Nov. 23 (Bloomberg) -- Stocks rose around the world, commodities advanced and the dollar and the yen fell as sales of U.S. homes increased more than forecast and speculation grew that central banks will keep interest rates near record lows.

The Standard & Poor’s 500 Index rallied 1.3 percent to 1,105.42 at 12:30 p.m. in New York, near a 13-month high. Europe’s Dow Jones Stoxx 600 Index added 2 percent, poised for its best gain in six weeks. Oil climbed above $79 a barrel, copper rallied to a 14-month high and gold reached a record as the Dollar Index fell for the first time in three days.

Sales of existing U.S. homes increased 10 percent in October to the highest level since February 2007, National Association of Realtors data showed today. Economic reports this week will show rising export orders in Taiwan and South Korea, according to Bloomberg News surveys of economists’ forecasts.

“What may be perceived as strength in commodities or equity prices can just as easily be seen as weakness in the value of the dollar,” said Kevin Caron, a market strategist in Florham Park, New Jersey, at Stifel Nicolaus & Co., which manages about $98 billion in client assets. “What you’re seeing is an unprecedented array of government and taxpayer funded efforts to revive the economy, and they’re doing it, in the United States of course, at the expense of the dollar.”

Global stocks and commodities also advanced on speculation U.S. policy makers will keep borrowing costs near record low levels. Charles Evans, president of the Federal Reserve Bank of Chicago, told the Financial Times that U.S. interest rates may stay near zero until “late 2010, perhaps later.”

‘Some Comfort’

Evans’s comment “is going to provide the market with some comfort in the near term, allow asset markets and higher-risk markets to continue to move higher,” Ian Stannard, a foreign- exchange strategist in London at BNP Paribas SA, said today in a Bloomberg Television interview. That “will keep the dollar under pressure for the time being,” he said.

All 10 industry groups in the S&P 500 advanced at least 0.9 percent, led by energy producers. Deere & Co. and Schlumberger Ltd. rallied more than 2.8 percent after analysts advised buying the shares. Chevron Corp., General Electric Co. and Exxon Mobil Corp. climbed more than 2 percent to lead the Dow Jones Industrial Average up 131.43 points, or 1.3 percent, to a 13- month high of 10,449.59.

The MSCI World Index of 23 developed nations added 1.8 percent, its biggest gain in a week. BHP Billiton Ltd., the world’s biggest mining company, and Rio Tinto Group rallied at least 3.4 percent in London. Renault SA, Europe’s second-biggest automaker, increased as much as 5 percent in Paris after Credit Suisse Group AG advised buying the shares.

Asia Advances

The MSCI Asia Pacific Index rose 0.7 percent. China Construction Bank Corp., the nation’s second-biggest lender, gained 4.1 percent in Hong Kong after Zhang Ping, chairman of the National Development and Reform Commission, said China will favor “consistent, stable” policies on the economy. James Hardie Industries NV, the top seller of home siding in the U.S., surged 6.4 percent in Sydney after forecasting earnings at the top end of its range.

Copper for March delivery rose 1.9 percent to $3.1945 a pound in New York and climbed as high as $3.204. Nickel, zinc and tin also gained.

Crude oil jumped 3.4 percent to $79.33 a barrel in New York as a weaker dollar heightened the appeal of commodities and after an Iranian military exercise bolstered concern that Middle Eastern supplies may be disturbed. Natural gas for December delivery rose 4.1 cents, or 0.9 percent, to $4.465 per million British thermal units.

Commodities Gain

The S&P GSCI index of 24 raw materials advanced 1.8 percent today, extending its 2009 gain to 48 percent, poised for the best performance for commodities since 1973. Gold futures touched $1,174 an ounce as the slumping dollar boosted bullion’s appeal as an alternative asset.

The U.S. dollar and yen dropped versus major counterparts as commodities and stocks advanced, spurring demand for riskier assets. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, decreased 0.8 percent to 75.065. It slid to 74.679 on Nov. 16, the lowest level since August 2008.

South Africa’s rand was the biggest winner versus the yen and dollar among the major currencies tracked by Bloomberg as the gain in commodities and stocks encouraged carry trades, in which investors buy higher-yielding assets with amounts borrowed in nations with low interest rates. The rand strengthened 2.1 percent against the yen and 1.8 percent against the dollar.

Treasury Auctions

U.S. Treasuries were little changed as the government prepared to sell a record $118 billion of notes this week. The yield on the 10-year note climbed one basis points to 3.38 percent, according to BGCantor Market Data. The U.S. will sell $44 billion of two-year notes today, $42 billion of five-year securities tomorrow and $32 billion of seven-year debt in two days.

