31 December 2011
$6.3tn wiped off markets in 2011 – Pg. 1 ‐ Almost $6.3tn was erased from global stock markets this year as the Eurozone financial crisis reverberated across the world in the latter half of 2011, calling into question the future of the world’s largest currency bloc ‐ Global stock market capitalization dropped 12.1% to $45.7tn …. ‐ The S&P 500 is flat this year while the FTSE 100 has only dropped 5.5% ‐ Asian equity markets were hit particularly hard with Japan’s Nikkei index losing 17.3% this year, Hong Kong’s Hang Seng index 20% and the Shanghai Composite 22% ‐ Some investors also fear that China’s economy could be facing a “hard landing” next years, posing yet another danger to the fragile global economy
Spain warns off deficit overshoot – Pg. 2 ‐ …this year’s budget deficit is likely to reach 8% of GDP, much higher than expected and a full 2% above the target agreed with the EU ‐ Following the rescue of Greece, Ireland and Portugal by the EU and the IMF, Italy and Spain are under intense pressure in the sovereign bond markets to restore order to their public finances and make their economies more competitive
Decline in Chinese output begins to abate – Pg. 4 ‐ Chinese manufacturing activity declined for the second consecutive month in December but showed tentative signs of stabilizing ‐ With inflation falling sharply and growth slowing in recent months, Beijing has cautiously started to relax its tight monetary policy settings. It trimmed banks’ required reserves at the end of November – its first such move in three years ‐ …. ‐ The stock market has provided another indication the slowing economy. The Shanghai Composite Index is down 22% this year – making it technically a bear market – and is near its lowest level since 2009
Forecasts for a future imperfect – Pg. 7 ‐ Will Barack Obama be re‐elected? Yes (Prof Note: The FT also predicted Hillary Clinton would win)
Ten‐year low for euro on last trade day – Pg. 8 ‐ The euro has dipped to a 10‐year low against the Japanese Yen, underlining the yen’s enduring status as a haven amid this year’s global financial turmoil ‐ The euro also finished the year as the worst performing major currency against the dollar, falling 2.9% since the beginning of the year ‐ Various explanations have been offered for the euro’s strength. For much of the year, fixed‐ income investors moved from sovereign wealth bonds in the peripheral countries of Italy, Spain and Greece into those of France and Germany, sending German Bund yields to record lows but keeping the euro high ‐ Many believe the ECB will embark on some form of quantitative easing next year amid a worsening European economic outlook
30 December 2011
Chinese push to put man on moon – Pg. 1 ‐ China has declared its intention to land an astronaut on the moon… ‐ Chinese experts say after 2020…. ‐ The last time an astronaut set foot on the moon was in December 1972 as part of the Apollo 17 mission ‐ ….US without a vehicle of its own for manned space flights ‐ Beijing this week launched a trial of its own satellite navigation system… ‐ …hopes to complete construction of a permanent space laboratory by 2016
Sceptical investors race to safety of US money market funds – Pg. 1 ‐ The flight to safety has coincided with a mini‐recovery in the equity markets, with the S&P 500 rising 14.5% since October 3 ‐ Money market funds invest in highly liquid securities such as US Treasuries and short‐term debt issued by financial institutions ‐ The sector is used by institutional investors to park cash not invested elsewhere
Optimism over US economy but dangers lurk in background – Pg. 3 ‐ GDP could well exceed 3% on an annualized basis in the fourth quarter ‐ …businesses have created more than 150,000 positions every month on average since September ‐ The biggest concern is that the Eurozone sovereign debt crisis could flare up again and inflict much more severe damage to the global financial system – including US banks and the supply of credit to US consumers and businesses – than it has so far ‐ …growth expected to be 1.5‐2.0% next year…. ‐ ….house prices are falling again – raising concerns that the collapse has not fully run its course
Women on boards – Pg. 10 ‐ …more countries considering quotas ‐ Norway went first, requiring listed companies to reserve 40% of board seats for women from 2008
Gold falls to lowest level for six months – Pg. 11 ‐ Spot gold in London fell to $1,523 a troy ounce, the weakest since July and down almost $400 from a nominal record reached this year ‐ Gold has nevertheless climbed almost 8% in 2011, marking the 11th straight year of gains an d outperforming most other commodities and stock indices
Banks learn the liquidity lessons from tough rules – Pg. 14 ‐ UK regulators have also proved more flexible than the industry had feared – rather than insisting that each bank maintain its buffer at all times, the FSA s as allowed banks to dip into their stocks to cover temporary funding squeezes, as long as the management has the credible plan to rebuild the base ‐ ….the UK requires banks to hold enough gilts and cash to cover expected outflows during both a short, sharp market shutdown and a less severe 90‐day stress scenario. The global version uses a 30‐day scenario and allows banks to include some high‐quality corporate and covered bonds in their buffers
29 December 2011 ‐ MISSING
28 December 2011
Sears’ shares fall on news of closures – Pg. 1 ‐ ..warned on weak sales of expensive electronic items and clothing would force it to close between 100 and 120 stores (Prof Note: Sears sells expensive electronics??? N o wonder they failed, news to me!) ‐ The news follows Gap saying in October that it will close one‐fifth of its Gap‐branded US stores in the next two years, and reflects a growing recognition that a weak economy and the rise of ecommerce has left the US with too many stores ‐ The fall in the shares takes them to levels last seen in 2004 ‐ The National Retail Federation has revised its holiday forecast upwards, predicting that seasonal sales would rise 3.8% this year to a record $469bn, but this is below last year’s 5.2% increase
Financial history lessons urged to help prevent future bubbles – Pg. 1 ‐ Fund managers and financial advisers should be forced to reduce the likelihood of future market panics and crashes (Prof note: How about be required to have an degree in FINANCE? Further note: I lectured a financial crises class last year, it was incredibly enlightening!) ‐ CFA UK….argues that the study of financial history should form a major part of all compulsory education for retail and wholesale investment professionals ‐ (Prof Note: CPAs are only granted to accountants. Why are CFAs granted to non finance individuals?)
Saudi Arabia unveils stimulus budget – Pg. 2 ‐ Saudi Arabia has approved a stimulus budget for next year after raising spending by one‐ quarter in 2011 as part of efforts to reduce the potential for social unrest in the region’s biggest economy ‐ On Monday, the Saudi authorities estimated 2012 budget expenditure at $184bn … ‐ In 2011, Saudi Arabia overspent the budgetary allocation by 39% ‐ raising real spending by about 25% ‐ The real GDP rate was 6.8% in 2011, the highest level since 2003, … ‐ An average price of $78 a barrel for Brent Crude would allow Saudi Arabia to meet expected real spending commitments in 2012…
Obama strives for balance in Fed nominees – Pg. 3 ‐ President Barack Obama yesterday made a fresh attempt to fill vacant positions on the board of the US Federal Reserve,…
Markets braced for Italy debt auction – Pg. 4 ‐ Italy’s benchmark borrowing costs have risen above the critical 7% level in a week that will see Rome auction up to 20bn (euro) of debt ‐ Italy, the world’s third largest bond market, is seen by many investors as the barometer for the eurozone debt crisis ‐ Italy’s borrowing costs have begun to diverge away from Spain’s in recent weeks
China and Japan pact on currency ‘symbolic’ – Pg. 4 ‐ China and Japan will promote the use of their currencies for trade and investment, … ‐ The two asian economies said that they wanted to reduce costs and risks for their companies – an implicit call for less reliance on the dollar, which is at present their predominant medium of exchange ‐ Japan also confirmed a plan to buy Chinese government bonds – the first time it has added renminbi‐denominated debt to its foreign exchange reserves ‐ The key obstacle to promoting such trade has been China’s reluctance to relax controls on its capital account, meaning that foreign companies that receive its currency have nowhere to invest in apart from the offshore renminbi base of Hong Kong
24 December 2011
Obama handed political victory as Congress extends payroll tax cuts – Pg. 1 ‐ Congress yesterday approved a two‐month extension to payroll tax cuts, …. ‐ …the extension of a tax cut equivalent to $1,000 a year for the average family
A time for forgiveness – Pg. 5 ‐ Most rich economies are bracing themselves for stagnation at best in 2012. The crisis has causes but they all have to do with credit and debt: too much of it ‐ From 2000 to 2007, the average mortgage debt of US households went from two‐thirds of disposable income to more than 100% ‐ British households raised their mortgage indebtedness from 83% to 138$ ‐ Debt itself is presumably as old as settled society: the earliest samples of writing that have been recovered are often debt records. ‐ …strengthens the hold a creditor has on a borrower who falls on hard times ‐ Shiller: “Ordinary fixed‐interest debts make people more vulnerable to their economic fortunes. That’s reason why lenders have always been seen as questionable figures” ‐ …excessive debt can even today be experienced as a real reduction in freedom ‐ In the US, many economists say the job market remains depressed because unemployed people who in better times would have moved where there was work are trapped by mortgages “under water”
Heavy selling of gold funds as attraction of bullion wanes – Pg. 12 ‐ Gold prices traded in a narrow range over the course of the week, rising just 0.5% to $1,604.80 a troy ounce by late afternoon on the spot market ‐ Bullion prices have fallen 16.5% from a record nominal high of $1,920.30 touched in September, as hedge funds have been forced to liquidate their holdings to meet redemptions and banks have slimmed their gold trading books
Credit card fees – Pg. 16 ‐ [banks] can charge a merchant between 2 to 3% to process a credit card. As the new rules will probably encourage further card usage, banks will reap the rewards
23 December 2011
Call for QE to stave off eurozone deflation – Pg. 1 ‐ Such steps had been taken in the US and UK, where the central bank had seen deflation risks, …
Fall in jobless claims lifts US outlook – Pg. 1 ‐ The US economy is heading into 2012 with some momentum after new claims for unemployment benefit fell to their lowest level since April 2008 and consumer sentiment rose for the fourth consecutive month ‐ Consumer struggles were illustrated again yesterday as estimates of annualized economic growth in the third quarter of 2011 were revised down from 2% to 1.8%.
Portugal’s poor suffer as austerity bites – Pg. 2 ‐ …income inequality in Portugal is the highest in Europe ‐ The biggest concern I that restricting benefits and tightening tax thresholds will create what welfare organizations are calling the “new poor” – people who earn marginally too much to qualify for social payments and tax exemptions but not enough to meet their mortgage payments or rising costs
NYSE‐Borse deal gains US approval – pg. 16 ‐ …won key US approval for their planned merger even as the companies prepared to step up political lobbying in Europe after failing to convince EU officials that proposed antitrust concessions go far enough ‐ The US Department of Justice said on Thursday it would let the merger proceed if DB gets rid of its interest in Direct Edge, a US stock exchange operator ‐ A sale of the Direct Edge stake would have to take place within two years of a merger ‐ Analysts believe that the biggest hurdle to clear remains in the EU, where representatives of the two companies met EU competition commission staff this week to discuss extra steps aimed at assuaging concerns over market dominance
22 December 2011
Banks snap up 489bn (euro) in ECB loan offer – Pg. 1 ‐ Markets have been debating whether the banks will use cheap loans to buy higher yielding government debt in a class “carry trade” rather than finance existing assets ‐ The ECB has sought to reduce banks’ funding difficulties in the hope of averting a dangerous “credit crunch” that would drive the eurozone into a deep recession
Rich fight back in US class war – Pg. 4 ‐ Under threat are what Barack Obama has described as the lowest tax rates for the wealthy since the 1950s, while a tax break enjoyed by private equity bosses and hedge fund managers will come under close scrutiny should Mitt Romney, a former private equity executive, be his Republican opponent ‐ That only half of those who file a tax return pay federal taxes is also often heard in private, …
Homeowners cast doubt on loan lifeline – Pg. 4 ‐ [Hamp] the $29.9bn programme, run by the US Treasury department, was meant to help 3m – 4m American homeowners modify their mortgages and avoid repossession ‐ …foreclosure crisis shows no signs of abating
Sales figures revised down – Pg. 4 ‐ The number of existing homes sold in the US in recent years has been revised down by about 14%, further indications that the property market downturn was worse than originally thought ‐ The NAR said yesterday it had revised downward home sales and inventory figures for the 2007 to 2010 period (Prof Note: I all for Yun’s (chief economists) immediate termination! NAR lied to us (not that I believed them for a second!) I want to know, how was fired for this ENORMOUS lie to the American public?! I want names of terminated senior people!)
US oil prices rise as crude inventories fall – Pg. 22 ‐ Oil prices rose after US government data showed that the country’s crude oil inventories suffered their biggest one‐week fall in more than a decade ‐ The US tax system encourages refiners to destock at the end of the year, particularly if prices are on the rise ‐ The drop in US inventories comes as crude oil stocks in Europe are already at unusually low levels
21 December 2011
House rejects payroll tax deal – Pg. 1 ‐ The rejection in a vote that fell largely on party lines, plunges Washington into another round of fiscal brinkmanship with only days before the year’s end and creates the risk of a damaging squeeze on the economy at the start of 2012 ‐ If there were no agreement then payroll taxes would rise from 4.2% to 6.2%, several million Americans would lose unemployment benefits, and payment to doctors treating Medicare patients would be cut by 27% on January 1 ‐ The Senate managed to agree on the two‐month deal by paying for it with an increase in fees charged by Fannie Mae and Freddie Mac, the government controlled mortgage insurers
New‐found planets right size for ‘twin Earth’ – Pg. 1 ‐ Astronomers have detected the first Earth‐sized planets orbiting a distant star. ‐ The 700 or so extrasolar planets found previously were all considerably larger than earth. ‐ The new worlds orbit Kepler‐20, a Sun‐like star 950 light‐years away
Moody’s warns on British economy – Pg. 2 ‐ Britain’s deteriorating pubic finances and growth outlook have substantially reduced its ability to maintain its triple A credit rating, Moody’s warned last night in a shot across the coalition government’s bows ‐ It has placed all of its European ratings, not just those in the eurozone, under review in a move it said “could lead to a repositioning of a large number of sovereign ratings” ‐ Moody’s made it clear the deteriorating UK domestic outlook, not just a potential eurozone break‐up, was important in its assessment ‐ The rise in deficits and debt since 2008 had weakened the position, this was now threatened by a deteriorating growth outlook and the UK was vulnerable to the eurozone crisis even though it was not a member of the single currency ‐ Moody’s report was the first time Britain’s top credit rating has also been challenged under the coalition government and comes after the latest official forecasts show the government eliminating the deficit only in 2016‐17, two years later than previously hoped
Gap opens over mortgage rescue plan – Pg. 6 ‐ The US regulator supervising mortgage groups Fannie Mae and Freddie Mac is weighing a proposal that would reduce bankrupt homeowners’ loan balances, delighting borrower advocates yet pitting it against White House that is not considering the idea ‐ The FHFA is “actively considering” a plan that would call for Fannie and Freddie to allow homeowners in Chapter 13 bankruptcy proceedings, who owe more on housing debt than their homes are worth, to pay zero per cent interest for five years, subject to approval by bankruptcy judges, … ‐ About one in four borrowers, or 11m homeowners, is underwater, … ‐ The US is struggling under the weight of more than $700bn in negative equity ‐ About 1.5m borrowers have declared Chapter 13 since 2008, …
Eurozone woes hit US mortgage securities – Pg. 15 ‐ Asset sales by banks under pressure in Europe have hit prices for securitized mortgages in the US, indicating that the effects of the eurozone crisis are widening ‐ Rather than selling distressed assets in their home markets, there are increasing signs that European banks are selling asset outside the region, hitting prices for asset=‐backed paper ‐ European banks alone hold about $100bn in US mortgage‐backed securities that are not backed by Fannie Mae and Freddie Mac,…
20 December 2011
‘Great Successor’ takes over – Pg. 1 ‐ The death of Kim Jong‐il threw the Korean peninsula into uncertainty yesterday as the North Korean regime names the dictator’s inexperienced youngest‐son as the “Great Successor”, rattling financial markets in the south ‐ The transfer of power to his son, reported to be no more than 28 years of age, could threaten stability across east Asia as the scion of the Kim dynasty may struggle to rule a country buckling under international sanctions, hunger and power cuts ‐ South Korea put its military on an emergency footing ‐ The greater danger, according to analysts, is that rival generals and party officials will jostle for advantage, using Kim Jongeun to further their ambitions
Republicans defy temporary fix on US stimulus deal – Pg. 2 ‐ President Barack Obama has delayed his holiday in Hawaii – which was due to begin on Saturday – until Congress reaches a deal on the payroll tax cuts and unemployment insurance (Prof Note: the correct decision) ‐ The crux of the disagreement is over how to cover the $200bn cost of a full‐year extension
Bankruptcy tourists head for UK – Pg. 3 ‐ Ireland’s economic boom and bust, which led to a bail‐out from the European Union and IMF a year, has left households saddled with 185bn (euro) of debt. High unemployment and a 50‐60% fall in house prices, which has left up to 300,000 mortgage holders in negative equity, means tens of thousands of people have little hope of ever being able to pay back their loans ‐ But in Ireland, unlike in many western countries, bankruptcy is not an option for most people. Just 29 people were declared bankrupt last year and 17 in 2009.
UK refuses to contribute to IMF plan – Pg. 4 ‐ The EU has fallen short of its campaign to supply the IMF with an additional 200bn (euro) to battle the debt crisis after the UK rebuffed pleas to contribute ‐ Mr Osborne also reiterated the UK government’s stance that the IMF’s mission was to protect “countries – not currencies” and that Britain believed the 17 eurozone members should take more decisive action to tackle the crisis themselves
Hotels disturbed by falling revenues – Pg. 16 ‐ Outside the hotel industry, the reality of falling hotel occupancy and downward pressure on room rates in the big cities looks like the inevitable consequence of declining business confidence and eurozone uncertainty ‐ Hotel companies face not just consumer demanding even lower room rates, but cost pressures in the form of utility bills and property taxes
Bet on January effect is only for the brave – Pg. 22 ‐ The 20 worst performing stocks in the S&P 500 have dropped an average of 55% in 2011, led by banks, steel producers and technology companies ‐ A popular investment strategy at the start of January is to buy beaten down stocks from the prior year In the hope that their prices rise in value as they revert back to their long‐term average
Big lenders suffer heavy selling as Bank of America falls below $5 – Pg. 24 ‐ Bank of America shares fell beneath $5 for the first time since 2009, as bank stocks suffered heavy selling pushing the S&P 500 to the brink of 1,200 for the first time since November
19 December 2011
Draghi warns on break‐up – Pg. 1 ‐ …warned of the costs of a eurozone break‐up,…. ‐ Countries that left and devalued their currency would create “a big inflation” and fail to escape from structural reforms that would still have to be implemented “but in a much weaker position”…
Tie‐up to boost US mortgage probe – Pg. 1 ‐ Investigators will be able to share documents and findings, and pool resources,… ‐ The New York attorney‐general is armed with the Martin Act, a powerful prosecutorial tool. The state law allows Mr Schneiderman to investigate anyone doing business in New York and to bring cases without having to show that the accused intended to commit fraud. State prosecutors need only prove that a fraud was committed, which state courts have defined as “all deceitful practices contrary to the plain rules of common honesty)
Boehner casts doubt on fate of stimulus deal – Pg. 3 ‐ Mr Boehner said that negotiations should be reopened and should focus on finding a solution for the entire year, rather than just the two months covered by the Senate compromise ‐ Barack Obama, …has made the extension of payroll tax cuts and unemployment insurance the centerpiece of his economic agenda heading into the 2012 re‐election campaign
Alliance brings big guns to bear in probe of home loans – Pg. 6 ‐ Eric Schneiderman, NY AG, has the power to file criminal charges as part of his investigation into banks’ role in packaging mortgages into securities for sale to investors, who have suffered hundreds of billions of dollars worth of losses ‐ The partnership is bolstered by Mr Schneiderman’s ability to use the Martin Act, a 1921 state law that allows him to bring misdemeanor and felony criminal charges against alleged wrongdoers doing business in New York. The prosecutor can operate across state lines, essentially acting on behalf of investors across the US ‐ While the law allows for civil and criminal sanctions, experts say the New York AG’s criminal power can be used to press alleged wrongdoers to settle cases rather than fight in court ‐ The NY AG could use evidence obtained by the FHFA inspector‐general to launch securities fraud lawsuits against financial institutions already under fire from private investors, such as BofA, for selling securities that proved toxic
Markets bodies seek derivatives rules overhaul – Pg. 21 ‐ European governments and regulators must make big changes to derivatives rules that are costing banks billions of dollars in transaction costs, . ‐ …object to derivatives transactions that are costing the financial industry an estimated $150bn, hitting balance sheets and threatening job losses in leading financial centres ‐ They are demanding European governments post collateral on derivatives trading, including interest rate swap deals ‐ Currently a bank will post collateral to a sovereign, which means that if their side of the transaction is making a loss or is “out of the money”, they will pay a margin fee. However, if the sovereign is on the losing side of the trade, they do not pay such a fee ‐ Bankers say sovereigns consider themselves too powerful and important to post collateral
17 December 2011
Ex‐chiefs of Freddie and Fannie charged – Pg. 1 ‐ Six former top executives at Fannie Mae and Freddie Mac have been charged with securities fraud in a civil case brought by the SEC for allegedly misleading investors ‐ …accused of significantly understating Fannie and Freddie’s holdings of high‐risk home loans. Those loans eventually soured, leading to a government bail‐out that could cost US taxpayers $193bn through 2014, excluding dividend payments,… ‐ The SEC said that it was seeking cash penalties from the executives, ‐ The agency also wants the executives to be forbidden from serving as directors or officers of public companies
Jobs bill offers electoral lifeline for Democrats – Pg. 3 ‐ ….no president has been re‐elected while the jobless rate has been in excess of 7.2% since Roosevelt in the 1930s. The unemployment rate now stands at 8.6%, with a consensus forecast of 8.8% for next year
India calls halt to rate rises over growth fears – Pg. 4 ‐ India left its key interest rate unchanged yesterday as it decided to put an end to its aggressive anti‐inflationary efforts ‐ The Reserve Bank of India left the repo rate, the rate at which the central bank lends to commercial banks, at 8.5%.... ‐ The decision marks a pause in the strategy that saw the central bank raise rates 13 times since March 2010 ‐ India’s economy grew at an annualized 6.9% for the quarter ending September 30, the slowest rate for more than two years
Land bill boosts Indonesia – Pg. 4 ‐ Indonesia’s parliament has passed land reform legislation that paves the way for large‐scale infrastructure investment aimed at bolstering efforts to achieve higher growth in the emerging democracy ‐ The legislation should enable the government to purchase land needed for public infrastructure projects – roads, airports, power plants and harbours – which have been held up by disputes with private owners ‐ Indonesia’s economy has gained momentum in recent years and is expected to grow 6.5% this year, dispute uncertainties in the global economy ‐ While the law was praised for creating legal certainty, land acquisition could still take years if disputes have to be settled in court ‐ The bill defines what constitutes crucial infrastructure, including toll roads, bridges, railways, parks and public housing ‐ Indonesia has said it needs to spend $200bn on infrastructure between 2009‐2014, but the government has only allocated a third of that amount through its regular budget
16 December 2011
IMF chief warns over 1930s‐style threats – Pg. 1 ‐ …world faces the risks of “economic retraction, rising protectionism, isolation and…what happened in the 30s …Depression
WTO takes fresh look at trade agreement – Pg. 2 ‐ Governments of some of the world’s largest economies agreed yesterday to open yet further their public procurement markets to each other’s companies, an agreement that could provide a model for trade deals ‐ …fresh attempt from China to join the pact met a cool welcome from the US, which said it did not cover enough of China’s huge and complex array of state agencies and regional and local governments
Jobless claims drop to three‐year low – Pg. 6 ‐ Fresh data suggested that the US economy has picked up some momentum during the final quarter of the year despite concerns over global growth ‐ …claims were often volatile during the holiday season
Deal near on $200bn stimulus – Pg. 8 ‐ The $200bn price tag would be covered through a mix of spending cuts – possibly including curbs on federal worker pay and pensions – and revenue increases through higher fees on Fannie Mae and Freddie Mac mortgage guarantees, and wireless auctions
Surprisingly sturdy – Pg. 9 ‐ …buying boring US government bonds has been the right call for investors in search of a safe haven ‐ Debt‐strapped consumers and a fragile banking system raise disturbing parallels with Japan, whose economy has stagnated for two decades since its property bubble popped in the early 1990s ‐ In times of stress, buying Treasuries, German bunds and UK gilts is the safety‐first option ‐ There are two ways to view Treasuries when it comes to investing. One is to focus on the fixed rate of return as income and prospects for future price appreciation. At the start of the year, many investors believed the yields on offer were too low and the potential for further declines was limited ‐ That, however, ignored Treasury debt’s haven role. When investors flee other markets they park their money in Treasuries, and this characteristic of investment behaviour is why some argue that US government debt should always be part of a portfolio
Goldman runs into sukuk hurdle – Pg. 18 ‐ The exotic offering would be the first foray into the market for Goldman… ‐ “flaws” o First, that the prospectus suggested that underlying assets used in the sukuk could be sold to a third‐party; second that the funds raised could be directed to Goldman itself; and third that there was no guarantee the securities would trade at par ‐ Lawyers who structure products to comply with Islamic law warn that whatever the merits to the scholarly debate investors may be deterred by the doubts
Sino‐Forest puts nervy bondholders in Jeopardy – Pg. 24 ‐ …Chinese forestry company spirals towards the biggest corporate default in the history of the Asian bond market ‐ What happens next will not only affect the Toronto‐listed company’s investors ‐ Sino‐Forest has four tranches of debt in issue, due in 2013, 2014, 2016 and 2017 – all of which were trading at about 25 cents on the dollar on Thursday, down from 100cents earlier in the year
15 December 2011
Beijing slaps duty on US car imports – Pg. 1 ‐ China will impose retaliatory duties on US car imports in the latest sign of trade friction between the world’s two largest economies ‐ China overtook the US in 2009 as the world’s largest vehicle market, and sales there account for a substantial chunk of profits for BMW and Mercedes, which build the SUVs they sell globally in North America ‐ The action is the latest in a flurry of legal actions between the US and China, in which each country accused the other of supporting domestic industry with illicit state subsidies and challenged each other’s use of emergency blocks on imports
$740bn pay gap threat to US recovery – Pg. 1 ‐ …”We get 58%”….that figure is the share of US national income that goes to workers as wages rather than to investors as profits and interest ‐ It has fallen to its lowest level since records began after the second world war and is part of the reason why incomes at the top – which tend to be earned from capital – have risen so much. If wages were at their postwar average share of 63%, workers would earn an extra $740bn this year, about $5,000 per worker,…
Bloc set for fiscal union, says Merkel – Pg. 2 ‐ Member states of the eurozone have set themselves on an “irreversible course towards a fiscal union” to underpin their common currency, even if it may take years to reach that goal, …. ‐ Italy paid another euro‐era record 6.47% for five‐year bonds at an auction and the euro fell below the $1.30 mark yesterday morning
Asia shivers in chill wind from eurozone – Pg. 3 ‐ All across China and the rest of Asia, the financial crisis in Europe is being felt in export‐ oriented manufacturing sectors, …. ‐ In response, many producers are trying to diversify exports away from turbulent western markets and sell more to developing states ‐ Most analysts believe that Chinese exports to Europe will fall into negative territory this month or next ‐ Japan, Korea and most other Asian nations also export large amounts of goods to China for processing and re‐export to the west, so Chinese export sector problems have direct knock‐ on effects throughout the region ‐ In China, overall growth remains heavily reliant on exports,… ‐ As Europe slips back toward recession….
Growth fears hit India and China – Pg. 3 ‐ India has warned that emerging market economies are beginning to “falter”, as China’s top economic policymakers described the global outlook as “extremely grim and complicated”
Republicans face voting shake‐up – Pg. 4 ‐ …Republican presidential nomination…..party introduces voting rules designed to lengthen the primary process ‐ …many US stats shifting next year to a proportional voting system, making it harder for any candidate to lock up the nomination early,… ‐ All states that hold caucuses and primaries before April 1 are supposed to use a proportional representation system to allocate their delegates, who proceed to the party convention in August where the nominee is chosen ‐ In states with proportional voting, if one candidate won 40% of the vote in New Hampshire and another candidate 25%, they would get 40 and 25% of the delegates, respectively ‐ Because only 1,277 delegates will be awarded before April, it will be impossible for any single candidate to win the 1,145 delegates required to clinch the nomination in the first three months of the year ‐ …Iowa, which will become the first state to vote on January 3, is exempt because it holds caucuses, a kind of political beauty contest, and allocates its delegates later
US marriage rates on the rocks – Pg. 4 ‐ Just 51% of people over age 18 are married today, compared to 57% in 2000 and 72% in 1960, with trends pointing toward wedded couples becoming a social minority within a few years ‐ Wealthy, more educated adults, are more likely to marry than the working class. During times of high unemployment, people without a university degree have more difficulty finding jobs and are less likely to marry
US dollar downside – Pg. 16 ‐ The EU accounts for 14% of sales for S&P 500 companies, ‐ Companies with high exposure include McDonald’s, Mylan, and Kraft foods with 40%, 36% and 32%, respectively
US banks benefit in ‘flight to safety’ – Pg. 17 ‐ Foreign‐owned banks operating in the US have suffered their largest six‐month fall in deposits on record, … ‐ Cash on deposit at foreign‐owned banks fell $291bn, or 25%, to $879bn from the end of May to the start of December
Gold tarnished in dash for dollar – Pg. 26 ‐ Gold tumbled below $1,600 an ounce for the first time in more than 10 weeks and silver fell almost 7% as the precious metals bore the brunt of a dash for dollars among investors and traders
14 December 2011
Fed more upbeat despite euro woes – Pg. 1 ‐ The US Federal Reserve said the economy was doing a little better but noted big downside risks from the eurozone crisis and kept monetary policy on hold ‐ Recent consumption and business confidence data have raised hopes of stronger growth next year but much depends on whether Congress extends a 2% reduction in payroll taxes into 2012
Storm clouds are gathering over global economy – Pg. 3 ‐ Few economists are willing to bet heavily against another global recession in 2012. By common consent, the economic outlook is much darker today than it appeared in early autumn ‐ The euronzon crisis has worsened, with contagion spreading through Italy and Spain and lapping at the door of France ‐ ….German employment hit another post‐unification high in October…. ‐ The center of the crisis is Europe, where economies both in and around the eurozone appear on the verge of recession ‐ The great concern is that economic downturn will exacerbate the stresses in the sovereign debt and bank funding market, which are far from solved, creating a vicious downward spiral akin to 2008 and the potential collapse of the euro ‐ China is feeling the slowdown in the rest of the world and the authorities are beginning to worry at their ability to sustain growth
Closing skills gap seen as essential for growth – Pg. 6 ‐ The number of unfilled positions has risen by 35% since their trough in June 2009 – but the unemployment rate has remained stubbornly high ‐ ….suggest companies may not be trying very hard to fill jobs, while workers in receipt of unemployment insurance may not be trying that hard to find them ‐ ….companies that are growing say an unqualified workforce is already a significant barrier to hiring ‐ Companies counter that today’s jobs require a broad set of skills, and that the education system is not producing workers with the flexibility they need
Euro’s tumble puts asset sale theory to the test – Pg. 21 ‐ The euro’s tumble towards $1.30 against the dollar on Tuesday may have looked dramatic, but the single currency – for all the nervousness over the eurozone debt crisis – remains above its January low
13 December 2011 Damning report into collapse of RBS urges tougher legal sanctions – Pg. 1 ‐ UK laws should be changed to allow directors at failed banks to be automatically banned, fined and stripped of their remuneration,….
Sarkozy in U‐turn on downgrade – Pg. 2 ‐ ….downplayed the importance of the potential loss of France’s cherished triple A credit rating, in an about‐turn that raised speculation that a downgrade could be close ‐ Moody’s Investors Service, another rating agency, also warned yesterday that it might downgrade some European countries
Indian industrial output drops 5.1% ‐ Pg. 3 ‐ …sending rupee to a low and demonstrating the vulnerability of emerging markets to the eurozone debt crisis
Cycle of ‘creative destruction’ loses momentum – Pg. 4 ‐ Start‐ups are crucial for creating jobs, but their dwindling birth rate is stalling hopes of recovery…. ‐ The dwindling birth rate for businesses matters because young companies are disproportionately responsible for creating jobs ‐ Companies less than five years old have generated all of the net jobs in the US economy since the 1970s,…. ‐ ….total number of jobs created by start‐ups, which had been running at 3m‐3.5m a year, dropped to just 2.3m in 2009 ‐ The waning force of creative destruction in the US can be seen in employment data. For most of the 1990s, new jobs equivalent to about 8% of total employment were created every quarter, while jobs disappeared at a rate of about 7.5%, so the total number of people in work rose. Starting in about 2000, both job creation and destruction began to drift downwards, and carried on falling even as employment recovered after the 2000‐2001 recession
12 December 2011
OECD warns on funding struggle – Pg. 1 ‐ Markets and governments face an uphill struggle to fund themselves next year amid extreme uncertainty over the eurozone and the global economy, as new figures reveal that the borrowing of industrialized governments has surged beyond $10tn this year and is forecast to grow further in 2012 (Prof Note: this is the first time I have seen “Tn” in the financial times. Up to now, it has always been X,000bn) ‐ For the foreseeable future it will be a “great challenge” for a wide range of OECD countries to raise large volumes in the private markets, with so‐called rollover risk a big problem for the stability of many governments and economies ‐ Rollover risk is the threat of a country not being able to refinance or rollover its debt, forcing it to either to turn to the ECB in the case of the eurozone countries or to seek emergency bailouts, which happened to Greece, Ireland and Portugal ‐ The OECD says the gross borrowing needs of OECD governments is expected to reach $10.4tn in 2011 and will increase to $10.5tn next year – a $1tn increase on 2007 and almost twice as much as in 2005 ‐ The OECD says that the share of short‐term debt issuance in the OECD area remains at 44%, much higher than before the global financial crisis in 2007 ‐ The OECD also warns that a big problem is the loss of the so‐called risk‐free status of many sovereigns, such as Italy and Spain, and possibly even France and Austria. The latter two have triple A credit ratings but investors no longer consider them risk‐free
Cameron grapples with fallout of European Union treaty veto – Pg. 1 ‐ Mr Cameron decided to veto the treaty in the early hours of Friday morning, bowing to pressure from his fiercely eurosceptic party to withhold support unless he won “reasonable” concessions at the negotiations
Pipeline threat to US payroll tax talks – Pg. 4 ‐ For months the fate of the payroll tax cuts the White House consideres vital to US economic recovery has hinged on whether Republicans and democrats can agree on how to pay for them ‐ But as those differences have narrowed, a political split over the approval of a pipeline project linking Canada to the Gulf of Mexico has surfaced as a new threat to the passage of the $200bn stimulus package ‐ …extension of the 2% reduction in payroll taxes for US workers and the renewal of unemployment benefits that could prevent the economy from sliding in the run‐up to his re‐ election campaign ‐ ….on average, ought to see their taxes go up by $1,000 in 2012
A tough nut to crack – Pg. 6 ‐ …today….US joblessness is higher than in much of Europe. The US consumer is mired in high personal debt ‐ For the remainder of the workforce, including college graduates, it is both increasingly hard to find a secure job and tougher for those who do find jobs to be paid in line with inflation ‐ Most people know the median income has declined sharply since the late 1990s. Fewer are aware that real incomes also fell sharply in the same period for those with degrees. Only those with postgraduate qualifications, particularly PhDs, saw net gains ‐ ….it took six months for the US economy to recover its pre‐recession jobs level after the 1982 downturn ‐ Following the 1991 recession, that had risen to 15 months. ‐ After 2001, it took 39 months – meaning that the economy required almost the full business cycle to regain the jobs total bequeathed by the previous one. ‐ Following the Great Recession of 2008….take 60 months to reach the pre‐downturn jobs level ‐ In December 2007, the US economy employed 146m people. Four years later, it languishes at 140m ‐ At the current rate of job creation it will take another two and a half years to regain 2007 levels – taking the replacement cycle to as much as 78 months ‐ The second problem stems from the first – America is employing a decreasing proportion of its people ‐ At the start of the recession, the employment‐to‐population rate was 62.7%. The rate is now 58.5% ‐ ….last month….the 315,000 who dropped out of the labour market far exceeded the 120,000 new jobs ‐ …rebooting an increasingly mediocre school system is easier said than done (Prof RANT: I sign masters thesis for graduate degrees but cannot teach high school calculus….DISGUSTING!)
