for the commodity have been under pressure over the last couple of years,as new drilling techniques unlocked vast new stores of natural gas from shaleformations and other so-called unconventional reservoirs.

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But in the last two months, the steady price decline has turned into a free-fall, asunusually mild temperatures across much of the U.S. have damped demand forgas to heat homes and offices.

Natural gas for February delivery settled Friday at $2.989 per million Britishthermal units, the lowest closing price for the commodity since September2009. It closed below $3 in the winter for the first time in nearly a decade.

"The sub-$3 levels for gas prices in the winter really point to the incredibleamount of nonconventional gas that has come onto the market the last two

 years," said Gene McGillian, analyst at Tradition Energy in Stamford, Conn."Our production levels, our mild winter and the gas we have in storage havecombined to crush natural gas prices this month."

Natural gas traded as high as $13 per million British thermal units in July 2008.But in recent years, domestic production boomed, with horizontal drillingtechniques and hydraulic fracturing, or "fracking," helping producers unleash a

flood of gas from shale formations in Pennsylvania, Arkansas and elsewhere.

Natural gas production in the lower 48 states hit a record 71.3 billion cubic feeta day in October, the U.S. Department of Energy said this week.

The bonanza has ushered in lower prices for many consumers and businesses.New Jersey's Public Service Electric and Gas Co., citing lower costs partly due toshale drilling, reduced residential gas rates on Dec. 1 by 4.6%, bringing to 35%the utility's total decrease since January 2009.

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Shale drilling has also created jobs and the prospect of greater energy independence, while raising environmental concerns.

But the fresh abundance of natural gas has also weighed on its price,

undercutting the profitability of the business for energy companies."American natural gas production growth is essentially useless at this particularpoint in time since you can't make any profit on North American naturalgas," EOG Resources Inc. Chief Executive Mark Papa told an energy conferencein late November. EOG plans to direct 90% of spending to oil production in2012, drilling for gas only where it is necessary to hold on to acreage, he said.

The number of rigs in the U.S. targeting gas reservoirs has fallen to 809, down110 from a year ago, oilfield services company  Baker Hughes Inc. said Thursday.

Many of those rigs have been steered to more profitable oil basins; the numbertargeting oil has rocketed to 1,193, up 428 from a year ago, according to BakerHughes.

Still, due in part to the structure of the business, the torrid pace of natural gasproduction shows few signs of slowing. Producers often have a limited time to

 begin drilling once they lease property, which leads many to drill wellsregardless of commodity prices or risk losing their hold on reserves. Othercompanies are forced to drill by the terms of joint ventures they signed when the

outlook on gas prices was rosier.

Bloomberg News

A crew from Alpha Oil & Gas Services constructs a gas pipeline outside of Watford City, N.D., in

October.

Cheap gas hurts energy company profits. Chesapeake Energy Corp., the second-largest U.S. producer after Exxon Mobil Corp., said recently that to meet its2012 operating expenses and debt-reduction targets, it would pair $7 billion in

planned asset sales and other financial deals with a projected $6 billionoperating cash flow.

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That $6 billion forecast, however, assumes an average natural gas price thattranslates to $4.38 per million British thermal units, according to a recentinvestor presentation, a price 50% higher than current levels.

 A Chesapeake spokesman said if gas prices remain low, the company's drillingexpenses are likely to fall as well.

Independent explorers, rig owners and other oilfield service companies arelikely to be more sensitive to price declines than large international energy companies. With big balance sheets and a long-term investment horizon, they look to factors that could heighten demand for gas. The EnvironmentalProtection Agency, for example, recently ordered power plants to cut emissionsof pollutants by 2016. Gas producers envision plants ditching coal for cleaner-

 burning gas.

"If the U.S. is going to make a very large move on its greenhouse gas reductions,natural gas will be a big part of that," J. Michael Yeager, who runs BHPBilliton Ltd.'s oil and gas business, told investors in November.

BHP in February paid $4.75 billion for Chesapeake's Fayetteville gas fields in Arkansas, the largest-ever deal for a shale asset, and said it will tripleproduction over the next decade.

=============================================================

•

• ASIA BUSINESS

• JANUARY 2, 2012, 10:35 A.M. ET

 Asia Manufacturing Picture CloudsBy MICHAEL S. ARNOLD

SINGAPORE—Manufacturing activity continued to contract in South Korea and

Taiwan in December but grew in India, as the euro-zone sovereign debt crisisand the sluggish U.S. recovery hit Asia's export economies harder.

Data Monday showed manufacturing contracting for a fifth straight month inSouth Korea and a seventh month in a row in Taiwan.

That followed conflicting readings in recent days from China's two purchasingmanagers' indexes, with one showing continued contraction and one showingthe merest of growth.

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"Downside risks are materializing" in Korea, HSBC economist Ronald Man saidin a release Monday. "The sharper drop in manufacturing activity overDecember confirms that Korea's economy is losing steam, with employmentcontracting over the month for the first time in almost three years."

The South Korean PMI fell to a seasonally adjusted 46.4 in December fromNovember's 47.1, the sharpest drop in nearly three years. A reading below 50indicates manufacturing is contracting.

In Taiwan, HSBC's PMI remained well below 50 in December, though at 47.1 itdid beat November's 43.7. Some 70% of Taiwan's gross domestic product comesfrom exporting electronic components, technology products andpetrochemicals, leaving the small island particularly exposed to a globalslowdown.

Data in recent months have shown Asia's breakneck growth cooling in responseto the slowdown in the West, and central banks across the continent are movingto ease monetary policy.

 A key variable for the region's economies will be China's ability to pick up theslack, as it did during the global financial crisis in 2008. But with Beijing unableto marshal the same kind of fiscal stimulus now, economists are debating

 whether China's own economic landing will be hard or soft.

HSBC's PMI for China, released Friday, showed manufacturing continuing tocontract, with a reading of 48.7. The official gauge Sunday from the ChinaFederation of Logistics and Purchasing—generally sunnier than the private one—was at 50.3.

Nomura economist Zhiwei Zhang said the improvement in the official Chinagauge was a surprise, and predicted growth momentum "will continue to wane"in the first quarter.

In India, where a huge domestic market helps shield the economy from globaltremors, HSBC's PMI rose to 54.2 from 51.0. Indications are rising that theReserve Bank of India will soon move toward monetary easing as concern shiftsfrom fighting inflation to boosting the economy, but that could be a mistake,said Lief Eskesen, HSBC's chief economist for India.

"These numbers suggest it's premature for the RBI to replace inflation withgrowth as the main concern," Mr. Eskesen said.

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Data Monday out of Indonesia showed inflation rising at its slowest pace in 20months, but economists don't think it will induce the central bank to cut interestrates at its policy meeting next week.

—Se Young Lee in Seoul, Aries Poon in Taipei and Anant Vijay Kala in New Delhicontributed to this article.

==============================================================

• ASIA BUSINESS

• JANUARY 2, 2012, 4:57 A.M. ET

India Raises Iron Ore Export TaxBy RAJESH ROY

NEW DELHI -- India has raised the export tax on iron ore, likely increasing

local prices and also deepening a slump in shipments of the steelmakingmaterial from the world's third-largest supplier.

The government increased the tax to 30%, effective Dec. 30, 2011, from 20% on both iron-ore fines and lumps, according to an order posted on the CentralBoard of Excise and Customs website Monday.

The tax rise will likely hurt India's export competitiveness. India sells iron oremainly in the spot market to China, unlike Australia and Brazil, the top two

iron-ore producers, which sell the commodity mostly through long-termcontracts.

Shipments from the South Asian country decreased 28% between April andNovember to 40 million tons, according to the Federation of Indian MineralIndustries. Volumes have been hit by a mining ban in the southern state of Karnataka, a freeze on sale of old stocks in western Goa state and transport

 bottlenecks in the eastern state of Orissa.

"Indian iron ore will no longer be competitive in the world market," said R.K.Sharma, the federation's secretary general. "This [export tax rise] will push theindustry to the verge of dying."

 With high export tax and railway freight, India's iron-ore exports won't exceed50 million tons this fiscal year through March, he added.

India exported 97.64 million tons iron ore last fiscal year.

The increase in export tax could lower the profit margin of Sesa Goa Ltd.,

India's largest iron-ore exporter by volume, Managing Director P.K. Mukherjeesaid.

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Prior to the export tax change, industry officials had estimated exports in 2011-12 to be between 60 million and 65 million tons because of mining-relatedissues.

The Supreme Court earlier this year banned mining in the major iron-oreproducing districts of Karnataka to prevent illegal mining and environmentaldamage. In Goa, moves to reduce environmental impact and illegal mining areaffecting production. The two states account for around 70% of India's iron-oreexports.

The tax move follows lobbying by local steelmakers who wanted the level to beraised in order to preserve the raw material because of rapid expansion incapacity by the steel sector.

==============================================================

•

• BUSINESS

• JANUARY 2, 2012

India Loosens Rules for Foreign InvestorsBy ANANT VIJAY KALA

NEW DELHI—India's federal government on Sunday moved to allow qualifiedforeign investors to invest directly in local share markets, in yet another moveaimed at attracting foreign capital flows amid a shaky global economy.

Qualified foreign investors, or QFIs, will now be able to invest individually up to5% of the capital of the Indian company. Cumulatively, QFIs can invest up to10% of the capital of the company being invested in, the government said in astatement.