James Bullard, the St. Louis Fed president, said he favors the U.S. central bank seeking authority to continue buying mortgage-backed bonds after the first quarter of next year to bolster bank liquidity. International Monetary Fund Managing Director Dominique Strauss-Kahn told a Confederation of British Industry conference that “we don’t see a high probability of a double dip,” in the global economy, though avoiding that outcome isn’t “a done deal.”

Emerging Markets

Developing-nation stocks rose, led by shares in Hungary and Poland, as the MSCI Emerging Markets Index climbed 1.3 percent, its biggest gain in a week. OTP Bank Nyrt., Hungary’s largest lender, rallied 4.7 percent after the central bank cut the benchmark interest rate to the lowest in more than three years. The Czech koruna, Polish zloty and Hungarian forint all climbed at least 1 percent against the dollar.

Mexico’s Bolsa Index gained 0.7 percent, paring a rally of as much as 1.9 percent after Fitch Ratings downgraded the nation’s foreign-currency rating to BBB from BBB+, saying the recession has “accentuated weakness” in the country’s fiscal profile.

The Micex Index of stocks in Russia, the world’s biggest energy-exporting economy, increased as much as 2.3 percent to the highest value since Nov. 18 as oil prices climbed.

The Tel Aviv 25 Index climbed 1 percent even as the Bank of Israel unexpectedly raised the benchmark interest rate for a second time since the global economy began to recover as growth accelerated and inflation approached the top of the government’s target range.

The Dubai Financial Market General Index increased 1.6 percent, the biggest gain in a week. The benchmark rebounded from a 2.6 percent decline yesterday after the emirate’s ruler, Sheikh Mohammed Bin Rashid Al Maktoum, fired a senior aide and removed three others.

Large-Caps Outperform

For the first time since the equity rally began in March, the biggest U.S. stocks are beating the smallest as the dollar’s descent sends investors to companies with the most business in international markets.

The Dow Jones Industrial Average of companies with $111.4 billion in median market value rose 6.2 percent this quarter through last week, compared with the 2.6 percent loss by the Standard & Poor’s SmallCap 600 Index, whose members are worth $572.3 million on average. The Dow had trailed by 26 percentage points following the stock market’s low on March 9.

A benchmark gauge of corporate credit risk in the U.S. fell for the first time in three days as stocks gained.

Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, fell 2.75 basis points to 100.25 basis points as of 10:51 a.m. in New York, according to broker Phoenix Partners Group. The swaps typically fall as investor confidence improves.

Borrowers have sold a record $1.171 trillion in U.S. corporate bonds in 2009, surpassing the amount sold in 2007, according to data compiled by Bloomberg.

Sales of investment-grade and high-yield, high-risk debt compare with the more than $1.167 trillion that companies sold in all of 2007, a record year for corporate bond issuance, Bloomberg data show.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Stuart Wallace in London at swallace6@bloomberg.net

Nov. 23 (Bloomberg) -- Sales of existing U.S. homes jumped 10 percent in October to the highest level since February 2007 as Americans rushed to take advantage of a tax credit, cheaper properties and lower mortgage rates.

Purchases rose more than forecast to a 6.1 million annual rate from a 5.54 million pace in September, the National Association of Realtors said today in Washington. The median sales price decreased 7.1 percent from October 2008.

Stocks extended gains on signs the industry at the center of the deepest recession since the 1930s may contribute to a recovery. The extension of a tax credit originally due to expire Nov. 30 and its expansion beyond first-time buyers may fuel further gains in home sales, helping to overcome the drag from rising foreclosures and unemployment.

“It’s an impressive increase and shows a lot of pent-up demand for housing,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “Buyers have enough confidence to take the plunge. The housing market recovery will be a durable one.”

The Standard & Poor’s 500 Index rose 1.5 percent to 1,107.34 at 12:17 p.m. in New York. The Dow Jones Industrial Average added 1.3 percent to 10,452.23.

Existing home sales were forecast to rise to a 5.7 million annual rate, according to the median estimate of 66 economists in a Bloomberg News survey. Estimates ranged from 5.2 million to 6 million, after an initially reported 5.57 million rate in September.

Condos, Co-ops

Sales of existing single-family homes rose 9.7 percent, the biggest gain since 1983, to an annual rate of 5.33 million. Sales of condos and co-ops increased 13.2 percent to a 770,000 rate.

The share of homes sold as foreclosures or otherwise distressed properties rose to 30 percent from 29 percent in September, NAR chief economist Lawrence Yun said in a press conference today.

A “similarly robust” sales gain may occur this month, he said. “With such a sales spike, a measurable decline should be anticipated in December and early next year before another surge in spring and early summer,” Yun said.

The number of previously owned unsold homes on the market fell 3.7 percent to 3.57 million. At the current sales pace, it would take 7 months to sell those houses, compared with 8 months at the end of the prior month. The months’ supply is the lowest since February 2007.