Fall in Chinese demand hits petrochemicals prices – Pg. 18 ‐ The last time petrochemicals prices tumbled was in the run‐up to the 2008 crisis, ….
10 December 2011
Britain’s cold shoulder for Europe – Pg. 1 ‐ Britain’s veto of a pact aimed at saving the euro cast London to the margins of the European Union yesterday, as the bloc’s other members vowed to press on with closer economic and fiscal integration ‐ The refusal by David Cameron, UK prime minister, provoked fury in European capitals and left the EU deeply divided. It forced the eurozone’s 17 members, led by Germany and France, to opt instead for an intergovernmental deal that will have to be negotiated outside the EU legal framework ‐ ….US consumer sentiment was improving
Beijing tames the ‘tiger’ of inflation – Pg. 6 ‐ Official data released yesterday showed a sharp drop in consumer inflation in November, with prices rising 4.2% from a year earlier, compared with a 5.5% rise in October
Cracks spreading through Europe’s banks – Pg. 10 ‐ Germany: Bailout could be on the cards for Commerzbank o Three other German banks may also need taxpayer support o The stress tests have highlighted weaknesses in the German banking system, in particular many banks’ substantial portfolios of sovereign debt ‐ France: Moody’s downgrades lenders’ credit ratings o The credit ratings of BNP Paribas, Societe Generale and Credit Agricole have been downgraded by Moody’s, the rating agency, increasing pressure on European Union leaders to come up with a solution to the eurozone crisis o Moody’s said the banks made significant use of wholesale markets to fund their operations such that their creditworthiness was “necessarily affected by the fragile operating environment for European banks.” o The 10 biggest funs by assets under management have cut their lending to French banks by 69% since May according to Fitch Ratings
An American dream that turned sour – Pg. 11 ‐ ….so integrated is Mr Corzine in the Washington‐Wall Street nexus that he helped draft the Sarbanes‐Oxley corporate governance and accounting law created in the wake of the Enron scandal
Blind spots in the oversight system revealed – Pg. 11 ‐ The US Commodity Futures Trading Commission is the government regulator for US markets in futures, options on futures and now, most over‐the‐counter derivatives ‐ Keeping customer cash separate from house funds is a cardinal rule of the futures market ‐ Scrutiny is especially strong because CME is a for‐profit exchange operator whose revenues derive from trading volumes. MF Global was one of the top brokers by volume on CME’s exchanges ‐ On September 1 MF Global disclosed that Finra required the firm to raise capital
Banks sell off state bonds – Pg. 12 ‐ Europe’s bansk have slashed their holdings of sovereign debt issued by the peripheral nations of the eurozone, selling 65bn (euro) worth of it in just nine months
9 December 2011
European banks’ shortfall at 115bn (euro) – Pg. 1 ‐ Germany’s banking system was shown to be far weaker than previously thought in a new round of European stress tests, raising the prospect of further taxpayer bail‐outs ‐ The ECB also cut interest rates from 1.25% to 1% ‐ The ECB will start offering unlimited loans lasting three years to eurozone banks ‐ …US equities suffered their first significant decline in more than two weeks as optimism over a comprehensive eurozone deal faded
‘I simply do not know where the money is,’ Corzine tells Congress – Pg. 1 ‐ …estimated $1.2bn of missing customer funds ‐ Passing up the chance to “plead the fifth” and use his right of silence,…. ‐ Asked whether he might contribute his personal fortune to help plug the hole, he said he didn’t think the shortfall would “go unresolved”
Drop in US jobless claims hits at optimism – Pg. 2 ‐ The number of US citizens filing for jobless benefits last week fell to the lowest level since February, suggesting recovery in the labour market may be gaining momentum ‐ Initial claims fell most last week in California, Texas and Florida, while Wisconsin, Michigan and Iowa had the largest increases
Financial sector ‘drowning’ in regulation flood – Pg. 3 ‐ Financial services companies worldwide are being hit with, on average, 60 regulatory changes every working day, a 16% increase over last year and with no let‐up in sight ‐ The rules range from global packages such as the Basel III bank capital reforms to rules in the individual US states
Officials push IMF loan deal – Pg. 4 ‐ Eurozone authorites are pushing for a deal to lend 150bn (euro) to the IMF fund, a boost that would give it more firepower to help with the eurozone debt crisis ‐ The US has consistently said the IMF has ample resource and has no plans to put any fresh money into the fund, but IMF experts say Washington is unlikely to stand in the way if the eurozone authorities want to boost its spending powers
Distressed debt investors eye Europe – Pg. 20 ‐ Distressed debt investors are circuling a number of European companies that have run into trouble as the continent’s mounting economic woes put pressure on smaller businesses that are often highly leveraged ‐ Distressed debt investors, most of which are primarily US‐based have flocked to Europe over the past two years, anticipating a slew of opportunities
8 December 2011
Germany insists on new treaty for Europe – Pg. 1 ‐ Germany and France stepped up pressure on their European partners to agree treaty changes or a binding eurozone accord to stabilize the single currency,… ‐ ….behind the scenes British diplomats are working to find compromise where Britain accepts a treaty change covering the 27‐member EU in exchange for “safeguards” for the City of London ‐ The tough German line came as Angela Merkel, the German chancellor, and Mr Sarkozy published a joint letter to Mr Van Rompuy calling for sweeping measures to enforce fiscal discipline, including near‐automatic sanctions for countries with excess debt or deficits
China’s stuttering local land sales programme poses threat to growth – Pg. 2 ‐ In the first nine months of this year, the government collected just Rmb14bn ($2.2bn) in revenues from land sales versus a target for 2011 of Rmb50bn after Rmb45.5bn was raised in 2010 ‐ Land sales typically account for about 40% of local government revenue, which Chinese city and county governments rely on to finance large infrastructure projects. For city governments across China, this will translate into larger debts – and consequently fewer railway stations, airports and even opera houses ‐ If the trend in land sales continues, China’s GDP growth rate will slow and its banks, which have accepted land as collateral for local government loans, could potentially be saddled with bad debts ‐ Up to 30% of the loans could be non‐performing, but in China there is little detail on the scale of non‐performing loans
Occupy puts focus on homes at risk of foreclosure – Pg. 4 ‐ The Occupy movement is setting its sights beyond Wall Street’s financial firms, organizing protests against foreclosures, student debt and political fundraisers, and in many cases joining forces with established community activists groups
Bank pay and job cuts – Pg. 14 ‐ Cutting costs is the surest way to boost earnings, for now ‐ Firing staff remains a reticent bank chief’s preferred cost‐cutting took….
Banks tap into ECB dollar funding – Pg. 24 ‐ Demand for dollar funding from the ECB has jumped sharply after a price cut agreed with the US Federal Reserve, suggesting that banks are more comfortable about tapping the ECB for help ‐ The ECB could also broaden the pool of assets that banks can provide as collateral when obtaining liquidity ‐ …
7 December 2011
Brazilian growth shudders to a halt – Pg. 1 ‐ Brazil’s economy stalled in the third quarter of this year, demonstrating the vulnerability of the world’s emerging market growth engines to the slowdown in the developed world ‐ GDP contracted 0.04% in the three months ending on September 30 compared with the previous quarter as weakness in the industrial sector spread to Brazil’s once vibrant consumer sector ‐ China, Brazil and India, the three largest emerging economies, are all now slowing…. ‐ The eurozone crisis is hitting confidence while economic slowdown in Europe and the US is undermining demand both for manufactured goods from emerging markets and for the minerals produced by resource‐rich countries such as Brazil ‐ …China….predicted to grow at about 8% in 2012….The Asian Development Bank on Tuesday forecast east Asia’s economic growth next year would slightly drop to 7.2%, with a worst‐ case scenario of 5.4%
EU talks to strengthen financial firewall – Pg. 1 ‐ …running two separate rescue funds and winning increased support for the IMF ‐ Under the plans being considered, the ESM is unlikely to have its headline 500bn (euro) from the start, now invisioned for July
Rating agency’s warning provokes angry response – Pg. 2 ‐ The warning by S&P’s of a possible future downgrading of the 15 members of the eurozone brought angry charges from both bondholders and politicians that the US credit rating agency was destabilizing the markets, just as a comprehensive deal to stem the financial crisis was in sight ‐ S&P on Monday evening place d15 members of the eurozone, including Germany and France, on a negative “credit watch”, warning of a possible future credit downgrading
Japan: culture change required – Pg. 8 ‐ ….just 6.2% of women working in the private sector have positions as section managers or higher. ‐ …despite women accounting for half of Japan’s university graduates, within the central government they hold just 2.2% of jobs at director level or above, …. ‐ Key objectives include having women occupy at least 10% of section management positions in the private sector and 5% of manager‐level positions in central government by 2015 ‐ Childcare is a huge problem
US lenders to raise dividends – Pg. 18 ‐ Some of the largest US banks intend to raise dividend payments after the Federal Reserve Board completes its latest stress tests on their financial health, with BofA a notable absentee from the optimism expressed by its peers ‐ One option growing in popularity among lenders is to “optimize” their balance sheets, whereby banks reduce the size of their risk‐weighted assets by tinkering with how they classify certain assets as a stealth means of improving a bank’s capital position ‐ Yesterday, BofA agreed to pay $315m to investors in mortgage securities who said they had been misled about the health of the underlying mortgages
6 December 2011
Deal over eurozone fiscal rules – Pg. 1 ‐ Key points o Automatic sanctions for countries that breach the 3% of GDP deficits rule o Treaty change for all 27 EU members is preferred, but a treaty of the 17 eurozone members could be accepted o Private sector bondholders will not be forced to bear some of the losses in a future debt restructuring o The European Stability Mechanism to launch in 2012 o Both leaders want a decision by the end of the week on proceeding as 27 or 17
Kremlin’s hard man takes a body blow – Pg. 3 ‐ …the poor showing of his political machine, the United Russia party, in elections on Sunday has cast doubt over his political future ‐ Most observers believe Mr Putin will face few problems due to the lack of viable alternative candidates ‐ Mr Putin has not only lost support among the broader population but also within the business elite, thanks to the increasingly apparent cronyism that seems to have benefited his associates
Italy faces ‘sacrifices’ to avert collapse – Pg. 4 ‐ The “Save Italy” decree passé don Sunday sets out a net fiscal adjustment on 20bn (euro) over the next three years, giving a cumulative impact of 80bn (euro) – equal to some 5% of GDP – when combined with the three austerity packages passed by the previous centre‐ right government since July ‐ Markets….signalled their instant approval….
Pressure rises to shift burden of automatic cuts – Pg. 6 ‐ The failure of a special panel of Congress to agree on new measures to slash US deficits over the next 10 years triggered a punishment called sequestration, which will impose harsh cuts to many defense and domestic programmes ‐ Defense o Pentagon to suffer research and development, operations and maintenance and procurement cuts. In addition to the $450bn in cuts approved in the August debt deal. Military pay likely to be exempt ‐ Mandatory spending o Doctors and hospitals to suffer 2% cut in payments from Medicare. The health plan for the elderly. But benefits from Medicare and Medicaid, the health plan for the poor, are exempt, as is the social security pension scheme
CFTC rules on sue of client funds in wake of MF Global – Pg. 16 ‐ US regulators have adopted more stringent restrictions on how futures brokers and clearing houses can use customers’ funds as federal investors continue to look for an estimated $1.2bn still missing… ‐ MF Global….bet billions of dollars on European sovereign debt before downgrades of the brokers credit led the company to declare bankruptcy in october… ‐ It is illegal for a company to sue customer funds for its own investments
CME to allow renminbi as collateral – Pg. 22 ‐ …allow international investors to use the Chinese currency as collateral for trading in all its futures products from January 2012 ‐ The move, announced yesterday, means investors holding renminbi deposits in Hong Kong or other financial centres outside mainland China can use the currency to bet on markets including metals, grains and energy ‐ The exchange said it would cap the amount of renminbi it accepted at $100m, a relatively small figure, reflecting the fact that the offshore renminbi is only a few years old and is less liquid than most major currencies ‐ The renminbi is not the first emerging market currency to be accepted as collateral: traders can use the Mexican peso and the Turkish lira
Mortgage bond prices recovery as refinancing fears recede – Pg. 22 ‐ Investors in US mortgage bonds are signaling that renewed efforts by the Obama administration to spur home loan refinancing and boost consumer spending will fall flat. ‐ Prices are rising for older mortgage‐backed bonds that promise higher coupons than recently issued home loan securities ‐ These bonds fell in price when the White House and the Federal Housing Finance Agency announced the changes to Harp – the home affordable refinance programme – as investors worried that borrowers would pay off the underlying loans early, reducing their returns ‐ This market behaviour suggests the US housing market will remain in the doldrums, despite renewed efforts by policymakers to stabilize the sector and boost the economy ‐ One gauge of refinancing activity has fallen more than 33% from the year’s peak in September, ….
5 December 2011
Green light for Italian austerity measures – Pg. 1 ‐ Italy’s new technocratic government has approved tough austerity measure and economic reforms, kick‐starting a pivotal week in Europe’s campaign to shore up the single currency ‐ The Italian measures include tax increases, new taxes on financial transactions, pension reforms, cuts in local government spending and the dissolution of certain government entities. The package is to raise an additional 30bn (euro) over three years with the aim of balancing the budget by 2013 ‐ Germany is demanding changes to the European treaties that would concentrate unprecedented power in Brussels to scrutinize national budgets and sanction profligate governments
Merkel, the markets and mutual mistrust – Pg. 1 ‐ ….reconcile two powerful forces: her commitment to 50 years of European integration and a deep mistrust of financial markets ‐ ….political legitimacy should trump the unelected power of Wall Street and the City of London
ECB sets sights on shoring up banks – Pg. 2 ‐ If a legal means can be found, the ECB could demand an indemnity against losses on its bond purchases, which have already exceeded 200bn (euro) ‐ In contrast to its bond market intervention, the ECB sees help for the financial system as its clear responsibility,…. ‐ Financial markets have penciled in another cut in ECB interest rates after the reduction from 1.5% to 1.25% at November’s meeting ‐ A more radical but less likely option would be for the central bank to start buying bonds issued by banks
Gingrich takes strong lead in Iowa – Pg. 4 ‐ Despite his political baggage and chequered personal life, Mr Gingrich has vaulted ahead in recent weeks as voters respond to his strong debate performances and conservative credentials
A heated exchange – Pg. 7 ‐ Although Beijing unpegged the renminbi from the dollar in June 2010, it has allowed only a small appreciation this year ‐ China’s current account surplus, which American lawmakers say largely reflects undervaluation of the renminbi, has fallen from more than 10% relative to Chinese GDP in 2007 to a likely level of about 4% this year ‐ In October, the Senate passed a bill that would compel the US to use calculations of currency undervaluations when assessing to what extent imports are deemed to be unfairly priced, for the purposes of imposing emergency so‐called “antidumping” and “countervailing duty” tariffs ‐ Rising risk aversion among investors has recently reversed capital flows into China and weakened the renminbi
3 December 2011
US jobs data lift recovery hopes – Pg. 1 ‐ The US jobless rate dropped to its lowest level since March 2009, bolstering confidence that the economy remains on track for a steady, albeit sluggish recovery…. ‐ The unemployment rate fell from 9% to 8.6% last month while payroll growth – measured in a separate survey – accelerated slightly to 120,000 ‐ The sharp drop in the unemployment rate was partly due to a shrinking labour force, suggesting that some jobless people have become discouraged and have stopped searching for jobs
Dilemma for Tea Party as Iowa draws closer – Pg. 3 ‐ …Iowa caucuses only a month away, …. ‐ The national Tea Party movement, having succeeded in its goal of making the Republican party lurch sharply to the right and having installed a noisy cabal of hardcore conservatives in Congress, now faces a new challenge ‐ The lack of a clear candidate is a huge source of frustration
Jobs report tells story of mediocre recovery – Pg. 3 ‐ The problem with the jobs report is that it is actually two reports: the unemployment rate is based on one survey of about 60,000 households while the jobs number comes from a different survey that covers the payroll records of about 140,000 businesses. The payroll number is less volatile and widely regarded as the more reliable of the two ‐ The margin of error for the jobs/payroll figure is 100,000 so there is a good chance that the real number was somewhere between 20,000 and 220,000 ‐ …the margin of error on the household survey is much higher – the equivalent of 250,000 either way in terms of jobs, or 0.19% on the unemployment rate – which is why economists are reluctant to use it as their main guide ‐ Participation in the labour force fell by 315,000, taking the share of workers in the adult population down to 62%, a level rarely seen since the early 1980s
Central bank action dominates week of gains – Pg. 11 ‐ Global equities powered ahead of eurozone government bond yields tumbled in a week dominated by concerted central bank action to bolster market confidence and increasing signs of resilience in the US economy ‐ The key even came Wednesday when six of the world’s biggest central banks announced a co‐ ordinated move to boost liquidity by cutting the price of emergency dollar loans to lenders by 50bps ‐ The move was preceded by a cut in reserve requirements for leading Chinese lenders, while Brazil’s central bank announced a cut in its benchmark interest rate
2 December 2011
Draghi hits at eurozone aid plan – Pg. 1 ‐ A last‐ditch rescue plan for the eurozone has started to take shape after Mario Draghi hinted that a “fiscal compact” could pave the way for more aggressive ECB response to the region’s escalating debt crisis ‐ An agreement binding governments to strong rules on public finances would be “the most important element to start restoring credibility” with financial markets,… ‐ Mr Sarkozy also signaled his willingness to accept stronger European control over national budgets as demanded by Berlin ‐ Bond markets in Spain, France and Italy rallied sharply yesterday after successful auctions and co‐orindated central bank action this week cut the global cost of dollar liquidity
MF Global accessed funds for weeks before collapse, says US investigators – Pg. 1 ‐ MF Global had been dipping into client funds for weeks before its failure – rather than just in its final days as had been previously reported (Prof Note: Madoffesque?!) ‐ This comes as the failed company’s bankruptcy trustee revealed that some customer money from MF would never be recovered ‐ …customer shortfall at $1.2bn ‐ It is illegal to use customer funds for a firm’s purposes ‐ …the law does allow futures brokers to conduct internal “repurchase” operations, swapping out customer cash for collateral
Sarkozy reluctant to cede key powers – Pg. 4 ‐ But in a landmark speech on the crisis yesterday, the French president made clear France wanted national governments to continue to hold sway over key strategic and political decision‐making in the EU ‐ The French president, who has been reluctant to see a transfer of more power from elected governments to Brussels, said stricter central budget discipline would involve “common examination of our budgets” and “the establishment of the more rapid, the more automatic and the more severe sanctions for those who do not respect their engagements.”
China manufacturing output falls – Pg. 6 ‐ The reading will add to concerns among policymakers and investors that China is heading for a downturn just as the rest of the world is looking to it as a bright spot in an otherwise gloomy landscape ‐ By reducing the amount of deposits banks must hold on reserve by 0.5%, the central bank effectively injected about $63bn into the banking system ‐ Outside China the picture for manufacturers was more mixed: continued growth in the US – the world’s biggest economy – contrasted with contracting output in Europe and the UK
US concerned at indirect links to eurozone – Pg. 6 ‐ The concern is not direct trade links: US exports to Europe are such a small part of the economy that even a vast eurozone recession would barely touch US growth. Instead, the worry is over potential shocks to the financial system ‐ The six biggest US trading banks are testing their books against a “global market shock” scenario provided by the Fed ‐ Another indirect channel is that while direct exports to Europe are small, many multinationals export to Europe via Asian factories ‐ Money market funds have cut exposure to Europe by 42% since May, …
Caught in the grip – Pg. 8 ‐ ….banks – traditionally among the biggest investors in government bonds – have been weakened by the eurozone’s worsening sovereign debt crisis ‐ As they hoard capital in response, credit is rapidly becoming both scarcer and more expensive ‐ By Wednesday, five of the world’s most powerful central banks, in the US, Canada, Britain, the eurozone and Switzerland, announced emergency action to ease banks’ access to funds. It was the second liquidity intervention of its kind in as many months ‐ For most banks, the bond market have been closed for months ‐ Supplies in the form of deposits from customers are also scarce ‐ ….the third key mechanism for bank funding – interbank lending – is also drying up ‐ Trade finance is another area that some banks, notably the French, are retreating from – much to the concern of economists fearful that global business flows could be horribly disrupted ‐ …large‐scale transactions in leveraged or acquisition finance are finding few willing backers ‐ Worst of all is the risk of global contagion ‐ Latin America is also at risk ‐ China, Hong Kong, Singapore, Indonesia – the biggest financial economies of Asia – are all braced for a repeat of 2008,…
Massachusetts lawsuit accuses top five lenders – Pg. 16 ‐ …accusing them of “corrupting” the state’s land records through their pervasive use of fraudulent documentation in seizing borrowers’ homes ‐ The state’s allegations threaten the system of recording property deals and transferring property in Massachusetts, …
1 December 2011
Central banks’ move lifts markets – Pg. 1 ‐ Central bank action to avert a liquidity crisis cheered markets on Wednesday but highlighted the depth of international concern about possible economic turmoil in Europe ‐ In a co‐orindated move with other central banks, the US Federal Reserve slashed the rate it charges the ECB for short‐term dollar loans from about 1.1% to about 0.6%. China earlier made a decisive shift towards an easier monetary policy, with Brazil expected to follow ‐ US and European equities rose sharply, with the S&P500 closing up 4.3% and the FTSE 100 up 3.1%... ‐ China said it would cut the portion of deposits banks must hold in reserve from 21.5% to 20% in a sign that emerging markets are more worried about the threat to growth than inflation risks
Qatar’s premier urges west to embrace rise of political Islam – Pg. 1 ‐ Islamists are likely to represent the “next wave” of political power in the Arab world,… ‐ The Egyptian election follows victories by Islamist parties in polls in Morocco and Tunisia ‐ Qatar, the wealthy, gas‐rich Gulf state that is home to the Al Jazeera channel, has been the most enthusiastic backer of Arab protest movements
Hopes pinned on ECB as savior – Pg. 2 ‐ European finance ministers have increasingly settled on the ECB as the indispensable savior of the single currency after two days of meetings that revealed the shortcomings of other tools to fight the crisis ‐ The severity of the situation prompted an apparent shift by Germany over possible support to the IMF to boost its lending power
China eases restraint on monetary policies – Pg. 3 ‐ Beijing has kicked off a new round of monetary loosening, after more than two years of progressively tighter policies, by cutting the proportion of deposits that banks must hold in reserve with the central bank ‐ The move shows Beijing believes it has finally beaten stubbornly high inflation that peaked at an annualized 6.5% in July and is predicted to have fallen well below 5% in November ‐ …it also reveals growing concern about a slowdown in the world’s second‐largest economy … ‐ Seaport cargo volumes, domestic freight volumes, electricity output, passenger trips and housing construction have all cooled off following high rates of growth earlier in the year
US military cuts will affect ground forces, says Dempsey – Pg. 4 ‐ The US military’s capacity to deploy ground forces in future operations will be reduced by around 15% as a result of $450bn in defense spending cuts over the next decade
UK closes Iran embassy and expels diplomats – Pg. 6 ‐ Relations between Britain and Iran descended to their lowest level in more than 20 years on Wednesday when the UK government ordered the immediate closure of the Iranian embassy in London and closed its own mission in Tehran (Prof Note: this is not good!)
Push to ease US securities laws – Pg. 17 ‐ Plans for the biggest relaxation of US securities laws are being pushed forward in the US senate ‐ ….allowing companies to engage in “crowd funding” to solicit investments online and helping fast‐growing companies like Facebook keep their accounts private ‐ ….crowd funding measure – which allows companies to solicit investments of up to $10,000 without the normal registration and discloser procedures (Prof Note: Dangerous!) ‐ A move to allow companies to raise up to $50m without registering the offering has engendered little opposition ‐ At present, companies have to disclose publicly financial accounts if they have more than $10m in assets and more than 500 shareholders of record, even if their stock is not publicly traded
30 November 2011
Business plan for possible end of euro – Pg. 1 ‐ International companies are preparing contingency plans for a possible break‐up of the eurozone ‐ …. ‐ Executives’ concerns are emerging as eurozone finance ministers weigh ever more radical options to tackle the sovereign debt crisis, including the possibility of funneling ECB loans to struggling countries via the IMF ‐ Some are examining the legal consequences of a eurozone split for cross‐border commercial contracts and loan agreements, ….
American Airlines’ parent AMR files for bankruptcy protection – Pg. 1 ‐ Its shares have slumped after a run of quarterly losses even as its peers returned to profitability ‐ American chose to do without bankruptcy protection in the early 2000s while its rivals used the process to shed their pension plans and reduce structural costs, leaving it at a substantial disadvantage ‐ By seeking Chapter 11 protection, American hopes to force through a radical restructuring that it was unable to accomplish through negotiations with its workforce and unions. Bankruptcy courts have wide latitude to tear up and rewrite labour contracts and other agreements
UK announces extension to austerity policies – Pg. 3 ‐ …extend tough restraints on public sector pay for a further two years, as part of an attempt to keep his austerity plan on track amid much weaker growth than the government had expected ‐ …Britain had been knocked off course by high inflation, turmoil in the eurozone and the permanent damage caused by the financial crisis ‐ …revised its central forecast for economic growth to 0.9% this year and 0.7% next year, down from 1.7 and 2.5% respectively. The forecasts were also revised down for 2013 and 2014
Rupee’s fall opens debt trap for India groups – Pg. 14 ‐ Dozens of Indian companies are coming under financial stress after the sharp fall of the rupee against the dollar during the past few months made once‐cheap loans in the US currency much more expensive, … ‐ The most common forms of the debt are foreign currency convertible bonds, which can either be converted into a stake in the issuer on maturity, which is attractive if the issuer’s shares rise, or simply repaid in full
Courtroom star with nifty legal footwork – Pg. 15 ‐ In other significant decisions, he has slashed the amount of money the trustee liquidating Bernard Madoff’s firm can collect, challenged SEC settlement policies with other big banks, and ordered hedge fund manager Raj Rajaratnam to pay $92.8m, a record fine in the SEC insider trading cases ‐ Judge Rakoff’s current bête noire when it comes to the SEC involves its policy – since 1972 – of settling with companies and individuals with a disclaimer that they have not admitted nor denied wrongdoing.
29 November 2011
Appeal to Germany to save eurozone – Pg. 1 ‐ Germany is the only country that can save the eurozone and the wider European Union from “a crisis of apocalyptic proportions”…. ‐ The OECD also slashed its half‐yearly forecast for growth in the world’s richest countries, warning economic activity in Europe would grind to a near halt
Citigroup’s SEC settlement rejected – Pg. 1 ‐ A US judge rejected the SEC’s $285m settlement with Citigroup to resolve allegations that the bank misled buyers of a mortgage‐related security, and signaled he would no longer approve such deals without admissions of wrongdoing (Prof Note: Finally! The next step, naming names!) ‐ Judge Jed Radoff wrote that he could not approve the settlement “because the court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment”. ‐ Citigroup was seeking to settle allegations it misled investors in a $1bn security by failing to disclose it had helped select some assets included in the security and bet against them. Citigroup did not admit or deny wrongdoing – a standard practice for four decades in SEC settlements ‐ “The SEC’s longstanding policy – hallowed by history, but not be reason – of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact,” Judge Rakoff wrote (Prof Note: Amen!) ‐ He added: “The SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.” ‐ Judge Rakoff said the settlement failed to meet judicial standards of being fair, reasonable, adequate or in the public interest because it did not provide him with sufficient evidence to decide whether it was justified ‐ The ruling is the latest SEC settlement rejected by Judge Rakoff and the first outright rejection on the basis of the so‐called no‐admit, no‐deny policy
Wall St relieved as Frank retires – Pg. 6 ‐ He would have faced a tougher re‐election next November as changes to the Congressional map this year have made his Massachusetts district less Democrat‐friendly
QE3 and house prices – Pg. 16 ‐ …there is a good chance of an extension of the Federal Reserve’s $2,300bn quantitative easing programme if the US economy continues to ache and bicker ‐ Most primary dealers of US securities think that up to $500bn of mortgage‐backed securities could be bought by the Fed next quarter,…. ‐ ….two‐thirds of the US’s 75m homeowners with a mortgage ‐ Existing home sales have been stuck at an annualized 5m rate – a third off their peak – for four long years
US banks review seizures of military homes – Pg. 20 ‐ Ten leading US lenders may have unlawfully foreclosed on the homes of nearly 5,000 active‐ duty members of the US military in recent years,… ‐ Under the Servicemembers Civil Relief Act of 2003, mortgage servicers have to follow special procedures when foreclosing on homes belonging to active‐duty members of the armed forces and their families ‐ …there are restrictions on so‐called default judgments, in which homes are seized after the borrower fails to appear in court
Moody’s warns on eurozone debt – Pg. 25 ‐ The eurozone crisis is threatening to engulf all the region’s governments as their ability to raise capital in the markets is increasing in doubt, …. ‐ The agency fears that policymakers will not be able to move swiftly enough to stem the deepening crisis ahead of a series of key bond auctions that will test investor sentiment and put the ECB under greater pressure to intervene ‐ Moody’s said the probability of sovereign defaults is “no longer negligible” and a series of defaults would significantly increase the likelihood of countries leaving the eurozone
28 November 2011
European banks feel funding crunch – Pg. 1 ‐ The funding hole for European banks is deepening, following a sharp fall in bond issuance this year as market turmoil leads to a region‐wide credit crunch ‐ European banks have sold $413bn worth of bonds this year, equivalent to just two‐thirds of the $654bn that is due to be returned to investors in 2011 as the debts mature,… ‐ Investros say they have been deterred from buying bank bonds due to uncertainty over the health of some banks, the fate of the eurozone and the impact of new regulation ‐ The Basel III reforms will impose tough liquidity and capital constraints on banks’ private equity interests, such as a requirement to apply a costly 150% risk weighting to loans granted for buy‐out deals ‐ Banks face an even greater redemption hump next year, when $720bn worth of debt is due to mature
China fund targets projects in the west – Pg. 5 ‐ …plans to invest in the dilapidated infrastructure of developed countries, starting with the UK, …. ‐ The $410bn Chinese fund “is keen to team up with fund managers or participate through a public‐private partnership in the UK infrastructure sector as an equity investor”… ‐ …calling for a diversification of the country’s $3,200bn FX reserves into real overseas assets, including infrastructure ‐ …vast bulk is invested in highly rated sovereign debt, particularly US Treasury bonds
Black Friday sales hit record – Pg. 13 ‐ Retail sales on Black Friday rose by their biggest margin since 2007 to hit a new record, while online sales grew even faster,… ‐ Online sales expanded by 24.3% from last year, ….
Fitch supports calls for reform of sovereign bond insurance market – Pg. 13 ‐ Calls to reform the market for insuring against the default of sovereign debt have been backed by a leading credit rating agency following the voluntary deal for exchanging Greek bonds proposed last month ‐ The use of credit default swaps on debt‐laden eurozone countries has expanded greatly in recent years, with holders of government bonds buying CDS in order to protect their portfolio from a future debt default ‐ When a country or company defaults, investors who have paid a premium for credit protection are compensated for their losses on bonds by another party who sold the CDS and received the initial premium
26 November 2011
Two hours that sank Strauss‐Kahn – Pg. 1 ‐ Mr Strauss‐Kahn has never denied that there was a sexual encounter but has always maintained it was consensual ‐ ….Mr Strauss‐Kahn may have been set up
Belgium’s debt downgraded – Pg. 3 ‐ Belgium became the latest country to see its debt downgraded as a result of the eurozone crisis, in a further sign that debt market turmoil is no longer confined to the so‐called “peripheral” countries of the currency bloc ‐ Standard & Poor’s on Friday evening lowered their long‐term rating to AA from AA+, maintaining a negative outlook ‐ The fragility of the financial sector was another factor cited by S&P
Economy and demography hold key to result – Pg. 6 ‐ The US election will be a contest between demographics and economics, … ‐ Hispanics have been by far the fastest‐growing community in the US in the past decade ‐ In the short term, however, the gloomy business climate and high unemployment have put paid to such theories, and Mr Obama faces a huge challenge to be re‐elected if the economy fails to improve rapidly
One afternoon in Manhattan – Pg. 7 ‐ (Prof Note: Read in entirety. You can spend a lifetime building a career and reputation and loose it in an instance.)
Inside McKinsey – Pg. Special Sector (life and arts) ‐ (Prof Note: Read in entirety)
25 November 2011
Eurozone leaders in push for fiscal crackdown amid debt fight – Pg. 1 ‐ The leaders of Germany, France and Italy, the eurozone’s three biggest powers, made tougher fiscal governance a top priority in their battle to stem the sovereign debt crisis but offered no immediate concessions to calls for intervention by the ECB ‐ The euro fell from $1.338 against the dollar at the start of the leaders’ press conference to a low of $1.332, while stock markets across Europe gave up earlier gains ‐ The three leaders steered around calls, strongly resisted by Germany, for the ECB to intervene decisively on international bond markets to relieve the pressure building on countries such as Italy and France and even beginning to touch Germany,…
Saudis invest $6bn to train professional elite – Pg. 3 ‐ Saudi Arabia has spent $6bn this year on foreign study scholarships for almost 250,000 students and family members,… ‐ …help transform Saudi society by giving needed boost to its cadres of engineers, lawyers, doctors and information technology specialists ‐ The minister said the spending – averaging about $25,000 a person this year – covered not just tuition fees but also other items such as living allowances and medical insurance ‐ The scholarship programme was aimed at correcting a past failure to focus “on the right skills and the right education” ‐ A programme to build 500,000 houses is expected to begin next year ‐ The break‐even oil price the kingdom requires to balance its budget will jump from $68 a barrel last year to $88 this year and $110 in 2015
Rescue fund’s impact in doubt – Pg. 4 ‐ …the rise in borrowing costs for Italy since the summit is likely to force the European Financial Stability Facility to sweeten the deal offered to investors, which will limit the number of bonds the insurance would cover ‐ The officials are also pessimistic about the prospects of a second source of leverage, a co‐ investment vehicle designed to entice investors from emerging markets
Battle resumes over payroll tax cuts – Pg. 6 ‐ …future of cuts to payroll taxes that were introduced this year and expire on December 31 ‐ …failure to extend the payroll tax cuts, which bolstered the pay cheques of American Workers by $110bn this year, as well as other expiring measures such as emergency unemployment benefits, could knock one percentage point off US economic growth in the first two quarters of 2012 ‐ The payroll tax cut put in place in 2011 reduced the contribution of workers to their social security pension scheme from 6.2% to 4.2%. Mr Obama wants not only to extend that into 2012 but also expand it to 3.1%
Occupy protests spur wave of student anger – Pg. 6 ‐ ….regroups to tap anger over rising student debt, soaring fees and declining investment in education ‐ Organizers are calling a general strike for Monday aimed at shutting four campuses (Prof Note: I WILL hold classes! I will not be deterred!) ‐ Other states facing steep shortfalls have also slashed university funding, shifting more of the burden of paying for education on to students, who in turn have had to take out larger loans (Prof Note: Think before you borrow! What is the ROI before borrowing!!!) ‐ The middle‐class background of many protesters may prove beneficial to the Occupy movement (Prof Note to students: Rise up and demand quality education from your professors! If you are taking a shit class from a shit professor….RISE UP!!! If you are not being offered the electives you require….RISE UP!!!!!!!!)