The new rule will be effective Jan 15.

Previously, only foreign institutional investors and non-resident Indians wereallowed to directly invest in local shares.

However, with capital inflows drying out due to the global economicuncertainty, the government is finding it harder to fund its gaping currentaccount deficit.

 Asia's third-largest economy traditionally runs a wide current account gap, butauthorities hadn't been too worried as they had relied upon heavy capitalinflows to fund the deficit.

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The government has taken a string of measures to revive foreign investorinterest in the local economy, which has been managing a moderately fastgrowth pace despite the global slowdown.

In its annual budget, the federal government had allowed QFIs to invest in localmutual funds. With the new rules, they will be able to buy local shares directly.

The government has also eased foreign investment rules in local debt, allowingmore foreign capital to flow into its sovereign bonds.

The government said capital markets regulator Securities and Exchange Boardof India and banking regulator Reserve Bank Of India are expected to publishthe rules to make them effective on Jan. 15.

==============================================================

• UPSIDE

• DECEMBER 31, 2011

For Bank Stocks, Smaller Is Better in 2012By JACK HOUGH

For stock investors, banks weren't where the money was in 2011.

The KBW Bank Index, which includes 24 U.S. firms, from global giants likeBank of America and JP Morgan Chase to large regional players, plunged 25% in2011. The broader Standard & Poor's 500-stock index was essentially flat.

This is no repeat of the financial crisis, which exposed U.S. banks asdangerously underfunded and sent the KBW index crashing by more than three-quarters over two years ended March 2009. This time part of the problem is

that, with all of the new safeguards in place to prevent a repeat of 2008, bankscan't be as aggressive as they once could.

"Banks have much more capital today," says David Rolfe, chief investmentofficer at Wedgewood Partners, a St. Louis investment adviser overseeing $1.3

 billion. "But for the big players, the business simply isn't as profitable."

Smaller banks, however, might present an opportunity for bargain hunters.

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In the post-Lehman world, there are basically three sizes of banks: global"systemically important financial institutions," other big banks, and everythingelse.

SIFIs are banks deemed too big to fail. There are 29 worldwide, including eightin the U.S., and membership in the club isn't optional. It is determined by theFinancial Stability Board, a global oversight committee created in 2009. These

 behemoths face the closest scrutiny and strictest capital demands.

In the U.S., new regulations impose liquidity and stress-testing requirements onall large banks. Banks with assets of more than $10 billion must run periodicstress tests, and ones with more than $50 billion face outside stress-testing.

Strong banks are a good thing for investors in general, of course, but regulatorsare "erring on the side of caution" with large banks, says David King, an analyst

 with Newport Beach, Calif., investment bank Roth Capital Partners.

That can stifle stock returns two ways, he says. First, extra money held inreserve can't be lent or invested at a profit. Second, large banks will face

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scrutiny as they try to return cash to stockholders through dividends and sharerepurchases.

Big banks face another problem. Customers are depositing plenty of cash into

savings accounts and certificates of deposit but demand for loans has been weak.

In the past, a big branch network was necessary to attract deposits, says Mr.King. In the current environment, it's a burdensome expense for banks to carry.

The idea that big banks enjoy economies of scale is largely a myth, saysFrederick Cannon, director of research at Keefe, Bruyette & Woods, aninvestment bank that specializes in the financial sector (and the creator of theKBW Bank Index). What they have enjoyed is a funding advantage, and that is

changing.

"For 70 years, regulators viewed large, diversified banks as safer and thus ableto make do with lower reserve levels," says Mr. Cannon. "Now they're taking theopposite view."

That leaves strong, small banks—ones with assets below $10 billion—in aposition to outgrow and outperform the giants.

 And their shares seem inexpensive, analysts say. Small bank stocks did betterthan big ones in 2011, but not as well as the broader stock market. The KBW Regional Banking index lost 7%.

Mr. Cannon says small banks look inexpensive relative to the book value of theirassets—and large banks cheaper still. But the small ones will be better able toturn those assets into profits in coming years.

For stock pickers looking for highly profitable banks, the team of bank analystsat Keefe Bruyette & Woods recommends three for 2012: Bank of Marin Bancorp,

 based in California; Bryn Mawr Bank  in Pennsylvania and CVB Financial, out of Ontario. High returns on assets suggest banks like these are in a position togrow, says KBW.

For investors who want banks with high levels of excess capital, either for theadded safety or the likelihood that future cash flow will be spent on stockholdersin the form of dividends or share repurchases, the KBW team likes four banks:Columbia Banking System based in Washington state; Hermitage, Pa.-basedcommunity bank F.N.B., People's United Financial in Connecticut; and again,

CVB Financial.

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Mutual fund investors might consider the PowerShares KBW Regional BankingPortfolio, an exchange-traded fund with exposure to smaller banks. It costs $35a year per $10,000 invested and has a dividend yield of about 2%, on par withthe broad stock market. The average stock market value of its holdings was $1.3

 billion at the end of the third quarter.

 Alternatively, the SPDR S&P Regional Banking ETF holds companies with anaverage stock market value of $2.7 billion. It also costs $35 a year per $10,000invested and yields about 1.9%.

Finally, there is the FBR Small Cap Financial Investor fund, an actively managed mutual fund. It is costly, with yearly expenses of $151 per $10,000invested, but over the past decade the fund has returned 6% a year. That'sdouble the S&P 500's return over the period, and a handsome enoughperformance to rank among the top 1% of financial funds.

—Jack Hough is a columnist at SmartMoney.com.

==============================================================

• REVIEW & OUTLOOK ASIA

• DECEMBER 30, 2011

Beijing's Split and Hong Kong's Autonomy 

"One country, two systems" is becoming just "one country." In 1997, when the British colony of Hong Kong reverted to Chinese sovereignty,the most common analogy was the goose that lays the golden eggs. China wouldleave the territory's capitalism and civil liberties alone as promised, optimistssaid, and they were largely right. At least until now.

Jockeying for power ahead of China's leadership transition next fall is revealinga new debate over how better to control Hong Kong, and as a result DengXiaoping's "one country, two systems" formula that guaranteed the territory'sstatus as a free and open city is under threat. This has implications for the way the rest of the world treats Hong Kong, and especially for Taiwan, which China

 wants to reunify with the mainland under the same formula.

*** 

 A committee of 1,200 of Hong Kong's great and good will choose a new chief executive in March, and since most of the electors are "friends of Beijing," cuesfrom the leadership of the Communist Party will decide the race. Thatleadership's choice is still not clear, because the two main candidates areeffectively proxies for competing factions in Beijing arguing over Hong Kong'sfuture. This is providing a peek into how Beijing thinks about the territory.

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The pro-establishment frontrunner, former Chief Secretary Henry Tang, is closeto China's former paramount leader Jiang Zemin by dint of family ties inJiangsu province going back decades. Mr. Jiang presided over the handover of Hong Kong and the successful implementation, more or less, of its promised

autonomy. Since 1997, he entrusted this policy to the director of the Hong Kongand Macao Affairs Office, Liao Hui. But Mr. Jiang's health is failing, and hisShanghai faction seems to be losing influence over Hong Kong policy to theCommunist Youth League faction of current supremo Hu Jintao.

Mr. Tang's challenger is C.Y. Leung, one of the local leftists who expected togovern Hong Kong after the handover but have been spurned by Beijing in favorof tycoons and British-trained civil servants. After Mr. Liao retired in October2010, the new Hong Kong affairs Director Wang Guangya, believed to be close

to Mr. Hu's faction, made several unusual statements favoring the policy platform of Mr. Leung, including advocating more public housing and reform of land policy. That potentially threatens the interests of the tycoons, many of 

 whom got rich through real estate investments.

Mr. Wang also criticized British-trained civil servants for their lack of leadership, clearly meaning the current Chief Executive Donald Tsang, but alsohitting his No. 2 and chosen successor, Mr. Tang. Li Keqiang, the incomingpremier and another of Mr. Hu's supporters, came bearing economic measures

to integrate the city with the mainland when he visited in August, and he alsoset a harder tone on control of the media, opposition politicians and protesters.

To be clear, neither side is enthusiastic about allowing Hong Kong to keep itsautonomy. The question is which of Beijing's local friends can engineer firm butpopularly accepted government. Political reform legislation passed last yearallows for election of the next chief executive in 2017 by universal suffrage, andBeijing is clearly looking ahead with trepidation.

The local leftists boast a strong grass-roots organization with which to get out

the vote, and some of their proposals will garner mass support. But Beijing haslong been wary of unleashing populist passions and introducing more statistpolicies, lest they drive away investment and leave the central governmentobligated to support rich Hong Kong's finances, a situation that wouldn't godown well with the mainland public.

On the other hand, the tycoons have the resources to finance electioncampaigns, but they are lightning rods for criticism. The civil service has theexpertise to keep the government running smoothly from day to day, but as Mr.

 Wang said, they lack any understanding of how to practice politics andformulate a governing vision.

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None of these groups has a good claim to represent local people. Nevertheless, both factions in Beijing seem to agree that Beijing must use these supporters toplay a greater role in Hong Kong. Democracy is to be cautiously welcomed if itcan make the territory easier to govern. But if it provides an opportunity for the

opposition to take power, then it must be curtailed. If necessary, Beijing willrenege on past promises, as it did in 2007 when the National People's Congresslaid down the law on the pace of political reform, contradicting past assurancesthat this was up to Hong Kong people to decide.