New-Home Sales

Sales of previously owned homes, which make up more than 90 percent of the market, are compiled from contract closings and may reflect purchases agreed upon weeks or months earlier. Many economists consider new-home sales, recorded when a contract is signed, a more timely barometer.

The Commerce Department may report on Nov. 25 that new home sales rebounded to a 405,000 annual rate in October, according to the Bloomberg survey.

Home construction seized up last month as builders waited to find out if the first-time homebuyer tax credit would end, a Commerce Department report showed last week. Builders in October broke ground on the fewest houses since April’s record low annual pace.

Sales and construction may get another boost after President Barack Obama on Nov. 6 extended the incentive until April 30. Earlier, buyers had to close the transaction by Nov. 30 to be eligible. The government also expanded the program to include some current owners.

Debt Purchases

Mortgage rates held down by Federal Reserve purchases of housing debt are also spurring a recovery in the housing market. The average rate on a 30-year fixed mortgage fell last week to 4.83 percent, the lowest since May, according to Freddie Mac.

Borrowing costs may remain low as the Fed has signaled it will keep the benchmark interest rate near zero for an “extended period.”

“Activity in the housing sector has increased over recent months,” Fed policy makers said in their Nov. 4 statement. “Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”

The labor market remains a risk for housing. The unemployment rate, which rose to a 26-year high of 10.2 percent last month, will stay above 10 percent through the first half of 2010, a Bloomberg survey showed.

Foreclosure Filings

Foreclosure filings surpassed 300,000 for an eighth straight month in October as rising joblessness made it tougher for homeowners to pay bills, according to RealtyTrac Inc. data.

Some companies see a potential for stronger demand. Hovnanian Enterprises Inc., New Jersey’s largest homebuilder, has signed contracts or options to buy 4,000 land lots in preparation for a market recovery, said Chief Executive Officer Ara K. Hovnanian. The Red Bank, New Jersey-based builder had reduced its land holdings during the recession.

“Prices are ridiculously low in some markets,” he said at a conference in New York on Nov. 17. “That’s not going to stay.”

Sales of existing homes were led by a 14.4 percent jump in the Midwest, today’s report showed. Purchases rose 12.7 percent in the South, 11.6 percent in the Northeast and 1.6 percent in the West.

Sales had reached a 4.49 million pace in January, their lowest level since comparable records began in 1999.

Purchases of existing homes rose 23.5 percent in October compared with a year earlier. The median price fell 7.1 percent from a year earlier, to $173,100.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Nov. 23 (Bloomberg) -- The U.S. Securities and Exchange Commission will focus on financial instruments such as derivatives as it broadens a crackdown on insider trading by hedge funds, enforcement director Robert Khuzami said.

“The days of insider-trading scrutiny being focused almost solely on the equity markets are now gone,” Khuzami said today at a New York legal conference on hedge-fund regulation. After bringing its first insider trading case tied to credit default swaps in May, the SEC will “roll back the curtain on those markets and look at patterns across all markets,” he said.

Insider trading has become “systemic” behavior in the hedge-fund industry and the SEC is working with criminal authorities to ferret out misconduct, Khuzami said this month. Billionaire Raj Rajaratnam and his New York-based Galleon Group are among more than 20 people and firms the agency has sued since Oct. 16 in its probe of hedge funds.

The SEC brought its first insider-trading case tied to credit-defaults swaps in May, when it sued a Deutsche Bank AG salesman on claims he illegally fed information on a bond sale to a hedge-fund money manager. Prices on credit-default swaps, which insure investors against bond defaults, have surged before corporate takeovers in recent years, fueling speculation that traders are abusing inside information. The SEC has said since at least 2007 that it’s examining the trades.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt. The contracts, typically expiring after five years, pay if a borrower fails to meet obligations.

Khuzami, in an interview today, declined to say whether the SEC has any current insider-trading investigations involving derivatives.

Confidential Tips

Rajaratnam and his accomplices were part of a network that shared confidential tips on at least 10 companies, including Google Inc., Hilton Hotels Corp. and Intel Corp., investigators said last month. Rajaratnam and other defendants have denied wrongdoing.

The lawsuits, based in part on wiretaps and years of data- mining, allege that hedge-fund managers and traders obtained tips, sometimes in exchange for payment, on corporate deals and earnings that generated as much as $53 million in illegal profits.

Khuzami, a former federal prosecutor who joined the SEC in March, is adding front-line investigators, speeding inquiries and creating specialized units after the agency was faulted for missing Bernard L. Madoff’s Ponzi scheme. He’s also seeking to bolster his attorneys’ powers by gaining greater access to grand-jury evidence and expanding deal-making and cooperation with informants.

To contact the reporters on this story: David Scheer in New York at dscheer@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net.

Nov. 23 (Bloomberg) -- Mexico’s credit rating was cut one level by Fitch Ratings after tumbling oil output and the worst recession since the 1930s swelled the budget deficit.