Regulator to scrutinize home loan servicers – Pg. 16 ‐ Many large US banks are scaling back their mortgage‐collection operations, once lucrative businesses that now face heightened scrutiny as the new consumer finance regulator vows to step up its scrutiny of the industry ‐ The Consumer Financial Protection Bureau, created last year as part of the Dodd‐Frank overhaul of US financial regulation, will make the supervision of mortgage servicers, which collect payments and handle foreclosures, one of its top priorities,… ‐ …lead to higher compliance costs…. ‐ …three of the four biggest home loan servicers by volume had reduced the number of contracts they handle,…
24 November 2011
Shunned Bund sale fuels debt crisis fears – Pg. 1 ‐ The worst‐received German bond sale since the euro’s launch fuelled fears that the continent’s debt crisis was now affecting Berlin, the region’s biggest economy and key to the survival of the single currency ‐ The bond auction only managed to raise two‐thirds of the amount targeted ‐ …european debt was sold off across the board ‐ …yields on short‐term German debt went into negative territory, meaning that investors effectively are paying to hold the bills because they see Berlin as a haven
Wage cuts spark 10,000 to strike in fresh wave of unrest for China – Pg. 1 ‐ China is facing its worst wave of labour unrest since the series of wildcat strikes at Japanese‐ owned car plants last year, as declining export orders lead factors to reduce worker pay ‐ The strikes come amid mounting concerns about the global economy, which is suffering from the European sovereign debt crisis and a weak recovery in the US ‐ Factories are cutting the overtime that workers depend on to supplement their modest base salaries,…
US figures show little growth – Pg. 4 ‐ There was no sign of an acceleration in the US economy …
Europe’s banks strike funding deals – Pg. 24 ‐ UK banks are providing strained European lenders shut out of global funding markets with large amounts of financing through privately negotiated asset‐swapping deals ‐ The deals struck include “term repos”, where banks offer longer‐term financing in exchange for illiquid assets. The deals are said to involve relatively strong banks based in Britain providing funds to lenders in countries hit hardest by the eurozone crisis, including Greece, Cyprus, Italy, Ireland, Spain and Portugal ‐ Structured repos also include so‐called “liquidity swaps”, controversial transaction where banks agree to swap their illiquid assets for more liquid ones such as government bonds. These assets can then be used to meet certain regulatory requirements, or as security to obtain financing from central banks
Oil prices slide despite US stocks hitting two‐year lows – Pg. 24 ‐ Oil prices tumbled on concerns about Chinese growth and eurozone debt worries, despite data showing that US crude oil inventories have fallen to their lowest in two years ‐ …crude oil stocks….330.8m barrels ‐ Another factor affecting inventories is a clause of the US tax system – known as “last‐in‐first –out” or Lifo – which encourages refiners to destock when prices are higher at the end of the year than in previous months
Renminbi threat to dollar shows signs of stalling – Pg. 25 ‐ Trade is also the main source of renminbi liquidity to the international markets, so the slowdown could affect the price of Chinese currency assets held offshore such as dim sum bonds ‐ Bankers say one of the main types of arbitrage works as follows: a Chinese company places renminbi on deposit with a mainland bank, earning an interest rate of about 3.5%. The company then obtains a renminbi‐denominated letter of credit from the bank, ostensibly to pay for a shipment of goods from its own subsidiary in Hong Kong ‐ In turn, Hong Kong subsidiary takes the letter of credit to a local bank and uses it as collateral to obtain US dollar loan at a lower rate than those available on the mainland. In many cases, the company would also use currency derivatives to eliminate the foreign exchange risk, completing the arbitrage (Prof Note: Derivatives Class – Due for next class – Draw this transaction and submit in memorandum format! Demonstrate that this is a true arbitrage)
23 November 2011
Obama demands extension to tax cuts – Pg. 1 ‐ Barack Obama sought to reignite the debate over an economic stimulus package on Tuesday, demanding that a bitterly divided Congress pass an extension of payroll tax cuts before the end of the year ‐ Mr Obama’s drive to extend payroll tax cuts came as the US Federal Reserve indicated it was unlikely to ease monetary policy and the BEA revised its estimate of third‐quarter growth down from 2.5% to 2% ‐ The payroll tax cuts, which expire at the end of the year, are part of a $447bn jobs package that Mr Obama has been trying to push through Congress to give both the economy and his battered political standing a lift ‐ Sentiment was also hit by the downward revision to US growth, while instability in the eurozone is keeping investors on the sidelines ahead of the Thanksgiving holiday
Bank crisis threatens to spread eastward – Pg. 4 ‐ Austria’s move this week to impose tight curbs on its banks’ lending in central and eastern Europe has thrown into sharp relief the potential impact of the eurozone’s sovereign debt crisis ‐ To protect its own triple A credit rating, Vienna….to increase capital reserves and limit cross‐ border loans. ‐ These are the hardest times for banking in central and eastern Europe since the immediate aftermath of the fall of communism ‐ It will be difficult to replace the western European lenders that dominate the sector in most countries except Russia ‐ …cross‐border credit is set to fall by perhaps 20%, …. ‐ The biggest economies – led by Russia and Poland – might respond by accelerating the development of domestic banks; others will seek new foreign investors, possibly from Russia ‐ The EBRD forecasts the region’s GDP will grow this year by 4.4% and by 3.2% in 2012. This is far less than it predicted even in the summer but it is well ahead of a stagnating eurozone
Business laments the supercommittee’s failure – Pg. 5 ‐ Most displeased with the collapse of the deficit committee are a wide range of groups, from defense companies to technology companies and providers of healthcare coverage for the elderly, that will be hit by automatic spending cuts set to be introduced in 2013 as a penalty for the committee’s failure ‐ …2% cut to Medicare ‐ (Prof Note: Who lost their job(s) for this failure? Who was fired???)
Defence cuts threat prompts security fears – Pg. 5 ‐ ….defence department faces automatic cuts of $600bn over the next decade starting from 2013, on top of the $450bn that the Pentagon is already looking to save ‐ …extra cuts would lead to the smallest ground forced since 1940, the smallest number of ships in the navy since the world war and the smallest air force in history ‐ The defence budget had increased for an unprecedented 13 years in a row, ….was now 50% higher in real terms than it was in 2001
US bank earnings boosted by lower loan loss provisions – Pg. 17 ‐ US banks’ earnings jumped 49% last quarter to $35.3bn, their highest total since mid‐2007, as they were boosted by smaller provisions for loan losses,…. ‐ ….7400 banks across the US came from lenders setting aside 47% less money to cover losses ‐ Banks’ cost of funds including deposits dropped 20bps from last year to 0.7%, the lowest quarterly figure recorded in data going back to 1984 (Prof Note: This means your rate – 0.7% = the bank spread!) ‐ Lending rose an anaemic 0.3% compared with the second quarter, …
ECB lending to banks hits high – Pg. 22 ‐ Eurozone banks raised their borrowing from ECB sharply on Tuesday, with lending hitting a new high for the year amid signs banks are being shut out of private markets ‐ Lending conditions in the interbank markets have deteriorated in the past two weeks, despite the ECB reinstating some of its most potent crisis‐fighting tools, including one‐year liquidity injections
22 November 2011
Setback fears for fresh US stimulus – Pg. 1 ‐ The US congressional committee responsible for striking a budget deal had failed to reach agreement just ahead of yesterday’s deadline, diminishing the prospects for a fresh stimulus package to help revive the world’s largest economy ‐ US equities fell sharply and Treasury bond prices rose as the likely failure of the budget deal added more uncertainty to persistent worries in the eurozone ‐ Congress has also not yet passed a complete budget for the current fiscal year covering spending until September 2012 – a task which could provoke a new wave of brinkmanship between the two parties
MF Global shortfall hits $1.2bn – Pg. 1 ‐ The estimated hole in MF Global’s customer accounts has doubled in size to $1.2bn, …. ‐ …equivalent to almost a quarter of the $5.45bn in client funds that the firm was required to hold separately from its own funds ‐ The shortfall has blemished futures markets and left thousands of traders with insufficient margin deposits. Failure to separate customer and house funds is a violation under US law ‐ MF Global….appears in its final days to have acted desperately and dug into customer funds to meet margin calls in the bid to save the company for a sale, (Prof Note: I call this “doubling down”) ‐ MF Global’s records were sloppy and incomplete,… ‐ The search for the missing money has revived debate over whether US futures traders should have protections similar to those enjoyed by stock investors when a brokerage fails. The Securities Investor Protection Corporation, created in 1970, has a reserve that covers securities customers for up to $500,000
Austrian banks ordered to limit central and east Europe exposure – Pg. 1 ‐ …further sign of the potential knock‐on effects of the eurozone crisis on economies outside the bloc
Panel fails to make hard choices – Pg. 4 ‐ The committee was established in August to find a way round the impassed over lifting US borrowing limits, and was charged with finding a minimum of $1,200bn in budget savings over 10 years (Prof Note: This failure is yet another embarrassment to the international community for the U.S.) ‐ Any failure by the committee means the fiscal futures will remain uncertain at least until after the 2012 presidential election, which could increase market nervousness about vulnerability to a debt crisis ‐ In the short term it raises the threat of another government shutdown this year, ….
Dip in Chinese property deals sparks concern for banks – Pg. 4 ‐ The number of property transactiosn in China’s largest cities has fallen to dangerously low levels, … ‐ …ordered domestic banks to weight the impact of a 30% fall in housing transactions in “stress tests” aimed at determining the health of the Chinese financial system ‐ …in October property transactions fell 39% year‐on‐year in China’s 15 biggest cities,… ‐ Nationwide, transactions dropped 11.6%, accelerating from a 7% fall in September ‐ The fall‐off in transactions has affected developers’ cash flows and, in some cases, their ability to repay bank loans. Rising defaults after a lending surge in 2009 and 2010, much of which ended up in the property sector, were cited by the IMF…. ‐ The fear is that the impact of a bursting of the Chinese property bubble could yield a crisis just as dramatic as the one unfolding in Europe
Bankers in eurozone warning – Pg. 15 ‐ New curbs for US banks that restrict their ability to trade with their own capital will hit liquidity and demand for eurozone government bond markets at a time when both are in short supply, bankers have warned as they prepare to lobby regulators to water down the rules ‐ …eruozone sovereign bonds have raised particular concerns because US banks have historically played an important role in a market that has seen flows dry up because of worries about spiraling debt and the health of economies such as Italy ‐ Bankers and traders say that prop trading – trading on banks’ own accounts – is a big part of the US presence in the $13,000bn eurozone debt market, but exact figures are hard to come by
21 November 2011
Chain fear of lasting global recession – Pg. 1 ‐ …predicted that the global economy will slip into long‐term recession and warned that Chain will need to deepen its financial reforms to cope with the fallout ‐ …could set the stage for domestic monetary loosening as Beijing frets about a deflating property bubble at home and chronic economic woes in China’s two largest export markets – Europe and the US ‐ China’s economy expanded 9.1% from a year earlier in the third quarter, slower than 9.5% in the second quarter but an enviable growth rate at a time when many countries are flirting with recession ‐ Because virtually all China’s banks are owned by the state and their top executives are all senior Communist party officials, Beijing can adjust monetary policy without having to adjust interest rates or make any public policy shift at all ‐ Another reason for Beijing to be cautious about stimulating growth is the fact that inflation remains high
Deficit talks on verge of failure – Pg. 1 ‐ After more than two months of negotiations, the so‐called “supercommittee” appeared unlikely to reach its minimum target of agreeing on at least $1,200bn in savings for the US government over the next decade, amid fierce disagreements on taxes and spending between Democrats and Republicans ‐ The lawmakers need to strike a deal by Monday night for it to be presented for a Vote on Wednesday. If not agreement is reached, it would set in motion $1,200bn in automatic across‐the‐board spending cuts to defence and domestic programmes, beginning 2012 ‐ Both Moody’s and Fitch are reviewing their stance on the US’s triple A credit rating should there be any dilution of the automatic triggers
Support grows for insider trading ban – Pg. 6 ‐ The US Senate will this week consider a proposal to ban insider trading by lawmakers, spurred into action by increasing public outrage that representatives in Congress are allegedly benefitting from their positions and becoming richer at a time of economic crisis ‐ The sudden surge in support for tougher restrictions on lawmakers’ stock trading comes after a current affairs show reported last week that some lawmakers had profited from actions that would send most citizens to jail ‐ …the latest CBS News‐New York Times survey gave lawmakers an approval rating of only 9%
French bond sell‐off shows reach of crisis – Pg. 21 ‐ France’s corporate bond market has been hit by a sharp sell‐off, causing yields to spike and providing proof that the eurozone’s debt crisis is now permeating even the region’s supposedly safer corners ‐ French corporate bond yields are still relatively low and many are still returning less than at issuance
19 November 2011
ECB hits back at intervention calls – Pg. 1 ‐ The ECB hit back at eurozone governments that have called for the bank to intervene more decisively to tackle the sovereign debt crisis, warning of severe economic and social costs if its credibility was put at risk ‐ ECB guidelines have capped the amounts its dealers can spend on eurozone government bonds over a two‐week period at about $27bn, although it has often spent less than that
US deficit talks head for gridlock over tax revenues – Pg. 2 ‐ Talks on cutting the US deficit hovered close to failure on Friday but low expectations meant that there was little sign of a market backlash ‐ A committee of six Democrats and six Republicans from both houses of Congress must agree on $1,200bn of deficit reduction by the middle of next week or trigger an automatic ‘sequester’ that will make cuts of that size to defence and other spending from 2013 ‐ …markets seemed resigned to the risk of no deal, a deal much smaller than $1,200bn, or a deal stuffed with budgetary sleight‐of‐hand
Locked into defiance – Pg. 5 ‐ This week, city authorities in New York, London and Oakland in California took decisive action to clear the Occupy camps that sprung up around the world after the occupation of Zuccotti Park near Wall Street two months ago ‐ The Zuccotti Park raid, carried out at 1am on Tuesday without warning, drew protests that the mayor was being heavy‐handed and ignoring civil liberties ‐ Civil liberties lawyers say these are pretexts and protesters have a right to camp ‐ …US law appears to be on the side of the majors. In a 1984 case involving a campaign group that wanted to camp in Lafayette Park near the White House in a protest at conditions, the Supreme Court, sided with the park authorities. The justices ruled that camping did not count as “expressive conduct” – making a point symbolically – which is covered by the first amendment right to free speech and assembly.
Investors move to price in euro split – Pg. 12 ‐ The eurozone infection this week moved decisively from the periphery of the continent to its core ‐ Bond markets may be putting as high a probability as 25% on a split ‐ The dramatic ratcheting up in the seriousness of the crisis could be seen in the eurozone’s triple A countries. France and Austria both saw their spreads over 10‐year German Bunds reach records for the euro‐era and in Paris’s case top 200bps, a level Italy was at just four months ago ‐ …even Germany is showing some slight signs of being caught up in the burgeoning contagion ‐ The big danger for some investors and strategists is that eurozone bond markets might be broken beyond repair
18 November 2011
Spanish debt costs soar ahead of election – Pg. 1 ‐ Spain was thrust on to the frontline of the eurozone’s debt crisis on Thursday, as investors forced its borrowing costs sharply higher just three days ahead of a general election that polls predict will topple the ruling Socialist party ‐ In another day of bond market records, the premium demanded by investors for 10‐year Spanish debt over German Bunds – a measure of perceived risk‐ reached 499 bps. France’s premium exceeded 200bp before heavy buying by the ECB eased tensions ‐ This week even triple A countries such as France, the Netherlands, Finland and Austria have seen their bond yields rise
Star fund investor Miller to step down – Pg. 1 ‐ The legendary investor, who until 2005 boasted of beating the S&P500 index for 15 consecutive years, has since joined a roster of former investment gurus humbled by volatile markets ‐ Mr Miller’s Value Trust is ranked last of the 818 funds in its category over the past five years by Lipper, having lost investors 9% of their money each year, on average. Assets in the fund, which hit a peak of $21.5bn in 2007, according to Lipper, have since dwindled to $2.8bn ‐ A third of households who invest in mutual funds own at least one index fund
Asia ‘top priority’ for Obama – Pg. 2 ‐ …east Asia, as the US seeks to play a larger role in shaping the region’s future ‐ …US was “here to stay” as a Pacific power despite China’s dramatic economic and military advances ‐ …winding down of the US wars in Iraq and Afghanistan and increased attention on south‐ east Asia and the South China sea ‐ …Pentagon is planning at least $450bn of spending cuts over the next decade, ….
Protesters disrupt Wall Street but fail to silence NYSE opening bell – Pg. 3 ‐ Occupy Wall Street protesters clashed with police and blocked streets near the NYSE but failed to shut it down on Thursday in a National “Day of Action” to mark the two months since the movement began (Prof Note: I hope everyone is as concerned over this as I am! Apathetic America is waking up in a violent way!)
Emerging markets lead biggest central bank gold rush in 40 years – Pg. 13 ‐ Central banks made their largest purchases of gold in four decades in the third quarter after a sharp drop in prices in September spurred buying to diversity reserves ‐ …the buying, led by emerging market central banks intent on diversifying their FX reserves, …. ‐ Countries that have disclosed purchases include Thailand, Russia and Bolivia ‐ Central banks are one of the most important drivers of the gold market
17 November 2011
Technocrat cabinet takes helm in Rome – Pg. 1 ‐ Italy’s caretaker government of unelected technocrats led by Mario Monti took charge of the eurozone’s third‐biggest economy on Wednesday, to the applause of Europe’s leaders and skepticism of investors ‐ Yields on Italy’s benchmark 10‐year bonds remained just above the critical 7% level, despite heavy buying the ECB. Other eurozone bond markets saw a sell‐off but was milder than Tuesday’s rout ‐ In Greece, Lucas Papademos, former central bank governor, won an overwhelming vote of confidence in his interim government, boosting expectations that Greece’s bail‐out can get back on track
Tribunal hears of UBS effort to root out rogues – Pg. 1 ‐ UBS initiated a root‐and‐branch review of compliance practices in 2007 following unauthorized trading on its UK wealth management division’s Africa desk, a UK tribunal has heard
Hopes rest on Italy’s team of technocrats – Pg. 2 ‐ They might appear like aliens from another planet descending on Rome, but the 17 sombre and unelected technocrats in Italy’s new administration are riding on a wave of popular support – while carrying the hopes of panicking investors and foreign capitals ‐ Technocrat governments are not a new experience for Italy. The last was led by Lamberto Dini, brought in from the Bank of Italy after the collapse of Silvio Berlusconi’s first government in 1994. Mr Dini’s administration lasted 15 months and is credited with introducing pension reforms ‐ With the youngest member aged 56 and the oldest 75, the new cabinet packs penty of experience, though mainly in the world of academia and civil service. It also has a strongly Catholic flavor, …
War of independents stirs US presidential race – Pg. 4 ‐ The body has signed on well‐known Republicans and Democrats and former political and military figures, who say they are disillusioned with the crushing conformity of the two dominant parties at a time of national crisis ‐ With its HQ in Washington, the body’s website is run from NY and the ballot issued from San Diego. Its 143 employees have a single aim: finding a credible candidate ‐ Third‐party candidates can be decisive. Business Ross Perot and activist Ralph Nader in 1992 and 2000 respectively cost George Bush Nrn and Al Gore the elections in the eys of many members of their parties ‐ So far, Americans Elect has qualified in eight states and aims to have all 50 by next year, in time for an online nominating process to choose a candidate by mid‐2012
Renminbi’s threat to dominant dollar grows – Pg. 6 ‐ The Chinese renminbi could pose a threat to the international dominance of the US dollar within a decade, …. ‐ …China’s efforts to spread international use of its currency were succeeding in broadening its reach ‐ …China was continuing to intervene heavily in its domestic economy through a combination of subsidies and protections to state enterprises, rules on forced transfer of technology from foreign government procurement to Chinese companies – the so‐called indigeneous innovation policy ‐ Considerable controls remain on cross‐border capital flows, together with continued massive official intervention in foreign exchange markets to hold down the renminbi ‐ ….the institute said the renminbi was 24% undervalued against the dollar based on estimates of fundamental equilibrium exchange rates – currency values that would return economies roughly to current account balance if they were producing around their normal capacity ‐ The currency issue has risen back up the US political agenda. In October, the Senate passed a bill that would allow the US to impose retaliatory tariffs on Chinese imports in accordance with estimates of currency misalignment. But Republican leaders opposed to the move have so far resisted bringing a similar bill to a vote in the House of Representatives
Disillusioned with DC – pg. 7 ‐ The escalating economic crisis in Europe has overshadowed the fact that US political and budget reforms remain ensnared in partisan tangles ‐ The country’s political woes reflect more than frustration with the prolonged jobless recovery under Mr Obama, as the unemployment rate remains stubbornly above 9% ‐ Mr Obama inherited the financial crisis and the bank bail‐outs; and, his opponents say, made the situation worse with a $787bn stimulus that failed to return the economy to solid growth ‐ Americans are starting to reduce long‐term economic expectations in ways policymakers are struggling to get a grip on
Unsafe as houses – Pg. 12 ‐ The FHA touts itself as the only US government agency that “costs taxpayers nothing” ‐ That may soon change and was hardly true in the first place ‐ Founded in the Depression, the FHA’s role in fostering home ownership expanded hugely after the crisis hobbled its private but government‐sponsored brethren, Fannie Mae and Freddie Mac. It share of new mortgages insured expanded sixfold to more than 30% of the market. ‐ …an audit released this week shows that it faces a 50% chance of exhausting its current reserves. If home prices fall sharply, auditors reckon it could require as much as $43bn in support
MF Global collapse sparks funds rethink – Pg. 16 ‐ Washington regulators are to resuscitate a proposal to limit how futures brokers use customer funds following the MF Global collapse ‐ The broker’s bankruptcy filing last month left behind a $600m shortfall in safeguarded customer accounts that has hampered transfers of trading positions and tarnished the US futures market ‐ US law requires futures brokerages to hold customer funds apart from house funds. Investors are probing whether MF Global illegally commingled funds in the days before its bankruptcy on October 31 ‐ He favoured restricting the use of customer money to money‐market funds, US Treasuries and sovereign debt, he said. Investing excess customer collateral is a big source of revenue for futures brokers ‐ …traders that liquidated positions before the bankruptcy have had their accounts frozen
Equities fall amid fears over US banks – Pg. 24 ‐ Equities fell sharply at the end of the session after a report warned of growing risks to US banks following the euro’s third successive daily retreat, as the eurozone sovereign debt crisis continued to dominate trading ‐ US stocks then fell sharply after Fitch Ratings warned that “unless the eurozone debt crisis is resolved in a timely and orderly manner, the broad outlook for US banks will darken.
16 November 2011
Eurozone bonds hit by mass sell‐off – Pg. 1 ‐ Eurozone bond markets suffered a mass sell‐off on Tuesday as investors fears speard beyond Italy and Spain to triple A rated France, Australia, Finland and the Netherlands ‐ The premium that France and Austria pay over Germany to borrow rose to euro‐era records of 192 bps and 184bps respectively, levels investors say are no longer consistent with top credit ratings ‐ The rise in bond yields affected all main eurozone countries apart from Germany, and suggests that the two‐year‐old suggests that the two‐year‐old sovereign debt saga could be entering a dangerous phase
Sarkozy to tackle labour costs – Pg. 2 ‐ President Nicolas Sarkozy announced a review of the funding of France’s social welfare system on Tuesday, saying the heavy labour costs it imposed hurt the economy and the country’s ability to complete internationally ‐ To date Mr Sarkozy has ruled out an increase in the general level of VAT, which is regarded as politically toxic in France
Modest growth fails to dim recession fears – Pg. 3 ‐ The eurozone economy managed only modest growth in the third quarter of this year, with a rebound in Germany and France failing to dispel fears of a looming recession across the 17‐country region ‐ Eurozone GDP expanded by 0.2% compared with the previous three months, the same pace as in the second quarter,… ‐ Germany reported third‐quarter growth of 0.5%, and revised second‐quarter figures to show an expansion of 0.2% ‐ compared with 0.2% originally reported. France saw 0.4% growth, although revised second‐quarter data showed a 0.1% contraction, compared with the previously reported flat growth ‐ That put Germany and France on a par with the US economy, which expanded by 0.6% in the third quarter, and the UK at 0.5% growth
Homes agency says fund is sound amid claim it will need $50bn bail‐out – Pg. 4 ‐ The US Federal Housing Administration said that its main fund was “sound” despite a slide in its capital ratio and claims by critics that it would eventually need a $50bn bail‐out ‐ …the FHA’s economic net worth is $2.6bn, held against the $1,078bn portfolio of mortgages that it insures. That gives it a capital ratio of 0.24% compared with 0.5% last year and a minimum mandated by Congress of 2% ‐ The report highlights how the FHA – a low‐profile arm of the government that insures mortgages mainly for low income homeowners – has stretched to expand itself in the wake of the recession the financial crisis. As almost the only lender willing to take on lower quality mortgage business it has insured more than 30% of mortgages used for new homes purchases since 2009
US retail – Pg. 14 ‐ US retail sales for October, released on Tuesday, grew 0.5% sequentially – impressive coming on top of a strong September number, and ahead of expectations.
Gold hit as Paulson cuts ETF holding – Pg. 22 ‐ Gold prices dropped as much as 1.1% on Tuesday on news that John Paulson, the world’s most high‐profile investors in gold, ‐ Gold on the spot market initially dropped to a low of $1,760.04 a troy ounce, before recovering to $1,779.50 by late afternoon in London
15 November 2011
Supreme Court healthcare verdict to clash with Obama campaign – Pg. 1 ‐ The supreme court will rule on the legality of President Barack Obama’s healthcare overhaul in the middle of the presidential election campaign next year ‐ The case will revolve around the question of whether it is constitutional for the government to force almost all Americans to buy health insurance, a decision called “enormously consequential” by legal experts ‐ Faced with a rising number of state challenges to the healthcare law – some of which it lost – the Obama administration asked the Supreme Court to consider the constitutionality of the Affordable Care Act. Separately, 26 states led by Florida, asked to have the law overturned ‐ At the centre of the decision is the question of whether Congress exceeded its authority by requiring Americans to buy health insurance by 2014, known as the “individual mandate”, or pay a penalty ‐ Opponents say that the federal government has exceeded its power under the commerce clause of the constitution – which allows it to regulate interstate commerce – by compelling people to buy health insurance
Portugal faces bloc’s worst recession – Pg. 2 ‐ Portugal’s economy contracted from July to September for the fourth consecutive quarter, highlighting a deepening recession that the EU forecasts will be the worst in the 27‐nation bloc next year ‐ According to EU forecasts, Portugal and Greece will be among countries suffering recessions in 2011 and 2012, with Portugal contracting 1.9% this year and 3% in 2012, while Greece contracts 5.5% this year and 2.8% in 2012 ‐ EU forecasts suggest the jobless rate will reach a record 13.6% next year
Flat growth raises fears in Paris over rating – Pg. 3 ‐ …reducing the budget deficit from 5.7% this year to 3% in 2013, …. ‐ At stake is France’s triple A sovereign debt rating, which enables it to manage the cost of its large public debt – due to peak above 87% of GDP next year ‐ …outlook for 2012 is gloomy ‐ The government has twice adjusted its forecast down to 1% since early August, when it was still predicting 2.25% growth for next year
Battle over budget set to colour US election – Pg. 5 ‐ The 12‐member “super‐committee” split evenly between Democrats and Republicans is running out of time to reach agreement by the November 23 deadline set by Congress in August to cut $1,200bn from the deficit in 10 years
US basketball season set to be scrapped – Pg. 7 ‐ The NBA is likely to cancel the entire season as its players moved to disband their union on Monday, (Prof Note: Wonderful…is anyone thinking of the vendors that make a living from basketball? This is about the “little” guy too) ‐ A cancellation would mark the first lost season of a big US sports league since the National Hockey League scrapped its 2004‐05 season. It would inflict serious damage to the NBA’s popularity, which was soaring after a banner year that finished in June
Beijing in a hole over new homes – Pg. 8 ‐ For the global economy, the distinction between digging holes and actually building homes in China has rarely been so important, as the affordable housing programme is an important swing factor in commodities markets ‐ Chinese housing starts closely matched figures for domestic steel and cement consumption before 2010, but over the past year a wide gap has opened, with reported housing starts exceeding steel and cement consumption ‐ …real estate investment accounting for 10% of China’s GDP, …. ‐ …China is still standing by the overall target laid out in its five‐year plan for 2011‐15, during which time it has vowed to complete 36m units of affordable housing
14 November 2011
Obama pushes Pacific trade deal – Pg. 1 ‐ …US wants to sign what he described as a next‐generation trade agreement with nine Asia‐ Pacific nations by the end of 2012 ‐ The TPP is meant to deal with non‐tariff barrier issues, including government procurement, the conduct of state‐owned companies, regulatory convergence and protection of intellectual property ‐ …current members of the TPP – Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, the US and Vietnam – gave a broad outline rather than specific details ‐ Some officials and business leaders see the TPP, along with Russia’s probably accession to the WTO next month, as welcome signs of momentum in the struggle to negotiate new trade deals
Private equity groups increase risk to boost stakes in hot funds – Pg. 1 ‐ Investors in the secondary leveraged buy‐out fund market are using further leverage to finance purchases, adding another layer of risk and stirring up memories of the debt‐fuelled private equity boom ahead of the financial crisis ‐ While private equity groups in Europe and the US are finding it harder to raise capital, the market for stakes in their pre‐crisis funds has become so hot that some investors have taken on loans to be able to pay higher prices for such assets
Immigration key to Obama’s poll hopes – Pg. 5 ‐ The Department of Homeland Security will within weeks start separating high priority cases involving criminals it wants to deport from low priority cases it will drop, after a directive in June stated that its agencies will exercise discretion in deportation decisions ‐ ….estimated 11m undocumented immigrants in the US
A market less efficient – Pg. 9 ‐ Signs of a crisis are emerging amid claims the biggest stock markets are no longer helping companies raise money efficiently ‐ …abrupt slowdown in companies choosing to list publicly on stock markets in Europe and the US… ‐ In Europe and the US, the number of fresh companies listing, or floating new shares on stock exchanges in IPOs, has dropped sharply in the past five years – in London, by more than half ‐ For‐profit exchanges….have shifted their focus to merging with rivals, as well as building lucrative new revenue streams such as derivatives and “high‐frequency” trading conducted at the blink of an eye using sophisticated algorithms ‐ Flotations designed to raise less than $50m are all but extinct ‐ Stock markets still fulfil two vital functions,…First, on the so‐called “primary market”, they match investors with entrepreneurs to finance successive waves of innovation. Then, by providing a forum for trading shares, known as the secondary market, they let investors “diversity risk and uncouple time horizons from those of the companies they invest in”, …. ‐ Problems are also emerging in the secondary markets, as competition between exchanges and rivals has spread trading across multiple venues, to the confusion of the investors and issuers ‐ In the US, the IPO task force, made up of investors, venture capitalists, entrepreneurs and investment bankers, found it now takes 9.4 years from start‐up for the average company to go public, compared with 4.8 years in the early 1980s
Debt piled on debt as investors reshuffle their assets – Pg. 18 ‐ Four years into the financial crisis, an investment‐strategy where debt is being piled on top of debt might seem a risky approach similar to the leveraged world of the pre‐2007 bubble years ‐ On the supply side, banks in particular are adjusting to regulatory pressure that, in effect, bars them from investing in risky assets such as private equity and hedge funds
12 November 2011
Vote paves way for Berlusconi exit – Pg. 1 ‐ Silvio Berlusconi is expected to resign as Italy’s prime minister this weekend, after the lower house of parliament gives final approval to a package of economic reforms agreed with the European Union. ‐ Underlining the depth of international concern over the wider threat posed by the collapse of market confidence in Italy, Mr Napolitano has fielded calls from his counterparts in Washington, Paris and Berlin ‐ In a sign of US anxiety about the European crisis, Federal Reserve vice‐chair Janet Yellen told a conference that Europe’s financial problems posed “significant downside risks to the US economic outlook” and called for “forceful action to stabilize the situation”
US consumer sentiment rises – Pg. 4 ‐ US consumer sentiment has risen to the highest level since June, spurring hopes of a spending‐fuelled boost for the economy ‐ The survey showed expectations for unemployment fell, with 27% of respondents saying they expected the jobless rate to rise – against 34% in October ‐ Personal expenditures rebounded 2.4% in the third quarter, the strongest pace this year, helping the overall economy accelerate to a 2.5% growth rate
Italy imposes ban on naked short selling – Pg. 8 ‐ Italy has imposed a ban on naked short selling of all Italian securities capping a week of extreme market volatility as the country moved into the spotlight of the eurozone debt crisis ‐ Consob, the stock market regulator, said the ban naked short selling would take effect on December 1 and be in force for the foreseeable future ‐ It will apply to both foreign and Italian investors, irrespective of where Italian‐regulated shares are traded, including those listed on the Chi‐X Europe and BATS Europe trading platforms in London. ‐ It also extended a ban on short selling of Italian financial and insurance shares until January 15 2012
Bond vigilantes make a comeback – Pg. 12 ‐ The term Is often used to describe investors’ tendency to dump bonds when governments run big deficits. The resulting rise in yields was often an effective way to discipline governments, who had to rein in spending to win market confidence ‐ ….bond vigilantes were sighted in the wild again in 2009 after a decade‐long absence from developed markets, after Greece admitted it had lied about its spending ‐ There is another way to be a vigilante. Big bond investors – such as Pimco – and hedge funds regularly bet against governments, hoping to profit if yields go up ‐ ….Japan, the US and UK remain havens, with 10‐year Gilt yields hitting their lowest ever during the week
11 November 2011
Markets undermine eurozone rescue bid – Pg. 1 ‐ This week’s market upheaval in Europe has made it difficult to increase the firepower of the eurozone’s $600bn rescue fund to the 1,000bn (euro) that the bloc’s leaders had hoped for, the fund’s chief executive said yesterday ‐ Investors have fled from bonds issued by highly indebted countries ‐ The European Commission sharply downgraded its forecast for eurozone growth next year from 1.8% to 0.5%. The global ramifications of Europe’s economic woes became clearer with growth in China’s exports slowing in October and a sell‐off in Asian equities
Deficit deal eludes Washington – Pg. 2 ‐ The so‐called “supercommittee” is due to report by November 23 on finding budget savings of at least $1,200bn over 10 years, but must strike a deal before then to ready legislation for a full vote of Congress by the year’s end ‐ The committee has an inbuilt trigger which gives both parties a big incentive to reach a deal, a mechanism that would force $1,200bn in cuts, half of it from defence spending, in the event of failure
TV blunder leaves Perry’s presidential bid in disarray – Pg. 2 ‐ …now holder of the “worst debate gaffe ever” title ‐ …he forgot the name of the third federal agency he wanted to eliminate (Prof Note: This would be like a finance professor forgetting the NPV equation!) ‐ But the slip‐up could toll a death knell for Mr Perry (Prof Note: GOOD!) ‐ (Prof Note: Perry makes Dan Quayle look good! Perry is certainly no ‘Dan Quayle’!)
US sport sex scandal adds to erosion of public trust – Pg. 2 ‐ His [Joe Paterno] reputation was that of a pragon of moral rectitude, an inspiration to the young athletes under his command, most of whom actually graduated with degrees, which cannot be said of many other “sporting U’s” (Prof Note: Perhaps Paterno took a Machiavellian approach to morals: it is more important to appear to be moral than to actually be moral!) ‐ Nobody at the university informed law enforcement of the alleged crimes, nobody reached out to the families of the boys, some not 10 years old (Prof Note: What moral lesson has Paterno taught us all? “When you are in a leadership position and another adult (grad student) brings to your attention they saw another adult having sex with a young boy you should call the police.” What a joke! Let the lawsuits begin!!!) ‐ …college football programmes, which generate so much money (an estimated $70m a year for Penn State’s coffers), have become laws unto themselves, bigger than the institutions whose names they carry on to the pitch every Saturday ‐ Penn State, like the Wall Streeters who ran amok with the nation’s finances, thought it could avoid being held accountable for the alleged criminal behaviour of one of its own – and it got away with it for nine years, just as the bankers have three years after the 2008 financial debacle. ‐ The obvious parallels with the Catholic Church, which concealed sexual predators of the cloth for far longer, hardly need stating. Mayble longer statues of limitations are in order.