To prevent such an embarrassment, Beijing is putting pressure on Hong Kong toobserve a new political correctness. In March, incoming paramount leader XiJinping instructed officials to put more emphasis on "one country" ahead of "two systems." Local officials have followed this new line by attacking

opposition politicians as traitors for meeting with the U.S. consul-general, andinitiating patriotic education in the schools.

*** 

The only approach that Beijing is not considering is abiding by its promises toallow Hong Kong people to govern Hong Kong. Interference in local governmentis increasing the risk of confrontation and instability, as well as the emergenceof a unified opposition. Beijing would be better off if free and fair elections in2017 produced a more independent-minded chief executive who disagreed with

Beijing on some issues but respected the central government's red lines.

Unfortunately, none of the mainland's future leaders seem to share the wisdomof their predecessors. Beijing no longer appreciates the dangers of squeezing thegolden goose too hard. As Hong Kong struggles to keep its autonomy, there is adanger that China will throttle the freedom that makes the territory successful.

==============================================================

•

• ECONOMY

• JANUARY 2, 2012, 1:06 P.M. ET

Spain Scrambles to Contain Budget DeficitDAVID ROMAN And CHRISTOPHER BJORK

MADRID—The Spanish government said Monday it will introduce moreausterity measures this week on top of a swath of spending cuts and taxincreases approved last week, as it scrambles to contain a budget deficit that

may have surpassed 8% in 2011.

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The new measures are set to be approved at a Cabinet meeting Thursday,Budget Minister Cristobal Montoro said Monday during an official event inMadrid. He didn't specify what measures the government plans to introduce.

On Friday, the right-leaning government proposed about €8.9 billion inspending cuts for 2012 that ranged from trimming public-sector employment tocurbing subsidies for political parties. It also said it would raise some €6 billion

 by raising taxes.

 Also Monday, Finance Minister Luis de Guindos said the budget deficit for 2011may be above 8% of gross domestic product, overrunning an estimate given justdays ago of just below 8%. The previous Socialist government had targeted a

 budget deficit of 6% of GDP.

Spain is the latest of several countries on the euro zone's fiscally frail periphery to miss budget-deficit reduction targets. Portugal, Italy and Greece have all beenforced to push through austerity measures in recent months.

"It's possible that we surpass 8%. I hope it's not by much," said Mr. de Guindosin an interview with Spanish radio station Cadena SER.

He repeated that his government expects a contraction of the economy both inthe last quarter of 2011 and the first quarter of this year, meaning Spain is on

the path to a double-dip recession.

The economy staged a timid rebound in the first half of last year, but thedeepening European credit crisis has recently taken a toll on exports, hurtconsumption and caused more job losses. With almost five million unemployed

 workers, some 22.8% of the Spanish work force is currently out of work.

"Everyone must make sacrifices," Mr. de Guindos said. "We're in a very difficultsituation, very complex, probably the toughest we've seen in decades."

Mr. de Guindos said he hopes to keep Spain's value-added tax, one of the lowestin the euro zone and one that wasn't raised Friday, at the current level.

Regarding previously mooted plans to launch a government "bad bank" to takein property-related assets now held by commercial banks, Mr. de Guindos saidno final decision has been made. He also added that the government will try tominimize the impact of any banking cleanup on the public finances.

==============================================================

• ECONOMY

• JANUARY 2, 2012, 10:35 A.M. ET

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Euro-Zone Manufacturing Activity Falls forFifth Month

By PAUL HANNON

LONDON -- Manufacturing activity in the euro zone declined for the fifthstraight month in December, although less sharply than earlier in the fourthquarter, according to a survey of purchasing managers released Monday.

The survey is consistent with other indicators of recent activity, and together thenumbers suggest the euro-zone economy contracted during the final threemonths of the year.

Markit Economics said its Purchasing Managers Index for the sector rose to

46.9 from 46.4 in November, in line with expectations and below the 50.0threshold that distinguishes an expansion from a contraction. Over the fourthquarter, the average PMI for manufacturing was the weakest since the secondquarter of 2009.

Markit said that while the fall in output slowed in all of the nations covered by its survey, there were wide disparities. Factories in Germany, France, theNetherlands and Austria reported only mild declines in output, while those inItaly, Spain and Greece reported much larger drops.

 Wherever they are based, all manufacturers are operating in a difficultenvironment.

"Euro-zone manufacturers are now very much on the back foot and finding lifeextremely challenging as domestic demand is hit by tighter fiscal policy acrossthe region, squeezed consumer purchasing power, and heightened euro-zonesovereign debt tensions leading to tightening credit conditions and financialmarket turmoil," said Howard Archer, an economist at IHS Global Insight.

Beyond problems within the currency area, the survey suggests manufacturersface increasingly anemic demand from other parts of the global economy.German producers, which have been among the currency area's most successfulexporters, report "emerging signs of weakness" in Asia.

 While the rate of decline in output eased, there are few signs that a rebound isimminent, with euro-zone new orders falling for a seventh straight month.

"Euro-zone manufacturing is clearly undergoing another recession," said Chris

 Williamson, an economist at Markit. "Worryingly, new orders are falling at a farfaster rate than manufacturers have been cutting output, meaning firms have

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 been reliant on orders placed earlier in the year to sustain current productionlevels."

The threat of a new recession already prompted the European Central Bank to

cut its key interest rate in November and December. Its governing council meetsnext week, and is expected to ease policy again.

The euro zone's economic woes continue to have an impact on manufacturerselsewhere that have close ties to the currency area.

In Turkey, the manufacturing PMI fell to a three-month low in December,although it still pointed to an expansion of activity. In the Czech Republic, thePMI rose slightly, but indicated that activity declined for the second straightmonth. And in Poland, the PMI fell, and indicated that activity declined at the

sharpest rate since October 2009

==============================================================

•

• BUSINESS

• JANUARY 2, 2012, 10:09 A.M. ET

ECB Buys €462 Million in BondsBy MARGIT FEHER

FRANKFURT -- The European Central Bank stepped up its sovereign bondpurchases last week but the weekly amount purchased remained significantly lower than the volumes seen in the previous four months.

The ECB settled €462 million in government bonds on the secondary marketlast week, it said Monday, up from €19 million the previous week but less thanthe €22 billion to €2.2 billion since the ECB restarted the purchases in Augustto resolve market tensions, having spent 19 weeks on the sidelines.

Calls from politicians and analysts on the ECB have been mounting to come tothe rescue of the debt-ridden euro-zone governments with increasing its bondpurchases considerably and thus move closer to solving the European debtcrisis.

The ECB, however, has firmly refused the calls.

The latest such comment came from ECB governing council member Luc CoeneFriday. Mr. Coene, who is also the governor of the National Bank of Belgium,said that Europe shouldn't "count on the ECB" to save the euro zone "through

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large-scale purchases of government bonds." Large-scale ECB government bondpurchases would fail to deal with the root of the problem -- fiscal imbalances --and thus they wouldn't restore market confidence, Mr. Coene said in aninterview with Belgian weekly Trends.

The ECB doesn't break down the debt-purchase figures by country or maturity.

The ECB further said it will drain €211.5 billion Tuesday from the market at a variable-rate tender with a maximum bid rate of 1.00%. The tender is aimed atoffsetting the potential inflation-boosting impact of the bond purchases.

Separately, bank use of the European Central Bank's overnight facilities fellFriday but remained high, while political leaders warned in their New-Yearaddresses that the euro zone may face an even tougher year in 2012 than in

2011.

Banks borrowed €14.823 billion from the ECB Friday, the central bank saidMonday, down from an 11-month high of €17.307 billion Thursday. Banks,meanwhile, deposited €413.882 billion with the ECB, down from €445.683

 billion Thursday.

Banks' use of the ECB's overnight deposit facility hit a 2011 peak last week, atover €452 billion. Most analysts said this was a result of banks hoarding their

excess funds at the ECB after tapping its first three-year refinancing operation.

Banks are reluctant to lend one another as they fear their counterparties may beexposed to weak European sovereign debt. As a result, they are dealing with theECB instead.

The large amount banks left on their balance sheets Friday, the last trading day of 2011, may also be the result of their obligations to meet balance-sheetrequirements at year-end.

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• BUSINESS

• JANUARY 2, 2012, 9:27 A.M. ET

For India, a Power Failure LoomsBy ERIC YEP

MUMBAI—Almost a decade ago, seeking to overcome one of the biggestchallenges facing India's development, the government set an ambitious goal:electric power for all by 2012.

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Instead, as the target date of March nears, the power sector is in a shambles,and its dire state threatens India's economic prospects at a time when growth isalready being slowed by high inflation, a burgeoning government budget deficitand ripples from the European financial crisis.

India is the world's fifth-largest electricity producer after the U.S., China, Japanand Russia, but its per capita consumption is among the world's lowest, at778.71 kilowatt hours a year. Almost 300 million people don't have access toelectricity. The country needs a huge jump in supply to sustain its rapideconomic growth, fight poverty and light the homes of those powerless millions.