Fitch lowered Mexico’s foreign-currency debt rating to BBB, the second-lowest investment grade, from BBB+. The outlook on the rating is stable. The country received its investment-grade rating from Fitch in January 2002.

“The global economic and financial crisis and falling oil production have accentuated weaknesses in the sovereign’s fiscal profile,’ Fitch said in a statement. “These weaknesses limit Mexico’s fiscal maneuverability in the face of future oil income shocks.”

Mexico’s peso pared gains after the downgrade, rising 0.3 percent to 13.0325 at 12:39 p.m. New York time. The Bolsa index added 0.5 percent to 30,823.39.

Congress approved a 2010 budget last week that calls for spending of 3.18 trillion pesos ($244 billion) and a budget deficit of 0.75 percent of gross domestic product. Including spending by state-owned oil company Petroleos Mexicanos, the deficit will reach 2.75 percent of GDP, the widest since 1989, according to JPMorgan.

Both Fitch and Standard & Poor’s have said they would wait to see the budget passed by congress before making a rating decision. S&P has a negative outlook on Mexico’s BBB+ rating.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

Nov. 23 (Bloomberg) -- For the first time since the equity rally began in March, the biggest U.S. stocks are beating the smallest as the dollar’s descent sends investors to companies with the most business in international markets.

The Dow Jones Industrial Average of companies with $116.6 billion in median market value rose 7.9 percent this quarter, compared with the 0.2 percent loss by the Standard & Poor’s SmallCap 600 Index, whose members are worth $591.8 million on average. The Dow had trailed by 26 percentage points following the stock market’s low on March 9.

The largest corporations are winning now because they get more sales abroad, where growth in nations from Brazil to China exceeds the pace in the world’s biggest economy. The dollar’s drop helps Peoria, Illinois-based Caterpillar Inc., Ford Motor Co. and McDonald’s Corp. by boosting the value of revenue when foreign earnings are brought back to the U.S.

“The large-cap multinational exposure to a weak dollar and non-dollar revenues has been causing them to outperform,” said Chris Hyzy, New York-based chief investment officer at U.S. Trust, a Bank of America Corp. unit overseeing about $188 billion. “That’s going to be stickier than many people believe. It’s not going to go away in the new year.”

Large Stock Shift

While the dollar has fallen since March, the 30-company Dow average didn’t start beating the rest of the stock market until this quarter. Now, investors are buying bigger stocks on concern the rally in equities will slow, said Henry Herrmann, the chief executive officer of Waddell & Reed Financial Inc., which manages $70 billion from Overland Park, Kansas. The S&P 500 posted its first monthly drop since February in October after a 56 percent jump and declined 0.2 percent last week to close at 1,091.38 on Nov. 20.

The Dow added 162.86 points, or 1.6 percent, to 10,481.02 at 10:51 a.m. in New York today. The S&P SmallCap 600 climbed 2.5 percent to 316.68.

The largest companies generate about 33 percent of their sales abroad, compared with 20 percent for the smallest, according to data compiled by Charlotte, North Carolina-based Bank of America.

Smaller companies are at a disadvantage because the dollar has declined against all 16 of the most-active currencies this year as the government sold record levels of new debt to support the $11.6 trillion that it spent, lent or guaranteed to end the worst recession since the 1930s. The Dollar Index has lost 16 percent from its three-year high on March 5, the steepest retreat since 1986.

‘Quietly Very Pleased’

President Barack Obama “has to be quietly very pleased about it,” said Kenneth Rogoff, a professor at Harvard University in Cambridge, Massachusetts, and former chief economist at the International Monetary Fund. “The dollar’s decline benefits big multinationals that happen to be getting a lot of their profits from abroad. That’s clear.”

Caterpillar, the biggest maker of bulldozers and excavators that got 66 percent of sales outside the U.S. in 2008, has added 16 percent this quarter on the New York Stock Exchange. Tokyo- based Komatsu Ltd., its top competitor, added 2.4 percent since Sept. 30.

Ford, the only major U.S. automaker to avoid bankruptcy, has risen 22 percent in the fourth quarter, compared with a 10 percent decline for Seoul-based Hyundai Motor Co., South Korea’s largest car manufacturer. Dearborn, Michigan-based Ford does 51 percent of its business abroad. South Korea’s won is the second- best performer among Asia’s 10 most-active currencies this year.

66% of Sales

McDonald’s has gained 12 percent since Sept. 30, while Darden Restaurants Inc., the owner of Olive Garden and Red Lobster, declined 6.4 percent.

Converting currencies into dollars will add 10 cents to 13 cents a share to 2010 profit at McDonald’s, the world’s largest restaurant chain said on Nov. 12. The Oak Brook, Illinois-based company, whose market value is more than 15 times bigger than Darden’s, gets 66 percent of sales from overseas, versus 3.6 percent at its Orlando, Florida-based rival.