A hard puzzle to solve – Pg. 7 ‐ …reintroducing the drachma – which Greece swapped for the euro in 2001 – would enable the country to lower its costs and regain competitiveness ‐ …many European officials had begun to speculate about Greece’s departure well before last week ‐ … ‐ …while there is no built‐in escape hatch from the eurozone, one was added to the broader EU with the Lisbon Treaty, which came into force two years ago. A special article 50 was drawn up that allows for a member state to leave, provided that its departure is approved by a weighted majority of the remaining members. ‐ Euro‐denominated domestic contracts – from property leases to salaries – would have to be redrafted
France furious over S&P error – Pg. 13 ‐ France demanded an inquiry after a leading rating agency mistakenly suggested on its website that it had downgraded the country’s prized triple A credit rating, sparking a sell‐off in Paris’ government bonds
Fears 125% mortgage plan will scare off investors – Pg. 13 ‐ US policymakers are considering ways to buy troubled government‐guaranteed mortgages from a new refinancing programme in case investors balk at the idea, …. ‐ The Initiative, known as the Home Affordable Refinance Programme (Harp), was changed last month so that it can refinance mortgages that amount to more than 125% of the value of a home ‐ Such loans are currently not eligible for inclusion in standard mortgage‐backed securities ‐ Officials are considering three options to support the new effort. Their first preference is for Fannie Mae and Freddie Mac, the government‐controlled mortgage financiers, to package these products into a new class of mortgage‐backed securities for sale to private investors, if the pricing is reasonable ‐ If this fails, Fannie and Freddie could acquire the loans and keep them on their balance sheets ‐ A third idea mooted in Washington is for the Federal Reserve to act as a back‐up buyer for these mortgage securities ‐ …tax rules mean that the 125% loan‐to‐value debt cannot go into regular mortgage‐backed securities (MBS) issued by the two agencies ‐ If they are issued as a new class of MBS, investors may demand a higher yield to reflect the illiquidity of such a small poor of mortgages – and that cost would ultimately be passed on to homeowners, potentially negating the benefit the programme intends to confer
10 November 2011
Confidence fears test Italy – Pg. 1 ‐ Italian bond yields on Wednesday recorded their biggest one‐day rise since the launch of the euro amid fears investors had lost confidence in the world’s third biggest debt market ‐ The Italian bond sell‐off, which sparked a fall in the euro, European equities and bank stocks, was triggered by a move clearing houses to increase the cost of margin payments for trading of the country’s bonds ‐ The markets were also hit by worries that Rome would not drive through necessary economic reforms …. ‐ The biggest worry for some commentators is contagion spreading to France, which saw its premium over Germany to borrow in the markets jump to fresh euro‐ear highs
HSBC warns on rise of payment ‘holidays’ after mortgage losses – Pg. 1 ‐ A rising number of Americans are unilaterally deciding to take a mortgage payment “holiday” after judging that it would not lead to their home being repossessed,…. ‐ …Citigroup reported that the percentage of mortgages that were 90 days delinquent had increased for the first time in nearly two years
What happens next: the scenarios for Italy – Pg. 3 ‐ 1 The current plan: cut debt and spur growth ‐ 2 Provide a precautionary line of credit ‐ 3 If all else fails: a full‐scale bail‐out ‐ 4 Or, a takeover by the ECB
US struggles to solve puzzle of stubborn unemployment rate – Pg. 4 ‐ New data released this week show the number of vacant jobs in the US rose to 3.4m in September – the highest in more than two years – even as the unemployment rate is mired at 9% ‐ …the proportion of people leaving jobs who chose to quit is back to 50% ‐ That level is getting close to pre‐recession norm….
US trade unions hope to build on state poll victory – Pg. 6 ‐ US trade unions will attempt to build on the momentum from their decisive victory in an Ohio collective‐bargaining referendum to press their case on labour rights in other Mid‐ Western battleground states ahead of next year’s presidential election ‐ Ohioans voted overwhelmingly on Tuesday to reject the Republican backed measure to limit collective bargaining and curtail strikes by public sector workers, …. ‐ Mississippi voters rejected a ballot initiative to define a fertilized human egg as a legal person, defeating a move that would have outlawed abortion and some birth control in the state (Prof Note: I remember years ago while in an office and VA passing the new law about homicide and fetuses. A woman announced in a meeting that she was in her third trimester, and I said, “Now you are a double homicide.” HR had no idea what to do with me when I could prove that my statement was factual. I was told to be more “sensitive.” Hmph!)
Romney holds steady as rivals rise and fall – Pg. 6 ‐ …the only contestants in the race have been the inability of Mitt Romney, presumptive frontrunner, to take a commanding lead, ….(Prof Note: While my endorsement may mean nothing, perhaps my anti‐endorsement will mean something…I am anti‐Perry! First he threatens the Fed Chairman and then last night he cannot name the three government organizations he is going to abolish! Hello Mr. Perry, please remember that “Potato” has no “e”)
Subprime loans come back to haunt HSBC – Pg. 19 ‐ Loan impairment at its US consumer division more than doubled in the third quarter of the eyar to $1.8bn, …. ‐ The bank’s latest problem is that large numbers of borrowers has simply stopped paying their mortgages ‐ …delinquencies in its portfolio of US mortgage loans had increased significantly in September, although there were signs of improvement last month ‐ Nearly 6.4m US borrowers – 12.3% of all homeowners with a mortgage – are late on their payments, …. ‐ …property values have slid nationally by almost a third from their 2006 peak
9 November 2011
Berlusconi pledges to resign – Pg. 1 ‐ …pledged last night that he would resign after parliament passes a new financial stability law that will implement fresh austerity measures demanded by the EU ‐ Gold slipped back through $1,800 an ounce ‐ Despite the ECB’s efforts, the 10‐year bond yield hit a euro‐era high of 6.77%. the spread over German debt widened to a record 497bps
Eurozone woes threaten global liquidity levels – Pg. 1 ‐ …sucking liquidity out of financial markets worldwide,…. ‐ Financial markets and the global economy appear to be repeating the pattern of the first stage of the financial crisis in 2008, in which middle‐income economies were eventually dragged down by turmoil in rich nations after initially appearing to decouple from the US and Europe ‐ Many Asian nations depend on foreign banks for much of their funding, raising the prospect of a credit crunch as cash‐starved foreign banks either retrench or raise the price of their loans ‐ Continental Euroepan banks were responsible for 21% of the $2,520bn of international bank loans outstanding in Asia, excluding Japan, as of the second quarter of 2011, ….
EFSF bond purchase beset by delays – Pg. 2 ‐ The purpose of giving the eurozone’s 440bns (euro) rescue fund more powers and additional firepower was to provide it with the authority and wherewithal to intervene in the Italian debt market ‐ …Italian bond market worth 1,900bn (euro) ‐ Most developing countries have insisted any new resources they provide for rescuing struggling economies must be down through the auspices of the IMF rather than the EFSF, a resistance that could kill the special fund concept
Chinese look overseas in move to cut costs – Pg. 6 ‐ Labour costs in China have risen 15‐20% annually over the past two years, squeezing margins and creating testing times … ‐ Wages in Bangladesh are about 20‐30% of those in China ‐ …Beijing’s decision to double wages for factory workers by increasing minimum wage every year over the next few years will encourage factories to migrate from China
Banks left exposed to future crisis by haircut – Pg. 13 ‐ The precedent set by the restructuring of Greek sovereign debt risks leaving banks more exposed to future financial crises of other countries ‐ Banks and other bondholders that volunteer for a 50% cut in the value of Greek sovereign debt could set a precedent for other sovereign haircuts….
HSBC warns of looming Asia crunch – Pg. 20 ‐ Within the region, China, Singapore, South Korea and Hong Kong had the highest exposure to European bank lending ‐ …lending could plunge if the eurozone crisis spins out of control ‐ Local banks are also seeing their cost of funds rise amid concerns about their asset quality,… ‐ In 2008 financial crisis, European banks cut lending to Asia but 20%, leading to widespread contagion and preventing some companies from rolling over their debt.
Iran standoff sparks fears of $200‐a‐barrel oil – Pg. 21 ‐ The price of Brent Crude, the global benchmark, has rallied to almost $115 a barrel as the war of words between Israel and Washington, on one side, and Tehran over its nuclear programme escalates ‐ Three elements make the latest standoff more dangerous than at any point over the past three years. One, the market is already battling with supply disruptions in Libya, Yemen and Syria; two, crude oil inventories, particularly in Europe, are sharply lower; three, the starting point for a price rally is much higher than in the past ‐ Iran is the world’s third largest oil exporter, after Saudia Arabia and Russia, making the country an important cog in the global oil market. Last year, Iran sold an average of 2.6m barrels a day, mostly to Japan, China, and India
8 November 2011
Italy’s bonds in danger zone – Pg. 1 ‐ Bond markets dragged Italy into the danger zone yesterday, forcing the ECB to intervene, … ‐ Italian 10‐year bond yields rose to euro‐era highs of 6.68% at one point, well into territory considered unsustainable by the markets ‐ The Italian government faces a key test of its strength in parliament with a vote to ratify the 2010 state accounts today
SEC eyes money market reforms – Pg. 1 ‐ ….possibly including capital standards and an end to the practice of, in effect, promising investors they will never lose money ‐ Money market funds – viewed by US investors as a higher‐yielding alternative to government‐insured bank deposits – were prominent in the financial crisis when one popular fund, the Reserve Primary Fund, “broke the buck” by falling to a value of 97 cents a share in 2008 ‐ ….$2,600bn industry
Fall in German output points to bloc recession – Pg. 3 ‐ A eurozone recession – possibly severe – looks almost inevitable before the end of the year, even if the region’s debt crisis does not intensify (Prof Note: Remember that the eurozone is a larger economy than the U.S.) ‐ …growth had gone into reverse in europe’s largest economy. Production was down 2.7% on the previous month ‐ Germany’s role as Europe’s industrial powerhouse means its slowdown has worrying implications for the eurozone ‐ The risk now is that doubts over the public finances and future political leadership of Greece and Italy turn a “mild” recession into something much worse ‐ Unlike the export‐led economic slump in Europe that followed the collapse of Lehman Brothers investment bank in late 2008, the causes of the current slowdown are largely domestic and unlikely to be reversed in the foreseeable future ‐ In the deep recession of early 2009, eurozone GDP fell by as much as 2.7% in a single quarter. So far, there are no signs that the current contraction will be as sharp – but it could be worse than “mild”
Allow renminbi to fall, Chinese economist urges – Pg. 6 ‐ China should allow the renminb to fall when other emerging market currencies are weakening, …. ‐ China’s central bank has talked about introducing more two‐way volatility in the renminbi’s trading, but the idea of allowing out‐right depreciation has rarely been voiced…. ‐ …China’s foreign exchange reserves, which dropped $61bn to $3,202bn in September…. ‐ US lawmakers have already proposed legislation targeting China that would punish countries for manipulating their currencies, a move that Chinese officials have strenuously opposed ‐ China implemented a de factor currency peg during the global financial crisis in 2008, locking the renminbi in place against the dollar even as other emerging market currencies plunged. That had hurt China both economically and diplomatically,…
Student loans – Pg. 14 ‐ ….US student loans – uniquely non‐dischargeable in bankruptcy – are either $1,000bn or rapidly approaching that level ‐ ….American undergraduates amassing $25,000 in average debt and 10% defaulting almost immediately, the burden is certainly real ‐ …without even rudimentary underwriting – from taxpayers in loans to colleges via their students ‐ A disproportionate share is being gobbled up by for‐profit colleges such as Apollo Group’s University of Phoenix that, on average, gets 87% of revenue from federal money (93% of its students take out loans – six times the rate of comparable community colleges) ‐ (Prof Note: Let us look at the economics of a classroom. Students pay, on average, $2,500 for a semester class. There are approximately 20 students/class. The adjunct professor is paid, depending on university between $5,000 ‐ $7,500/class (let us assume $6,000 for argument). So, Rev = $50,000; Exp = $6,000; Gross Income = $44,000. So, gross margin = 88%. Take back Wall Street…ba hum‐bug. Take back education! P.S. I want a raise!)
7 November 2011
Greece agrees coalition – Pg. 1 ‐ …form a government of national unity to start implementing a 130bn (euro) bail‐out plan, then take the country to elections ‐ Mr Papandreou will stand down as prime minister, opening the way for a non‐political personality with a strong economic background to serve as interim premier
Buy‐out fund investors call for change in ‘outdated’ fee structure – Pg. 1 ‐ Large investors are pushing for sweeping changes in “outdated” and “excessive” fee structures of private equity funds, underlining how the financial crisis is reshaping the asset class ‐ SWFs in particular have started to put pressure on buy‐out bosses to change a traditional model of management fee of up to 2% ‐ Private‐equity groups typically charge a 1.5‐2.0% annual management fee on the overall fund commitments, plus another 20% bonus on profits
Credit rating agencies lobby hard to block EU reform – Pg. 2 ‐ Credit rating agencies and their customers have launched a pre‐emptive attack on the latest Brussels plan to overhaul the rating industry, claiming it amounts to a “semi‐nationalization” of credit analysis that could trigger a “panicked sell‐off” of sovereign debt ‐ Moody’s gave warning that the measures – such as suspending sovereign ratings in exceptional circumstances – would “disrupt access to capital markets” and backfire
Ohio showdown looms over worker rights – Pg. 4 ‐ ….referendum on a law that limits state workers’ collective bargaining rights and forced them to pay more towards their healthcare and pension costs ‐ The vote has roader significance in many other states where benefits for state employees have been the target of reform efforts, such as Wisconsin, Indiana, and Illinois ‐ The law bans strikes by all of Ohio’s 350,000 government workers, restricts collective bargaining in the public sector, requires all public employees to pay at least 15% of their healthcare premiums and 10% of their salaries to pension contributions, and forces a meritocractic calculations on pay and job cuts ‐ It also reduces sick leave and caps holiday time at five weeks a year
Streets behind – Pg. 8 ‐ Nearly five years after America’s housing market showed the first signs of distress, prices are once more falling after false downs in 2009 and 2010, with forecasters aiming for prices t return to last year’s levels some time in 2014 ‐ Construction of homes for families remains depressed. Sales of new homes are at record lows while those of existing homes are a third below their 2005 peak. Delinquencies remain near record highs, and the pipeline of seized or soon‐to‐be‐seized homes waiting to hit the market continues to grow, leaving would‐be buyers fearful that the largest investment of their lifetimes will soon be devalued thanks to a flood of distressed homes dragging down prices ‐ Lenders seized 2m homes in 2009 and 2010 combined, and are expected to repossess another 1m this year ‐ In a normal US expansion, housing contributes half a percentage point to real growth in GDP,…. ‐ Today it is having the opposite effect…. ‐ About 25m Americans were unable to find full‐time work last minth… ‐ Some 28m mortgage holders out of a total of about 55m are paying above‐market interest rates, defined as a percentage point or more over the average rate for a new 30‐year mortgage…. ‐ Close to three‐quarters of them, or 20m, have equity in their homes, making them at least in theory prime candidates for a refinancing ‐ Nearly one‐quarter of homeowners with a mortgage, or about 11m borrows, owe more than that debt than their homes are worth, putting them “under water” to the tune of about $700bn (Prof Note: Holy $hit! That is $4,200 for every taxpaying person! We are Fk’d!) ‐ More than 4m homeowners are more than 60 days late on their payments or already in foreclosure, ….
From ownership society to a nation of renters – Pg. 8 ‐ …home ownership rates falling from a record 69.4% in 2004 to 66.1%,…. ‐ The ownership rate could drop to 61% in the next three to five years,… ‐ It has not fallen below 62% since before 1960
5 November 2011
Berlusconi brushes off debt crisis – Pg. 1 ‐ ….the Italian prime minister, said on Friday that the offer of an IMF loan to his indebted country, arguing that Rome did not need one even as its borrowing costs remained at near‐ unsustainable levels ‐ Yields on Italy’s 10‐year bonds surged to euro‐era highs after Mr Berlusconi said he decline the offer of a low‐interest IMF loan. At 6.4% they are near the level at which Greece, Ireland and Portugal were forced into IMF‐European Union bail‐outs ‐ …IMF managing director, said she had not offered Italy a loan – known as a “precautionary credit line” – but other officials familiar with the deliberations in Cannes told the FT that Italy had been urged to accept as much as 50bn (euro) in assistance
Decline in US unemployment rate to 9% unable to offer political cheer – Pg. 3 ‐ The US economy added 80,000 jobs in October in a sign that the world’s largest economy is stuck on a path of stable but very slow growth ‐ …pace of jobs growth is still too slow to keep up with an expanding population and bring about a rapid decline in joblessness ‐ September was also revised up from 103,000 to 158,000 new positions ‐ Most economists think that growth of at least 200,000 jobs a month is needed to reduce unemployment steadily ‐ German industrial orders plunged 4.3% in September, adding to evidence of a sharp slowdown in Europe’s largest economy
‘It shouldn’t have taken positions so big – let alone the one it did’ – Pg. 5 ‐ Some $630m of the funds MF Global held for its trading clients could not be located ‐ The failure of MF Global, with its $41bn in assets – the eighth biggest bankruptcy in US history – its modest compared with the chaotic failure of Lehman Brothers, which had a $691bn balance sheet, in 2008 ‐ MF Global’s downfall occurred because the market lost faith in the $6.3bn bet Mr Corzine had placed on the bonds of European countries including Italy and Spain (Prof Note: Sound a little like LTCM?) ‐ The $6.3bn trade that sunk MF Global is known as a “repo‐to‐maturity” contract. This meant it was more than a bet on the underlying performance of the bonds of Italy, Belgium, Spain, Portugal and Ireland ‐ For MF Global’s customers, the process has been anything but smooth. Many say they have no idea when they will get back funds from their accounts – or even how much they have left
US credit unions surge in popularity – Pg. 9 ‐ US credit unions are attracting a new wave of interest as big banks have raised fees for consumers while global protests against the financial system have focused attention on corporate profits ‐ …650,000 people had joined credit unions in the past month, compared with 600,000 new customers in all of 2010. CUNA estimated that credit unions had added about $4.5bn in new savings accounts ‐ Unlike traditional banks, membership of a credit union is based on criteria such as place of residence, employer, or involvement with a church or community group ‐ Bank assets have risen faster over the past year, but credit unions reported lower delinquency and write‐off rates, pointing to better credit quality. Nationally, delinquencies at credit unions were 1.6%, compared with 4.4% at banks, while credit unions’ write‐off ratio was under 1%, compared with 1.7% at banks
4 November 2011
Greek PM drops referendum – Pg. 1 ‐ ….abandoned plans to hold a referendum on eurozone membership and instead set his sights on winning a parliamentary confidence vote, in a dramatic aboutface welcomed by European leaders and financial markets ‐ Greece’s 16 eurozone partners, as well as the US and China, are anxious that Mr Papandreou and his collegues approve the rescue deal as soon as possible in order to limit the risks to the world economy
Debt pressure grows on Berlusconi – Pg. 2 ‐ …put on notice at the G20 summit that Italy had to regain its credibility on debt markets ‐ Italy’s debt crisis dominated pre‐summit talks on Thursday between eurozone leaders and European Union officials in Cannes ‐ …italy – with total public debt of 1,900bn (euro) – risks spiraling funding costs that would force it to follow Greece, Portugal and Ireland in seeking a bail‐out, for which the EU does not have adequate firepower in place
Draghi warns of ECB’s limited role in crisis – Pg. 3 ‐ …combined a cut in interest rates with a clear‐cut warning that he sees a limited role for the ECB in combating the eurozone debt crisis ‐ …lowering the ECB’s main interest rate from 1.5% to 1.25% by citing the sharp worsening in recent economic data and by preannouncing “significant downward revision” to 2012 growth forecasts, to be published next month ‐ ….deliberately left open whether official borrowing costs would be lowered further next month, although he said that after Thursday’s decision “inflation should remain in line with price stability over the policy‐relevant horizon” ‐ …kept flexibility in the ECB’s bond‐buying programme, which in recent weeks has kept borrowing costs for the Italian government from spiraling out of control ‐ …warned that governments should not rely on “external” help, insisting the ECB had not “really been focusing” specifically on Italian bond yields
Cuba lifts real estate ban – Pg. 4 ‐ Cuba formally lifted a five‐decade ban on residents buying and selling property … ‐ For the first time since the 1959 revolution, Cubans will be able to own a main residence and a second vacation home, and sell them to other Cuban residents without government approval ‐ …spur some real estate development, and speed renovation of Cuba’s picturesque but dilapidated housing stock. It I also expected to reconfigure Cuban conceptions of class as some homeowners cash in their properties and areas of Havana are gentrified ‐ The new rules state that the purchase, sale, donation and trading of houses will be recognized even in cases of “divorce, death or permanent departure from the country” ‐ Last month the government ended another ban, also dating from 1959, on the sale of cars. State companies have also been given more autonomy, payrolls and subsidies have been trimmed, and retail services liberalized ‐ ….new housing law continues to prohibit foreigners from owning property unless they are permanent residents
Hopes rise for Russian accord to join WTO – Pg. 5 ‐ Now that Russia has reached a compromise with Georgia, only technical issues appear to remain after nearly two decades of stop‐start talks on membership,… ‐ It still faces a final round of multilateral talks on November 10 with trading partners, including the European Union and the US, which have already signed off on bilateral agreements,…
Fall in US jobless claims raises hopes – Pg. 6 ‐ An encouraging decline in new claims for unemployment insurance has raised hopes of robust job creation when the Us reports payrolls data today ‐ …may not be enough to prevent a rise in the unemployment, perhaps from 9.1 to 9.2%, …. ‐ Economists expect the report to show that the US economy added 95,000 positions in October…. ‐ The Federal Reserve said on Wednesday it expected unemployment to remain above 8.5% to the end of 2012,….
Freddie Mac seeks extra $6bn in rescue funds after quarterly loss – Pg. 15 ‐ ….$4.4bn third‐quarter loss, the company’s worst three‐month performance in more than a year ‐ The additional $6bn brings its total bail‐out from the government to $72.2bn, of which $14.9bn has been returned in the form of dividends. ‐ Sales are down, delinquencies are rising and the pipeline of seized homes due to flood the market is growing
3 November 2011
Europe piles pressure on Athens – Pg. 1 ‐ European leaders threatened to cut off an already overdue tranche of 8bn (euro) in international aid to Greece as they piled pressure on Athens over its plan to hold a referendum on the eurozone’s latest rescue plan for the debt‐crippled country ‐ Mr Papandreou’s surprise announcement of the referendum on Monday plunged the eurozone back into turmoil days after a 130bn (euro) rescue plan had been painstakingly negotiated ‐ Greece has to make a 12bn (euro) bond repayment on December 11
Bernanke warns on gloomy outlook – Pg. 1 ‐ The US Federal Reserve predicted slower growth and higher unemployment in the world’s largest economy, while also expressing concern about Europe’s worsening debt crisis ‐ US equities and Treasury bonds rose after Mr Bernanke said the Fed would consider buying mortgage securities should the economy warrant further help ‐ The Fed’s latest projections show the US economy expanding by 2.5 to 2.9% next year, down from 3.3 to 3.7% projected in June ‐ The central bank also raised its forecast for unemployment over the next two years, saying the current 9.1 rate would only moderate to 8.5 to 8.7% by the end of 2012. It had earlier forecast an improvement to 7.8 to 8.2% ‐ ….Fed predicted that inflation will remain low through 2014. Most Fed officials forecast that inflation will range between 1.5 and 2% over the next three years
Voter backlash grows as fears rise over strife – Pg. 3 ‐ The debt crisis in the eurozone is causing a growing backlash from voters towards their governments in many of the 17 member states,… ‐ Some incumbent governments ‐ particularly in northern Europe – are struggling to get the latest rescue measures approved in their parliaments, whereas others in the most debt‐ laden economies, such as Greece and Italy, have seen a slump in popularity over their enforced austerity measures ‐ In the Netherlands, the government appears to have lost its pro‐European majority in parliament, …. ‐ The crisis has already caused the incumbent governments to fall in both Ireland and Portugal ‐ Worries about the eurozone debt crisis have risen to the top of German voters’ concerns
Guessing game over Fed split – Pg. 4 ‐ The US Federal Reserve’s decision to keep policy on hold in November meant that the main point of interest for analysts was the unexpected 9‐1 split on the rate‐setting FOMC ‐ ….further policy easing could be on its way ‐ The private sector added 110,000 jobs last month, beating economists’ estimates of 100,000 new positions, and September’s total was revised up to 116,000 from 91,000….
Vultures in view – Pg. 7 ‐ Much of the financial world has been gripped for the past few weeks by gloom interspersed with bouts of sheer panic ‐ Alternatively, they may try to seize control of struggling companies by buying their loans and bonds, and converting this debt into equity ownership – a strategy known as “loan to own” ‐ European companies have to repay more than $4,000bn of loans and bonds in the next four years, …. ‐ Banks in France, the UK, Ireland, Germany and Spain have unveiled plans to slash a total of $1,065bn of assets… ‐ Distressed debt funds either based in or focused on Europe have raised a record $7.4bn from investors since the start of 2010,… ‐ Most investment banks are rebuilding or beefing up distressed debt desks, expecting the sector to provide a rich vein of lucrative business in the coming years
MF Global case raises doubts over CME’s role – Pg. 15 ‐ The case of the missing customer funds at MF Global is focusing attention on the failed broker’s de facto supervisor, CME Group ‐ CME, the largest US futures exchange operator, is also the designated self‐regulatory organization for more than 50 futures brokers including MF Global. As such, CME had direct responsibility for making sure MF’s books were square ‐ ….company might have failed to follow a key commandment of futures broking: to segregate customer accounts from house accounts ‐ CME’s main source of revenue is clearing and transaction fees ‐ The segregation of customer funds has been enshrined in federal law since the 1930s. Designated self‐regulatory organizations such as CME must enforce minimum financial and reporting requirements for members such as MF Global. Futures brokers are required to calculate by noon each day that they are in compliance with customer funds custody requirements (Prof Note: As CFO I specifically separated depositor money from working capital at additional expense refusing to reduce banking fees, consolidate monies, and separate through accounting measures)
China money market rates tumble – Pg. 22 ‐ China’s money market rates have fallen sharply amid signs that the government is beginning to ease its tight monetary policy around the edges to keep growth on track
2 November 2011
Race to save eurozone deal – Pg. 1 ‐ European leaders are racing to save the latest rescue plan for the eurozone after financial markets reeled on Tuesday on fears that Greece’s proposal to hold a referendum on its second bail‐out package could lead to a disorderly default by Athens ‐ The political upheaval came as investors feared that last week’s agreement was unraveling. Bank shares dropped sharply with France’s Societe’ Generale recording its biggest one‐day fall since its privatization in 1987. Both it Italy’s Intesa Sanpaolo fell 16% ‐ Bond markets showed even more alarm as the premium Italy pays over Germany to borrow hit a euro‐era record of 455bps. Greece, Ireland and Portugal were all forced to accept international bail‐outs after their borrowing costs reached their that level ‐ Greek and Italian stock markets both fell by 7% while German and French equities dropped 5%
MF Global broke rules on funds’ separation – Pg. 1 ‐ MF Global, the broker‐dealer that collapsed this week, broke rules on keeping customer money separate from its own trading accounts, …. (Prof Note: I will never forget my controller coming to me when I was CFO one week we could not make payroll. We had to fund Wednesday by noon and were short (way short). We had a sale Thursday and the controller, knowing I have a HUGE issue (it was Wednesday at 9:00am) offered to transfer the funds from a deposit account (illegal) and replace them with the proceeds of the sale on Thursday. “No one would no and we would make no entries.” My answer took 5 minutes (a lifetime at that time) and was “no.” I was fearful that the ease of using deposit accounts, legally restricted accounts, to fund short‐term working capital needs could become habitual.) ‐ ….become the largest casualty of the eurozone sovereign debt crisis
Sarkozy’s hopes hit by referendum – Pg. 3 ‐ The decision by Greece to hold a referendum on the eurozone rescue deal was a bombshell for the French president that not only upended final preparations for the G20 in Cannes but also threatened to damage his re‐election strategy ‐ The plan was for the G20 to reinforce the eurozone plan and allow Mr Sarkozy, summit host, to present a united response to the sovereign debt crisis and a positive message of supporting the faltering global economy ‐ That in turn was meant to be a platform from which the president could launch his campaign for the presidential election in April ‐ The Paris bourse closed down 5.38% ‐ He [France] has already downgraded the growth forecast for 2012 to 1% of GDP, which will require a second austerity package within three months to ensure the country stays on target to reduce its budget deficit to 3% by 2013
PMI data indicate slowdown in China and US – Pg. 3 ‐ Growth in manufacturing activity in the US and China is slowing but shows little sign of a slide towards recession ‐ China has increased interest rates and reserve ratios for banks several times this year, and has taken administrative measures such as restrictions on housing purchases and telling banks which industries to lend to
BofA in U‐turn as it scraps debit card fee plans – Pg. 11 ‐ …acting after fears that customers of the second‐largest US bank by deposits would move their accounts ‐ The $5‐a‐month fee was proposed last month in response to new financial regulations that cap the amount retailers are charged for processing transactions ‐ The rule, which was set by the US Federal Reserve and came into force last month, caps the so‐called “interchange fee” at about 24 cents for an average debt card transaction, a significant decline from previous charges.
Battered banks look at debt rejig to boost finances – Pg. 19 ‐ …fall in the value of their debt may be of greater importance ‐ Those that suffered the heaviest declines were among those deemed most exposed because of their holdings of Greek debt ‐ Rather than call on shareholders – which may lead to further share price falls – they could cut their existing debt obligations and free up new money through so‐called liability management exercises ‐ Bankers say the exercises may make sense as prices for banks’ subordinated bonds – those that rank lowest in their capital structure – have plunged in recent months ‐ Offering to purchase debt at below par – or face value – is one form of LM for bansk, but there are others
1 November 2011
Big bets on European debt sink MF global – Pg. 1 ‐ MF Global became the largest US casualty of the eurozone crisis on Monday as it filed for bankruptcy protection after making big bets on the European sovereign debt market ‐ MF Global’s brokers were barred from trading floors across the US as market participants tried to assess whether the company’s failure would trigger the same catastrophic effects as Lehman or the more short‐term and contained upheaval caused by the 2005 bankruptcy of Refco, another futures broker ‐ MF Global was undone by a slew of credit downgrades to “junk” and after Moody’s, Standard & Poor’s and Fitch decided the company had taken on too much risk with its $6.3bn bet on European sovereign debt ‐ MF Global’s shares were suspended as the Federal Reserve Bank of New York said it was stopping doing business with the company, which had been a “primary dealer”, part of an exclusive club of firms licensed to sell US Government debt
Greece to hold bail‐out referendum – Pg. 1 ‐ Greece’s prime minister has unexpectedly announced a public referendum to approve a second EU bail‐out agreement for his austerity‐hit country, less than a week after it was greed with international creditors at a European Union summit ‐ An opinion poll published on Sunday showed more than 60% of Greeks are opposed to terms of the new bail‐out, which would include a further 100,000 job losses over the next three years and big reductions in pensions
Japan’s yen move catches G20 off guard – Pg. 2 ‐ Japan’s decision to intervene unilaterally against the yen a few days before the G20 heads of government summit in France reveals two things. ‐ One, that the periodic surges of upward pressure on certain currencies as a result of volatile financial markets remain; two, that governments such as Japan’s place little faith in the G20’s ability to address the matter ‐ …investors much more worried about the world economy and the eurozone, the recipients of unwelcome capital inflows and currency appreciation are the likes of Switzerland and Japan, regarded as safe havens ‐ The Swiss National Bank shocked investors in September by announcing it would intervene in unlimited amounts to stop the Swiss franc rising higher
Eurozone jobless at euro‐era peak – Pg. 2 ‐ …seasonally adjusted unemployment in the 17‐country bloc rose to 16.2m in September, 188,000 higher than in August and the highest since comparable data started in the late 1990s, …. ‐ The surge in joblessness came amid mounting evidence that a recession looms in much of continental Europe ‐ The OECD slashed its growth forecasts to show the eurozone economy expanding by only 0.3% in 2012, assuming there is no sudden crisis. In June, it had forecast 2% growth ‐ 10.2%...eurozone unemployment level in September….the highest since June 1998. The equivalent US unemployment rate in September was 9.1% ‐ Unemployment remains highest in Spain, where the rate reached 22.6% in September…
Brics prefer IMF to channel bail‐out funds – Pg. 3 ‐ Leading emerging market countries have shifted further towards channeling any rescue loans to the eurozone through the IMF, reducing Europe’s chances of negotiating direct bilateral bail‐outs to help solve its sovereign debt crisis ‐ The IMF and its shareholder countries have been discussing creating new lending facilities, which would be aimed at bailing out countries with short‐term liquidity problems as a result of financial contagion from abroad
The pendulum swings – Pg. 6 ‐ …North Dakota has the lowest unemployment in the union – just 3.5% ‐ Many analysts expect that in the coming decade the US will leapfrog Saudi Arabia and Russia to become the world’s largest producer of liquid hydrocarbons, counting both crude oil and lighter natural gas liquids such as propane and ethane. That optimism reflects the increasing flow of “tight oil” as wells gas from shale – rock formations holding reserves unlocked through new extraction technologies ‐ …America has cut the share of its oil consumption met by imports from more than 60% in 2005 to 47% last year ‐ …smaller oil import bill would cut the US goods trade deficit – petroleum has accounted for 44% this year – and make it more resilient to shocks and supply disruptions in times of conflict ‐ In 2009, however, US output started to grow again, led b offshore production in the Gulf of Mexico then onshore tight oil
Halloween 2011
EU urged to lead on financial regulation – Pg. 1 ‐ …German’s finance minister, wants the European Union to take the global lead in introducing a financial transaction tax to curb speculative trading, along with tougher regulation of banks and the “shadow” banking sector, such as hedge funds ‐ If the UK blocked agreement on such a tax in the full EU, he told the FT, the eurozone should press ahead on its own ‐ …warned that Italy, as one of the largest eurozone economies, must solve its own problems to cut its debt burden
Business in G20 push for growth – Pg. 1 ‐ Business leaders from the world’s top economies are set to press for firm action on growth, trade and social issues at this week’s G20 summit in France, warning of the dangers of political disaffection ‐ Medef will host a “B20” of top business people in Cannes to coincide with the meeting of G20 heads of government ‐ The B20 has sought to become an integral part of the G20 process and has had two meetings with the “Sherpas” – the government officials who prepare the summit agenda …. ‐ The B20 is most frustrated over the long‐stalled, so‐called Doha round of international trade liberalization talks
ILO warns on threat to jobs – Pg. 2 ‐ The world faces a “dramatic downturn” in employment over the coming months unless governments act to soften the effect of the economic slowdown on labour markets, … ‐ …verge of a “new and deeper jobs recession” that will delay recovery and could spark more social unrest in dozens of countries ‐ …two‐thirds of advanced economies and half of emerging economies are already experiencing a slowdown in job creation at a time when worldwide unemployment stands at a record of more than 200m ‐ The US is the only big advanced country with a national jobs plan ‐ After the collapse of Lehman Brothers, the US bank, in 2008, many enterprises kept staff on, expecting the slowdown to be temporary – but three years on, the business environment is more uncertain and retention may be less widespread ‐ The risk of social unrest is rising in 40% of countries, notably in the European Union, the Arab region and to a lesser extent Asia ‐ Out of 118 countries, 69 showed an increase in the percentage of people reporting a worsening of living standards in 2010 compared with 2006
Sweetened sour loans – Pg. 14 ‐ Three little letters seemed to transport investor sentiment. Last week’s reports of falling ratios of non‐performing loans at Chineses banks sent shares soaring ‐ The trouble is that reported NPL numbers are neither much of a guide to asset quality nore to the judgment of loan officers at Chinese Banks. Under China’s five‐tier loan classification system, the first two – “pass” and “special attention” – are supposed to apply if the borrower is servicing the loan through the venture’s recurring cash flows; the last three (NPLs) if loans are serviced by secondary sources, or are delinquent
Top‐end property market shows signs of cooling – Pg. 19 ‐ Global demand for luxury property is showing signs of receding, with prices round the world rising at the slowest rate since the start of the financial crisis ‐ The growth of prime property prices – the top 5% of property by value – in Europe, North America and Asia has outstripped the rest of the housing market during the downturn, fuelled by investors looking for safe places to store wealth
US jobs and industrial data to be scrutinized – Pg. 22 ‐ Economists expect Friday’s release of the nonfarm payrolls report to show the creation of 95,000 jobs outside of the agricultural industry in October, with 120,000 private sector jobs created and 25,000 public sector ones lost ‐ The overall unemployment rate is expected to remain at 9.1%
29 October 2011
Italy spoils mood after EU deal – Pg. 1 ‐ Italy’s borrowing costs have climbed to ero‐era highs just a day after European leaders agreed on a new plan to reverse the region’s spiraling debt crisis, a worrying sign that they have failed to regain the confidence of the markets ‐ Rome was forced to pay a record 6.06% at an auction of its benchmark 10‐year bonds, up from 5.86% a month ago,… ‐ Markets increasingly see Italy as decisive for how the eurozone debt crisis plays out ‐ ….Italy needing to roll over nearly $425bn of its $3,500bn (approx) debt mountain next year,….