The depth of India's power problems became apparent in the autumn of 2010,

 when blackouts interrupted irrigation and manufacturing across the country—and even hit wealthy, urban neighborhoods. What once was an industry full of investment and optimism has plunged into a crisis, driven by a mix of factors—some brewing for years, some recent.

Government giveaways such as free electricity for farmers have drained cashreserves from the largely state-run electricity-distribution system, leaving itfinancially crippled and unable to purchase power despite existing demand. A giant new offshore gas field has delivered less fuel than promised. An ambitious

nuclear-power program has been stymied by demonstrations at plant sites since

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the Fukushima disaster in Japan last March. And, worst of all, despite abundantreserves of coal, India can't produce enough to feed its power plants.

On average, coal-fired plants should maintain stocks to last 22 days, according

to the guidelines of the Central Electricity Authority—but a Dec. 29th reportfrom the regulator showed that of 89 such plants it monitors, 46 didn't haveenough coal to last a week, with some holding less than a day's worth or even nocoal at all. The plants account for roughly half of total electricity-generatingcapacity.

 As more power plants come online—the government and private industry areestimated to have spent as much as $100 billion since 2007 to add capacity—thecoal shortages are expected to worsen. At the current rate of growth in coalproduction, the requirements of existing power plants and those underconstruction will not be met until the year beginning April 2016, CreditSuisse analysts said in a November note.

More than half of India's installed electricity generating capacity of 182gigawatts is coal-based, and a large chunk of future power projects will also runon coal. By comparison, China's installed capacity at the end of 2010 was 962gigawatts, about 73% of it from coal. India's coal sector is hampered by primitive mining techniques and rife with theft and corruption; the monopoly coal producer, state-controlled Coal India, has consistently missed productiontargets. Shoddy transport infrastructure, inadequate for moving coal from far-flung mines to where it's needed, compounds these problems.

To increase output, Coal India needs to mine new deposits—but most lie underprotected forests or conflict-ridden tribal lands. Government efforts to create aneffective land-acquisition program for such projects, including compensation fordisplaced people, have been underwhelming.

"The federal government has neither set up any national fund for the

rehabilitation of the displaced persons of various power projects in the country nor set up any committee to study the issue of setting up of such a fund, " K.C.

 Venugopal, junior power minister, told Parliament in September.

Coal Minister Sriprakash Jaiswal told Dow Jones Newswires, "Domestic coalproduction cannot keep up with the rising demand, especially from powercompanies. They have to import to feed their rising needs and bridge the gap."But international coal prices have surged.

"The situation is extremely challenging considering the fact that billions of dollars have been invested in building power plants but they can't be used to

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produce power due to nonavailability of coal," said Ravi Sharma, CEO of AdaniPower.

 Adani Power's parent, Adani Group, has invested heavily in coal mines in

 Australia, but India lags behind other major nations in securing coal assetsabroad. It accounted for just 9% of overseas deals in the sector in the financial year ended March 31, trailing the U.S., Japan and China, according to dataprovider Dealogic.

"Progressive governments elsewhere are not just aggressively scouting but aretangibly tying up resources known to be available globally. India needs to alsoget its act right," said Anil Sardana, managing director at Tata Power Ltd., oneof India's largest private power producers.

India's efforts to develop other fuels have stumbled. It had hoped to set up gas-powered plants after Reliance Industries Ltd. made the country's biggest gasdiscoveries in the deep water off the eastern coast, but output has failed to meetthe company's projections.

Hydroelectric power projects in the mountainous north and northeast arecaught in ecological, environmental and rehabilitation controversies. Indiaimports power from Bhutan and expects to import from Nepal, too, but thegeographical challenges in the region are immense.

Once electricity is generated, it must be supplied where it's needed, with acrucial link being the provincial distribution utilities that buy electricity andresells it to consumers. Operating at huge losses, they're fast running out of money to buy what electricity is available. Not only do they give away hugeamounts of electricity to farmers, partly to curry political favor, they lose moreto rampant electricity theft and to government departments that don't pay their

 bills. Inefficient collection is a problem across the country. The result: Theamount of electricity categorized as lost in India's states reaches as high as 40%,

and even in the best stands at 15%.

 With fuel costs high and utilities losing money, raising power prices would seemlike a solution—but it's a politically charged and sensitive issue for a governmentthat's being blamed for high inflation levels and widespread corruption.

The Finance Commission, an expert body that defines financial relations between the center and the states—appointed every five years, this latestcommission was the 13th—forecast that in the year ending March 31, statetransmission and distribution utilities will lose 803 billion rupees ($15.2

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 billion), equal to about 0.8% of the country's gross domestic product. It furtherforecast that the losses will rise.

Blackouts are just one effect. By creating uncertainty about future electricity 

sales, the losses also lead power companies to shelve projects, and add topressure on lenders that finance the sector.

 With its latest five-year plan ending in March, India's government is set to missthe electricity generation target it set out. It has met only 64% of the target sofar.

—Saurabh Chaturvedi in Delhi and Wayne Ma in Beijing contributed to this article.

==============================================================

• DEALS & DEAL MAKERS

• DECEMBER 30, 2011

Banks Face Off For Facebook IPOGoldman Sachs, Morgan Stanley Are Considered Front-Runners for Top Job

in Handling 2012's Trophy IPO

By LIZ RAPPAPORT and RANDALL SMITH

WSJ's Shira Ovide has details of Facebook's expected 2012 IPO and how big banks will be battling

to be the underwriter. AP Photo/dapd, Joerg Koch

This year has been lackluster for Wall Street bankers. But next year, there'sFacebook Inc.

Up for grabs is the lead investment-banking role in the social-networking site'sinitial public offering, and long-time rivals Goldman Sachs Group Inc.

and Morgan Stanley are considered front-runners, bankers and venturecapitalists say.

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Associated Press

Facebook CEO Mark Zuckerberg. The firm expects to sell stock in 2012.

The Menlo Park, Calif., company plans to file its offering documents in early 

2012, a person familiar with the matter has said, meaning that a decision on bankers could be soon. Some bankers have been waiting by the phone over theholidays for the call that they will be participating in the company's IPO in some

 way, another person said.

 As they gear up for the offering, Facebook executives have held a new round of meetings since Thanksgiving with Wall Street firms, according to peoplefamiliar with the situation.

The deal will be one of the most hotly contested offerings of the decade, withhundreds of millions of dollars in potential fees and bragging rights on the line.

Facebook's stock sale could be as big as $10 billion, valuing the company at$100 billion or more. Fees for IPOs of that size have averaged 2.2%, accordingto Dealogic, which tracks new issues. That would mean a possible total payoff of as much as $220 million, though the company could negotiate lower fees

 because the Facebook deal is such a trophy.

Goldman and Morgan face stiff competition from rival investment banks vying

for the prize of becoming the lead manager. Still, both are seen as having a legup on competitors, even though each has possible knocks against them.

Goldman orchestrated a $1.5 billion private offering of Facebook shares inJanuary, indicating a value for the company of $50 billion. Morgan Stanley isthe leading bank for Internet IPOs this year, both in the U.S. and world-wide.

Goldman was seen initially as a shoo-in for leading the offering. But the New  York company has had to prove itself anew to Facebook in the wake of a flub 11

months ago. Goldman had to restructure a private-placement deal that nearly ran afoul of U.S. securities laws that restrict advertising of private placements.

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Goldman solved the problem by limiting the offering to non-U.S. investors, butexecutives at the social-networking company became less enamored with the

 bank, according to people familiar with the matter.

Goldman Chairman and Chief Executive Lloyd C. Blankfein went to woo at leastone Facebook board member earlier this fall, according to people familiar withthe matter.

Meanwhile, Morgan Stanley recently held the coveted "lead left" role in the IPOof games site Zynga Inc. The "lead left" bank sees its name in the top left spot onthe front page of the IPO prospectus. This "lead of the leads" status imbues the

 bank with the most authority on a deal, but also subjects that firm to the mostcriticism if things go awry in an offering.

Zynga shares have mostly traded below their offering price since the IPO, whichsome bankers have said could hurt Morgan Stanley's chances in winning theFacebook deal.

Goldman and Morgan Stanley are running neck-and-neck for the title of No. 1 inunderwriting the most U.S.-listed IPOs for 2011, according to Dealogic.

Representatives for Goldman, Morgan Stanley and Facebook declined tocomment.

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The prize role on Facebook could put the winner ahead of competitors in anarea that has proven to be one of Wall Street's bright spots amid relentlesspressure on profits.

Bankers who advise corporations on mergers and financing have regained somedominance within their Wall Street firms this year as trading businessessuffered. Traders have been hurt by jittery investors and new rules intended tocurb risk-taking with a firm's own capital. The Facebook deal could give the

 winning bankers even more power.

 At Goldman, fixed-income trading revenue fell 37% in the first nine months of 2011 compared to a year earlier, while investment-banking revenue rose 6%.Morgan Stanley has been trying to expand its nontrading businesses,particularly its wealth-management business.

Even if Goldman loses top billing in the Facebook deal, it will still win. Thereason: If Facebook is valued at $100 billion, Goldman would double the valueof its own stake in the company, giving it an instant $375 million profit.

 As part of Goldman's fund raising of $1.5 billion for Facebook in January, thesecurities firm bought what was then slightly less than 1% of the social-network company for $375 million. Goldman has a history of investing its own money alongside that of clients.