“People are trying to determine who has pricing power, where can we see revenue growth, where is there potential for market expansion, where is the emerging market international exposure,” Waddell & Reed’s Herrmann said. “Most of those questions lead to the conclusion of bigger cap and higher quality.”

Better Returns

The dollar’s drop is also helping broader measures for the biggest U.S. companies outperform indexes for the smallest. The S&P 100 has risen 5.8 percent this quarter, compared with a 4.9 percent gain for the S&P 500 and 1.1 percent rise with the S&P MidCap 400. The Russell 2000 Index has lost 1 percent. Their median market capitalizations are $40 billion, $8.55 billion, $2.17 billion and $375 million, respectively.

Among companies in the S&P 500, those generating more than half their revenue abroad beat those doing business solely in the U.S. by 30 percentage points in 2009 through Nov. 17, according to data compiled by Bespoke Investment Group LLC, a Harrison, New York-based research firm. The stock measure has risen 61 percent since March 9.

Weakness in the U.S. currency will continue next year even after the Federal Reserve boosts interest rates, a move Chairman Ben S. Bernanke says is an “extended period” of time away, according to the top forecasters in Bloomberg’s ranking of 46 firms last month. Standard Chartered Plc, Aletti Gestielle SGR, HSBC Holdings Plc and Scotia Capital Inc. say the dollar will depreciate as much as 7.1 percent versus the euro.

Central Banks

Odds of a Fed increase don’t exceed 50 percent until September, according to trading in Fed funds futures contracts. The central bank cut its target rate for overnight loans between banks to as low as zero, a record, in December.

“Over the next 12 months, and more likely over the next few years, the dollar should fall,” said David Kelly, who helps oversee $480 billion as chief market strategist for JPMorgan Funds in New York. “Large-cap companies do have more exposure to the rest of the world, so they should benefit.”

Record foreclosures, frozen credit markets and $1.72 billion in bank losses and writedowns from the collapse of the subprime-mortgage market prompted government rescue plans that have accelerated the dollar’s retreat.

Policy makers say they want to end the dollar’s plunge. European Central Bank President Jean-Claude Trichet has argued for a strong dollar, calling it “extremely important” last month. Bernanke said during a Nov. 16 speech in New York that the Fed is “attentive” to changes in the currency’s value and “will help ensure that the dollar is strong.”

Amassing Reserves

To keep their currencies from appreciating too fast, governments in developing nations have amassed record foreign- exchange reserves as their central banks bought dollars. Brazil imposed a tax on foreign investments in October to end a rally that’s driven the real up 34 percent against the dollar in 2009.

International sales haven’t guaranteed stock gains. Chicago-based Boeing Co., which gets 39 percent of revenue abroad, cut its full-year profit forecast on Oct. 21 following $3.5 billion in charges for the delayed 787 Dreamliner and 747-8 jumbo jet programs. Its shares lost 2.6 percent since Sept. 30.

Emerging markets remain a draw for corporations. The U.S. unemployment rate is 10.2 percent, the highest level since 1983, and Americans cut spending for the first time in five months in September, according to the Commerce Department.

U.S. GDP

The median of 63 economist estimates compiled by Bloomberg show that the U.S. may expand 2.6 percent in 2010, after increasing at a 3.5 percent rate in the third quarter of 2009 following a year of contraction. Brazil, Latin America’s biggest economy, will grow 3.8 percent in 2010 and China, the most- populous nation, will gain 9.5 percent, according to the median forecasts.

“Large companies are in the sweet spot,” said Michael Obuchowski, chief investment officer of First Empire Asset Management Inc. in Hauppauge, New York, which oversees about $3.3 billion. “When the consumer is still slowly recovering, being able to boost the exports really helps the manufacturing part of the economy, the exporting part of the economy.”

To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

Nov. 23 (Bloomberg) -- Bank of America Corp.’s board may extend its search for a permanent new chief executive officer into 2010 if directors can’t settle on a candidate in the next three days, according to people familiar with the matter.

The directors, who met Nov. 20, may be willing to go past their Nov. 26 target and the Dec. 31 retirement of CEO Kenneth D. Lewis if it means getting a better choice, according to a person familiar with the deliberations. At least four external candidates, including Citigroup Inc. director Michael O’Neill, rebuffed approaches. Options include an interim chief or a delay in Lewis’s retirement.

Bank of America faces pressure to pick someone in a short period who’s acceptable to regulators and whose pay would be low enough to win approval from Treasury Department paymaster Kenneth Feinberg, the people said. Politics also has influenced the choice at the biggest U.S. bank, the people said. House Oversight Committee Chairman Edolphus Towns said last week Brian Moynihan, one of two internal candidates, may lack the needed leadership.