Paris‐Berlin split widens over deal – Pg. 2 ‐ The strangle between France and Germany that made this week’s eruozone rescue plan so difficult to finalize is often portrayed as a personal tussle between a cautious Angela Merkel and a hyperkinetic Nicolas Sarkozy ‐ Until the crisis broke two years ago, all eurozone governments were able to borrow money at almost identical rates, …
Obama takes high‐risk stance against the rich – Pg. 3 ‐ …the US economy suffering its deepest slump since the Great Depression, the Obama administration has designed a political strategy to match, with echoes of the campaign rhetoric deployed by Franklin Roosevelt in the 1930s ‐ …White House is cementing a message that strikes at wealth and privilege ‐ The after‐tax income of the wealthiest 1% of US households increased by 275% over the past three decades, compared with the average of 62% for all Americans, ….
Asset sales will pose a tricky problem for Europe’s banks – Pg. 8 ‐ European banks are not strong enough to sell off thousands of billions of euros worth of assets without capital injections, ….. ‐ …European banking system had a $150bn capital shortfall, …. ‐ Without raising capital first, European banks may be unable to withstand the hit from selling assets at the discounts being demanded by investors,…
Cash‐strapped shoppers wooed – Pg. 9 ‐ US retailers are battling to secure a share of reduced consumer spending on seasonal gifts by introducing product and payment initiatives designed for cash‐strapped shoppers ‐ Walmart, which accounts for roughly one in every $10 of retail spending, is luring shoppers with the promise that if they buy a product at tis stores and later find it available for less elsewhere they will get a fit card for the difference ‐ ….households earning less than $100,000 a year expected to cut their gift spending by 27% this year to $291, whereas households earning more than $100,000 would trim psending by less than 2% to $812 ‐ While the economy returned to solid growth in the third quarter, thanks partly to a 2.4% annualized rise in consumer spending, it came via an unsustainable cut in the savings rate
28 October 2011
China set to aid Europe bail‐out – Pg. 1 ‐ China is very likely to contribute to the eurozone’s bail‐out fund but the scope of its involvement will depend on European leaders satisfying key conditions, …. ‐ Any Chinese support depended on contributions from other countries and Beijing must be given strong guarantees on the safety of its investment,… ‐ ….Beijing might also ask European leaders to refrain from criticizing China’s currency policy,… ‐ ….European banks, make them accept a loss of 50% on their holdings of Greek debt and boost the firepower of the rescue fund, known as the Europea financial stability facility ‐ With $3,200bn in foreign exchange reserves, roughly a quarter of which are believed to be held in euros,… ‐ One condition China might ask for is that its contribution be at least partly denominated in renminbi, which would protect its investment against currency fluctuations, Chian would buy euro‐denominated bonds but repayments would compensate for any changes in the value of the renminbi, which has appreciated nearly 20% against the euro in the past three years
GDP data show US recovery in the balance – Pg. 2 ‐ The story of US GDP in the third quarter looks like one of recovery interrupted by a powerful shock halfway through, as the eurozone worries and a debt ceiling downgrade struck in August ‐ Overall growth came in at an annualized rate of 2.5%, much as expected, and the fastest pace since the third quarter of last year
Doubts temper markets’ surge – Pg. 4 ‐ The sugar‐rush reaction of markets to European summits kicked in early on Thursday, as investors welcomed the news that leaders had reached broad agreement on measures to ease the region’s sovereign debt crisis ‐ Bank shares rocketed, the euro surged, German and French equities saw some of their biggest gains in years, and the borrowing costs for peripheral eurozone countries fell
State tax surge – Pg. 14 ‐ …US state tax revenue surged by 11% in the second quarter, the fastest pace in six years ‐ The jump was driven by tax increases
Nintendo faces first full‐year loss in 30 years – Pg. 17 ‐ …new hardware has failed to galvanize sales and the strong yen has eaten into profitability ‐ For a company depending on the unprofitable sales of hardware to drive profitable sales of software, this is discouraging
Investors to pay for homeowner respite – Pg. 23 ‐ Investors holding US mortgage securities have not been spared the volatile trading that has swept across other asset classes in recent months ‐ This week so‐called high coupon mortgages suffered their worst one‐day price drop so far this year after the Federal Housing Finance Agency put forward proposals designed to help borrowers refinance their mortgages ‐ US commercial banks held $1,220bn of Federal agency mortgage backed securities as of mid‐October, up from $1,060bn in September 2010
27 October 2011
Struggle for eurozone deal – Pg. 1 ‐ Eurozone leaders will attempt to reduce Greece’s outstanding debt to 120% of GDP by the end of the decade, but were struggling last night to pin down details of the private sector’s contribution, needed for a comprehensive deal ‐ ….force bondholders to accept their debt payments halved, …. ‐ They believe Athens is on track for its debt to peak at 186% of GDP in 2013, compared with Berlin’s 83% ‐ …European leaders are expected to set up a special fund seeded with money from the EFSF that they hope will attract outside investment from cash‐rich emerging countries such as China and Brazil, a fund that may be managed by the IMF
Former McKinsey chief on Wall St charges – Pg. 1 ‐ …indicted on insider trading charges, becoming the highest‐profile executive caught in the US government’s sweeping investigation of corruption on Wall Street ‐ The insider trading investigation has tarnished McKinsey,…
Fed eager to focus on how best to get its message out – Pg. 4 ‐ …growing sense of urgency about improving communication ‐ Three different issues are tangled together. The first is whether to clarify the Fed’s goal by agreeing on a clear inflation objective. Second is explaining how the Fed is likely to change policy in the future to reach that goal. Third is whether to use communication to easy policy now with, for example, a pledge to keep rates low until unemployment falls to 7 or 7.5%
Foreign investors move into property haven – Pg. 4 ‐ Foreign capital has piled into big, multi‐family apartment blocks and residential homes in the US in the past year as international investors seek a safe haven in increased American demand for rental property ‐ Foreign investment represents 5.8% of all multi‐family purchases, up from 3.7% in 2010 ‐ A weaker dollar, international market volatility and a continuing foreclosure crisis have combined to create an unlikely safe haven for international investors ‐ Foreign investors….have directly invested nearly $4.2bn in the US multi‐family property market since the start of 2009, … ‐ The national home ownership rate as of the second quarter this year was 65.9%, ….the lowest rate since 1998, while rental vacancies were at their lowest since 2002 ‐ Foreign purchases of existing single‐family homes, town houses, condominiums and co‐ operatives have also risen , up by more than a quarter in the year ending March 2011. They make up 7.7% of the total market… ‐ Of the total foreign investment into the US from 25 countries, more than 80% came from five; Canada – which accounted for a third of the activity – the Netherlands, Switzerland, the UK and Israel Regions of rancor – Pg. 7 ‐ Labour costs have become a focus for conflict between lawmakers and unions since the recession decimated state revenues and lifted the veil on chronic underfunding of benefit schemes for civil servants past and present ‐ ….states had officially salted away $2,280bn to cover pension liabilities then estimated at $2,940bn, leaving a gap of $660bn ‐ The median return assumption of 126 state and local retirement systems is a rosy 8% a year,… ‐ Most US states must balance their budgets annually
Dubai launches domestic property fund – Pg. 17 ‐ Dubai has launched a fund focused on its domestic real estate market as the government moves to underpin property prices, which have fallen two‐thirds from their 2008 peak ‐ The 8‐ to 10‐year fund marks a significant government intervention into the city’s broader real estate market, one fo the biggest drags on the indebted emirate’s economy ‐ Dubai, which received a $20bn bail‐out from UAE and its capital Abu Dhabi to ward off default in 2009, earlier this year completed a $25bn restructuring of troubled conglomerate Dubai World
Qatar joins Mexico with oil hedge – Pg. 20 ‐ Qatar, a member of the Opec oil cartel, has joined Mexico in taking out an insurance policy against falling oil prices next year, hedging some of its oil for 2012 as both nations adopt a cautious view about global economy
26 October 2011
Italy coalition in fight for life – Pg. 1 ‐ Italy’s prime minster was fighting to stave off a collapse of his centre‐right coalition government amid European Union demands for concrete economic reforms in time for today’s highly‐anticipated summit of eurozone leaders ‐ Any Italian compromise that promises future action could be hard to swallow for eurozone leaders seeking a comprehensive solution to the sovereign debt crisis at the Brussels summit, their second in four days
Gloom holds back US economy – Pg. 2 ‐ The gloom of US consumers has emerged as one of the greatest threats to the world’s largest economy as new data showed levels of pessimism similar to those of a deep recession ‐ The Conference Board’s index of consumer confidence fell sharply to 39.8 in October from 46.4 in September. The reading in the lowest the index has seen in its 40‐year history except for a few months during the 2008‐09 recession ‐ Consumers have suffered a painful squeeze on their disposable income this year and have been battered by bad headlines such as the August downgrade to the US credit rating ‐ There was a further blow to confidence on Tuesday as the S&P Case‐Shiller home price index showed a larger than expected fall in house prices in August. The property market is continuing to struggle under the weight of the foreclosures crisis and persistently high unemployment ‐ Prices fell 3.8% from a year earlier ‐ The average price of a house remains at mid‐2003 levels. Prices have fallen nearly 31% from their peak in the summer of 2006
Obama loses magic for young voters – Pg. 2 ‐ For many young voters with high hopes for Barack Obama, his presidency has been something of a disappointment ‐ The jobs problem is a key part of this ‐ But the president’s approval rating among people under 30, which was at 75% the week he took office, now regularly comes in below 50%, ….
China property sales decline causes concern – Pg. 3 ‐ China’s largest real estate developer believes the country’s property market, a key driver for the economy, has turned and expects conditions to worsen in the coming months as sales volumes decline further ‐ A 30% drop in property prices would precipitate a collapse in fixed investment in China and the investment‐driven economy would experience a so‐called hard landing after years of annual growth above 9%, …. ‐ Property investment accounts for more than 20% of total fixed investment in China and UBS estimates almost 30% of final products in the economy are absorbed by the property sector ‐ Debt‐laden provincial governments in China rely heavily on land sales for revenue and have poured investment into commercial housing projects ‐ These local authorities also account for up to 30% of all outstanding bank loans, many of which are collateralized by land and housing developments, so a collapse in the property market could have a devastating knock‐on effect ‐ Average house prices for the entire country still increased in September from a year earlier, ….
Indian lenders free to set deposit rates as big bang ends ‘lazy banking’ – Pg. 14 ‐ India is set for one of the biggest shake‐ups of its commercial banking industry in decades after a move by the Reserve Bank of India deregulated interest rates on the country’s savings accounts ‐ The reform is expected to benefit smaller, private sector banks eager to expand their deposit base ‐ The end of decades of regulated interest rates will raise the cost of funds and squeeze margins but leave the customer base in urban India open to better offerings from low‐cost rivals from the private sector
25 October 2011
Hard line taken with Greek debt holders – Pg. 1 ‐ European negotiators have asked Greek debt holders to accept a 60% cut in the face value of their bonds, a hardline stance that far exceeds losses agreed in a deal between private investors and eurozone authorities three months ago ‐ …ECB and IMF remain concerned the tough stance could trigger bondholder insurance policies known as CDS, sparking investor panic because of uncertainty over which financial institutions face CDS losses ‐ Credit events are defined retrospectively and depend partly on whether debt holders agree to take losses ‐ A person close to bondholders said a 60% cut in face value would be equivalent to 75‐80% reduction in net present value
Mortgage bonds hit 6‐months lows – Pg. 1 ‐ Prices for billions of dollars in mortgage bonds fell to their lowest levels in six months on Monday as traders bet that new measures to help distressed homeowners would lead to a wave of early repayments ‐ The price declines hit mortgage‐backed securities sold with coupons – the return paid to investors – that are higher than current interest rates ‐ The FHFA said borrowers with loans worth 125% or more of their home’s value will become eligible for Harp for the first time while Fannie and Freddie will waive some warranties that have made banks reluctant to refinance high loan‐to‐value mortgages. The FHFA will also reduce some upfront refinancing fees, but only eliminate them for refinancing shorter‐term mortgages
Home refinance moves do little to lift gloom – Pg. 4 ‐ ….make it easier for distressed US homeowners to refinance their mortgages …. ‐ Fannie Mae and Freddie Mac….will cut refinancing fees and let borrowers who owe significantly more than their homes are worth receive new government‐backed loans at lower interest rates (Prof Note: Once again, not holding individuals for decisions THEY made!) ‐ ….changes to the Home Affordable Refinance Programme…. ‐ …FHFA said it would eliminate some fees but only for refinancing into shorter‐term mortgages, such as 20 rather than 30 years ‐ HARP was originally hailed as helping 4m – 5m borrowers to refinance at lower interest rates but, through August 2011, just 894,000 homeowners had taken advantage ‐ It will also waive its requirement that Fannie and Freddie obtain fresh appraisals of a home’s value during the refinancing process and extend the HARP programme until December 2013 (Prof Note: So much for helping appraisers!) ‐ Most important to lenders, FHFA will no longer hold originators of the new mortgage responsible for underwriting errors and other irregularities committed by the original lender to the loan (Prof Note: Hmmmmm….less accountability….just what the U.S. needs!)
Chinese officials jailed for leaking economic data – Pg. 6 ‐ China has jailed two government officials for leading data to securities brokeratges in a case that some fear may threaten economic transparency and debate ‐ …convicted of leaking information including data on GDP, inflation, fixed‐asset investment, money supply and credit figures
Rising cost of credit hits Asian companies – Pg. 13 ‐ Asian companies are being hit with rising costs for raising money in the region – even those with strong credit lines ‐ ….junk‐rated companies have found credit markets have been almost totally closed to them since June ‐ The trend provides evidence that Asia’s economies have not decoupled from the west, and neither have its capital and banking markets
Mattel’s Hit purchase for $680m – Pg. 15 ‐ Mattel, the toy company famous for its Barbie dolls, has bought Hit Entertainment, the children’s media group behind Bob the Builder and Thomas the Tank Engine (Prof Note: I love Thomas (those that do not know, I collect trains); at University I would race back to grab the Tele from my roommate’s gf that insisted on watching supermarket shop‐off to see Thomas and the island of Sodor)
SEC imposes first ‘dark pool’ fine – Pg. 20 ‐ US authorities have imposed their first fine on a “dark pool” trading venue in a move that highlights US regulators are scrutinizing how much trading venues handle order flow ‐ So‐called “dark pools” have gained popularity with institutional investors in recent years by enabling them to execute large share trades away from the main public markets. Prices are not displayed until after the trades are completed, leading critics to argue that the practice leads to a less transparent, more illiquid markets
Debt Capital Markets – Read in Entirety
24 October 2011
Pressure on Italy in eurozone struggle – Pg. 1 ‐ Germany and France have turned on Italy to demand further action to boost growth and reduce its huge debt, as leaders of the eurozone struggled to agree on how to boost their rescue fund to stop contagion in the sovereign debt markets before a Wednesday deadline ‐ Confidence in Italy’s public finances is critical to preventing the spread of the Greek debt crisis across the eurozone ‐ ….agreed the need for European banks to find 108bn (euro) in new capital to persuade investors that they can withstand the pressures of the sovereign debt crisis ‐ One plan would set up a special fund to attract global investors, including potentially the IMF, that would buy Italian bonds and those of other troubled eurozone countries. The other, which could run in parallel, would guarantee against losses by bondholders ‐ Without further cuts in repayments to bondholders, EU and IMF lenders will be saddled with 252bn (euro) in bail‐out loans until the end of 2020, ….
VW to overtake Toyota for top spot – Pg. 1 ‐ Volkswagen will become the world’s biggest carmaker this year – seven years earlier than its management’s aim to replace Toyota in top spot, (Prof Note: The U.S. simply must lower labour costs if it has any opportunity to retain past glories) ‐ …German automaker will claim the number one spot for both sales and production ‐ …VW has exploited its position as the top‐selling carmaker in China, the world’s biggest car market, and have even managed to increase sales by 8% this year in a stagnating European market ‐ It has also become one of the industry’s most skilful practioners of platform sharing across its brands….
Wall St and Treasury eye new debt security – Pg. 7 ‐ The US Treasury and Wall Street dealers are set to discuss whether to introduce a new debt security to help finance the country’s mounting budget deficit in coming years ‐ …possible introduction of floating‐rate notes ‐ In contrast to normal fixed‐rate Treasuries, which pay the same coupon throughout their lifespan, the payment to investors from floating‐rate notes would go up or down as the Federal Reserve changed short‐term interest rates ‐ ….also proposed the issuance of ultra‐long bonds and callable securities in February ‐ With the prevailing view in the bond market that Treasury yields have set their lows and will gradually rise in the coming years, issuance of floating‐rate debt could prove more costly for US taxpayers ‐ ….the US Treasury is locking in funding over the next 30 years at record low yields ‐ Regular sales of floating‐rate notes would help meet the expected demand for safe securities to be placed on banks’ balance sheets under proposed tighter capital standards under Basel III and as collateral in derivatives trading
Differences at the margins – Pg. 9 ‐ A fiscal focus: Effective tax rates on $300k gross income (%) o France: 55% o Italy: 50% o Germany: 43.9% o UK: 41.6% o Japan: 37.6% o US: 29.8% o Singapore: 18.5% o Hong Kong: 15.0% o UAE: 5.0% ‐ US average tax rates by income category o Less than $100k: 34.9% o $100k ‐ $250k: 32.5% o $250k ‐ $350k: 33.4% o $350k ‐ $500k: 32.5% o $500k ‐ $1m: 31.2% o More than $1m: 29.8%
Fairyland value accounting – Pg. 14 ‐ Try this on your credit card company: your creditworthiness has weakened, so you write down the value of what you owe to reflect the greater risk that you will not pay it all back and credit the difference to your personal income. That is exactly what accounting allows; the five big US banks – Citigroup, Bank of America, JPMorgan, Morgan Stanley and Goldman Sachs – have just reported gains equivalent to more than four‐fifths of their quarterly $16bn net profit as a result of falls in the value of their own debt and credit standing
Banks turn up heat on coal‐fired financing – Pg. 17 ‐ Dirty coal‐fired power plants would not be financed under standards being drawn up b some of Europe’s best‐known banks in a sign of the growing pressure on lenders to scale down support for fossil fuels
22 October 2011
New alarm over Greek economy – Pg. 1 ‐ Greece’s economy has deteriorated so severely in the past three months that global lenders would have to find 252bn (euro) in bail‐out loans through the end of the decade unless Greek bondholders are forced to accept severe cuts in debt repayments ‐ The report also made clear that European leaders are considering “haircuts” on Greek bonds far higher than previously known ‐ ….bondholders would have to take a 60% loss on their holdings….
Italian bonds at heart of dispute – Pg. 2 ‐ The fight between Germany and France over how to raise the firepower of the eurozone’s $611bn rescue fund in the end comes down to a basic question: is there enough money in Europe to prevent a run on the Italian bond market? ‐ Adding new money to the fund has proved impossible because it would probably force a downgrade of French debt, collapsing the entire EFSF rescue system. Plans to increase the fund’s firepower have similarly run into trouble because the leading “insurance” scheme – which would use the EFSF to guarantee losses on Italian bonds – saddles France with too many liabilities ‐ Moody’s has already warned it is reviewing France’s debt rating, in part because of the loss guarantee scheme
French banks told to take bigger losses on Greek debt – Pg. 10 ‐ Controversially, the 21% “haircut” envisaged for private sector bondholders as part of the rescue package has been used as a benchmark for losses by various French banks and some insurers when they reported their results for the first half of 2011 ‐ In sharp contrast, some rivals in other countries – such as the UK and Germany – recognized much heavier losses of about 50% on their “available for sale” Greek government bonds, in line with distressed market prices
US earnings get boost from accounting standards – Pg. 12 ‐ Consumer lending dropped, yet loans to businesses rose quarter‐on‐quarter,…
Japanese yen soars to record high against dollar – Pg. 14 ‐ The yen jumped to a record high against the dollar on Friday as prospects of further quantitative easing in the US and the lack of a resolution to the eurozone crisis left the Japanese currency as the last mainstream bastion of stability ‐ The yen soared as much as 1.4% to a fresh record of Y75.78 per dollar….
21 October 2011
Europe on edge as rescue talks stall – Pg. 1 ‐ European leaders will be forced to hold a second summit, perhaps as early as Wednesday, because of the inability of Germany and France to reach a deal on how to increase the firepower of the eurozone’s 440bn (euro) rescue fund ‐ Differences over the EFSF have widened in recent deays after some officials warned the leading plan for overhauling the fund – guaranteeing about 20% losses on Spanish and Italian bonds – might not work ‐ The EFSF’s ability to raise rescue money at low interest rates is tied to France’s and Germany’s triple A status, meaning a French downgrade could lead to a collapse of the EU’s financial rescue system
State steps up oversight of indebted Harrisburg – Pg. 4 ‐ ….signed legislation on Thursday allowing the state to seize control of its capital, Harrisburg ‐ Harrisburg’s receivership is a first for a city in Pennsylvania but it is just the latest move by state lawmakers to try to control the financial crisis in their towns, cities and countie ‐ Harrisburg’s troubles stem from guarantees it made on $300m in debt, several times its budget, related to a local rubbish incinerator ‐ Historically, municipal bankruptcy has been viewed as a last resort – an expensive process that allows a local government to reject contracts, most notably deals with labour unions, but threatens to bring years of stigma in the debt markets, which states and cities rely on to fund infrastructure projects ‐ For this reason, filings have been rare, with only 630 since 1937 with Chapter 9, the part of the Federal bankruptcy code applicable to municipalities, was established….
Rating agencies face shake‐up – Pg. 13 ‐ Sweeping changes to the regulation of credit ratings are set to be proposed by Brussels that would deal a blow to the business models of the big three agencies that issue them ‐ …European regulators would be able to suspend credit ratings of a country undergoing a bail‐out ‐ The reforms also propose giving wide‐ranging powers to Esma, the European markets regulator, to approve rating methods and ban sovereign ratings in “exceptional situations”
Cost‐cutting US lenders beat earnings forecasts – Pg. 16 ‐ Three leading US regional lenders reported third‐quarter earnings that beat analysts’ expectations as lower expenses and fewer loan delinquencies overcame decreased revenues to fuel higher profits ‐ The lenders all reported lower revenues, as high unemployment in the US and deleveraging by consumers saps loan demand
BNP Paribas – Pg. 20 ‐ A proposal that eurozone’s rescue fund should issue credit default swaps to investors buying government debt from Italy and Spain was launched yesterday even as bonds in the European financial stability facility sold off sharply
20 October 2011
EU puts banks’ shortfall at just 90bn (euro) – Pg. 1 ‐ Europe’s grand plan to strengthen its banking system is set to fall well short of current market expectations, identifying a capital shortfall of less than $138bn that must be made up over the next six to nine months, …. ‐ Officials said the main reason for the different numbers was the EBA’s inclusion of the positive impact on banks’ capital position of applying market values to the region’s better performing sovereigns, such as Britain and Germany, offsetting the peripheral “haircuts”
Citigroup pays $285m in SEC probe – Pg. 1 ‐ Citigroup has agreed to pay $285m to resolve a SEC probe alleging that the bank misled investors in a 2007 mortgage‐related security ‐ The SEC alleges that Citi was negligent in failing to tell investors in the security – a $1bn CDO, or package of mortgage‐related assets, known as Class V Funding III – that the bank helped select $500m of mortgage assets that went into the debt and was also betting against it ‐ Citi has paid more than $11bn in legal and regulatory expenses in the past decade,..
More Fed leeway as inflation rate eases – Pg. 3 ‐ The pace of US consumer inflation weakened in September, giving the Federal Reserve more room to stimulate growth if necessary ‐ The consumer price index rose 0.3% last month, in line with estimates and slower than August’s 0.4% increase ‐ The latest CPI data also had implications for US fiscal policy. Based on the trend towards higher inflation over the past year, the US government pension scheme – known as Social Security – announced it would pay higher benefits for the first time since 2009, aiding the strained household balance sheets of more than 60m retired and disabled Americans ‐ In 2010 and 2011 benefits were flat on the back of low consumer inflation, the only years that payments were not increased since cost of living adjustments were introduced in 1975 ‐ The 3.6% boost in 2012 means that the average monthly Social Security payment for retired workers will increase from $1,186 to $1,229 next year
A weekend to save the euro – Pg. 7 ‐ What sets Sunday’s summit in Brussels apart is that policymakers’ greatest fear at the start of the crisis – that the fiscal troubles of a small country on Europe’s periphery would infect the global economy – has come true ‐ Greek debts, even at 350bn (euro) could be absorbed easily by a content as prosperous as Europe ‐ What has also made Greece dangerous is the precedent it set ‐ Italy can still borrow in public markets, but only at rates many think unsustainable ‐ To meet the challenge, Europe’s leaders are trying to solve three simultaneous problems by Sunday night: putting Greece on a solid foundation through a second bail‐out; re‐ establishing confidence in Europe’s largest banks by ordering them to raise capital; and giving the newly empowered 440bn (euro) eurozone rescue fund more firepower so it can ensure Greek difficulties do not spread to Italy and larger financial institutions
US mortgages – Pg. 12 ‐ …8m homeowners in native equity (Prof Note: These are NOT homeowners….they are renters!)
Bank documents seized in Euribor probe – Pg. 16 ‐ European regulators seized documents from big banks in London and France this week after a tip from a bank involved in the inquiry inter interbank lending rate after it had uncovered potential problems linked to Euribor, … ‐ ….libor, the London‐based reference point for $350,000bn in contracts, was rigged at the height of the financial crisis ‐ Inquiries were extended to Tibor, the Tokyo‐based version,…
Watchdog voices concern on ETF risks – Pg. 20 ‐ The top US securities regulator said it was concerned about risks posed by the growth of complex exchange traded funds and intended to continue closely monitoring the booming market ‐ ETFs that aim to produce magnified or inverse returns to their underlying index have grown in popularity. Such funds represent a sliver of the market, $32bn out of $954bn in total US ETF assets as of September…
19 October 2011
France raises the stakes in euro crisis – Pg. 1 ‐ France has warned that European unity would be at risk if eurozone leaders failed to take bold action to tackle its sovereign debt crisis at a crucial summit this weekend ‐ As Moody’s, the US rating agency , warned France that it could see its credit outlook cut as a result of the growing sovereign debt emergency, Mr Sarkozy alluded to his country’s vulnerability were the eurozone to fall apart ‐ The high stakes for France were underlined by the warning from Moody’s that it would lower its outlook for the country’s triple A rating to negative from stable due to the impact of “the uncertain financial and economic environment” ‐ French 10‐year yields saw one of the biggest daily jumps in recent months, rising to 3.13%
Goldman Sachs hit by $428m net loss – Pg. 1 ‐ Goldman Sachs has reported a third‐quarter net loss of $428m, only the second time since it went public in 1999 that Wall Street’s most admired and reviled investment bank has not made a profit ‐ Goldman’s investing and lending business, which includes its principal investment arm and a stake in Industrial and Commercial Bank of China, reported negative net revenues of $2.5bn ‐ The bank’s business model is under threat from a slew of regulations: from the Volcker rule that bans proprietary trading to more rules on derivatives trading ‐ Goldman said it had, as planned, cut 1,300 jobs in the quarter….
China homes in on soft landing – Pg. 2 ‐ China’s economy moderated to its slowest pace of growth in more than two years in the third quarter, as it remains on track for a government‐engineered “soft landing” that has unsettled global investors ‐ China’s gdp grew 9.1% in the third quarter from a year before, the slowest pace for the world’s second‐largest economy since early 2009 and down from 9.5% increase in the second quarter ‐ Economists said the biggest risks to the Chinese economy were a global recession leading to a steep fall in demand for exports, or a collapse in China’s real estate market ‐ Hong Kong’s Hang Seng index dropped 4.2%.... ‐ The consumer price index rose 6.1% from a year earlier in September… ‐ The government has raised interest rates five times over the past year and increased the reserve requirement for banks nine times, while also ordering them to reduce lending and imposing limits on home purchases to curb property and consumer prices
Debt warning hangs over Paris – Pg. 3 ‐ The agency’s warning on Monday night that it might change its outlook on France’s critical triple A rating from stable to negative in the next three months fell well short of an actual downgrade. But it was enough to trigger a bout of market nerves ‐ France’s triple A rating, through the lower borrowing costs that come with it, underpins the country’s ability to manage its fragile public finances ‐ It also underpins France’s ability to help finance the eurozone’s rescue efforts for Greece and other vulnerable peripheral countries ‐ The country’s public debt is set to exceed 87% of GDP next year… ‐ France is reluctant to meet German demands for private sector investors to write off a much bigger chunk of their Greek exposure than the 21% already agreed, fearing the effect on the banks
Bernanke makes case for ‘forward guidance’ – Pg. 7 ‐ …communication about future policies will become an increasingly important took for central banks, in a possible hint about its strategy ‐ The Fed used a forecast that it will keep rates low until mid‐2013 to ease monetary policy in August ‐ The minutes suggested that those changes could include an explicit inflation objective for the Fed – something long favoured by Mr Bernanke – but also other options such as putting a number on its goal for unemployment, pledging to keep interest rates low until a specific economic target is met, providing more guidance on how it expects to change interest rates in future, and expanding its range of communication tools
China sells US Treasury debt amid strong haven demand – Pg. 22 ‐ China was a heavy seller of US Treasury debt in August after S&P’s downgraded the country’s triple A credit rating (Prof Note: Go Panda! Clearly the U.S. cannot learn to be fiscally prudent….the Eagle needs a swat in the a$$ from the Panda!) ‐ ….foreign demand for US stocks, bonds and other financial assets surged in August as investors focused on buying Treasuries as a haven investment ‐ Large purchases of US Treasury securities came from investors in the UK, Switzerland, Japan and Caribbean banking sectors, which are favoured by hedge funds ‐ The outlier was China, which sold $36.5bn in Treasuries, with sales of $40bn in longer‐dated coupons taking the country’s holdings down to $1,137bn, the lowest in a year. That still left China as the largest foreign holder of Treasuries followed by Japan at $936.6bn, up from $914.8 bn in July
18 October 2011
Banks hit by falling mortgage payments – Pg. 1 ‐ Fears about the health of US consumer balance sheets grew on Monday as Citigroup and Wells Fargo joined JPMorgan Chase in recording a flattening or rise in the number of homeowners falling behind on mortgage payments ‐ …weakness in the consumer side of their businesses – mortgage delinquency numbers suggesting that record low mortgage rates and government loan modification programmes are failing to help large swath of homeowners ‐ Citi said the percentages of mortgages that were 90 days delinquent rose for the first time in almost two years – up from 3.87% in the second quarter to 3.88% in the third
Obama’s new jobs plan puts pressure on critics – Pg. 6 ‐ The Obama administration has asked the US congress to support urgent measures to fund jobs for teachers, firefighters and police in an effort to force republicans to back a new stimulus for the faltering economy ‐ …$446bn jobs bill was blocked in the Senate…. ‐ Although private sector employment has been expanding this year, the public sector has contracted due to cuts in local government spending and also because the federal stimulus of 2009 has been winding down ‐ Since the beginning of last year, job losses in local government education have aeraged 11,000 a month, and total payrolls are 220,000 below their level at the end of 2007 ‐ Job losses in education have become an important factor in the stagnation of the unemployment rate at 9.1%, with tens of thousands of public sector redundancies offsetting some private sector growth each month
Walmart China unit chief and senior executive quit – Pg. 19 ‐ The latest departures at the top of Walmart’s China operations follow the equally abrupt resignations in May of the company’s chief financial officer and chief operating officer in China. ‐ Monday’s announcement followed the arrests last week of two Walmart junior store managers and the detention of 35 employees by authorities in Chongquing, where Walmart stores were found to be selling ordinary pork labeled as organic ‐ A number of US executives in the business community in Beijing have privately voiced concerns that Walmart could be the target of retaliation for proposed US legislation aimed at punishing Chian for keeping its currency undervalued
Banks in spotlight over QE2 auctions – Pg. 22 ‐ …just over a week since the launch of the second round of quantitative easing in the UK ‐ This is the first time QE has seen such a blatant attempt by a commercial bank to make a quick profit out of the auction process… ‐ In this case, the central bank refused to buy the gilt and warned the offending bank over its actions, making it clear to the rest of the market that it was not about to be hoodwinked into buying bonds at artificially high prices in the auctions, … ‐ The BoE says it will not buy more than 70% of the free float of individual gilts and, once the current QE programme ends, it will hae about 30% of this free float in nominal terms ‐ The limits of the buy‐back policy are underlined by the fact that the BoE is not prepared to purchase a large amount of corporate bonds because it is wary of taking credit risk on to its balance sheet.
US funds tracking renminbi bonds face liquidity problems – Pg. 22 ‐ Three ETFs launched in the US to track the return on renminbi‐denominated bonds may have trouble trading the debt securities they are meant to track because of limited liquidity in the market for so‐called dim‐sum bonds ‐ The renminbi bond market has grown rapidly. Some $11.3bn of debt has been issued this year,… ‐ A liquid market is important for ETFs, because the fund issuer or market maker need to buy and sell the securities a fund is tracking, in order to create or redeem shares
17 October 2011
G20 calls for speedy eurozone package – Pg. 1 ‐ France and Germay have less than a week of frantic negiation ahead to resolve key differences on a “comprehensive plan” to end the eruozone sovereign debt crisis after the world’s leading finance ministers put the ball firmly in their court at the weekend ‐ The Group of 20 richest nations told the eurozone that by European summit next Sunday it should: agree on the losses the private sector should take on Greek debt; arrange a credible plan for the recapitalization of Europe’s banks; and install a firewall to protect other countries from Greece’s woes ‐ The package must also convince the markets that Europe has the firepower to prevent further contagion
Wind farms set to become EU’s top power source – Pg. 1 ‐ Wind farms could provide as much as 49% of EU electricity by that date, ….up from 5% today ‐ Average electricity prices for households and businesses would rise “strongly up to 2020‐30” under all scenarios, … ‐ …goal to cut greenhouse gas emissions by at least 80% from 1990 levels by 2050 ‐ Nuclear plans are the next biggest source, with a share of 28%, while wind and hydroelectric plants, the two main sources of renewable energy, produce a combined total of 18% ‐ Average household electricity prices could rise by more than 50% within 20 years under both the low nuclear and high renewable scenarios, …
US student debt impact likened to subprime loan crisis – Pg. 7 ‐ US university students and graduates are facing a double whammy of ballooning debt loads and high unemployment, raising worries that a potential delinquency crisis could bleed into the wider economy (Prof Note: a job, like a home is NOT an entitlement. Students need to think of marketability of degree prior to incurring $100k+ debt. This is also why I am proud to say that EVERY class I lecture how to use the knowledge to make money!) ‐ Student debt has increased nearly sevenfold from $80bn in 1999 to $550bn at the end of June 2011 ‐ But the unemployment rate for 20‐ to 24‐ year‐olds is nearly 15% ‐ higher than the overall 9.1% rate – comprising the ability of graduates to pay off their growing debts ‐ Student loan delinquencies have risen from 6.5% in 2003 to 11.2% in June 2011, nearly as high as the 12.2% rate on credit cards ‐ The criteria for federally guaranteed student loans are not as stringent as for other kinds of debt, and many loans have been securitized and sold off to investors ‐ ….total level of outstanding student debt is projected to reach $1,000bn in the near future,…still considerably smaller than the estimated $2,500bn in risky subprime loans ‐ (Prof Note: it is imperative that students learn as MUCH as possible. The information is as important as the degree!)