In addition, Goldman will make nearly another $100 million on fees that clientspaid the firm to invest in Facebook through a private fund in January. On about$1 billion invested in the Facebook fund by Goldman's non-U.S. clients,Goldman charged a 0.5% fee on any capital investors committed for expenses, a4% placement fee plus a 5% fee on any gains in the fund if investors cash out.

If Facebook goes public with a stock-market value of $100 billion, that wouldadd up to about $95 million in fees, depending on whether investors cash out

after the IPO.—Shayndi Raice contributed to this article

==============================================================

• ASIA BUSINESS

• JANUARY 2, 2012, 1:06 A.M. ET

India Manufacturing Activity Picks Up

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By ANANT VIJAY KALA

NEW DELHI—India's manufacturing activity picked up sharply in December,helped by improved demand that drove up new order growth, a survey showedMonday.

The seasonally adjusted HSBC Purchasing Managers' Index, prepared by Markit, rose to 54.2 in December from 51.0 in November.

 A figure above 50 indicates expansion.

"Activity in the manufacturing sector rebounded in December led by higherdemand from both domestic and foreign clients, suggesting that the momentumin the sector is not quite as weak as official and more dated [industrial

production] data would suggest," said Leif Eskesen, chief economist for Indiaand Asean at HSBC.

 Weak industrial output in recent months has stoked worries of a sharpslowdown in the economy, raising expectations that the Reserve Bank of Indiamay have to ease its tight policy stance to support growth. However, the latestdata will calm those worries.

"All in all, these numbers suggest it's premature for the RBI to replace inflation with growth as the main concern," Mr. Eskesen said.

HSBC said employment in December increased marginally after falling for fourconsecutive months.

However, input prices rose further during December, underscoring persistentprice pressures, despite the central bank's aggressive monetary tightening.

The RBI has raised its lending rate 13 times since March 2010, but paused at itslast policy review on Dec. 16 as growth has been stuttering.

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• HEARD ON THE STREET

• DECEMBER 31, 2011

India's Slowing Growth Will Test Banks'Resilience

By HARSH JOSHI

Part of the reason lies in past bad lending decisions. After the peak of the

financial crisis in 2009, India's banks opened the floodgates with loans toalready over-leveraged companies. Credit Suisse looked at loans to 3,550 non-

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financial services companies in India with aggregate borrowing of $385 billionat the end of March and found that nearly 30% had net debt more than six timescurrent earnings before interest, taxes, depreciation and amortization. That'sincreased by about 50% in the past five years.

 A weakening economy adds to the pressure. In October, India's industrialoutput contracted 5.1% from a year earlier. A slump in demand from Europeand a slow recovery in the U.S. don't help. As output and revenue growthdecelerate, companies' ability to repay debt suffers. The risk is spread acrossseveral sectors. India's private airlines, construction companies, utilities andreal estate developers are all notorious for generating non-performing loans. Allthose sectors will suffer from an economic downturn.

To compound the problem, many companies have borrowed in foreign currency from local banks, taking advantage of lower interest rates overseas. But an 18%fall in the rupee against the dollar since April means they now face significantly higher repayment costs. Struggling borrowers could try to convert foreign debtinto rupee-denominated loans or restructuring high risk loans to easerepayment conditions. For lenders, that's better than outright defaults but it willhurt profits.

Goldman Sachs estimates banks' gross non-performing loans includingrestructured debt will rise to as much as 6% of total loans in the next financial

 year, up from 5% in March. The Reserve Bank of India's stress test reportpublished earlier this month forecasts 5.8% of non-performing assets in the

 worst-case scenario, double the current level.

India's banks aren't doomed. The RBI says the banks' capital to risk-weightedassets ratio fell from 14.5% at the end of March 2010 to 13.5% at the end of thelatest fiscal year. That's still quite conservative, but the downward trend is aconcern. At the very least, profits will come under pressure. Banks seldom

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perform better than the economy they serve. With India's economy heading intoa testing time, its banks will suffer too.

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• PORTUGUESE

• JANUARY 2, 2012, 11:24 A.M. ET

Corte manda Venezuela pagar US$ 908milhões por ativos da Exxon

Por KEJAL VYAS e ANGEL GONZALEZ, de Caracas

Um painel de arbitragem internacional concedeu à petrolífera americana ExxonMobil Corp. cerca de US$ 908 milhões em um veredicto sobre os ativos depetróleo nacionalizados pelo presidente venezuelano, Hugo Chávez, em 2007,informou a empresa.

Associated Press

O pagamento é substancialmente menor do que os US$ 7 bilhões que a Exxonestava pedindo em restituição e provavelmente será bastante favorável para ogoverno de esquerda da Venezuela, que nos últimos anos iniciou uma campanhade nacionalização generalizada para centralizar o controle de sectoreseconômicos cruciais.

"É um ótimo presente para Chávez e para a Venezuela", disse Russ Dallen,analista e operador de títulos do banco venezuelano de investimentos CaracasCapital Markets. "O veredicto impõe um valor muito menor do que as pessoasprovavelmente estavam esperando. Certamente significa que [petrolífera estatalPetróleos de Venezuela SA, ou PDVSA] saiu com poucos arranhões",acrescentou Dallen.

O porta-voz da Exxon, Patrick McGinn, disse que a decisão por um tribunal de

arbitragem da Câmara Internacional de Comércio", confirma que a PDVSA temuma responsabilidade contratual com a Exxon Mobil."

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Um porta-voz da PDVSA se recusou a comentar quando contatado por telefone.

 Ambas as partes ainda estão aguardando uma decisão sobre a ação impetradapela subsidiária local da Exxon, a Mobil Cerro Negro Ltd., contra a Venezuela

 junto ao Centro Internacional para a Arbitragem de Disputas sobreInvestimentos do Banco Mundial, ou Ciadi, onde o governo de Chávez enfrentacerca de 20 casos pendentes. Com o risco de bilhões de dólares em pagamentosiminentes, o número de casos tem sido fonte de preocupação constante para osdetentores de títulos soberanos da Venezuela.

O veredicto foi dado quatro anos depois que a Exxon, a maior petrolífera decapital aberto do mundo, saiu da Venezuela em meio a uma disputa com ogoverno do país, que decretou que o monopólio estatal do petróleo teriaparticipação majoritária na joint-ventures com parceiros estrangeiros. Por lei, aPDVSA passou a deter pelo menos 60% de todos os projetos de petróleo do país.

 A Exxon afirmou que investiu cerca de US$750 milhões na Cerro Negro. A empresa reduziu seu pedido dos US$ 12 bilhões originais para US$ 7 bilhões.

 Apesar da compensação menor do que o esperado para a Exxon, o dinheiroainda é uma soma substancial da mudança para a PDVSA, que registrou umlucro líquido de US$ 4 bilhões durante os seis primeiros meses de 2011. A estatal venezuelana tem enfrentado um declínio na produção de petróleo e

problemas de fluxo de caixa nos últimos anos, à medida que Chávez desviagrande parte da receita para projetos sociais, o que, segundo os críticos, resultouem investimentos insuficientes para a manutenção da petrolífera.

No início deste ano, o ministro do Petróleo venezuelano, Rafael Ramirez, disseque seu governo planejava pagar não mais do que um total de US$ 2,5 bilhõesnos casos em arbitragem com Exxon e a ConocoPhillips. A Chevron Corp.,segunda maior petrolífera dos EUA, decidiu aceitar participação controladorada PDVSA e permaneceu na Venezuela.

Em setembro, Ramirez também descartou a possibilidade de um acordo com aExxon fora dos tribunais, pouco depois que o procurador-geral do país disse arepórteres que um acordo de US$ 6 bilhões estava sendo negociado.

O projeto Cerro Negro tinha um valor estimado de cerca de US$ 2 bilhões e estálocalizado na enorme e em grande parte ainda inexplorada bacia do Orinoco.

==============================================================

•

PORTUGUESE• JANUARY 1, 2012, 4:48 P.M. ET

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Executivos cujo futuro pode ser decidido nonovo ano

The Wall Street Journal

Reputação, dinheiro, sobrevivência. Muito está em jogo para importanteslíderes de grandes empresas globais em 2012.

Há vários exemplos: Abilio Diniz terá em 2012 seu grande teste para manter seucontrole sobre o Pão de Açúcar; Tim Cook tem pela frente a dura tarefa desubstituir o carismático Steve Jobs; na American Airlines, Thomas Hortoncomeça o ano num processo de concordata, com a missão de cortar custos — oque deve exigir intensas negociações com sindicatos.

 Aqui está um resumo de alguns dos mais intrigantes cenários para o mundo dosnegócios e os principais executivos que vão navegar por eles no próximo ano.

 Abilio Diniz | Pão de Açúcar

 Abilio Diniz passou a sua vida construindo a maior rede de supermercados doBrasil, o Pão de Açúcar, enfretando seus concorrentes, sua família e seusamigos, durante o percurso.

Em um período de debilidade financeira na última década, ele concordou em

 vender seu império para o francês Casino SA., mas a complexa transação sóculmina em 2012, quando Diniz, de 74 anos, terá que entregar uma única edecisiva ação que dará o controle ao Casino.