That’s narrowing the field and giving the board “an incredibly tough job,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “For people who have choices, it’s hard to figure out why someone would take this job.”

The people familiar with the matter spoke before any board meetings this past weekend. They declined to be identified because CEO selection is confidential at the Charlotte, North Carolina-based bank.

Decision Nears

Bank of America representatives have said the bank was aiming for a decision by the Nov. 26 Thanksgiving holiday, calling it a target rather than a deadline. “The board has been talking to a number of candidates, both internal and external, and expects to have a decision in the very near future,” spokesman Robert Stickler said in a Nov. 20 e-mail.

Holland said director Charles K. “Chad” Gifford, a former CEO of FleetBoston Financial Corp., which was bought by Bank of America in 2004, could step in on an interim basis.

Some candidates are reluctant to wade into disagreement between board members and the government over the bank’s future strategy, said Rochdale Securities LLC analyst Richard Bove, citing large shareholders briefed on the matter.

“The government and perhaps some of the new directors want the bank cut back in size, while the old core Bank of America people don’t want to do that,” Bove said.

Dropping Out

O’Neill, a former chief financial officer of predecessor BankAmerica Corp., withdrew from consideration after talking with search-committee members because he felt they didn’t fully grasp how serious regulators are in their demands for change, the people said.

O’Neill told the committee members that the company needed to increase the size of its banking operations and shrink its trading business, one person briefed on the talks said. The committee members responded that such a shift would be unproductive because it would abandon the strategy set when Lewis bought Merrill Lynch & Co., the person said.

Compensation is another obstacle, because Bank of America’s $45 billion bailout from the Troubled Asset Relief Program puts the CEO under the purview of Feinberg, the paymaster. Lewis agreed in October to forgo any pay for 2009 after being advised to do so by Feinberg. Feinberg’s pay restraints have limited the board’s options, one of the people said.

Feinberg’s Role

Feinberg probably wouldn’t approve a package big enough to lure PNC Financial Services Group Inc. Senior Vice Chairman William Demchak, who was among 18 candidates on a list provided Nov. 3 by Finger Interests Ltd., a Houston-based investment fund with 1.1 million Bank of America shares. As of August, Demchak owned about 219,000 PNC shares, currently worth about $12 million, data compiled by Bloomberg show.

Bank of America may need to buy out stakes in competing lenders owned by candidates like Demchak to prevent a conflict of interest. Some candidates could be eliminated because Feinberg isn’t likely to approve their buyouts on concern that Congress wouldn’t tolerate large payments, according to a person familiar with the process. Getting rid of TARP would eliminate that obstacle as well as unwanted input from regulators, according to a person familiar with the board.

Finger Candidates

The Fingers helped lead a shareholder revolt that stripped Lewis of his chairman’s title in April. At least four people on the Finger list subsequently said they weren’t interested. They are O’Neill; former JPMorgan Chase & Co. investment-banking co- head William Winters; U.S. Bancorp CEO Richard Davis; and Eugene McQuade, a former Freddie Mac president who now oversees Citigroup’s largest banking subsidiary, according to people familiar with the matter.

Two executives not on the list, Bank of New York Mellon CEO Robert Kelly and BlackRock Inc. CEO Laurence Fink, have told colleagues and friends they’re not interested.

Ex-GMAC LLC CEO Alvaro de Molina, a former Bank of America chief financial officer who also made the list, was never contacted, people said. Charles Scharf, head of retail banking at JPMorgan, was contacted, people familiar with the matter said. Scharf and de Molina declined to comment.

Aside from Moynihan, 50, other internal candidates include Chief Risk Officer Gregory Curl, 61. Lewis, 62, favors Curl, one person familiar with the matter said earlier this month.

Fed’s Choice

Federal Reserve officials, who questioned Lewis’s judgment when he considered backing out of the bank’s $29 billion purchase of Merrill Lynch, are pressing for an outsider because they want more drastic change, a different person said.

“B of A would really benefit from a fresh set of eyes and a fresh management approach,” said William Atwood, executive director of the Illinois State Board of Investment, which holds 2 million Bank of America shares. “It would be a bad thing if they’re focusing their attention internally.”

Lewis has indicated to associates that he would remain as CEO on an interim basis if asked by the board, according to a person familiar with his thinking. Rochdale’s Bove wrote in a Nov. 20 note that several large investors support the idea.

“That would give the board time to get their ducks in a row and they would have more breathing room,” said Marc Oken, a former Bank of America chief financial officer who left in 2005.

It also would be a discouraging sign of how poorly the search is going, Atwood said.

“If that’s their best option, they’re really not doing very well,” Atwood said.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Ian Katz in Washington at ikatz2@bloomberg.net

Nov. 23 (Bloomberg) -- Eastern Europe, where currencies and equities combined to produce total dollar-denominated returns of about 50 percent this year, is showing signs of unraveling as the continent’s favorite investment because of runaway debts.