15 October 2011
Investor threat to Greek bail‐out – Pg. 1 ‐ The lead negotiator for private holders of Greek debt has said that investors are unwilling to accept greater losses on their bonds than the 21% agreed in July, jeopardizing eurozone plans to finalize a second Greek bail‐out by the end of next week ‐ At the urging of Germany, other European leaders have in recent weeks agreed to reopen the July haircut deal, arguing that changed economic circumstances in Greece – including a plummeting in value of Greek bonds – meant bondholders should take a bigger hit
US rejects wider IMF role in eurozone – Pg. 2 ‐ The US and UK rejected suggestions from emerging market countries that the IMF needed more firepower to fight the eurozone crisis, creating a discordant start to the Group of 20 finance ministers …. ‐ Tim Geithner, US Treasury secretary, said the IMF had “substantial resources that are uncommitted”, while other non‐eurozone countries insisted it was for European to resolve the crisis themselves ‐ Opposing new funds for the IMF, finance ministers from the US, UK, Japan, Canada and Australia rejected indirectly committing more of their own taxpayers’ resources to fight fires in the eurozone ‐ The issue of the potential IMF support for a eurozone rescue package will dominate the G20 meeting,… ‐ Mr Geithner was backed by other non‐eurozone advanced economies in stressing the view that the single currency must resolve its own problems
More jobs expected to go in the Square mile – Pg. 10 ‐ The City of London’s downsizing drive is picking up speed, but for employees at securities firms it feels like death by a thousand cuts ‐ Banks including Goldman Sachs, HSBC and Royal Bank of Scotland have already announced thousands of job losses in the past few months ‐ ….more belt‐tightening is on the way ‐ Uncertainty about future demand, worries about the global recovery and concerns over the eurozone crisis have weighed heavily on securities trading and investment management firms, which have been particularly hit by recent volatility in the stock market
Company clues to the economy’s prospects – Pg. 12 ‐ Last week Goldman Sachs substantially revised downwards its estimates for year‐on‐year growth in the eurozone for 2012, from 1.3% to 0.1%
14 October 2011
Emerging countries in talks on IMF boost – Pg. 1 ‐ Emerging market countries are working on ways to contribute money rapidly to expand the effective firepower of the IMF, with the aim of increasing its role in combating the eurozone sovereign debt crisis ‐ …governments are considering either funding an IMF‐run special purpose vehicle (SPV) or lending the IMF by buying special bonds ‐ In practice the US may have difficulty contributing on a large scale, but people familiar with the talks say that China and Brazil – one of the driving forces behind the plan – have already shown interest
Judge gives Rajaratnam 11 years and attacks ‘virus’ in business – Pg. 1 ‐ …the longest term for insider trading in recent times ‐ ….ordered to pay $10m fine, plus $53.8m in restitution, but escaped a longer prison sentence because of ill health
Trade growth slumps in China as western demand weakens – Pg. 1 ‐ Exports increased by their slowest pace in seven months in September, expanding 17% from a year earlier to just under $170bn, compared with a nearly 25% increase in August,… ‐ Imports rose 21% from a year earlier to $155bn, … ‐ Trade with crisis‐hit Europe, China’s single biggest partner, showed the most obvious slowdown last month, with exports to the region growing by just 9.8% from a year earlier, compared with 22% growth in August
Repossessions leave Irish feeling homesick – Pg. 2 ‐ At the end of June, some 56,000 mortgages were in arrears of more than 90 days, around 7% of homeowners. A further 70,000 accounts have been restructured by lenders because families ran into financial difficulties ‐ The collapse of the Irish property market, which has experienced price falls of 50‐60% in parts of the capital, has left most homeowners in negative equity and little hope of escaping their debts ‐ Unlike in many US states mortgage holders in Ireland cannot simply hand back the keys to their homes to escape debt. When a bank sells a repossessed property below the value of a customer’s loan, it can still pursue the homeowner for the rest ‐ It takes five years to discharge yourself from bankruptcy in Ireland, but in the absence of adequate personal insolvency legislation people find that they cannot escape from mortgage debt (Prof Note: Perhaps the U.S. can learn from Ireland)
US unemployed pin hopes on learning new skills – Pg. 4 ‐ The constant advance of technology means someone unemployed a year or more, of which there are an estimated 4.5m in the US, will find skills outdated
Italy debt premium over Spain leaps – Pg. 20 ‐ Italy’s benchmark borrowing costs on Thursday reached their highest premium over those of Spain in the euro era, in a worrying sign of how investors are more worried about Rome than Madrid
13 October 2011
Fed looked at another round of easing – Pg. 1 ‐ …”QE3” is still possible if the economy weakens ‐ The Fed launched “Operation Twist” ‐ a $400bn programme of selling short‐dated an buying longer‐dated Treasuries – at September meeting in an effort to drive down long‐term interest rates and support a failing recovery ‐ The minutes also suggest that other options include quantifying the Fed’s unemployment goal, pledging to keep interest rates low until a specific economic target is met, providing more guidance on how it expects to change rates and increasing its communication tools
US mortgage rates run above average – Pg. 1 ‐ Mortgage rates for US homeowners are running half a percentage point higher than historical averages would suggest,… ‐ Since 2000, rates for 30‐year mortgages in the US have generally been about 150bps higher than the yields on 10‐year Treasury securities. This year, the spread between the two rates narrowed further touching a low of 128bp in February ‐ On Wednesday, the average 30‐year fixed‐rate mortgage in the US had a rate of 4.18%, …nearly 200bp higher than the 10‐year Treasury yield ‐ Lenders say they are charging higher mortgage rates because of together lending standards, falling home capacity to process new homes loans, all of which have increased costs ‐ The number of mortgage brokers has shrunk by two‐thirds since 2006 (Prof Note: GOOD! Perhaps now we are left with the true quality and professionals!) ‐ CoreLogic estimates 53% of borrowers with equity in their homes, or 20m homeowners pay above‐market rates
Harrisburg opts to file for bankruptcy – Pg. 2 ‐ Harrisburg, the debt‐laden capital of Pennsylvania, has filed for bankruptcy as state lawmakers were preparing to take control of the city ‐ Harrisburg, which has a population of nearly 50,000 stands to lose financing from Pennsylvania
Jobless total in UK hits 17‐year high – Pg. 4 ‐ Britain is facing a winter of rising unemployment after the jobless total rose to its highest level for 17 years,… ‐ The increase in jobless numbers, by 114,000 to 2.57m was larger than economists were expecting. It took the unemployment rate to 8.1% of the workforce in the three months to August – the highest rate for 15 years and a rise of 0.4% on the previous three months ‐ The rise in the unemployment figure confirms the jobs market is deteriorating as the UK emerges even more slowly from recession than it did in the Great Depression of the 1930s ‐ The 8.1% unemployment rate compares with 9.1% in the U.S. and 10% in the eurozone
Chrysler strikes pay deal with unions – Pg. 19 ‐ ….US carmaker investing $4.5bn and creating 2,100 jobs ‐ The contract will mean new hires at Chrysler will be paid a signing bonus of $3,500, smaller than the $5,000 agreed at GM or the $6,000 agreed at Ford (Prof Note: Signing bonus?! And we are upset over BofA’s $5 fee! I will stick with foreign cars, thank you!) ‐ Wages for entry‐level workers will rise to as much as $19.28 an hour from a range up to $15.78 currently, …
Homeowners yet to feel the boost from Fed’s ‘twist’ – Pg. 25 ‐ The key 30‐year mortgage rate has dropped below 4% for the first time on record, …. ‐ If households are to benefit from the Fed’s initiative, mortgage providers must pass on lower borrowing costs ‐ ….8m homeowners who owe more on their homes than they are worth,… ‐ More than 100,000 mortgage brokers have lost their jobs since 2006 (Prof Note: ….leaving us, hopefully, with the quality brokers and NOT the high school dropouts that switched from selling cars as it was more lucrative. Before I get a bunch of emails….my comments are based on my experiences as CFO for a homebuilder with mortgage brokers that did not understand mortgage calculations. There are quality mortgage brokers in existence and, unfortunately, some quality did lose their jobs)
12 October 2011 Europe’s banks face 9% capital threshold – Pg. 1 ‐ European authorities plan to set a higher‐than‐expected capital threshold for the region’s banks and give them six to nine months to achieve that level or face government recapitalizations,… ‐ …the key measure of financial strength – to 9%, well beyond the current expectations of banks…. ‐ …could see dozens of banks forced to raise a combined 275bn (euro),… ‐ Evidence of continued stress emerged to Tuesday as banks parked even greater sums at the ECB, rather than lending to others
Greeks pay for the crisis with their health and wealth – Pg. 4 ‐ The new tax is being added to owner’s electricity bills; households who fail to pay will be cut off ‐ …country is facing a fifth successive year of recession and a possible sovereign default ‐ Greece’s middle class is barely a generation old, having emerged in the 1970s with the restoration of democracy after a seven‐year military dictatorship ‐ Hotel stays by Greeks on the Aegean islands fell by about 30% in July and August,…
Wall St braced for tighter rules – Pg. 5 ‐ The so‐called “Volcker Rule”, aimed at significantly limiting proprietary trading and investments in hedge funds and private equity shops by banks that benefit from FDIC, will open for public comment mid‐January…
Axe hands over 10,000 securities jobs – Pg. 5 ‐ Wall Street companies faced with declining profits could cut another 10,000 jobs in a blow to New York’s economy,… ‐ That would bring the total joblosses to 32,000, or nearly 17% of the workforce,… ‐ The sector has lost more than 4,000 jobs since April 2011 and several large companies have already announced plans for more redundancies. BofA said last month it would cut 30,000 jobs, or 10.5% of its workforce,…
White House ready to battle for $447bn jobs bill – Pg. 5 ‐ The cost of the package is covered by a contentious 5.6% surtax on incomes above $1m – a “millionaire’s tax” …
Brazilian retail sales fall more than reported as consumers feel pressure – Pg. 6 ‐ The Brazilian consumer, who sustained Latin America’s largest economy through the 2008 crisis, showed signs of faltering in August after retail sales fell more than expected ‐ ….driven up delinquencies in consumer loan books ‐ …2011 GDP would be lower than its forecast of 3.3% year‐on‐year compared with last year’s 7.5%
Banks fail to trim bonuses in pay packages – Pg. 16 ‐ Top earners at some of the world’s biggest banks are still taking home as much as 96% of their pay in the form of an annual bonus… ‐ Banks have not been required to reduce bonus payments as a proportion of total pay as part of the G20 principles ‐ The skew toward bonuses is particularly pronounced in the US and UK,…bonus payments account for between 80 and 96% of the total pay awarded to US banks’ highest‐paid employees, and between 78 and 93% of the total pay awarded to UK banks’ highest paid executives,… ‐ That compares with between 38 and 56% of the total pay awarded to senior executives at banks based in emerging markets in Asia, and between just 32 and 46% of total pay at Japanese banks
Open trims demand forecast but chief rules out recession – Pg. 22 ‐ Brent crude, the global benchmark, dropped briefly below the key $100 level last week because of fears that the eurozone sovereign debt crisis would trigger a global economic crisis ‐ Libya has boosted oil production to 350,000‐400,000 b/d this week, about a quarter of its prewar output level of 1.6m b/d,…
Paulson’s costly bet on America’s rebound unravels – Pg. 23 ‐ So far this year…..lost an estimated $6bn of his investors’ – and his own – money
11 October 2011 EU Sets deadline to tackle debt crisis – Pg. 1 ‐ EU leaders have given themselves a deadline of two weeks to agree a deal to tackle the eurozone debt crisis, a grand bargain senior officials said would include a final decision on Greece’s bail‐out and a strategy to recapitalize the region’s banks ‐ Greece remains the most contentious issue,… ‐ Despite the remaining hurdles, the euro saw its biggest one‐day gain against the dollar in more than a year as hopes rose that policymakers had committed themselves to tackling the crisis
China to boost stakes in largest banks – Pg. 1 ‐ The Chinese government will boost its stakes in the country’s largest banks as it attempts to shore up financial stocks and restore investor confidence ‐ Monday’s announcement came too late for the Chinese stock market, which had closed earlier at a 30‐month low, but had an immediate effect on late trading in Hong Kong ‐ Chinese growth has so far held up well, but the European debt crisis and fears of a double‐ dip recession in the US have cast a shadow over the country’s economic prospects
Macroeconomic researchers win Nobel Prize – Pg. 6 ‐ Two economists known for their work on integrating expectations more sensibly into models of the economy have won the 2011 Nobel Prize for economics… ‐ The citation was specific in honouring the “empirical” or practical rather than theoretical work of both economists, since Pro Sargetn is best known for his work on rational expectations theory, which underpinned the belief that financial markets work efficiently
Intentions in tatters – Pg. 7 ‐ The Senate alarmed many supporters of free trade by pushing forward aggressive legislation to punish China for manipulating its currency
UN warns over volatility in food prices – Pg. 20 ‐ The jump in prices for grain and other staples led to riots during the 2007‐08 food crisis and more recently central banks in Asia have tightened monetary policy to combat food inflation ‐ ….prices were rising as demand was growing rapidly because of economic development, population growth and the increased use of biofuels
10 Oct0ber 2011 ‘Time is short’ for eurozone – Pg. 1 ‐ David Cameron has urged European leaders to take a “big bazooka” approach to resolving the eurozone crisis, warning they have just a matter of weeks to avert economic disaster ‐ …Angela Merkel, Germany’s chancellor, and France’s President Nicolas Sarkozy repeated their determination to defend the stability of the eurozone as they met for a bilateral summit in Berlin, … ‐ …Mr. Cameron wants Germany and others to accept the “collective responsibility” of euro membership and to increase the firepower of the eurozone’s $589bn bailout fund to stop financial contagion spreading from Greece ‐ He also called for the IMF to be more active in “holding feet to the fire”, confronting eurozone leaders in the starkest terms possible with the consequences of further prevarication ‐ The final part of his plan is to address Europe’s underlying weaknesses, including deepending the single market and improving the governance of the eurozone, if necessary, through treaty change ‐ ….tacit acknowledgement that Greece may not be able to meet the onerous terms of its austerity plan
Basel chief pushes tough line on bank reforms – Pg.1 ‐ Global banking regulators will press ahead with the first worldwide effort to force banks to hold more liquid assets and to cut back industry reliance on short‐term funding, despite complains that the rule changes could damage the broader economy, …. ‐ The deal will force banks to hold more top‐quality capital against unexpected losses, but there are concerns that some of the 27 member countries will not stick to the agreement ‐ The committee will publish “heat” maps to show which countries comply. Experts will also check whether each country’s implementation laws and regulations reflect the letter of the agreement ‐ The Basel group is at work on details of two rules: the liquidity‐coverage ratio, which will require banks to hold enough liquid assets to survive a 30‐day crisis, and the net‐stable funding ratio, to force financial institutions to use more long‐term funding
Concern over Fannie and Freddie grows in Asia and Middle East – Pg. 1 ‐ Asian and Middle Eastern central banks and sovereign wealth funds are increasingly anxious about the safety of their investments in the debt of Fannie Mae and Freddie Mac, despite the assurances of US government officials (Prof Note: I am in Asia right now and this is a HOT topic) ‐ Spooked by US political wrangling, (Prof Note: this is just embarrassing) ‐ …Bank of Japan, say they will be far more cautious in the future ‐ “The GSEs are not safe,” said one top official at an Asian central bank, who added that his institution was reluctant to sell its existing holdings because of fears of spooking the market ‐ Many foreign investors are not reassured by the increasing explicit US government guarantees, and are wary of the debt the two housing agencies issue ‐ The political fallout over the US debt ceiling this summer and the consequent S&P downgrade of US sovereign debt intensified fears that politics might derail the government promise to guarantee the debt ‐ “We have become hostage to the irresponsible behavior of politicians”, said Bader al‐Saad, head of KIA, (Prof Note: Join the crowd buddy! At least you are not paying their salaries [directly})
Voters’ anxiety over faith preying on Romney – Pg. 4 ‐ Mitt Romney’s Mormon faith and his commitment to socially conservative values are back in the spotlight, potentially offering Rick Perry, Texas governor and rival for the Republican nomination, an opportunity to recover from early campaign mistakes (Prof Note: Let us not forget that Perry threatened the Fed Chairman) ‐ Mormons believe in Jesus Christ but also believe in other tenets that traditional Christians reject, such as their sacred text, the Book of Mormon (Prof Note: Hmmmmm….I wonder what a ‘Staiger’ endorsement is worth?!)
US mortgage rates – Pg. 14 ‐ ….October 1981 was when mortgages were at their most expensive ever at 18.45%, while last week they hit a record low below 4%. The cumulative payments on an identical mortgage are less than a third as much today” ‐ This flexibility has boosted house prices and consumer spending tremendously over the decades, which is why part of the rationale for Operation Twist is to milk the trend further ‐ A rising mortgage rate trend would be exacerbated as mortgage bond investors who bought Treasury bonds to hedge against negative convexity (pre‐payment risk) dumped them instead (Convexity measures how sensitive a bond’s duration is to a change in interest rates).
Caution over earnings outlook – Pg. 15 ‐ US corporate profits are expected to show double‐digit yearly growth in the third quarter reporting season that starts this week, but investors will be watching for signs of a slowdown that could remove a key support from stock valuations ‐ Alcoa’s profits have been hit by a 6% decline in average aluminium prices in third quarter,… ‐ The financial sector is expected to be even weaker, with annual growth for banks nearly at a halt ‐ …analysts have lowered their forecasts for S&P 500 companies’ third quarter year‐on‐year profit growth from almost 17% when the quarter began, to just 13% now,….
Woeful quarter for hedge funds – Pg. 15 ‐ Hedge funds suffered their worst three months since the peak of the 2008 financial crisis in the third quarter this year with almost every type of alternative investment strategy losing money for investors ‐ The average hedge fund suffered a 2.8% fall in the value of its assets in September, which took total average losses for the quarter to 5.5%,… ‐ Some of the industry’s highest‐profile managers have struggled this year. John Paulson’s flagship Advantage fund is down 47% for the year after losing a further 19.3% in September
US distressed debt investors aim to seize European opportunities – Pg. 15 ‐ US hedge funds and private equity firms specializing in distressed situations are gearing up new or existing European offices in expectation of a surge in opportunities as the region grapples with its sovereign debt crisis and sputtering growth ‐ European banks hold of billions of euros worth of assets that could be sold at depressed prices, and large parts of the financial system are severely dislocated, opening up opportunities for funds that specialize in mispriced assets such as loans and bonds
Gloomy outlook tests analysts’ confidence – Pg. 18 ‐ The S&P 500 and the FTSE 100 have each lost almost one‐fifth of their value compared with their peaks earlier this eyar, while the main volatility index, Vix, has been above 30 since the start of August making this the longest continuous period it has stayed above the threshold for more than two years
Exchanges, Trading & Clearing – Special Section (Prof Note: Recommend reading)
8 October 2011
US jobs data give hope on economy – Pg. 1 ‐ The US economy added a better expected 103,000 new jobs in September, raising hopes that a “double‐dip” recession can be avoided ‐ …unemployment rate held steady at 9.1%, the new data reflect the changing complexion of the US labour market and suggest that there is less likelihood of a second recession in three years ‐ Instead of collapsing after this summer’s federal debt ceiling battle, the jobs market appears to have weakened only gently, making a spiral into recession less likely ‐ The September figures were flattered by 45,000 telecoms workers who went back to their jobs after a strike; they had been subcontracted from the total in August
Ireland’s credit unions fall prey to anxiety – Pg. 2 ‐ It is 10am on a Friday at Cabra Credit Union, a co‐operative financial institution based in a working‐class district in Dublin ‐ But credit unions, widely known as the people’s banks in Ireland, are not immune to the country’s financial crisis, which led to a European Union‐IMF bail‐out last year ‐ The money to recapitalize the credit unions will come from what remains of the 17.5bn (euro) of state funds within the 85bn (euro) bail‐out fund agreed with the EU and the IMF that was not used to recapitalize the banks ‐ Ireland’s central bank, which regulates the sector, judged 79 of the 407 credit unions to be a solvency risk,…
White House feeds off anger – Pg. 4 ‐ Underlying the protests, and the administration’s response, is the stubbornly stagnant economy that continues to sap voter confidence and challenge politicians ‐ Mr Obama attacked BofA and said financial institutions did not have “an inherent right” to a certain level of profit, a comment he has since rowed back from (Prof Note: Whoa…is it not the goal of capitalism to earn a profit. Wait a second, do I not lecture in my Finance 101 MBA course that the goal of a corporation is to maximize wealth. The very foundations of our society are being shaken, I hope people are noticing)
Risk‐averse sellers fail to discriminate – Pg. 12 ‐ There are clearly deep concerns about the health of certain economies, particularly those on the periphery of the eurozone, and there will almost certainly be big losses to be borne b some of the banks with outsized exposures to those risks
Bank’s QE gamble splits sentiment – Pg. 14 ‐ The Bank of England’s decision to launch a second round of quantitative easing to stimulate growth in the UK highlights the grave risks for financial markets as the economy teeters on the brink of a double‐dip recession ‐ The initial reaction to QE saw equities jump and gilt yields and sterling fall, which was positive as the drop in gilt yields and sterling should in theory spark lower company borrowing costs and improve export competitiveness, in turn buoying growth in the UK ‐ The Bank recently estimated that QE1’s 200bn (sterling) had a peak effect on real GDP of an additional 1.5‐2%, which means a 75bn (sterling) injection should roughly equal between 0.5 and 0.75%
Real Estate Trusts – Pg. 18 ‐ Since August, the S&P500 real estate investment trust index has fallen 15%, half as much as the S&P500 ‐ In theory, Reits’ share prices should be less volatile than those of most other companies. They derivate rental income from tenants locked in for contracted periods and have long‐ term earnings visibility ‐ The simple fact is that they are not as profitable as they once were ‐ Writedowns of their assets (which muddied comparable performance data for the past two years) are largely complete, yet Reits’ returns on equity are not about 13%, a discount of more than half to the S&P500, which boasts an ROE of 25%. That compares with a discount of about one‐third before the financial crisis ‐ While revenues for the sector are about the same as they were before the crisis, deleveraging has eaten into returns
7 October 2011
ECB raids policy cupboard – Pg. 1 ‐ Europe’s central banks have escalated their use of unconventional policy weapons in a bid to calm nervous financial markets and prevent the continent’s economies from sliding into recession ‐ …the Bank of England surprised markets by unveiling plans to provide further monetary stimulus to the UK economy faster and on a greater scale than had been expected
Higher labour costs in China begin to push manufacturing jobs back to US, study finds – Pg. 1 ‐ …trend could cut the US’s merchandise trade deficit with the rest of the world, excluding oil, from $360bn in 2010 to about $260bn by the end of the decade ‐ The shift would also reduce its soaring deficit with China, which reached $273bn in 2010 and has triggered an intense political controversy over China’s exchange rate policies
Obama steps up Wall St attack – Pg. 2 ‐ …US president also endorsed a proposal from Democrats in the Senate for a so‐called millionaire’s tax to pay for his $447bn bills to promote jobs ‐ Mr obama is battling the threat of a double‐dip recession in the US economy, which could further imperil his already difficult re‐election prospects
A disruptive digital visionary – Pg. 7 ‐ With no formal technical background, he [Jobs] borrowed, bought or merely popularized many of the ideas most closely associated with this company’s success ‐ ….friend Steve Wozniak – their first gadget was an illegal device that transmitted a tone down telephone networks to allow them to make free calls ‐ … ‐ He dropped out of Reed College, Oregon, and in 1974 went to India in search of spiritual enlightenment ‐ A perfectionist who did not suffer fools lightly, he insisted on having the final say over technology, design and marketing of everything stamped with the Apple name ‐ (Prof Note: College is not a requirement for success, look at Gates. Jobs was young, cherish every moment)
‘Volcker rule’ may extend to non‐US banks – Pg. 14 ‐ Banks based outside the US could come under the American “Volcker rule” that bans proprietary trading, …. ‐ …the rule bans US banks from trading for their own account and imposes strict limits on their ownership of hedge funds in an attempt to hive off the riskier parts of finance from the utility functions of banking ‐ Non‐US banks were supposed to be exempt, but these latest drafts forces the likes of Barclays, Deutsche Bank and Credit Suise to pass a four‐step test: a transaction must be “conducted by a banking entity that is not organized under the laws of the United States”; no part can be a US resident; no staff “directly involved” in the US; and the transaction must be “executed wholly outside” the country ‐ The rule is due to be unveiled next week…
Fed’s Twist succeeds in pushing US mortgage rates to fresh lows – Pg. 21 ‐ US 30‐year mortgage rates have fallen below 4% this week for the first time,… ‐ …the 30‐year mortgage rate averaged 3.94% for the week ending October 6, down from 4.01% the previous week ‐ The 15‐year fixed rate, which is popular borrowing benchmark for homeowners, also dropped to its lowest level on record, falling to 3.26%....a year ago the 15‐year rate averaged 3.72%
6 October 2011
EU to retest banks’ strength – Pg. 1 ‐ Europe’s top banking regulator has started to re‐examine the strength of the region’s banks, modeling a big writedown of all peripheral eurozone sovereign debt ‐ …could potentially identify capital shortfalls across the banking system of as much as $266bn ‐ The move, a tacit admission that the EBA’s two previous rounds of stress tests were not robust enough,… ‐ The top three French banks, BNP Paribas, Societe Generale and Credit Agricole, own huge stocks of debt issued by eurozone peripheral countries and have come under pressure from markets
US job cuts hit two‐year high – Pg. 2 ‐ Planned lay‐offs in the US surged to a two‐year high as Bank of America and the US military announced heavy cuts, while companies continued to hire workers at a modest pace in September ‐ The private sector added 91,000 jobs last month, being forecasts of 75,000 new positions,… ‐ …lay‐offs surged last month to the highest level in more than two years,…. ‐ Employers said they would cut 115,730 jobs in September, compared with 51,114 in August and 37,151 a year ago ‐ Seventy per cent of last month’s cuts came from two employers: the US government led by the army’s five‐year troop reduction plan, and Bank of America, which announced 30,000 lay‐offs as part of a restructuring plan
China tests US with currency move – Pg. 3 ‐ …Beijing has put the brakes on renminbi appreciation, raising the spectre of a bitter dispute between the world’s two biggest economies ‐ The last time Beijing locked the renminbi in place against the dollar was August 2008, about three months before it launched a Rmb4,000bn stimulus programme that proved crucial to the Chinese economic recovery and the world ‐ Beijing let the renminbi rise almost 7% against the dollar from June last year until the end of August this year, a key component of its campaign to rein in inflation ‐ The central bank last raised interest rates in early July and told banks to set aside more deposits as required reserves in June
Moody’s downgrade adds to pressure on Berlusconi to resign – Pg. 4 ‐ The three‐notch slashing of Italy’s credit status by Moody’s on Tuesday had been widely anticipated in Rome and discounted on the markets
New wells to draw on – Pg. 7 ‐ Within the past two years, the industry has woken up to the prospect that the rock layer stretching across the north‐east of the continent from Kentucky to Ontario is rich in oil, gas and the “natural gas liquids” such as ethane and propane that are used as feedstock for the chemicals industry ‐ Many other countries, including China, are also thought to hold large shale gas reserves ‐ Plans using this lavish hydrocarbon endowment are threatened by public disquiet over hydraulic fracturing – “fracking” – the process used to release gas and oil by pumping water and chemicals underground at high pressure ‐ Shale gas is particularly important because it is stranded in US, with no facilities to sell it on world markets, although the country’s first liquefaction plant to enable the gas to be exported is now under development. As a result, gas is much cheaper in North America than in other leading economies. The US price of about $3.60 per million btu compared with about $8 in the UK and $16 in Japan ‐ The US gas price works out at the equivalent of $22 a barrel, about one‐fifth of the Brent crude price of more than $100
US banks defer 60% of executive bonuses – Pg. 15 ‐ The new trend in bank pay comes after a financial crisis that many blame on excessive risk‐ taking by bankers and traders who were compensated for taking short‐term risks without having to suffer long‐term consequences of their actions ‐ …deferral periods typically last three to five years and involve a mixture of cash and stock grants, a three‐year stock deferral was the most common,… ‐ Risk‐takers now see their pay being adjusted for risk
Warning of unintended outcomes with Tobin tax plans – Pg. 18 ‐ …bankers, analysts and investors point out that, instead of banks, such a tax would be likely to hit pension funds and other “long‐only” savings vehicles and middle‐sized companies which use derivatives to hedge against swings in commodity prices and currencies, because they would be the least able to avoid it ‐ High‐frequency traders, one of the main targets of the proposed legislation, would likely move offshore and shift more of their transactions from equities and bonds, which would be taxed at 0.1%, to contracts for difference and derivatives, which would be taxed at 0.01%
Threat to growth of samurai bond market – Pg. 22 ‐ The eurozone debt crisis is threatening growth in Japan’s samurai bond market, which was heading for record volumes this year amid strong demand ‐ Samurai bonds – yen bonds issued by foreign entities – tend to pay a premium over comparable corporate bonds, hence their attraction ‐ There was a noticeable absence of European issuers tapping the market during August and September, ….
5 October 2011
EU agrees to unit in defence of its banks – Pg. 1 ‐ EU finance ministers are examining ways of co‐ordinating recapitalizations of financial institutions after they agreed that additional measures were urgently needed to shore up the region’s banks ‐ Wall Street surged 4% in the final hour of trading after the FT reported the latest European moves to tackle the debt crisis ‐ The finance ministers left open the exact means of how the recapitalization could be co‐ ordinated. One option being examined is to set a new higher capital requirement for banks that went through an EU stress test last summer ‐ Markets have been unsettled by troubles at Dexia, the Franco‐Belgian lender, which holds $4.7bn in Greek bonds and 15bn (euro) in Italian bonds and have been struggling to raise enough short‐term cash
Bernanke accuses China of ‘hurting the recovery’ with currency moves – Pg. 1 ‐ The chairman of the US Federal Reserve has accused China of damaging prospects for a global economic recovery, through its deliberate intervention in the currency market to hold down the value of the renminbi ‐ The US Senate voted over‐whelmingly on Monday to open debate on a bill, clearly aimed at China, that would impose tariffs on imports from countries with undervalued currencies ‐ …legislation could spark a “trade war”
Bernanke downbeat on outlook – Pg. 4 ‐ …downbeat outlook for the economy in his testimony to Congress saying recent indicators “point to the likelihood of more sluggish job growth in the period ahead” ‐ Other issues holding the economy back included consumer caution because of the weak labour market, lack of housebuilding because so many households had mortgages worth more than their properties and the drag from fiscal cutbacks ‐ Mr Bernanke’s outlook for inflation was dovish
A return to reform – Pg. 9 ‐ America’s corporate tax rate is the second‐highest in the Organization for Economic Co‐ operation and Development club of rich nations ‐ Unlike most countries, the country taxes profits earned by its companies overseas ‐ Tax policy remains one of the most divisive issues in American politics, … ‐ For Democrats, reform represents a serious opportunity to address decades of rising income inequality, and at least 15 years of median income stagnation, by making the wealthy shoulder a heavier burden ‐ Republicans…argue that they code is already sufficiently progressive – and that making it more so would reduce rather than improve the incentives for job creation ‐ …the code is now 10,000 pages long. (Prof Note: Dodd‐Frank is 2319)
Crude oil falls below $100 a barrel – Pg. 22 ‐ …pulled down by fears the global economy could be on the brink of another growth‐sapping crisis ‐ Goldman Sachs, historically a commodities bull, reduced its Brent crude oil price outlook for 2012 from $130 to $120 a barrel and cut its copper forecast from $10,790 to $9,200 a tone
Lending loses its luster for China’s rich – Pg. 22 ‐ The scale of the bankruptcies and defaults seems small but the stories of failed private lending operations, which are appearing every day in the Chinese media, illustrate a deeper deficiency in the nation’s financial system ‐ Savings in banks are losing real value by the day, with one‐year deposit rates capped at 3.5% but consumer price inflation running at 6.2% ‐ The Shanghai stock market is down more than 20% since late last year with investors losing faith in equities despite robust company earnings. Property has been squeezed by sustained government tightening policies, with transaction volumes falling in most big cities in September,….
4 October 2011
Eurozone and Asia lead factor slowdown – Pg. 1 ‐ The global manufacturing sector is in its worst shape since the summer of 2009 as slowing economic growth and the deepening eurozone crisis take their toll on the world’s factories ‐ In the eurozone, the manufacturing sector shrank for the second month in a row, with new orders falling at their fastest pace since June 2009
Dexia holds emergency talks – Pg. 1 ‐ Europe’s sovereign debt crisis forced Dexia, the Franco‐Belgian banking group, into emergency talks on Monday to consider strategic options including an effective break‐up, … ‐ The lender, a municipal financing expert, was looking at setting up a “bad bank” to hold a portfolio of assets which has long burdened it, … ‐ Dexia has traditionally been the biggest operator in the funding of French municipalities – although analysts say wholesale funding difficulties have curtailed this. It also runs a significant retail network in Belgium and Turkey ‐ Since the 2008 bail‐out, Dexia has been majority owned by French, Belgian and Luxembourg governments and state‐led bodies such as the French CDC ‐ The euro tumbled to a more than decade low against the yen amid tensions over Greece, which has warned it will run out of cash next week unless it is offered fresh loans ‐ The euro also fell to an eight‐month low against the dollar
Property price fall puts focus on ‘bad bank’ – Pg. 2 ‐ Two surveys published on Monday show prices have fallen as much as 55% from their peak in parts of Dublin, plunging hundreds of thousands of homeowners into negative equity and further dampening consumer spending ‐ Prices in Dublin were unlikely to stabilize until the second half of 2012, … ‐ He said between 200,000 and 330,000 homeowners were now in negative equity (Prof Note: This is the F’in problem….a homeowner in negative equity is NOT a homeowner….they are a renter!!!) ‐ Some 9% of residential mortgages are in arrears of 90 days or more,….