Em 2012, o audaz executivo tentou manter sua empresa, agindo pelas costas doCasino para fechar um acordo com o mais feroz rival da empresa francesa, aCarrefour SA, também da França. A tentativa fracassou, mas ninguém acreditaque isso tenha dissuadido Diniz e muitas surpresas são aguardadas antes doprazo limite, no próximo mês de junho.

(Rogerio Jelmayer)

 Akio Toyoda | Toyota

Para Akio Toyoda, diretor-presidente da Toyota Motor Corp., 2012 pode ser umano de vai ou racha.

O comandante da maior montadora japonesa se comprometeu a manter aprodução doméstica em 3 milhões de veículos ao ano, apesar de os rivais

 japoneses estarem correndo para o exterior. A alta do iene para cotações

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recordes em relação ao dólar corroeu as margens de lucro nas exportações japonesas.

Toyoda, de 55 anos, está iniciando o terceiro ano desde que assumiu o leme da

empresa de nome tão parecido com o seu e que foi fundada por seu avô. Ele jáprometeu evitar o esvaziamento da base industrial japonesa. Mas com a cotaçãodas ações da Toyota nos menores níveis em 15 anos, o seu comprometimentolevanta uma questão que ecoa Charles Erwin Wilson, que presidiu a GeneralMotors no início do século XX: "O que é bom para o Japão é bom para a Toyotae vice-versa?"

(Chester Dawson)

Tim Cook | Apple

Em seus mais de dez anos na Apple Inc., Tim Cook já provou que é um craquena gestão das operações da gigante de tecnologia. Em 2012, o mundo vaidescobrir até que ponto ele está confortável como o homem à frente da empresa.

Em agosto, o executivo de 51 anos foi indicado para o cargo de diretor-presidente, substituindo o legendário cofundador Steve Jobs, que morreu emoutubro depois de sofrer com um câncer pancreático. Até agora, Cook temconseguido conquistar pontos com empregados e investidores, que dizem que

ele é afável, mas também rigoroso, e que mergulha nas operações e produtos da Apple com a mesma atenção aos detalhes que Jobs tinha.

Este novo ano vai trazer uma outra bateria de testes: Cook vai provavelmenteficar em evidência, acompanhando o lançamento de novas versões paraaparelhos antigos, como o iPhone e o iPad e, possivelmente, alguns novosprodutos, como a tão antecipada TV Apple.

(Jessica E. Vascellaro)

Tom Staggs | Disney 

Para os principais executivos da Walt Disney Co.'s, 2012 vai ser o primeiro anocompleto na corrida pela coroa de diretor-presidente, e nenhum outrocandidato parece ter mais changes de ocupar o posto que Tom Staggs e Jay Rasulo.

Servindo o atual diretor-presidente, Robert Iger, que em 2011 anunciou suaintenção de deixar a posição em 2015, os dois executivos veteranos da Disney 

trocaram de posição a pedido do chefe. Em 2012, cada um deles terá que

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supervisionar planos ambiciosos que vão indicar o potencial para dirigir umadas maiores empresas do mundo.

Staggs, presidente do conselho da área de parques temáticos e resorts, vai

conduzir o desenvolvimento da Disneylândia de Xangai, parte de um resort deUS$ 4,4 bilhões.

Rasulo, diretor financeiro, terá que colocar a empresa em condições deapresentar resultados comparáveis aos do último trimestre fiscal, em que aDisney apresentou lucro e receita recordes.

(Erica Orden)

Kenneth C. Frazier | Merck 

No seu primeiro ano à frente da Merck & Co., Keneth Frazier defendeu ospesados gastos da empresa farmacêutica com pesquisa de medicamentos,apesar das críticas de Wall Street.

Ele prometeu proteger os laboratórios da Merck — no Brasil, MSD — dosgrandes cortes que rivais como a Pfizer Inc. estavam fazendo e, com isso, oconselheiro que virou diretor-presidente se tornou um importante defensor daciência na indústria farmacêutica.

Se Frazier tem condições de se sair melhor do que aqueles que dizem quepesquisa e desenvolvimento gastam demais depende da sorte de remédios comoo Bridion, criado para reverter os efeitos da anestesia cirúrgica e que a Merck pretende submeter aos reguladores americanos para aprovação em 2012.

O ex-aluno da Universidade Penn State também vai dirigir um comitê especialque investiga a resposta da universidade a alegações de abuso sexual infantilcontra um ex-treinador de futebol.

(Jonathan D. Rockoff)

Ginni Rometty | IBM

Desde ontem a International Business Machines Corp. está em uma nova era,com a primeira mulher no comando. Virginia M. Rometty, atualmente em seu30º ano empresa, conquistou o cargo depois de ter conduzido a expansão daIBM para o segmento de consultoria de alto nível e para os mercadosemergentes.

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No topo da sua lista de prioridades está a continuação dos esforços decrescimento na área de software para empresas e computação em nuvem, alémdo maior foco em mercados emergentes.

Rometty, de 54 anos, não pretende fazer mudanças na estratégia, modelo oumapa financeiro da IBM no curto prazo, disse ela ao The Wall Street Journal emoutubro, quando foi nomeada diretora-presidente.

Entretanto, a executiva sabe que é crucial que a IBM não deixe de se reiventar,um conselho dado por seu atencessor, o diretor-presidente Samuel J.Palmisano, que continua à frente do conselho.

(Spencer E. Ante)

Cyrus Mistry | Tata Group

Ele tem capacidade gerencial ou só está lá por causa de seu pai? Essa é a questãoque pesa sobre Cyrus Mistry, o aparente herdeiro do emblemáticoconglomerado indiano Tata Group, que tem entre seus ativos a montadora decarros de luxo Jaguar e o hotel Pierre, de Nova York.

O currículo de Mistry exibe conquistas como diretor gerente da empresa deconstrução da família, a Shapoorji Pallonji & Co. Mas seu pai, o recluso

 bilionário Pallonji Minstry, é também o maior acionista da Tata Sons, a empresaholding do grupo Tata, com uma participação de 18%.

Mistry terá tempo para aprender no emprego antes que as respostas se tornemclaras: ele vai passar quase um ano como aprendiz do presidente do conselho,Ratan Tata, que se aposenta em dezembro de 2012.

(Paul Beckett)

Jack Ma | Alibaba Group

Jack Ma, presidente do conselho do maior império de comércio eletrônico daChina, a Alibaba Group Holding Ltd., acabou se tornando uma figura-chave noincerto destino da americana Yahoo Inc., que tem uma participação de cerca de40% em sua empresa.

Ma tem o direito de fazer a primeira oferta pela fatia da Yahoo na Alibaba, e oexecutivo não esconde sua intenção de ficar com pelo menos uma parte dessasações. Isso lhe dá poder de decisão sobre o ativo mais valioso da Yahoo.

Este ano, Ma conseguiu contornar seu conselho na decisão de transferir ocontrole de uma importante subsidiária para uma outra companhia que ele

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controla. Ma diz que fez a mudança para cumprir as regras relativas aopagamento de serviços pela internet, mas a decisão o colocou no meio do debatesobre governança corporativa na China e intensificou o temor de que o governopossa tentar limitar ainda mais os investimentos estrangeiros no crescente setor

de internet no país.

(Loretta Chao)

==============================================================

• PORTUGUESE

• JANUARY 2, 2012, 12:25 P.M. ET

Um colunista econômico espia o futuroPor DAVID WESSEL

DAVID WESSEL

De vez em quando alguém pergunta a um colunista econômico: Quais assurpresas que você prevê para o ano que vem? E o colunista responde, sorrindopara não parecer sarcástico: Se eu conseguisse prevê-las, não seriam surpresas.

 A melhor pergunta é: Em que pontos há maior probabilidade de que o consensoesteja errado?

O consenso é que a economia dos Estados Unidos vai terminar 2011 com umcrescimento muito mais forte no quarto trimestre (talvez 3,25%, a uma taxaanualizada) do que no terceiro (1,8%), mas vai crescer muito devagar no anoque vem (talvez 2,25% no primeiro trimestre), um ritmo insuficiente parareduzir o desemprego rapidamente. Embora a taxa de desemprego tenha caído0,4 ponto percentual, ou quase 600.000 pessoas, em novembro, o consenso éque ela vai diminuir muito gradualmente, se diminuir, a partir dos atuais 8,6%,ou 13,3 milhões de desempregados, durante 2012.

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Reuters

Então, o que poderia fazer o ano acabar mostrando melhores resultados?

Durante o último ano e meio, os EUA foram pegos em um cabo de guerra. Deum lado está a resistência natural da economia. Do outro, os efeitos de longaduração do estouro da bolha do crédito e um pouco de má sorte — o aumento dopreço do petróleo causado pela Primavera Árabe, a interrupção da cadeia desuprimentos após o terremoto no Japão. No fim de 2010, a resistência daeconomia estava ganhando. Em 2011, ela cedeu terreno.

Os dados mais recentes são animadores. Os pedidos iniciais de seguro-desemprego, um dos melhores sinais preliminares de alerta, caíram para seumenor nível em três anos e meio. A população diz que está um pouco mais fácil

encontrar emprego, outro indicador útil. A construção e vendas de imóveisresidenciais estão em alta. Os estoques estão enxutos. E, apesar de um declíniona quarta-feira, o mercado acionário se recuperou da queda do final denovembro.