Hungary’s forint is the second-worst performer in the past month of 26 emerging-market currencies, cutting its gain against the dollar since March 10 to 34 percent. Slovakia, Poland, Bulgaria and the Czech Republic are among seven countries showing the steepest increase in credit risk of 21 sovereign credit-default swaps tracked by Bloomberg. The NTX New Europe Blue Chip Index has fallen 0.4 percent after closing at 1,208.60 on Nov. 16, the highest since Oct. 7, 2008.

“Some investors might really underestimate the setback potential” for bonds and currencies, said Tim Haaf, who helps oversee $60 billion in emerging-market assets for Newport Beach, California-based Pacific Investment Management Co., a unit of Munich-based insurer Allianz SE. “The world is coming out of the doldrums, but eastern Europe still has to burn off these higher debt levels, the external debt levels, and it will take longer to grow out of that.”

Swelling public deficits have forced European Union members, including Poland and Latvia, to shelve euro adoption targets. Romania and Hungary have had to implement budget cuts that exacerbated their recessions to meet requirements for loans of 20 billion euros ($30 billion) each to finance their current- account and budget deficits.

Berlin Wall

Countries east of the Berlin Wall abandoned communism 20 years ago and embraced free markets with the ambition of achieving Western living standards, leading to expansion at or above double digits. Those countries are now relying on bailouts totaling $100 billion, 69 percent of the global total, from sources led by the International Monetary Fund and World Bank, according to data compiled by Bloomberg.

The European Commission forecasts government debt in Hungary will exceed 75 percent of gross domestic product for the next three years, and in Poland debt will rise to as much as 61 percent of GDP in 2011. The commission sees Latvia’s budget deficit at 12.3 percent of GDP in 2010 and Poland’s swelling to 7.5 percent of GDP next year.

“Growth is unlikely to recover to pre-crisis levels,” said Arend Kapteyn, chief economist for Europe, the Middle East and Africa at Deutsche Bank AG in London. Emerging European nations benefited from 2002 through 2008 from foreign-capital inflows equal to about 8 percent of the average annual gross domestic product to finance a credit boom, he said. “We don’t think those flows are going to come back at the old level.”

Economic Prospects

The region’s equity indexes climbed this year even as central and eastern Europe will shrink 6.3 percent in 2009, with the contraction stretching into 2010 in four former communist states, including Hungary, the European Bank for Reconstruction and Development said Nov. 2. It estimates six of the region’s economies will grow 1 percent or less next year, while overall growth will average 2.5 percent.

Romania’s Bucharest Exchange Trading Index has risen 75 percent this year in U.S. dollar terms, including reinvested dividends. The index’s top gainers are oil refinery Rompetrol Rafinare SA, up 276 percent this year, and drugmaker Biofarm Bucuresti SA, up 177 percent. The country’s government collapsed last month after Premier Emil Boc lost a confidence vote amid disagreements over budget cuts, and lawmakers have yet to appoint a new coalition.

Hungary’s benchmark Budapest Stock Exchange Index gained 84 percent in dollar terms since January. The nation’s economy will contract 6.5 percent this year and a further 0.5 percent in 2010, the European Commission said on Nov. 3.

Ukraine

Ukraine’s PFTS Index climbed 108 percent since January, with engineering company Motor Sich JSC rising more than 300 percent, even as political wrangling stalled budget cuts needed to draw the next $3.4 billion tranche of a $16.4 billion IMF loan. Ukraine may not have enough money to pay for Russian gas ahead of winter unless it gets the bailout payment by Dec. 7. Ukrainian bonds fell the most in the world during the past month.

The NTX New Europe Blue Chip Index, the region’s benchmark, has almost doubled since it declined to a five-year low in March. The rally stalled in the past month with the index trading between 1,100 and 1,200. It rose above 1,200 five times in the period and then declined.

‘Started to Lag’

“They’ve outperformed for the past six months but have started to lag a little,” said Ralph Acampora, who left Knight Capital Group Inc. in 2007 where he ranked among Wall Street’s most experienced technical analysts and now helps manage money in New York at Geneva-based Altaira Wealth Management SA. “The hot money is getting a little less aggressive.”

Radoslaw Bodys, central and eastern Europe economist in London at BofA Merrill Lynch Global Research, said he doesn’t see “significant risks over time.” Eastern Europe will “definitely lag Asia and probably also lag Latin America, at least early on,” because Eastern Europe is more developed, “so by definition, potential growth is lower. Initially it’s going to be slower than western Europe’s recovery, but quite soon I think it’s going to do better,” he said.