US economy defying fears of double‐dip – Pg. 4 ‐ Two of the shocks to the US economy – high petrol prices and supply‐chain disruptions related to Japan’s earthquake – were receding,…
Global banks forced to write ‘living wills’ – Pg. 21 ‐ The FSB said on Monday that all the big international banks will be required to write what it called “recovery and resolution plans” and regulators should develop cross‐border crisis management groups to carry them out ‐ In some cases banks are having to detail how they could wind up their trading books within a matter of days and split crucial systemic functions, such as retail deposits and payment processing ‐ US banks also have to provide lists of potential buyers for assets they might have to sell ‐ US authorities are requiring resolution plans from 124 banks with more than $50bn in global assets
3 October 2011
Greece’s cabinet agrees to large cuts – Pg. 1 ‐ …immediate dismissal of thousands of public sector workers – under intensifying pressure from its international creditors ‐ The budget assumes that Greece’s economy will shrink about 2% in 2012, on top of a projected 5.5% contraction this year as private consumption plummets and the government slashes infrastructure spending and other public investment ‐ About 23,000 workers nearing retirement will lose their positions along with 7,000 others after mergers and restructuring at dozens of state‐controlled organizations
Richer countries try to cut pay‐out – Pg. 2 ‐ A planned $3.8bn EU payment to Greece and other struggling countries could be reduced by at least half after some rich EU countries raised concerns about the impact on their own public finances ‐ Six EU countries – Greece, Portugal, Ireland, Latvia, Romania and Hungary – stand to receive the money…. ‐ Under European Commission proposals, the percentage of “co‐financing” would drop to as little as 5%, from over 15%
Congress set to press China over renminbi – Pg. 6 ‐ …renewing a push to penalize China over its currency, potentially forcing the White House to choose between angering its Democratic base and upsetting its delicately balanced relations with Beijing ‐ The Senate is expected to vote on anti‐China trade legislation today,… ‐ The bill would require the commerce department to use estimates of currency undervaluation when calculating so‐called countervailing duties, imposed against imports deemed to be state‐subsidized ‐ On Sunday China’s official news agency said the US was resorting to an old habit of deflecting blame to China ‐ China still tightly manages its currency, buying all the dollars that flow into the country and then reinvesting them abroad, largely in US‐denominated assets such as Treasury bills
Bankers versus Basel – Pg. 9 ‐ Basel III, named after the Swiss‐based international committee of regulators that issued the rules, is a complex package of reforms designed to make banks more resilient and less likely to need taxpayer rescue in future. It forces lenders – particularly the largest – to build up buffers of equity, cash and liquid assets to protect themselves against unexpected losses or another market crisis ‐ There are four key elements to the Basel III deal aimed at making banks more able to survive unexpected losses or funding problems and less likely to need taxpayer rescue. The rules will be fully phased in by 2019 o Capital: Banks must have top quality (“core tier one”) capital equal to 7% of assets adjusted for risk, or face restrictions on paying bonuses and dividends o Surcharge: The biggest “systemically important financial institutions” have to carry an extra 1 – 2.5% in capital, for a total of up to 9.5% of risk‐weighted assets o Liquidity: Banks have to keep enough cash and easy‐to‐sell assets to survive a 30‐ day market crisis o Leverage: the Ratio of core tier one capital to a bank’s total assets, with no risk adjustment, may not exceed 3%
1 October 2011
A history of statistics that failed to add up – Pg. 3 ‐ The discovery of another deficit fudge triggered the country’s current crisis, when the newly elected Socialist government revealed a double‐digit deficit in October 2009 – almost three times the previous forecast
More bounce per ounce – Pg. 7 ‐ For metals championed by their proponents as a “store of value” immune to the vagaries of governments and their printing presses, gold and silver – known as “the poor man’s gold” – have, to say the least, proved disappointing ‐ Prices have been falling since gold hit its high of $1,920 per troy ounce three weeks ago ‐ …Monday, when gold reached a low of $1,534 an ounce, down 20% from its peak ‐ As it turns out, when things really turn bad, “gold gets killed”…. ‐ Investors discovered that, in an interconnected world, all assets move together in a crisis ‐ There are two big questions for investors. Does the recent fall mark the loss of haven status and the beginning of the end for gold’s decade‐long bull market? If not, how long will it take for prices to recover? ‐ For modern investors, gold is simply an alternative to paper money ‐ The build‐up in the gold price in the past few years, and particularly the rapid run‐up before the last summer plunge, reflected a loss of faith that governments would keep control of their printing presses ‐ The more it appears they will debase their currencies through policies such as QE, the more investors seek an alternative ‐ Gold has been one destination; certain currencies another: the Swiss franc and the yen have soared in the past year,…
Battered and bruised on the Street – Pg. 14 ‐ Equities recorded their worst quarterly decline since the depths of the financial crisis in 2008, and while the S&P 500 has not followed other global benchmarks into bear territory just yet, it faced a testing time in October ‐ The S&P 500 recorded a drop of 7.2% in September, and a decline of 14.3% over the third quarter, its worst performance since the final three months of 2008, when the market dropped 22.6%. In the UK, the FTSE 100 was down 13.7% over the third quarter
Investors pull back from emerging market funds – Pg. 14 ‐ Emerging market funds have suffered the worst run of redemptions since at least 2004 over the past week, the latest evidence of investor unease over riskier financial markets ‐ Almost $6bn was pulled out of emerging market funds in the five days to Wednesday,… ‐ All 25 of the largest emerging market currencies dipped against the US dollar in September, many by double digits
30 September 2011
Germany backs rescue fund – Pg. 1 ‐ The German parliament has voted by an overwhelming majority in favour of measures to bolster the $597bn eurozone rescue fund, giving it new powers to buy bonds, in a move that lifted financial markets and boosted the euro ‐ The measures to bolster the borrowing capacity of the European financial stability and give it new powers, including issuing liquidity loans to countries in difficulty, could be tested in weeks or months if market speculation about a Greek debt default comes true
Revised GDP and jobs data lift gloom – Pg. 1 ‐ The outlook for the US economy brightened a little on Thursday as revisions to data on growth and jobs suggested it was farther from sliding back into recession than had been feared ‐ GDP growth in the second quarter was upgraded from 1 to 1.3%, while annual revisions by the BLS found 192,000 extra people were in work in March, equivalent to a month of robust jobs growth ‐ …new unemployment benefit claims at 391,000 – the fewest since April
Chinese watchdogs see silver lining in property sector’s financial woes – Pg. 1 ‐ The stocks and bonds of Chinese property developers have been battered this year, with the sell‐off accelerating in recent weeks ‐ With property transactions slowing dramatically and prices starting to fall, some investors think it is only a matter of time before Beijing backs down and reopens credit channels for developers ‐ Chinese housing prices soared from late 2008 to 2010
UK fears defeat on regulation – Pg. 2 ‐ Britain is braced for defeat in Brussels on a critical piece of financial regulation, which would force it to cede control over the shape of key markets in the City of London, home to more than three‐quarters of Europe’s derivatives trading
China property developers start to feel jittery – Pg. 5 ‐ In a city where the average annual income is less than $8,000, a 500 square metre apartment in this development is priced at well in excess of $10m ‐ Beijing boasts China’s most expense real estate, but across the entire country similar high‐ priced half‐built residential complexes now ring every city ‐ Taking steel as an example, China is by far the world’s largest consumer and Chinese real estate construction directly accounts for 40% of the country’s steel usage ‐ S&P’s warned this week most developers would be able to withstand a 10% fall in sales next year but would face “severe liquidity strains” if sales fell 30%
Corporate debt sales hit lowest point in three years – Pg. 19 ‐ Global corporate debt sales plunged to the lowest level for three years in the third quarter, as the financial maelstrom hammered investor appetite for riskier issuance and deterred safer companies from accessing capital markets ‐ ….the average coupon for fixed rate investment grade corporate bonds fell to an average of 4.23% in the third quarter, compared with 4.36% in the three preceding months, … ‐ Dollar‐denominated issuance in particular has been strong, due to the US market’s traditional resilience to turmoil ‐ The riskiest, junk‐rated companies are mostly in good shape but some could face looming repayments that might be tough to meet without market access ‐ Global high yield issuance fell 73% to $29bn in the third quarter,…
US muni yields fall to historic lows – Pg. 22 ‐ US municipal bonds on Thursday were on course for one of their best quarter in the last two years, as yields on this type of debt fell to historic lows alongside benchmark US Treasuries ‐ “Munis” have not kept pace with the rally in Treasuries, whose yields plunged on fears of a US economic slowdown and debt problems in the eurozone ‐ Another near‐term risk is the US economic slowdown, which will filter through to state and local governments, slowing or even halting the recovery in tax revenues ‐ Federal lawmakers this fall could reduce spending to states and cities as they seek to reduce the national deficit, a factor that rating agencies have said could affect credit ratings for states and local governments ‐ Lawmakers are also considering changes to tax breaks on munis, which are the factor that most attracts investors
29 September 2011
Business lashes out at Tobin tax plans – Pg. 1 ‐ A EU proposal to impose a tax on financial transactions has been attacked by financial and business groups as an assault on the City of London and on companies seeking to protect themselves against market uncertainty ‐ …tax could raise about $75bn a year to replenish government coffers ‐ The proposal, which requires unanimous approval from the European Union’s 27 member states, enjoys the backing of Germany and France, the bloc’s largest member states, but is staunchly opposed by the UK ‐ Under the proposal , trades in bonds and shares would be taxed at 0.1%, while more complex derivatives would face a 0.01% levy
SEC probes banks over handling of problem mortgage loans – Pg. 1 ‐ The SEC is examining whether banks misled shareholders about the number of loans they might be forced to buy back because of early defaults – known as loan repurchase requests – and set aside sufficient reserves to fund those purchases or handle related litigation, … ‐ The investigation also seeks information related to early payment defaults and loan repurchase requests ‐ The SEC is also looking into whether some banks reached settlements with originators over problem loans but failed either to disclose the pacts or replace the bad loans as required by contracts…
Funding woes sap quality of US education – Pg. 3 ‐ Cuts to US public universities are undermining the administration’s goal of “out‐educating” the rest of the world and damaging America’s global competiveness, …. ‐ The cuts are part of a broader trends of disinvestment in infrastructure that has undermined the US’s ability to compete in the global marketplace, … ‐ While the US educational system declines, its rivals, notably China and India, are pouring money into their own schools and reaping the benefits of an increasingly educated workforce ‐ China plans to increase education spending to 4% of GDP next year from 2% in 2006 ‐ Debt loans are also growing. Student loans jumped to $550bn in the second quarter of 2011 compared with $90bn in 1999,….
Creditors reject call for bigger losses – Pg. 4 ‐ Large holder of Greek bonds have reacted angrily to suggestions that some eurozone countries want investors to suffer bigger losses than those agreed in the second bail‐out of Athens ‐ Opposition is being led by France and the ECB which fears that imposing heavier losses, or haircuts, could lead to fresh selling to eurozone banks shares and lead markets to focus more acutely on Italy, the eurozone’s largest bond market and third‐biggest economy
Tokyo returns to big privatizations – Pg. 7 ‐ The government in Tokyo plans to sell its entire stake in Japan Tobacco and other companies to raise (20bn) to fund reconstruction of the north‐east region of Tohoku, ….
Hong Kong fears income gap has potential to stoke social unrest – Pg. 7 ‐ GDP is growing annually at more than 6% and unemployment is at 3.2%, the lowest level since 1998. Hong Kong had the world’s fastest growth in number of US dollar millionaires last year ‐ Hong Kong has the highest income inequality among developed economies, ….
Homeowners rush to refinance loans amid low borrowing costs – Pg. 25 ‐ US mortgage applications surged in the past week as historically low borrowing costs lured homeowners to refinance their existing loans ‐ Applications increased 9.3% from the week earlier,… ‐ Refinancing activity increased 11.2%, the third consecutive weekly increase and the highest since August ‐ The rate for 30‐year Fannie Mae mortgage bonds was at 3.10% on Wednesday, up from Friday’s low of 2.74%
28 September 2011
Cracks in Greek bail‐out – Pg. 1 ‐ The divisions have emerged amid mounting concerns that Athens’ funding needs are much bigger than estimated just two months ago ‐ …calls for more losses to be imposed on the private sector, France and the ECB are fiercely resisting any such move
Inflation outlook on US lowest for a year – Pg. 1 ‐ Market expectations for US inflation have dropped to their lowest level in a year and are below the Federal Reserve’s unofficial target, as investors respond to the central bank’s latest attempt to stimulate the economy (Prof Note: This could bode well for a QE3) ‐ The expected rate of inflation over the next 30 years, as measured by the difference between Treasury Inflation Protected Securities (TIPs) and cash government bonds, dropped as low as 1.85% in recent days from 2.73% last month. The rate was just under 2% on Tuesday
Data point to stagnant US economy – Pg. 4 ‐ The US economy continues to struggle as data released on Tuesday showed stagnant house prices and very weak consumer confidence, although there is still little sign of a spiral towards recession ‐ The Case‐Shiller index found that prices of single‐family homes in the 20 largest US cities fell 4.1% from a year go, …. ‐ Housing demand remains weak throughout most of the US despite record‐low mortgage rates. New home sales fell to a six‐month low in August
Health insurance costs deal blow to Obama – Pg. 4 ‐ The cost of health insurance has surged in the US this year,… ‐ Insurance premiums for family health benefits in 2011 jumped 9% from a year ago to $15,073, ….
Confidence and houses – Pg. 12 ‐ The average US home across America’s 20 main cities is now worth 14% less than in 2008. But so are the stock prices of boring old Walmart and PepsiCo. JPMorgan has lost a third of its value over that time; Citigroup three times as much
Regulation ‘threatens big project financing’ – Pg. 13 ‐ Banks are being discouraged from large project finance deals by new global capital rules and the eurozone crisis,… ‐ Standards ordered by the Basel committee of international regulators will make large long‐ term loans harder to hold on banks’ balance sheets,… ‐ Project finance loans to build power stations, wind turbines and bridges are unattractive because of their size, tenor and illiquidity, …
‘Dark pools’ lose out to exchanges – Pg. 20 ‐ The private stock trading venues owned by banks and brokerages known as “dark pools” suffered a sharp decline in market share in the US in August, reversing a rapid ascent over the past three years,…. ‐ The share of all US equity trading taking place in the 18 dark pools tracked by Rosenblatt Securities fell by more than a percentage point in August, …. ‐ Exchanges have been losing share to dark pools, whose share of trading was less than 5% three years ago
Brazilian stocks turn hostage to euro woes – Pg. 21 ‐ Latin America’s largest economy and its capital markets are hostage to the same uncertainties over the eurozone that have pushed almost all emerging markets to lows in recent weeks and have wakened their currencies ‐ Among the large global emerging markets, few are as well‐placed as Brazil to withstand a large external shock with its $352bn of foreign exchange reserves, sound financial system and significant capacity for counter‐cyclical stimulus measures ‐ ….inflation touched 7.23% in the 12 months to end‐August just as the latest wave of pessimism over the eurozone began to intensify
27 September 2011
Buffett launches first Berkshire buy‐back – Pg. 1 ‐ …famed stock investor declared the market value of his own company to be extremely cheap ‐ …estimates that Berkshire had $77bn in cash and equivalents at the end of the second quarter, giving Mr Buffett $57bn of dry powder ‐ Shares in Berkshire had fallen by a fifth this year before trading began on Monday, giving the company a market capitalization of $165bn
S&P hit by threat of civil charges over its rating of $1.6bn CDO – Pg. 1 ‐ …alleging that it violated federal securities laws in connection with its rating of one of the structured finance instruments at the heart of the financial crisis ‐ The Wells notice marks the first time the SEC has sought to pursue charges against a rating firm in connection with its rating of a CDO, linked to pools of residential mortgages ‐ Rating agencies have been under scrutiny for issuing their safest rating, triple A, to mortgage‐related securities, many of which were downgraded only months later and went into default after the housing bubble burst ‐ The SEC is looking at what S&P knew about the housing market when it issued the ratings and whether it misled investors who bought the product,…
Battle rages over India poverty line – Pg. 2 ‐ The poverty line estimated in India, traditionally worked out by calorie intake, are highly sensitive because as many as 400m Indians live on less than $2 a day. Those below the poverty line are entitled to subsidized food and other welfare payments ‐ …person living on more than $0.64 a day in urban areas, such as New Delhi and Mumbai, would no longer be classified as being below the poverty line ‐ In comparison, the World Bank’s poverty line is $1.25 a day ‐ India Is now home to more poor people than the entire sub‐Saharan Africa region
ECB expected to boost bank liquidity – Pg. 4 ‐ The ECB is likely next week to extend its provision of liquidity to banks as it seeks to counter the escalating eurozone debt crisis, but there is still a question as to whether it will cut official interest rates as well ‐ The ECB has said it will provide banks with unlimited loans lasting up to three months until at least early next year. But that deadline is almost certain to be extended – perhaps until mid‐2012 – providing reassurance that banks will not run out of liquidity and allowing them greater planning security. In addition, the ECB could reintroduce offers of six‐months or 12‐ month liquidity ‐ Under consideration next week will be whether to resume purchases of covered bonds, which are issued by banks and backed by mortgages or public sector loans and are regarded as ultra‐safe investments. A 60bn (euro) covered bond purchase programme was unveiled in May 2009 ‐ ….the ECB has room to cut – it has raised rates twice this year, most recently to 1.5% in July ‐ ….
26 September 2011
UBS chief quit after clash over strategy – Pg. 1 ‐ UBS chief executive Oswald Grubel resigned after the board refused to back his plans to overhaul the bank’s strategy and corporate governance,.. ‐ Mr Grubel announced his resignation on Saturday, 10 days after discovering that a trading scandal had cost the Swiss bank as much as $2.3bn,… ‐ …trading losses have thrown into question whether UBS will be able to continue with an investment bank that does anything more than cater to the needs of its wealth management clients
US tax authorities target bank deals – Pg. 1 ‐ US tax authorities are targeting cross‐border finance deals worth billions of dollars between leading US and UK banks as they step up efforts to clamp down on abusive tax avoidance, … ‐ Four US banks – BB&T, Bank of New York Mellon, Sovereign (now part of Santander of Spain) and Wells Fargo – are suing the US government over more than $1bn in tax credits that the IRS has disallowed over the past decade ‐ Foreign tax credits are intended to prevent taxpayers paying tax twice ‐ The US banks contend that the transactions – known as structured trust advantaged repackaged securities, or Stars, deals – were legitimate cross‐border lending arrangements
Debt talks fail to agree solution – Pg. 2 ‐ The IMF annual meetings wrapped up in Washington on Sunday with widespread concern over the eurozone sovereign debt crisis but no immediate consensus on the solution ‐ The IIF estimates that the reduction, which involves banks voluntarily signing up for one of four options for rescheduling sovereign bonds, will involve a 21% reduction in the net present value of banks’ holdings of the debt
Crisis hits region’s financial centres – Pg. 2 ‐ The eurozone’s fiscal woes are damaging the competiveness of its financial centres, with Paris, Madrid and Milan plunging in a survey that ranks the attractiveness of world cities for banking and finance ‐ The GFCI ranking is a keenly watched barometer within banking and financial services that combines objective factors such as office rental rates, airport satisfaction and transport with surveys of financial professionals about their perceptions of each city ‐ London has led the GFCI since its creation in 2007, but its lead has shrunk substantially. In the latest ranking, London with 774 points out of a possible 1,000, was only one point ahead of New York and four ahead of Honk Kong
States play tax credit contest to attract jobs – Pg. 3 ‐ As US states jockey to attract jobs to push down high unemployment rates, companies are benefiting from a host of tax breaks and other government‐funded incentives ‐ Maryland is looking at expanding benefits for biotechnology and research and development groups, …
Perry suffers poll blow as Republican doubts grow – Pg. 3 ‐ Rick Perry, the leading Republican candidate for the presidency, has been hit by a new blow, losing weekend straw poll of party activists in Florida he had poured resourced into (Prof Note: We know he claims he cannot be bought for $5,000….I am still wondering his price for being bought?!)
Women allowed to vote and stand in Saudi Elections – Pg. 6 ‐ (Prof Note: Spectacular!)
Professors take the academic road to the east – Pg. 12 ‐ …Asia is becoming the hotspot for the top management thinkers (Prof Note: Yes…Asia values education and thought supported by quantitative analysis!) ‐ …economic growth is coupled with a real willingness to invest in high‐quality education (Prof Note: Be there in two weeks!)
Debt sales set to hit US banks – Pg. 17 ‐ US investment banks are facing losses on financing commitments for buy‐outs and other deals struck before the recent turmoil , as they sell down about $25bn in loans and junk bonds
Emerging markets move to stabilize currencies – Pg. 17 ‐ The South Korean central bank surprised the markets on Friday with a $4bn lightning intervention in support of the won,… ‐ The day before, Brazil spent $2.75bn selling dollars in the currency swaps market to stop the rapid decline of the real ‐ Emerging nations fear the global economy is slowing fast, with a risk of further shocks if the eurozone fails to resolve its crisis
24 September 2011
Global economy pushed to brink – Pg. 1 ‐ Time is running out to find a solution to the eurozone crisis and prevent another global recession…. ‐ Gold continued to slide sharply, falling more than five percent, while US oil prices traded below 480 a barrel, their lowest level in more than a year ‐ Eurozone governments have pledged to pass legislation by mid‐October to make their rescue fund, the European financial stability facility, more flexible and are now discussing ways to “maximize its impact in order to address contagion”
Obama fields his top tax warrior – Pg. 2 ‐ The 81‐year‐old billionaire investor has even agreed to allow his brand to be affixed to the tax policy, government by a principle christened the “Buffett rule” ‐ According to the “Buffett rule”, as enunciated by Mr Obama, middle‐income earners should not pay higher average taxes than people taking home more than $1m a year. The administration has given no detail about how such a policy would work in practice ‐ The top marginal tax rate in the US is 35% ‐ Mr Buffett’s company, Berkshire Hathaway, has paid him a nominal salary, usually about $100,000 a year, which would attract an average tax rate of just over 20% ‐ He will not pay tax on the bulk of the rest of his fortunate because he has agreed to give most of it to charity when he dies
Unrest escalates over development site – Pg. 3 ‐ Locals said the land sold was collectively owned by the residents. They were unaware of the sale until construction work began. Their outrage was also fuelled by the fact that some of the land was used for graves of the village people’s ancestors
Five warning signs to watch – Pg. 7 1) Third‐quarter growth: Reassuring bounce‐back or descent to downturn? 2) Eurozone debt crisis: Will Athens stay afloat or deliver global shock? 3) Central Banks: Will pro‐growth steps pay off or prove futile? 4) Markets: Spiral into bear terrain, harbinger of recession? 5) US politics: Can a divided Congress drive consumer spending?
Investors wrestle with the bear facts – Pg. 13 ‐ It wasn’t meant to work out like this. The US Federal Reserve’s launch this week of “Operation Twist” succeeded in forcing down long‐term treasury yields. But if it was meant to push investors into riskier assets, it failed abysmally as they focused instead on the rising chance of an imminent recession ‐ European markets trade on about 8 times forward earnings but those earnings imply a return on equity of about 14%... ‐ Normally a return of 8‐10% would be more likely, meaning that markets would be trading on 11.5% trough earnings. In a “normal” cycle” 10 times would be more likely, hence the 15% likely fall ‐ But other measures point to a sharper slide ahead. Tobin’s Q – the ratio of market capitalization to the replacement value of assets – is about 0.8 – 0.9 for the S&P 500, …. ‐ The Fed’s “twist” will involve the US central bank selling $400bn of short‐dated bonds to buy debt with longer maturities, but stops short of another increase in its balance sheet ‐ Japan‐like stagnation would undoubtedly be bad news for shareholders as equities have suffered terribly in the past two decades
23 September 2011
Sell‐off follows grim Fed outlook – Pg. 1 ‐ Global equities tumbled on Thursday as the US Federal Reserve’s gloomy economic outlook caused investors to sell stocks in a widespread flight to safety ‐ US and UK shares are not yet in bear territory but German and French equities have long been there ‐ Commodities also fell ‐ …data suggested the eurozone was on the verge of recession and the Fed said there were “significant downside risks to the economic outlook” ‐ The S&P 500 was down 3.2% at the close of trading and at its low point was off more than 18% from its April peak
EU looks to swift recapitalization of 16 banks on stress test threshold – Pg. 1 ‐ Seven are Spanish; there are two apiece from Germany, Greece and Portugal; while Italy, Cyprus and Slovenia have one each ‐ The 16 institutions ended up with core tier one capital ratios – the key measure of financial strength – of 5 and 6%. The past mark was 5%
Home truths threaten Twist – Pg. 2 ‐ Thursday’s market response was probably not what the US Federal Reserve wanted or expected in response to its larger‐than‐expected twist to the yield curve ‐ …crucial problem with all monetary stimulus at the moment: the channels for transmitting lower long‐term rates into the economy are not working well. ‐ The success of the twist depends on whether the financial system can turn it into more and cheaper lending to buy houses and build up businesses ‐ The biggest beneficiaries of Twist will be households with plenty of equity in their home that can refinance their mortgage at a lower rate ‐ …roughly one quarter of borrowers have a mortgage worth more than their home and half do not have the 20% of home equity needed to refinance at a low rate
Global trade growth slows sharply – Pg. 3 ‐ The expansion in global trade has slowed sharply, with the WTO warning that a loss of economic confidence harms prospects for export growth worldwide ‐ The WTO today cut its estimate for growth in global goods trade in 2011 to 5.8% from an already cautious forecast of 6.5% and warned that the risks were “firmly rooted on the downside”
Einstein’s theory in doubt as test appears to break speed of light – Pg. 6 ‐ Nothing is supposed to move faster than light, at least according to Albert Einstein’s special theory of relatively: the famous E = mc^2 equation. That stands for energy equals mass times the speed of light squared ‐ Scientists agree that, if the results are confirmed, it would force a fundamental rethink of the laws of nature, starting with the special theory of relativity proposed by Einstein in 1905 Page ‐ 12 Unchanged after 30 years, the handheld device that remains a must-have Tim Bradshaw
salutes the basic Hewlett-Packard 12c calculator
In a world of smartphones and tablet devices, Hewlett-Packard’s 12c is a relic of the 1980s. An electronic device with one fundamental function: financial calculations. And, by today’s standards, not even a particularly sophisticated financial calculator. Yet this month, it is celebrating its 30th anniversary with a special “Platinum” edition. The company is coy about figures but it is estimated to sell tens of thousands of these $70 calculators every year. It has never been out of production.
The reason for the HP 12c’s survival in defiance of technological progress is in part its stubborn refusal to change. While touchscreen smartphones and laptops can do many things quite well, the 12c is close to perfection for calculations fundamental to the daily work of many City analysts, accountants and actuaries.
It is one of only two calculators permitted to be used in Chartered Financial Analyst examinations, the other being the cheaper Texas Instruments Business Analyst II Plus.
Both offer reverse polish notation, an initially counter-intuitive way of entering sums that analysts swear by to calculate cash flows, amortisation, time value of money and mortgage payments.
The 12c, however, seems to have a special place in the hearts of those who use it. Its design remains almost entirely as it was when launched in 1981, when it cost $150, giving it a certain retro appeal.
That also means it hasn’t been encumbered with extraneous features that could detract from its utility – the “feature bloat” that commonly afflicts technology as manufacturers find new baubles to nudge us to upgrade. It doesn’t even allow storage of text or formulas, which is why it appeals to CFA examiners, who tested 165,000 students in the past year.
But perhaps more important is the aura of wisdom and financial prowess that a well-worn 12c confers on its owner. “By slapping the old HP 12c down on the table, you’re saying: ‘I’m a complex thinker, I can handle detail and I mean business,’ ” says Thomas Singlehurst, a CFA and a media analyst at Citigroup in London.
The black faux-leather pouch which the 12c comes in helps, of course, as do the array of satisfyingly clicky buttons, the clear black-and-white display, and tanklike durability.
“It’s delightfully tactile . . . and beautiful in its complexity,” says Adrian Melrose, a chartered accountant turned technology consultant and avid early adopter.
Today, Mr Melrose uses one of several 12c emulator apps available for the iPhone and iPad – HP’s official one costs $15 (or, for the true completist, $20 for the “Platinum” edition app). “There was a bit of gravitas that was lost when I moved to the iPad,” he admits. According to HP Solve, the company’s quarterly calculator newsletter, the 12c has been manufactured in five different countries since 1981, beginning in the US and Singapore before moving to China in 1999. (Some users have been known to complain that the keys rattle in 1990s Malaysian-made editions.) “The HP 12c calculator has withstood the test of professionals and time longer than any other calculator, and possibly longer than any other consumer electronics product ever made,” the company claims. HP has made changes beneath the surface over the years, moving from alkaline to lithium batteries and replacing gold-plated circuit board traces. When the original processor went out of production, HP emulated the 12c’s code so that it ran at the same speed, even on a faster chip.
Yet the 12c’s future is uncertain as HP ceases production of its Palm-based tablets and smartphones, plans the separation of its PC division and mulls the replacement of its chief executive. Its fans are concerned about the lack of clarity over where the 12c might end up.
Mr Melrose thinks the company would be mad to part with this iconic device. “I can confidently say that every HP 12c user would continue to replace it for the rest of their lives,” he says. “There is a 12c generation. It’s a way of thinking.”
Tech relic: the HP 12c is one of two calculators permitted in Chartered Financial Analyst exams
Adoboli ‘sorry beyond words’ – Pg. 15 ‐ Two of the four charges he faces – one of false accounting and one of fraud – date back to October 2008
Funding fears trigger decline in Chinese property shares – Pg. 15 ‐ Chinese property stocks suffered double‐digit declines on Thursday amid growing fears that developers are losing access to funding and will be forced to slash prices ‐ A moderate fall in property prices would please the government. Beijing wants to avoid repeating what it sees as Japan’s mistake in letting prices soar during the 1980s, paving the way for a stagnant decade after they crashed. It is also worried about social fallout
US mortgage bond rates fall to low on ‘Operation Twist’ – Pg. 22 ‐ US mortgage bond rates fell to a record low after the federal reserve’s decision to buy bonds backed by gse including Fannie Mae and Freddie Mac ‐ Mortgage bond yields guide the rate that consumer pay on home loans and drop in market rates is likely to filter through to 30‐year fixed rate mortgages ‐ There is about $1,400bn in outstanding mortgage debt backed by Fannie Mae and Freddie Mac with coupons ranging from 4.5 – 5%, ….
22 September 2011
Fed ‘twist’ seeks to boost US economy – Pg. 1 ‐ The US Federal Reserve launched “Operation Twist” on Wednesday in a bold attempt to drive down long‐term interest rates and reinvigorate the faltering economy ‐ The central bank said that it would buy $400bn of long‐dated Treasuries, financed by the sale of an equal amount of bonds with three years or less to run ‐ The policy is named after a similar attempt to twist the shape of the yield curve in the early 1960s ‐ The Fed also sprung a surprise by pledging to reinvest any early repayments from mortgage securities back into debt issued by mortgage financiers such as Fannie Mae and with a strong focus on buying 30‐year Treasuries ‐ …has decided [Bernanke] to override opposition on the rate‐setting FOMC and provide as much stimulus as easily practical ‐ The purchases will run until June 2012 ‐ “Operation Twist” means that the Fed will increase the average maturity of its assets but, unlike its previous rounds of QE, the Fed will not expand the overall size of its balance sheet ‐ Long‐term interest rates fell after the move, with the yield on the 30‐year Treasury bond dropping to 3% from 3.22%
Pressure on EU to shore up banks – Pg. 4 ‐ International regulators raised pressure on European policymakers to shore up the region’s banks, warning the impact of the sovereign debt crisis on bank capital posed a rising threat to financial stability ‐ The IMF estimated that, based on the movements in credit default swap spreads, falls in sovereign bond prices of the troubled peripheral eurozone countries since the crisis began last year had reduced the value of EU banks’ holdings by 200bn (euro)
Bank of England minutes hint at fresh easing – Pg. 6 ‐ …resort to another round of quantitative easing to boost the economy,… ‐ They voted unanimously to keep interest rates at 0.5% ‐ Economic conditions have worsened in the US, the UK, and the rest of Europe over the past few months in what the minutes described as “a synchronized slowing in global growth”
Bank of China shuns European lenders – Pg. 24 ‐ Bank of China has stopped dealing with some European banks on a series of ordinary currency transactions in the Chinese market because of concerns about mounting financial risks in Europe,… ‐ Chinese banks have displayed similar risk aversion before, cutting off foreign lenders from future‐settled foreign exchange transactions at the height of the global financial crisis in late 2008 ‐ Daily turnover in the global currency market is closer to $4,000bn
Bank of America comes under pressure after Moody’s downgrade – Pg. 26 ‐ The S&P500 plunged 30 points, or 2.5%, in the last 30 minutes of trading, as investors reached with disappointment to the much anticipated monetary policy announcement by the FOMC ‐ BofA shares fell 7.5% to $6.38, (Prof Note: Think about the purchase price when Buffett bought….will the regulators allow Buffett to lose money??? Think about it and consider it!)
21 September 2011
Singapore fund hits at UBS ‘lapses’ – Pg. 1 ‐ The biggest shareholder at UBS broke its silence about $2.3bn rogue trading scandal that has engulfed the Swiss group, criticizing “lapses” in the bank’s controls ahead of a pivotal UBS board meeting in Singapore ‐ Government of Singapore Investment Corporate (GIC), Singapore’s sovereign wealth fund, was already sitting on a substantial loss of its 6.4% stake in UBS… ‐ Some UBS bankers said the odds of Mr Grubel staying on as chief executive appeared to be shortening as the scandal gathered pace in Switzerland ‐ Regulators are considering rules to circumscribe the amount and quality of collateral ETF providers need and may also force the fund managers to disclose more about their counterparties and the techniques they use to match the indices and funds are supposed to track
Russia’s role as global creditor grows – Pg. 2 ‐ …Cyprus announced earlier this month that the island was close to agreeing to a $3.4bn emergency loan from Russia,… ‐ The island is favoured as a tax haven by many Russian business people. In 2010, Cyprus registered as the third‐largest source of foreign direct investment in the Russian economy, at $9bn, just behind the Netherlands and the UK ‐ The possibility that the island could become the next domino in the eurozone crisis has pushed Russia into talks to rescue Cypriot economy
Debate rages over rescue system funds – Pg. 2 ‐ Many European policymakers are beginning to envisage the fund – known formally as the European financial stability facility – as a nascent eurozone treasury that could sit alongside the ECB ‐ The sum of 440bn (euro) was intended to “shock and awe” financial markets in May 2010 during the first Greek crisis. The EFSF has since evolved from a temporary set‐up to help small peripheral countries, into a multipurpose firefighter to assist large banks and bigger eurozone economies such as Italy and Spain ‐ Under Mr Geithner’s plan, the EFSF would offer guarantees against a small portion of sovereign bond losses, instead of actually buying them outright
Unreformed Italy pays with downgrade – Pg. 3 ‐ …S&P’s stressed on Tuesday when it downgraded the credit rating of the eurozone’s third’ largest economy ‐ The lack of reforms, it continued, contributed to the barriers to foreign direct investment in Italy, which languishes at less than half the levels in France and Spain ‐ Last week’s austerity budget relies almost totally on higher taxes and cuts in spending to reach the goal of eliminating the deficit by 2013 ‐ The one potentially growth‐promoting aspect to survive was a clause that would enhance the powers of companies to negotiate hiring and firing with unions at a local level, rather than be dictated by the national contracts that rule the economy ‐ Italy has only recouped two of the 7 percentage points of GDP it lost in the 2008‐09 recession
IMF warns on threat to recovery – Pg. 4 ‐ Escalating risks to the global economic recovery mean the US and other major economies should not sharply tighten short‐term fiscal policy, … ‐ The chance of a serious slowdown in the world economy, with the growth falling below 2%, has doubled from earlier in the year,… ‐ The IMF said growth in emerging markets had held up well so far, and projected that the Chinese economy would continue to grow at rates above 9% this year and next, and that India would achieve growth above 7%
Expensive home prices soar in Asia – Pg. 4 ‐ The spike in value of these properties – defined as homes worth in excess of $15.7m – has been far less marked, …. ‐ ….billionaire homeowners in Mumbai and Singapore have seen the value of their properties increase by 138% and 144%, respectively, during the past five years ‐ By contrast, the value of ultra‐prime homes in London and New York have appreciated by less than 40% during the same period ‐ In Hong Kong, for example, space in the wealth Peak area of the island is at such a premium that billionaire buyers are willing to spend on average 6,700(sterling) per sf ‐ ….typical billionaires’ residence in Hong Kong spans just 5,200sf compared with 19,380 sf in Sydney, the size of a small supermarket … ‐ In London, the market for the most expensive homes is increasingly driven by interest from overseas buyers,… ‐ Overall, the value of ultra‐prime properties has climbed by 65% during the past five years
Gloomy outlook blights US housing – Pg. 5 ‐ The outlook for the US housing market remained downbeat as new home construction dropped a sharper than expected 5% in August ‐ Housing starts fell to a seasonally adjusted annual rate of 571,000… ‐ Starts were 5.8% below their level of August 2010, underscoring the lack of demand in the ailing sector
Financial regulators across the globe take aim at exchange traded funds – Pg. 16 ‐ Concerns about misspelling and systemic risk connected to ETFs have been mounting in recent months and the International Organization of Securities Commissions recently launched a global study of the threats they pose to financial stability (Prof Note: Months ago ETF systemic risk was discussed here) ‐ About $5,775bn in ETFs were traded on US and European exchanges last year but the majority of transactions are “over the counter”, that is not printed or reported on an exchange
20 September 2011
Obama targets rich with tax plan – Pg. 1 ‐ …must choose between higher taxes on the wealthy or starving education and health ‐ …the president did not provide details on how to meet what the White House is calling the “Buffett rule”,… ‐ Debates on the fairest – and most efficient – rates of tax for the wealthy are under way in the UK, Spain, Italy, France and Germany ‐ Mr Obama proposed cutting $4,400bn from the budget over 10 years
States seek to privatise prisons – Pg. 2 ‐ US states are set to privatise scores of prisons as they try to close gaping budget deficits, creating significant new markets for the industry’s biggest private contractors ‐ In Florida alone, 29 state prisons are set to be privatized ‐ ….private operators must guarantee cost cuts of 7% or more ‐ In the 20 years to 2007, the national prison population trebled to 1.6m people, with 9% held In private facilities. On average it costs about $25,000 a year to keep an inmate housed ‐ Two companies dominate the US private prison sector: Corrections Corporation of America and GEO Group (Prof Note: Hmmmm…..good research as I see growth here!)