Este poderia ser o início de um círculo virtuoso muito esperado. Nele, omercado de trabalho melhora. Os consumidores têm mais renda. O otimismoaumenta, e o que é mais importante, os gastos também. Enquanto isso, oenfraquecimento das economias no exterior mantém baixo o preço das

commodities e limita a inflação nos EUA. Com juros baixos de hipoteca emelhora nas finanças do consumidor, o preço da moradia finalmente sobe. Asempresas, cheias de dinheiro, se expandem e contratam mais, compensando aretração por parte dos governos.

Depois de se queimarem com um otimismo prematuro, analistas e autoridadesfinanceiras estão compreensivelmente cautelosos.

O que poderia dar errado? No alto de todas as listas de prováveis suspeitos está

a Europa. Os acontecimentos mais recentes no continente europeu reduziram,na opinião de autoridades americanas, o risco de uma catástrofe financeira — a

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moratória de algum governo europeu, capaz de arrasar os mercados, ou ocolapso de um grande banco, ou uma abrupta desintegração do euro. Na quarta-feira a Itália conseguiu empréstimos por dois anos com juro de 4,85%, emcomparação com 7,81% um mês atrás.

Mas os jogos de poder em que nenhuma das duas partes quer ceder – seja entrea Alemanha e o sul da Europa, ou entre os líderes políticos e o Banco CentralEuropeu – não estão resolvidos. A Europa está, quase com certeza, em recessão.Quando a maior esperança é que os governos europeus irão "conseguir searrastar" sem cometer outros grandes erros – bem, os riscos de algo dar erradoficam desconfortavelmente altos. E se isso acontecer, os mercados financeiros

 vão transmitir o problema de imediato para o resto do mundo.

Não se pode dizer que Washington esteja oferecendo um exemplo inspirador dedemocracia em ação.

Os riscos aqui são dois: 1. A incerteza prolongada e maior erosão na confiançano sistema político americano vão desencorajar as empresas de contratar ouinvestir nos EUA, e também os consumidores de gastar. 2. A paralisia políticapode impedir Washington de reagir se a economia precisar de ajuda, sejaporque a Europa ou algum Estado dos EUA encontrou problemas financeiros,ou devido a algum acontecimento imprevisto.

E há ainda o mercado imobiliário. Os informes oficiais dizem que os preços dahabitação estão se "estabilizando", e talvez estejam. Mas ficamos sabendo estasemana que eles caíram em outubro em 19 das 20 cidades que compõem oíndice Case-Shiller. No último ano esse índice de 20 cidades caiu 3,4%, além dos30% de declínio registrados nos últimos quatro anos. A cautela doscompradores de imóveis, um mercado de hipotecas ainda disfuncional e umanuvem negra de casas hipotecadas retomadas pelos bancos continuam a pesarsobre a habitação. Se os preços caírem mais nesse setor, isso pode atrapalharqualquer círculo virtuoso.

Há probabilidade de que as previsões do consenso para 2012 estejam erradas.Elas quase sempre estão. O coração de um colunista econômico quer acreditarque a economia vai melhorar; mas sua cabeça diz lhe que é mais provável quepiore.

=============================================================

•

• SPANISH

• JANUARY 2, 2012, 9:44 A.M. ET

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La economía de Venezuela creció 4% en2011, dice el banco central

Por KEJAL VYAS

CARACAS (Dow Jones)--La economía de Venezuela finalizó el 2011 con unaexpansión del 4%, gracias en parte a un elevado gasto gubernamental, pero elpaís sudamericano continuó afectado por una tasa de inflación anual del 27,6%,según el Banco Central de Venezuela.

 Ambas cifras preliminares, publicadas en el informe de fin de año del bancocentral, superaron las proyecciones que entregó el gobierno a comienzos del añopasado de un crecimiento económico del 2% y una tasa de inflación de hasta un25%.

Tras dos años consecutivos de recesión, la economía venezolana repuntó graciasa que los altos precios del petróleo permitieron a la nación rica en hidrocarburosdirigir recursos hacia proyectos de desarrollo, incluida una iniciativa de viviendalanzada por el presidente Hugo Chávez, quien se prepara para una campaña dereelección en octubre.

El banco central señaló en su informe que las cifras preliminares muestran queel sector no petrolero de la economía creció un 4,3%, mientras que el sector

petrolero se expandió un 0,6%. El petróleo y sus subproductos corresponden al95% de las exportaciones de Venezuela.

==============================================================

Europe Markets

 Jan. 2, 2012, 12:06 p.m. EST

Europe stocks rally on first tradingday of 2012

Sunways soars over 20% on Chinese bid

By Barbara Kollmeyer, MarketWatch

MADRID (MarketWatch) -- Thin trading conditions and a better-

than-expected purchasing-managers index for Germany boosted

European stock markets to a higher finish on the first day of 

trading for the near year.

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 The Stoxx Europe 600 index (STX:XX:SXXP) rose 1.1% to close at

247.15 on Monday. The index on Friday closed out 2011 with an

11.3% loss, the first yearly fall in three years and the worst annual

performance since 2008.

 The push higher was led by the German DAX 30 index (ITF:DX:DAX) ,which rose 3% to settle at 6,075.52.

A wide swath of stocks contributed to that gain, with heavyweight

engineering group Siemens AG (FRA:DE:SIE) (NYSE:SI) rising 2% and

drug group Bayer AG (FRA:DE:BAYN) gaining 2.9%.

Chemicals group BASF SE (FRA:DE:BAS) rose 2.3%, while insurer

Allianz SE (FRA:DE:ALV) rose 3.8%.

German stocks, in particular, were boosted after the Markit/BME

Germany Manufacturing purchasing-managers index rose to 48.4 in

December from 47.9 in November. That final number was up from anearlier estimate of 48.1.

“German PMI were marginally stronger than expected, and anything

better-than-expected in current market sentiment will lead risk

appetite back in markets,” said Christian Tegllund Blaabjerg, chief 

economist at FIH Erhvervsbank, in emailed comments. And “with low

liquidity you have a stronger reaction than usual in equity markets.”

Meanwhile, the Markit euro-zone purchasing-managers index rose in

December to 46.9 from a 28-month low of 46.4 in November,confirming a previous estimate. Both readings, however, remained

below the 50 level, indicating a further contraction in manufacturing

activity. Read more about euro-zone PMI data.

Quiet trading

 The absence of liquidity in markets on Monday was due to markets

remaining closed in London and the United States in observance of 

the New Year holiday.

But once markets return in full on Tuesday, Blaabjerg said, therereally isn’t much pointing to “a light at the end of the tunnel” for

Europe, and European stocks could face renewed pressure.

“The U.S., however, is a whole different case. I am betting my silver

dollar on the U.S. growth outlook in 2012 -- the housing market has

bottomed out, and once this happens the U.S. is coming back

strongly,” he said.

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Bond yields steady

European bond yields were largely steady across the board, with the

yield on Italy’s 10-year government bond (ICAPSD:IT:10YR_ITA) up 2

basis points to 6.88%. The Italy FTSE MIB

index (MCI:XX:FTSEMIB) rose 2.4% to 15,454.60.

 The market was led by a 3.7% rise for insurer Assicurazioni Generali

SpA (MCI:IT:G) and a 2.8% rise for bank Intesa Sanpaolo

SpA (MCI:IT:ISP) .

 The French CAC 40 index (ENX:FR:PX1) rose 2% to 3,222.30, with

BNP Paribas SA (EPA:FR:BNP) up 3.1% and heavyweight energy group

 Total SA (NYSE:TOT) (EPA:FR:FP) up 1.3%.

Spanish and Portugal stocks were also not left out of gains, with the

IBEX 35 index (MCE:XX:IBEX) rising 1.8% to 8,723.80 and the

Portugal PSI 20 index (ENX:PT:PSI20) jumping 2.1% to 5,611.37.

Banks were the main gainers for those indexes.

Spanish stocks rose despite Friday’s government announcement that

the budget deficit will hit around 8% in 2011, far exceeding the prior

government’s target of 6%.

“We need to wait until tomorrow to see how the market takes the

news of the 8% deficit,” said José Carlos Díez, chief economist at

Intermoney, in emailed comments.

 The alternative energy sector was active on Monday. Away from the

Stoxx 600, shares of German solar-panel maker Sunways

AG (FRA:DE:SWW) shares soared 21.3% after the company said that

China-based LDK Solar Co. (NYSE:LDK) will buy 33% of the firm and

then offer to buy the rest of the shares for 1.90 euros each.

Shares of Vestas Wind Systems AS (FRA:DE:VWS) rose 7.3%.

On the downside, shares of Storebrand ASA (OSL:NO:STB) fell 3.5%,

the top decliner in the Stoxx 600. Storebrand and other Norwegian

insurers have reportedly received thousands of claims in the wake of 

storm Dagmar that swept over Sweden, Finland and Norway with

hurricane-strength winds on Dec. 26 and Dec. 27.

==============================================================

Economic Preview

 Jan. 1, 2012, 9:00 a.m. EST

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U.S. jobs data likely to confirmmomentum

 Yet even as 2011 ends on strong note, doubts persist

about 2012

By Jeffry Bartash, MarketWatch

WASHINGTON (MarketWatch) — The first week of the new year

will reveal a lot about U.S. economy in the final month of the old

year.