Rachel Ziemba, senior emerging-markets research analyst at New York-based Roubini Global Economics, is less optimistic and says some assumptions about the drivers of growth may be overblown.

Eastern Europe is “lagging and will continue to lag behind the rest of the emerging markets,” she said. “There are a lot of expectations of an export-led recovery, but western Europe is only going to be able to absorb so much of their goods.”

Export Economies

Exports account for about three quarters of the economies of the Czech Republic, Hungary and Slovakia. That compares with about 50 percent in Germany, according to data compiled by the Organization for Economic Cooperation and Development.

Ziemba’s skepticism about the region’s resurgence by selling more overseas is shared by economist and Nobel laureate Paul Krugman. “How can we have an export-led recovery unless we find another planet to export to,” he said in a Sept. 21 speech in Helsinki.

Eastern Europe got a boost in exports after Germany and France handed out checks to people trading in used cars for new models -- the equivalent of the cash-for-clunkers program in the U.S. The stimulus temporarily increased demand and production for the Czech Republic’s Skoda cars and Audis made in Hungary. The rate of decline in industrial output eased to an annual 15 percent in Hungary during September from 25 percent in April. It dropped to 11.9 percent in the Czech Republic in September, compared with a 22 percent slump in April.

Auto Stimulus

The auto program “explains about 50 percent to 80 percent of the improvement,” according to Deutsche Bank’s Kapteyn.

“Profitability of exports will largely depend on exchange rates, which in our view could be too strong,” said Bartosz Pawlowski, senior currency and fixed-income strategist at BNP Paribas SA in London. The Czech koruna, Polish zloty and Hungarian forint have all gained ground against the dollar this year.

The cost of insuring against risk is rising with credit- default swaps tied to Ukrainian government debt rising 395 basis points to 1,548 on Nov. 20 from 1,153 two months ago. Poland CDSs advanced to 126 basis points on Nov. 20 from a six-month low of 110 on Oct. 15, data compiled by Bloomberg show. A basis point on swap contracts protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.

Flow of Investments

The region’s bonds may not be a safer bet for emerging- market investors as deficits threaten to hamper the flow of investment to companies, Pawlowski said. The European Commission estimated Nov. 3 that Hungary’s deficit is 4.1 percent of GDP this year, Poland’s shortfall is 6.4 percent and the Czech Republic’s is 6.6 percent, all above the EU’s threshold.

Governments across the region “will have to issue very sizable amounts of debt and that debt will probably be snapped up by banks, which in turn means there won’t be much left to lend to the economy,” Pawlowski said. “There are still substantial issues with the fiscal outlook, which isn’t the case in Asia or Latin America.”

The yield on Romania’s 8 percent note due October 2011 has risen 8 basis points, or 0.08 of a percentage point, since the beginning of November. The yield on Bulgaria’s 4.75 percent note due February 2011 gained 26 basis points in the same period, Bloomberg data show. Yields move inversely to bond prices.

Credit Risks

Adding to credit risks is a reliance on foreign-currency loans. Consumers and companies in Latvia, Lithuania, Estonia, Hungary, the Czech Republic and Poland borrowed in euros, which carried lower interest rates than debt in their own currencies, after the countries joined the EU in 2004. Romania and Bulgaria followed suit in 2007.

A 19 percent drop in the zloty against the euro during the second half of 2008, an 11 percent slide in Hungary’s forint in the same period and a 9.5 percent decline in Romania’s leu left borrowers struggling to service debt. Latvia, Lithuania, Estonia and Bulgaria all peg their currencies to the euro. Maintaining those pegs proved costly as the governments cut budgets to satisfy EU rules.

Foreign-currency borrowing by businesses and households, including mortgages, is about 48 percent of GDP in Hungary and 28 percent in Poland, according to a report by Bodys.

“This region will again be more vulnerable if there’s a setback in the markets for whatever reason,” Pimco’s Haaf said.

Political Instability

Political instability is another malaise. Since the onset of the credit crisis, the government has fallen in Latvia and Hungary’s Prime Minister Ferenc Gyurcsany was ousted, as was the Czech Republic’s Mirek Topolanek, who didn’t have to turn to outside sources for a bailout. Romania’s Boc lost a no- confidence vote on Oct. 13, and Romanians went to the polls yesterday to elect a president, the next step before lawmakers can agree on a new government. Presidential elections are due in 2010 in Ukraine and Poland.

“The problem at the moment is there are a lot of elections in the next year and there are very difficult macro stories,” said Tim Ash, chief emerging Europe economist at Edinburgh-based Royal Bank of Scotland Group Plc. “The region is underperforming. In terms of the export story, we’re not seeing very much of a recovery. I don’t really see a compelling bounce- back story.”

To contact the reporter on this story: Tasneem Brogger in London at tbrogger@bloomberg.net Agnes Lovasz in London at alovasz@bloomberg.net