A string of economic reports this week is likely to reveal that

manufacturing and service-oriented companies continue to expand

and that businesses are adding jobs at a faster clip. The capstone isFriday’s monthly report on job creation in December.

 Yet what the data cannot reveal is whether the recent momentum is

sustainable in the early months of 2012. Afterall, the economy

entered 2011 with a head of steam only to falter later on.

MarketWatch consensus

DATE REPORTCONSENSUS

PREVIOUS

 Jan. 3 ISM 53.0% 52.7%

 Jan. 3Constructionspending

0.2% 0.8%

 Jan. 4 Factory orders 1.8% -0.4%

 Jan. 4Motor vehiclesales

13.6 mln 13.6 mln

 Jan. 5 Jobless claims 375,000 381,000

 Jan. 5 ISM services 53.5% 52.0%

 Jan. 6Nonfarmpayrolls

155,000 120,000

 Jan. 6Unemploymentrate

8.7% 8.6%

 Jan. 6Average hourlyearnings

0.1% -0.1%

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 The biggest potential drags, economists say, are slower government

spending at all levels and the fragile financial health of U.S.

households.

Stronger growth in the final three months of 2011, economists point

out, was largely underpinned by consumers dipping into their savings

to pay for holiday-season purchases. Some expect consumers to

retrench over the next few months to pay down their debt and rebuild

their savings.

If that happens, the U.S. economy is likely to slow again and repeat a

recent stop-and-go pattern.

“I think we will see a slower growth in spending,” said economist

Ryan Sweet of Moody’s Analytics. “Consumers are going to see thattheir wages are not going up. They are going to grow a little more

cautious.”

A smaller band of economists, however, are more optimistic. They

point to increasing signs that companies are willing to hire and

believe the spending of newly employed workers will help sustain

recent levels of growth.

Which view turns out to be more accurate is not just a matter of great

interest to millions of Americans, especially some 16 million whocannot find permanent full-time work. The outcome of the 2012

presidential election is also likely to hinge on whether the economy is

surging or slowing down again.

 Year-end momentum

 The 2012 economic calendar kicks off with a closely followed survey

of U.S. manufacturers, which are expanding again after a late-

summer slowdown.

 The Institute for Supply Management’s manufacturing index, released

 Tuesday, is expected to rise slightly to 53.1% in December, according

to economists surveyed by MarketWatch.

A similar ISM survey of service-oriented companies, issued Thursday,

is expected to climb to 53.4% in December.

Both indexes would reach seven-month highs if they met or exceeded

expectations. Any reading over 50% indicates businesses are

growing.

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“They are pushing back up, in the low 50s. That’s an expansionary

reading,” said Paul Edelstein, an economist at IHS Global Insight.

“They give you a pretty good reading on the overall economy when

you take the two indices together.”

Along with the ISM surveys, auto sales in December are also expected

to show an economy in motion. Annualized sales are expected to

remain elevated at 13.6 million — the same as in November.

On Friday, the government will release the much-anticipated

employment report for December.

Most economists expect that the latest employment report will build

upon gains from September through November, when the U.S. added

an average of 143,000 jobs a month. The MarketWatch forecast estimates 150,000 jobs were created last

month — and some economists are predicting an even larger number.

“If they are stronger than we expect, it will be confirmation that the

 jobs market is gaining momentum,” Edelstein said.

 Yet while hiring is on the rise after almost screeching to a halt last

 June, companies are still not adding workers as fast as they normally

do in a strong recovery. The U.S. would have to add at least 250,000

 jobs a month for several years to reduce unemployment to precession

levels.

 The sluggish rate of job creation explains why the unemployment rate

remains very high — 8.6% in November. Economists project it will tick

up to 8.7% in December.

“Unfortunately, the current rate of job creation is not enough to make

a dent in the unemployment rate,” Sweet said. “We need stronger

hiring.”

 The key, as is often the case, lies with small businesses that account

for the bulk of new U.S. jobs created. Economists at Deutsche Bank

note that small businesses have grown more optimistic over the past

three months, citing an index produced by the National Federation of 

Independent business.

In particular, the number of small-business owners who said poor

sales was their single biggest worry has fallen to 25% as of November

from 33% in December 2010.

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If businesses are convinced sales will continue to rise, more hiring is

sure to follow and the recovery will quicken.

 Yet if sales fall off, as Sweet and others expect, the U.S. will stay on

its current course of slow and uneven growth.

=============================================================

Chuck Jaffe

 Jan. 1, 2012, 12:01 p.m. EST

8 fearless fund forecasts for 2012Commentary: Three-year hype, fee fights, a ‘trendy’

fund and more

By Chuck Jaffe, MarketWatch

BOSTON — The Danish physicist Niels Bohr gets credit for firstnoting that “Prediction is very difficult, especially if it’s about

the future.”

Presumably he was talking about looking into the future with

something simple — like physics — rather than something

complicated like the mutual fund industry.

In forecasting the big fund stories for the year ahead — which I’ve

done for more than 15 years now, typically with about a two-out-of-

three success rate — it’s seldom been harder than now to see theindustry stories about to make headlines.

 The only thing that’s certain is that there is major news in the fund

world every year, no matter the market conditions, political climate or

economic cycle. With that in mind, here’s my prediction for eight

stories that will have fund investors buzzing in 2012:

1. Big hype about three-year returns

For mutual fund companies, the best thing about the start of 2012 is

that it completely eliminates 2008 from three-year track records for

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stock funds. The Standard & Poor’s 500 Index (SNC:SPX) lost about

37% in 2008, but it is up roughly 15% annualized since the start of 

2009. The first three months of that time period, the market was

down 11%.

So when the first quarter of 2012 is over — even if the market is flatfor the next three months — you will start hearing fund firms and

financial advisers talking about how great the last three years were

(that’s also when the market’s five-year returns will finally be back

into positive territory), and how investors may have felt terrible, but

did pretty well.

For a lot of investors — even those with good three-year returns —

that talk is going to feel hollow, but it will lure others into the market.

2. Low volatility as a big selling point To find the story in mutual funds, look for what sells, and in 2012 the

people pushing product know that strategies that protect investors

against market shocks or that flatten out much of the market’s

volatility will open doors.

 There will be a continued push towards “non-correlated” assets

including commodities, real estate, emerging markets and more, but

the bigger idea will be managers who offer market exposure without

all of the volatility.

3. A blow-up in a fund designed to protect the downside

 The low-volatility play is logical because the big fad in fund investing

since 2008 has been funds that hedge away risk. Whether it has been

absolute-return funds, long-short issues or “balanced-risk” funds that

combine market exposure with some sort of insurance that lets them

promise they won’t lose money.

 The problem with these downside-protection funds is that they use

derivatives and other complex financial instruments to protectshareholders. At some point, a small fund will find itself upside-down

after a market event (maybe a fresh euro-zone scare?) and feel the

sudden crush that investors are trying to avoid.

Sadly, there’s no way to know in advance who the bad guy will be,

but it’s more likely to be from an obscure fund family — trying to

make a reputation with the new products — than a household name.

4. Regulators wage big legal battle over fees and expenses

 The Securities and Exchange Commission’s new Asset ManagementUnit has been working on a mutual-fund fee initiative since 2010. In

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plain English, a new sheriff is in town itching for a fight, so expect him

to pick one.

Moreover, expect this battle to be with a fund family whose name youare familiar with, if only because the hired guns in this battle are

aiming to make their reputation from the first draw, and the best way

to clean up the town is to pick on one of the well-known bad guys.

5. A big ETF move from Fidelity

Fidelity Investments in December filed for a big expansion of their

exchange-traded fund business and it appears the Boston-based

investment giant will finally jump with both feet into the ETF space.

Vanguard’s success in ETF Land — where its Total Bond

Market (NAR:BND) is now the biggest fixed-income ETF after starting

from scratch in 2007 — has shown Fidelity that there’s still time to

grab market share, but that window is closing. Fidelity is determined

to be a big player here, and it won’t be shut out.

6. Another wave of money-market fund closings

With interest rates near zero and unlikely to go anywhere during an

election year, more fund companies will simply give up on money

funds. The problem is not really that the funds aren’t making

shareholders any money, it’s that they’re not making money for thefund sponsors.

7. The SEC finishes 12b-1 reform (sort of)

 The Securities and Exchange Commission has recognized for years

that investors don’t understand 12b-1 fees, which technically cover a

fund’s sales and marketing costs.

 The problem is that regulators have vowed changes and done

nothing, and that’s what’s going to happen again. Oh, they will do

something cosmetic to appease politicians in an election year, but

mostly they want to “finish” the job so that they don’t have to bother

with it again.

8. A trendy new fund — literally

Industry insiders are whispering that one concept on the drawing

board for 2012 is a “trending” fund. Seriously.

We’re not talking about a fund that is following market trends or

current fashions. This fund invests in stocks that are “trending” by

mention on social networks such as Twitter.

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Apparently, the fund would basically be day-trading the stocks that

are being hyped via tweets. Some stock jockey appears on CNBC and

talks up shares in XYZ, the Twitter-verse explodes… and the fund

would go buy the stock to hold it for as long as the talk continues.

It’s great to talk about — even if it’s a ridiculously horrible investment

strategy — which is precisely why it’s apparently on the drawing

board. I just hope some fund company is crazy enough to try.

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