Brazil to seek new arms for currency battle – Pg. 4 ‐ Brazil is set to propose an “exchange rate anti‐dumping” measure to the WTO that would allow countries to retaliate against trading partners that undertake competitive devaluations of their currencies ‐ Brazil’s Geneva office is working on the plan, which would mark an escalation of what Latin America’s largest economy has dubbed the “currency war”, a battle against what it sees as the use of loose monetary policies by reserve‐currency issuers such as the US to boost their exports ‐ WTO rules dating back to the founding treaty in 1947 state that its members “shall not, by exchange action, frustrate the intent of the provisions of this agreement”. But that law, written at a time of the Bretton Woods global fixed exchange rate system, would be extremely hard to apply today, given the huge uncertainties around estimates of fair value for currencies (Prof Note: Stop….the WTO has only been around since 1995. The ITO [Int’l National Trade Organization was proposed at Bretton Woods and the U.S., under Truman, never ratified the agreement. Prior to 1995, the world lived under the rules of GATT [General Agreement for Tariffs and Trades]) ‐ Under Brazil’s WTO plan, countries would be permitted to retaliate with additional import tariffs against rivals that allow a depreciation of their currencies beyond a certain band ‐ Brazil believes current levels of import duties, which can be set at up to 35%, were decided at a time of stable exchange rates in the early 1990s and no longer reflect reality ‐ ….the real, which it a 12‐year high against the dollar in July and is up by 36% since the start of 2009
US plans to clean up blots in securitization market – Pg. 4 ‐ US regulators proposed a rule on Monday that will prohibit those responsible for bringing asset‐backed securities to market from profiting from investors’ losses (Prof Note: Are we now regulating lessons that should have been learned in Kindergarten???) ‐ …seeks to bank companies from shorting securities they are hawking to investors – the kind of activity Goldman Sachs was accused of last year in the so‐called Abacus deal
House arrest – Pg. 14 ‐ …China, where prices in more than half of the 70 biggest cities were flat, or fell, between July and August ‐ Households are generally not buying properties they cannot afford with money they do not have – the proximate cause of the collapse in the US and elsewhere ‐ ….17 years since the State Council abolished the allocation system of housing, allowing apartments to become privately traded commodities, the market has never experienced anything close to a slump
Court rules on Madoff‐invested fund – Pg. 17 ‐ Investors who made withdrawals from the largest hedge fund to become insolvent because of Bernard Madoff’s fraud scheme cannot be forced to return the money, a judge in the British Virgin Islands has ruled in a test case there
Consortium signs green property deals – Pg. 18 ‐ The scheme allows owners of financial and commercial buildings to finance energy‐saving works such as insulation with bonds paid for through the property tax system
Dollar’s rebound bodes ill for Wall Street – Pg. 22 ‐ The rebound in the US dollar may be the last thing that equity investors want to see after a torrid summer on Wall Street ‐ For much of the past year, a weak dollar has been seen by investors as a tailwind for US stocks, that has at various times helped boost quarterly earnings for a string of global companies… ‐ …with no end to the eurozone debt crisis in sight, the dollar has risen sharply to near a seven‐month high on a trade‐weighted basis (Prof Note: Let us all remember that the euro was originally designed to be at parity with the dollar)
19 September 2011
UBS says trader hid loss with fake deals – Pg. 1 ‐ …allegedly disguised huge loss‐making positions with ficticious counter‐trades, the bank has stated, the same tactic used by Jerome Kerviel who caused 4.9bn (euro) of losses at France’s Societe’ Generale in 2008 (Prof Note: Inexcusable! Hello….can you say, “Separation of front‐ and back‐office responsibilities? The CEO should resign! Fyi….I was in this business so my opinion comes with experience!)
Fears over prop trading exemptions – Pg. 1 ‐ The Volcker rule, which banks US banks from trading for their own account, is set to include exemptions that some officials fear will weaken its impact, …. ‐ In the wake of UBS’s $2.3bn loss last week, …. ‐ ….so‐called “repo” transactions and securities lending, and near‐term trading in currency and commodities – but not futures – will be permitted ‐ The draft rules exempt from the prop trading ban “positions arising under certain repurchase and reverse repurchase agreements or securities lending transactions [and] bona fide liquidity management”. They also allow “positions in loans, spot foreign exchange or commodities” ‐ In line with the statute, which was passed by Congress as part of last year’s Dodd‐Frank financial overhaul, securitizations are permitted, including a related “unlimited amount of interest rate or foreign exchange derivatives”
Athens appeals for cash to avert crunch – Pg. 3 ‐ Greece will seek to persuade its lenders that it deserves another 8bn (euro) loan payment in a pivotal conference call on Monday as the government battles to head off a looming cash crunch ‐ The onus will be no the Greeks to prove they are delivering the budget cuts and fiscal reforms mandated by that emergency loan – a task that has grown more arduous as a deeper recession than expected has cut into tax receipts, leaving a bigger fiscal gap to close ‐ Time is short. Greek officials estimate they have enough cash for the rest of this month, and perhaps the first 10 days of October
Warning on global recovery slide – Pg. 4 ‐ The global recovery “is in danger of skidding off course,”…. ‐ The gloomy prognosis applies across the Group of 20 leading economies, the TIGER index shows, although the slide back towards stagnation is much more prevalent in the advanced world compared with emerging economies ‐ The TIGER index combines measures of real economic activity, financial variables and indicators of confidence according to the degree to which they are all moving up or down at the same time ‐ The real economies of emerging countries of the G20 have performed better, with China still leading the way with continued rapid growth, punctured only by domestic tensions between high inflation and the desire to promote demand ‐ The ambition to restore the rate of growth and the pace of the global recovery to 2010 levels is compromised by the already exceptionally loose monetary policies around the world and the lack of additional firepower in fiscal policy with deficits remaining high
Strauss‐Kahn admits ‘moral fault’ over sex scandal – Pg. 4 ‐ …definitively ruled out running as a candidate in the French presidential election next year as a result of the scandal ‐ …vigorously denied that the incident in New York involved any violence ‐ …found that Ms Diallo had repeatedly lied (Prof Note: If only DSK had been a Seinfeld fan. DSK could have learned from George’s experiences)
Republicans promise to block ‘Buffett rule’ – Pg. 5 ‐ A White House proposal to impose a new minimum tax rate on millionaires has come under immediate fire from congressional Republicans, who described it as class warfare and promised to block it ‐ Mr Obama’s plan, though it will be announced only in outline today, will in effect be a replacement for the so‐called Alternative Minimum Tax – a provision in the US tax code to ensure that the rich pay at least a certain proportion of their income tax
Uncertainty over how far Fed will move in the twist – Pg. 5 ‐ The Federal Reserve is expected to ease monetary policy at its two‐day policy meeting this week – investors’ only uncertainty is how aggressively it will move ‐ Investors expect easing in the form of the central bank selling some of its short‐term Treasury holdings in order to buy longer‐dated bonds, namely the 10‐year sector, a policy move dubbed Operation Twist ‐ The 10‐year sector, for example, strongly influences mortgage and company borrowing costs ‐ The rationale behind lowering long‐term bond yields is that it will enable homeowners to cut their borrowing costs, encourage greater borrowing and investment, while pushing more investors to leave government bonds and buy riskier assets ‐ An alternative policy option could involve the Fed cutting the 0.25% interest rate paid on excess reserves, or IOER, held at the central bank, in the hope banks lend more funds into the economy. In turn, the Fed could elect to undertake a modest “twist” in conjunction with cutting its overnight rate
Welcome, number seven billion – Pg. 9 ‐ On October 31, earth will gain its seven billionth inhabitant,…. ‐ Can we feed a global population that is growing by 76m per year and will exceed 9bn by 2050, ….
Indian real estate faces cash crisis – Pg. 18 ‐ With the sector carrying a debt burden of about $24.6bn in the year to July 2011 – up almost seven times from $3.8bn in September 2005 – many small‐ and mid‐sized Indian property groups face the risk of default. Major developers are delaying projects, discounting properties and looking to sell big assets ‐ …the banks have almost stopped lending to the sector, and there are few companies willing to take a high‐risk bet on high‐priced development projects or buyers able to pay high mortgage rates ‐ Total banking industry exposure to real estate was 3.1% in July, down from 3.7% in July 2009 ‐ …residential demand in India’s financial capital dropped to a 30‐month low in the second quarter and sales fell 11% during the same period, … ‐ Many buyers are unable to secure a mortgage because record high interest rates, which India’s central bank raised to 8.25% on Friday – the 12th hike in 19 months – are taking a big toll on the industry ‐ The average home rate to buy a house in India is 16.5%,…
17 September 2011
UBS charges date from 2008 – Pg. 1 ‐ The charges state that Mr Adoboli, whow worked on UBS’s now notorious “Delta one” trading desk, “dishonestly abused” his position, intending to make a gain for himself, “causing losses to UBS or to expose UBS to risk of loss” ‐ The main credit rating agencies – Moody’s Standard & Poor’s, and Fitch – all placed UBS on review for a possible downgrade, citing concerns about its risk management procedures ‐ Such a massive trading loss could wipe out any profits from its investment banking operations for 2011, sharply reducing their year‐end bonus pay‐outs
Geithner tells EU leaders to stop bickering and act over debt crisis – Pg. 1 ‐ He argued that the EU’s growing reliance on foreign lenders would imperil the bloc’s ability to control its own destiny ‐ …Europe’s finance ministers agreed to withhold an $11bn loan payment to Greece, a move that could leave Athens scrambling to satisfy its lenders before it runs out of cash
Emerging markets split on whether to cut or raise – Pg. 3 ‐ …Indian central bank’s decision on Friday to raise interest rates highlights a growing divergence in emerging market monetary policy ‐ The Reserve Bank of India’s 25bp rise in its policy rate to 8.25% was the 12th increase in succession ‐ … ‐ With inflation running at almost 10% a year, the central bank feels it has little choice, especially as India’s scandal‐hit government is in no position to ease inflationary pressures by fiscal policy ‐ Indian inflation stands out among the largest emerging markets: consumer price roses 7.2% in Brazil, 8.2% in Russia, 6.6% in Turkey and 6.2% in China last month from a year earlier ‐ …at least Indian inflation is linked to a respectable GDP rate, with economists forecasting 7.7% for 2011. That is a bit less than China, on about 9%, but comfortably ahead of Turkey (6.7%) Russia (4.5%), and Brazil (3.9%) ‐ In China, ….rates are below inflation, giving negative ral rates
A nightmare scenario – Pg. 7 ‐ So long as this level of political capital is invested in the euro, monetary union is highly likely to survive ‐ Plan A, as far as European authorities are concerned, is to implement the agreement struck on July 21. Under the deal, Greece was offered a second programme of loans, worth 109bn (euro) including the guarantee that Athens would not need to return to financial markets for years, borrowing instead from other European countries and the IMF a low interest rates ‐ The alternative would be to restore Greece’s ability to create money to pay its bills – and that would require exit from the euro, to re‐establish the central bank’s ability to create money ‐ The effects of any default would not be limited to Greece, however, since the investors would then question who was next
Scandal at UBS points to mix of failures – Pg. 11 ‐ …Delta One desk was part of a fast‐growing but shadowy corner of investment banking that involves trading securities that track an underlying asset, such as shares or silver, as closely as possible ‐ Frequently associated with ETFs and swaps, it is an area most banking professionals have little familiarity with, in spite of the risks involved ‐ …17,775 employees across the business will be taking home substantially lower pay cheques this year, as the loss filters through to their annual bonus pot
Central banks buy time on funding, but how much? – Pg. 14 ‐ Five central banks, including the ECB, the US Federal Reserve and the Bank of England, promised to offer three‐month dollar loans ‐ The most important indicator in the dollar funding markets in Europe is the so‐called basis swap market. This measures the cost of borrowing dollars in exchange for euros. If eurozone banks cannot get dollars from US banks on a private bilateral basis, they have to go into the open market. This forces up the cost of borrowing dollars and puts further strains on their already stretched balance sheets
16 September 2011
Central banks help European lenders – Pg. 1 ‐ Five of the world’s central banks took bold concerted action to pre‐empt a looming dollar funding crisis in Europe, sparking a rally in eurozone bank shares and the euro ‐ The ECB, acting with the Bank of England and Switzerland’s central bank, said they would provide three‐month dollar loans to banks from October, which will cover the year‐end period ‐ A range of gauges of stress in funding markets for European banks fell from their highest levels since the 2008‐09 financial crisis. ‐ The central banks’ move, in conjunction with the US Federal Reserve, followed difficulties, especially at continental European banks, in obtaining dollar funding as US investors took fright at the eurozone debt crisis
Bank blow Trader arrested over $2bn hit at UBS derivatives desk – Pg. 1 ‐ …31‐year‐old trader had been arrested in London on suspicion of blowing a $2bn hole in its books, exactly three years after Lehman Brothers collapsed ‐ UBS warned that the discovery – which drew parallels with the $6.8bn hit caused to Societe Generale by Jerome Kerviel in 2008 – could push the group into a loss for the third quarter ‐ The revelation that a trader in “Delta One” – an area of derivative trading activity that is one of the only remaining ways for banks to take big bets with their own money – could cause such a catastrophic loss has promoted calls for fresh restrictions on investment banks
Lagarde warns IMF will hold back loan if Athens fails to act – Pg. 3 ‐ ….organization withholding its portion of an $11bn aid payment Greece needs by the end of this month, …. ‐ The Eurozone’s finance ministers are expected to decide today whether Greece’s latest concessions are adequate
US consumer prices – Pg. 14 ‐ With core inflation, which excludes food and energy, stubbornly below 2%, the latter camp has been ascendant ‐ Core inflation is now back through 2% and has been trending upwards since October 2008, when it hit a low of 0.6% ‐ The most worrying component of core inflation, however, is rental prices. The index for rent increased 0.4% in August, the biggest jump since mid‐2008.
Gold forecast to top $2,000 this year – Pg. 22 ‐ Gold prices will regain momentum and surpass $2,000 an ounce by the end of the year as investment demand for the precious metal returns to the peak levels seen in the financial crisis, … ‐ Gold prices reached a record $1,920 a troy ounce this month but have since struggled for direction, at one point suffering their sharpest two‐day drop in dollar terms in more than three decades ‐ Demand for gold has been boosted by central banks
Banks hunt new buyers for assets hit by crisis – Pg. 23 ‐ New regulations aimed at cracking down on this type of financial “self‐dealing” that exacerbated the financial crisis will simply make it uneconomic for banks – especially European ones – to hold many types of securitizations ‐ In the three years leading up to the subprime financial crisis, Europe’s banks sold more than 1,000bn (euro) worth of asset‐backed securities, packaging a variety of loans into securitizations and structured credit ‐ Basel III rules, for instance, will make it more expensive for banks to hold securitizations by requiring more capital to be held against them ‐ A new European directive also requires issuers of structured finance to maintain an economic interest in the product they create ‐ Unlike ABS, covered bonds will be allowed in banks’ liquidity buffers under incoming Basel III rules ‐ A mountain of ABS needs to be refinanced in the coming years, with commercial mortgage‐ backed securities particularly affected. That means banks will either have to sell more securities to replace maturing deals or shrink their balance sheets
15 September 2011
France’s top banks rocked by Moody’s rating cuts – Pg. 1 ‐ Moody’s Investors Service downgraded its long‐term ratings on two of France’s largest banks by one notch on Wednesday, while keeping BNP Paribas on review ‐ France has resisted international pressure to shore up its banking sector as ministers have focused on averting a Greek default
Britain sues ECB over City rules – Pg. 2 ‐ Britain is to sue the ECB over rules that allegedly handicap the City of London and would force one of the biggest clearing houses to move to the euro area ‐ …requires clearing houses to be based in the eurozone if they handle more than 5% of the market in a euro‐denominated financial product ‐ The policy, if enforced, would undermine London’s financial infrastructure as it would make clearing houses more operations to the eurozone, probably Frankfurt or Paris ‐ London is home to LCH.Clearnet, which process all share trading on the London Stock Exchange and operates an over‐the‐counter (OTC) derivatives clearing service, making it one of the largest clearing houses in the world ‐ Clearing houses have assumed heightened importance to the financial system because of rules from Group of 20 leading economies designed to clean up after the 2008 crisis
IIF warns of big threat to world economy – Pg. 3 ‐ Bankers and policymakers sounded rising alarm over the eurozone’s travails on Wednesday, saying failure to co‐ordinate economic policy threatened the world economy ‐ Robert Zoellick, World Bank president, criticized an attitude of “muddling through” in Japan and the US as well as the eurozone ‐ The IMf also said that central banks should take care not to overreact to jumps in inflation caused by large swings in commodity prices, unless there were signs that those movements were likely to trigger a spiral of increasing wages and consumer prices
Rise in US home loan applications as rates tumble – Pg. 5 ‐ US mortgage applications rose for the first time in a month as borrowing rates fell to a record low, …. ‐ …average interest rate for 30‐year fixed‐rate mortgages dropped to 4.17% from 4.23%, eclipsing the previous low of 4.21% in October 2010 ‐ …about 53% of borrowers with equity in their homes – or 20 homeowners – are paying more than 5.1% on their mortgages…. ‐ About 36% are paying more than 5.5%. seventeen per cent are paying more than 6% (Prof Note: What this fails to state is that if you are in the last third of a 30‐year CPM, while the rate was 6%, it is a sunk cost as interest is front loaded)
On Main Street, USA, an uncertain outlook – Pg. 7 ‐ Small companies – defined by the US Small Business Association, a federal agency, as those employing up to 500 workers – account for 99% of all American businesses, two‐thirds of private‐sector employment and half of economic output ‐ The main problem is lack of demand ‐ A second problem is the difficulty of obtaining credit ‐ Even though the SBA has made $30bn of loans available for small businesses, some start‐ups have complained that banks refuse to lend to those that lack a two‐year tax record
Strong reception for 30‐year Treasuries amid easing hopes – Pg. 23 ‐ Investors were aggressive buyers of 30‐year Treasury bonds at historically low yields on Wednesday amid expectations the Federal Reserve will announce further easing at next week’s policy meeting ‐ The bond market has priced in expectations that the Fed will launch Operation Twist next week, which could involve the central bank selling short term Treasuries and buying longer dated debt
14 September 2011
Merkel bid to stamp out Greece default talk – Pg. 1 ‐ ….insisting that no such event could happen before 2013, even as markets continued to gyrate wildly over eurozone fears ‐ …Philipp Rosler, her vice‐chancellor and economy minister, called for the “orderly insolvency” of Greece to be put on the agenda, once “the necessary instruments are available” ‐ Ms Merkel said that such a situation would not arise before 2013,… ‐ Amid continued uncertainty, markets experienced extreme volatility, with French banks the focus of attention
Number of Americans in poverty at highest in 50 years – Pg. 1 ‐ In 2010, 46.2m people fell below the poverty line, calculated as an annual income of $22,314 for a family of four and $11,139 for an individual ‐ The increase lifted the poverty rate to 15.1% of the US population, the highest since 1993 and almost 1% higher than the year before… ‐ …the number of households making more than $100,000 a year was 44.2m in 2011 compared with 44.1m the previous year. Their spending held steady at $1,400bn after previously falling
US Treasury ready to support Fed’s long‐term bond purchases – Pg. 1 ‐ The US Treasury would accommodate a possible Federal Reserve stimulus to drive down long‐term interest rates, …. ‐ The Treasury would play a crucial role if the Fed decided to launch “Operation Twist”, where the central bank would buy more longer‐term Treasury securities to drive down long‐term interest rates by reducing the amount of such debt available to other investors ‐ ….the Treasury would be unlikely to respond to falling long‐term interest rates with a sudden shift in the pattern of debt issuance, even though one of the Treasury’s strategic goals is to increase the average term of the US national debt ‐ Operation Twist‐ named after a similar move in 1961 – is one of a number of options the Fed will consider at its next monetary policy meeting on September 20/21 ‐ Other options include changing its communication about future interest rates or cutting the interest it pays to banks on their reserves ‐ In the 1961 Twist, there was formal co‐operation between the Fed and the Treasury. The Fed agreed to buy more long‐term securities and the Treasury agreed to sell fewer of them. This time, although there have been technical discussions between Fed and Treasury officials, neither side knows how or whether the other will act
Rome set to identify next asset sales – Pg. 2 ‐ Officials have spoken of state‐owned properties and utilities owned by local authorities – excluding water companies, ….
‘Brics’ to debate possible eurozone aid – Pg. 3 ‐ Any concentrated joint effort by the Bric nations to support the eurozone would mark a further symbolic shift in the momentum of the global economy towards the largest emerging market ‐ China has the world’s largest foreign reserves – at $3,200bn – while India has more than $320bn of reserves and Brazil over $350bn, providing the grouping with plenty of firepower to support the eurozone’s single currency ‐ In April, the development banks of the Brics plus South Africa signed an accord to bolster development lending among their economies
US wealth gap raises concerns – Pg. 4 ‐ The median household income of Americans dropped 2.3% in 2010 from the previous year, … ‐ The number of Americans without health insurance also rose by nearly 1m people to 49.9m ‐ Nearly a quarter of American children are living in poverty. Their number increased for the fourth year in a row to 22%, the highest since 1993 ‐ In 2009, the median full‐time male worker aged 25‐64 was earning $48,000 – roughly the same as in 1969 in real terms. Meanwhile, in the same 40‐year period, the income of the top 2% of working age men has jumped 75%
Fragile giants at the heart of western hopes – Pg. 9 ‐ In a little more than a decade, Brazilian mortgages have grown from virtually zero to 17% of household debt, or about 4.5% of GDP, and have become a driver of the economy ‐ Brazilian banks boast capital adequacy ratios among the world’s highest, with tier one that is on average equivalent to 17% of their risk‐weighted assets. Their profitability is the envy of western peers ‐ Total loans in China are nearly 80% higher than before the crisis,… ‐ …Brazil’s high interest rates – which average 47% but are as much as up to 205% on one type of credit card loan – increasing default rates and troubles in some smaller banks
Fright said Ted – Pg. 14 ‐ …Ted spread – the gap between three‐month Libor interbank rates and the US Treasury bill yields. Usually negligible, the spread rises when the banks start to lose faith in each other’s ability to repay loans. A great measure of trust, or lack of it, among banks, it is ignored at all times other than during crises
JPMorgan trading revenue to decline 30% ‐ Pg. 19 ‐ JPMorgan Chase’s trading revenue will slide about 30% in the third quarter, ….
Jobs plan fuels uncertainty over munis – Pg. 22 ‐ The Obama administration’s proposal is to pay for the new economic stimulus measures by curbing tax breaks – including the deduction now applied to municipal bond interest – for wealthy Americans, including individuals earning more than 200,000 a year and couples earning more than $250,000 a year ‐ All deductions for this category would be capped at 28%, instead of the current level of 36‐ 39.6%, making “munis” less attractive to the wealthy individuals who buy this type of debt
13 September 2011
UK banks face tough new raft of reforms – Pg. 1 ‐ Britain’s banks will be forced to boost their capital and separate their core operations from riskier trading and investment banking at an annual cost of up to $11bn, under sweeping reforms announced on Monday ‐ …call for a bank’s ringfenced operations to have its own board of directors and equity capital equivalent to 10% of risk‐weighted assets ‐ But in concessions, the banks will be able to chose which noncore businesses to place inside the ringfence, with a deadline of 2019 to implement some of the toughest measures in the world ‐ The Vickers report also said that banks must maintain additional loss‐absorbing capital, such as so‐called bail‐in bonds or contingent convertible bonds known as “cocos” over and above their equity, equal to a further 7% to 10% of assets adjusted for risk
Obama wants curbs on tax breaks for wealthiest to pay for jobs package – Pg. 1 ‐ Most of the savings – worth about $400bn – would come from limits to the ability of American households earning more than $250,000 per year to deduct items such as mortgage interest and charitable donations from taxes
Geithner set to join European meeting – Pg. 2 ‐ …likely to attend a gathering of European Union finance ministers in Poland on Friday,…. ‐ One US official said it had pressed leaders to continue the European Central Bank policy of buying bonds of peripheral eurozone counties, particularly Spain and Italy, to ensure they can borrow at sustainable rates
White House short on options for housing debt – Pg. 4 ‐ …acceptance that the White House cannot force the independent Federal Housing Finance Agency to do its bidding – so a grand mortgage refinance programme is not possible – but there are less dramatic ways of working with the FHFA to boost refinancing ‐ The FHFA oversees Fannie Mae and Freddie Mac, the quasi‐government entities that buy and guarantee loans and has opposed widespread refinancing to slash mortgage interest rates
Move to strip Fed chiefs of voting rights – Pg. 4 ‐ ….believes the Fed’s regional heads are more concerned with inflation than unemployment ‐ The Massachusetts Democrat is tweaking a bill he introduced in April that would strip regional Fed bosses of their voting rights on the central bank’s interest‐rate‐setting panel and instead grant them to White House appointees
Emerging markets eye Brazil’s rate cut gamble – Pg. 6 ‐ Brazil’s U‐turn on interest rates, in which it abruptly ended its tightening cycle this year by slashing 50 bps off its benchmark Selic rate to reduce it to 12%, is a gamble being watched by emerging market policymakers around the world ‐ …Brazil is the largest emerging market economy to have begun easing
BofA plan to axe 30,000 positions – Pg. 19 ‐ BofA said it would cut 30,000 jobs, or about 10.5% of the group’s workforce, and save $5bn a year in costs from the first phase of a restructuring plan
Fed ‘twist’ poses risk to Teasury bond trade – Pg. 22 ‐ With the hoped‐for recovery fizzling and house prices tumbling, there are growing expectations in the Treasury market that the Fed will reprise a plan from the early 1960s and attempt to “twist” lower yields on long‐term debt. These rates influence mortgage and corporate borrowing rates ‐ Unlike QE2, the “twist” will not increase the size of the Fed’s balance sheet and, in theory, should not greatly boost inflation expectations or weaken the dollar. Thus, it should keep Treasury yields anchored at their current low levels ‐ The Fed at present owns $632bn in Treasuries with a maturity of less than four years, …. ‐ That represents 16% of the total $3,886bn in outstanding debt issued in that sector ‐ Another question is whether the Fed buys debt with a maturity beyond 10 years and really pushes investors out of the government bond market into riskier assets. Such buying would increase the Fed’s exposure to future interest rate risk
12 September 2011
JPMorgan chief says bank rules ‘anti‐US’ – Pg. 1 ‐ New international bank capital rules are “anti‐American” and the US should consider pulling out of the Basel group of global regulators (Prof Note: Just like the U.S. failed at the metric system, just like the U.S., I fear, will continue to use U.S. Gaap….we need to be better team players!) ‐ The Basel III capital rules are designed to make the financial system safer by making banks build up risk‐absorbent “core tier one” capital to at least 7% of risk‐weighted assets. The biggest, including JPMorgan have to reach 9.5% ‐ Mr Dimon also criticized global liquidity rules, arguing that regulations that viewed covered bonds – a European market feature – as highly liquid but discounted government‐backed mortgage‐backed securities in the US were unfair and that other details hit investment banking activity core to US banks hardest
Greece takes action on debt standoff – Pg. 1 ‐ The Greek government announced on Sunday that it would impose a new two‐year property tax to raise $2.7 bn this year, closing a 1.7bn (euro) budget gap that the EU and IMF said must be resolved or they would stop making bail‐out payments
Twist on the cards as Fed seeks economic boost – Pg. 6 ‐ The most likely outcome is a move to extend the duration of the Fed’s balance sheet. Such a move is nicknamed Operation Twist, because the Fed would buy more long‐term Treasuries and possibly sell short term as well, thereby twisting the shape of the yield curve ‐ A Twist fits closely with the logic of the Fed’s last round of asset purchases – it reduces the supply of risk‐free, long‐term securities to investors – and the FOMC can draw on months if not years of planning. There would be plenty of opposition, but the Fed has already thrashed out many of the theoretical issues in its previous debates ‐ The purchase speed would have to be somewhat slower than the roughly $100bn a month during QE2, because the Fed would be buying from only part of the Treasury yield curve, and long‐term Treasuries are less liquid ‐ A second policy option – whether the Fed should change its language about the future path of interest rates – illustrates why this is not a simple debate about whether to ease further ‐ ..one more issue: whether to cut the 25bps of interest that the Fed pays to banks on their excess reserves
UK chancellor paves way for restart of QE – Pg. 6 ‐ George Osborne has opened the door to new forms of quantitative easing by the Bank of England as concerns mount in the Treasury over the state of the economy ‐ Economists have increasingly fallen in behind Mr Posen, urging the Bank to restart QE in the wake of weakening economic data, market turbulence and the eurozone debt crisis
The price of protection – Pg. 9 ‐ Banks will be forced to shield retail and small business activities from the higher risks of more volatile investment banking and ensure they can be smoothly would down in a crisis. The aim is to protect taxpayers from ever again having to bail out oversized institutions ‐ By separating the retail and investment banking arms of universal institutions – the commission’s central recommendation, aired in April’s interim report – intricate, efficient funding links developed over decades will be severed ‐ In short, the cost of funding and running large chunks of banks’ businesses will rise ‐ Increases in banking costs are not just a UK phenomenon ‐ Banks make up a big part of the UK economy – the total balance sheet of the biggest lenders is more than four times annual GDP, while in the US the biggest banks’ balance sheets total only about half the country’s GDP ‐ …most banks expect the biggest impact to be felt by corporate customers, particularly mid‐ sized companies that rely heavily on bank debt
10 September 2011
Markets turmoil after ECB split – Pg. 1 ‐ World financial markets have been thrown into fresh turmoil after the abrupt resignation of Germany’s member of the European Central Bank’s board exposed the deepening divisions over the bank’s handling of the eurozone debt crisis ‐ …ECB’s purchases of government debt….heightened German alarm at the expansion of the ECB’s responsibilities beyond its traditional inflation‐fighting role ‐ Yields on the 10‐year German Bund fell to a record low of 1.77%. The yield on equivalent US debt also fell to 1.91%.... ‐ It is the second high‐level German departure this year from the ECB’s government council
Business divide opens on stimulus – Pg. 2 ‐ …the plan’s design is more targeted at small businesses than at the largest companies, … ‐ …one of the plan’s main features is a cut in Social Security payroll taxes for employers from 6.2% to 3.1%. This is capped at the first $5m of wages, which prevents the top 2% of US companies in terms of size from taking full advantage of the measure ‐ ….there is a full exemption from the payroll tax for any additional wage increases or new workers added by a company ‐ …there is no tax reduction on repatriated overseas profits, which US multinationals such as Cisco systems have been clamouring for
China’s inflation grows resistant to official remedies – Pg. 2 ‐ Consumer inflation slowed to 6.2% in August,…down from a three‐year high of 6.5% in July,…. ‐ Labour is getting more expensive as the surplus pool of rural workers dwindles. Land is getting more expensive as cities sprawl. Capital is getting more expensive as small businesses compete for loans from banks that favour state‐owned companies
Desperate measures – Pg. 5 ‐ On Tuesday, the Swiss National Bank stunned financial markets by drawing a defensive line at an exchange rate of 1.2 Swiss francs to the euro and promising unlimited firepower to prevent strengthening beyond that point ‐ …fewer and fewer governments are genuinely letting their currencies float ‐ …widespread monetary easing, even if articulated as a currency policy, is not a zero‐sum game
Turmoil sends investors to havens – Pg. 12 ‐ So far, the main beneficiaries of the SNB’s action have been the Norwegian krone and the Swedish krona, with investors seeing the fiscally‐sound Scandinavian currencies as solid alternatives to the Swiss franc ‐ In Asia, the Singapore dollar is favoured ‐ Paradoxically, both US Treasuries and German Bunds have become more appealing despite the growing debt problems in the US and eurozone economies ‐ For investors in search of something less traditional, some are touting emerging market debt – usually classed as a risky asset – as an alternative haven ‐ Despite being less liquid than currencies, bonds or gold, farmland remains a popular haven investment for two reasons. First, it is a “real asset” that cannot be devalued by central bank or government policy. Second, its value is tied to the growth in agricultural consumption being drive by emerging economies (Prof Note: Ironically I was talking to a banker about purchasing distressed notes on farmland)
9 September 2011
Obama in $450bn push for growth – Pg. 1 ‐ …proposing $447bn in tax cuts and new spending to boost the US economy, marking a larger than expected push by the White House to rekindle growth in the world’s largest economy ‐ The plan includes a reduction in the Social Security payroll tax next year for US workers to 3.1%, from the current 4.2% and the usual rate of 6.2%. In addition, there is a 50% reduction in payroll taxes for businesses, capped at $5m of wages. Companies that can show they have hired new workers or increased wages will win a complete exemption from payroll taxes – capped at $50m in additional payroll ‐ …includes a call for the establishment of an infrastructure bank, and some $80bn in spending on new building projects, from school modernization to roads and bridges ‐ ….extension of unemployment insurance worth $49bn; and a tax credit for American who have been jobless over a long period
Gloomy Trichet paves way for eurozone rate cuts – Pg. 4 ‐ A cut in eurozone interest rates, perhaps even as early as October, has become a distinct possibility after Jean‐Claude Trichet, European Central Bank president, presented a markedly gloomier outlook for eurozone growth prospects ‐ The ECB has reacted more aggressively to inflation risks this year than the US Federal Reserve and Bank of England, raising interest rates by a quarter percentage point in April and July ‐ The ECB also sharply downgraded its forecasts for eurozone economic growth this year. ‐ Revised ECB forecasts showed eurozone GDP rising this year at a rate in a range with a mid‐ point of 1.6% ‐ down from the 1.9% expected in June – and falling to 1.3% in 2012 ‐ Eurozone inflation was expected to average 2.6% this year but fall to 1.7% in 2012 – close to the ECB’s target of an annual rate “below but close” to 2%. Risks to the ECB’s inflation outlook were “broadly balanced”, Mr Trichet said
Greek economy shrinks by 7.3% ‐ Pg. 4 ‐ Greece’s economy remains mired in recession, shrinking by 7.3% in the second quarter on an annual basis, … ‐ But the unemployment rate fell to 16% in June from a record 16.6% in May. Almost 30,000 workers were hired in June, the start of the summer tourist season ‐ The jobless rate for June has doubled in the past three years to 800,000….
US post office – Pg. 12 ‐ …more retail outlets than McDonald’s, Walmart and Starbucks combined ‐ ….drive it into default by October ‐ ….mandatory pension contributions that it will now miss for the first time, triggering technical default
Central banks – Pg. 12 ‐ The ECB left the policy rate at 1.5% on Thursday….current inflation is 2.5% ‐ The Bank of England also did nothing, but continues to push for growth with a policy rate at 0.5%, well below the 4.4% inflation rate ‐ Easy money slows growth by keeping commodity prices high – Brent crude is still above $110 a barrel
Search for new approaches has begun – Pg. 14 ‐ Regulators have forced banks to overhaul the way they structure pay ‐ But bank supervisors have generally declined to limit total pay levels, meaning that most banks’ wage bills remain at or even above pre‐crisis levels. But there are not signs that banks are themselves reining in pay ‐ …dramatically higher capital requirements under a new framework set by global regulators is forcing investment banks to scale back capital‐intensive activities, particularly in fixed‐ income trading, their core source of revenues
‘Shadow banks’ move in amid regulatory push – Pg. 15 ‐ The Dodd‐Frank financial reforms in the US, which banned banks from proprietary trading – or taking big bets with their own money – has already triggered an exodus of senior traders into a less regulated environment
US skills gap set to worsen with passing of ‘baby boomers’ – Pg. 17 ‐ In recent decades, apprenticeships and workplace training have been gradually downgraded, to the extent that many manufacturers now complain they cannot find the skilled workers they need in spite of stubbornly high unemployment ‐ …new recruits tend to be far less technically skilled than entry‐level workers were decades ago
Hong Kong faces dilemma over its peg to US dollar – Pg. 20 ‐ While Switzerland this week in effect pegged the franc to the euro, a debate is intensifying in Hong Kong over whether to severe the city’s 27‐year‐old peg to the US dollar ‐ …..HK$7.80 to US$1 has served the city well since its introduction in 1983 ‐ The big disadvantage of Hong Kong’s exchange rate mechanism is that it forces local interest rates to follow those in the US – even when the local economy is completely out of sync with the American one ‐ Hong Kong property prices have jumped almost 70% since the start of 2009. The consumer price index for July rose 7.9% from a year earlier, the fastest pace of inflation since 1995
8 September 2011
Criminal route eyed in Libor inquiry – Pg. 1 ‐ The US investigation into alleged manipulation of interbank lending rates is focusing on possible violations of a commodities law that has previously been used to send financial executives to prison ‐ …US authorities are modeling their investigation on an earlier prosecution of three energy companies for violations of the Commodity Exchange Act, which resulted in criminal settlements and prison terms of up to 14 years. Under the act, it is illegal to transit a falst report that would affect the price of a commodity ‐ In the current investigation, authorities are examining whether Libor, the reference point for $350,000bn in contracts, and Tibor, the smaller Tokyo‐based version, were rigged at the height of the financial crisis (Prof Note: Great examination question) ‐ All 16 banks on the London panel in 2007 and 2008 have received information requests
Obama gambles on jobs plan – Pg. 2 ‐ The plan is expected to include an extension of tax relief for workers, a short‐ and long‐term infrastructure proposal that will centre on fixing schools, and aid for the unemployed and cash‐strapped states ‐ …Obama’s jobs plan will correlate with separate negotiations to cut US deficits by $1,200bn, ….
Reports add to ailing economy fears – Pg. 2 ‐ Economic activity fell in two regions of the US in August, ….offering the most recent evidence of a stalling economy ‐ Most of the other 10 districts across the country said “modest” or “subdued” growth continued but several noted a slowdown ‐ The Beige Book is based on anecdotal information gathered from local businesses by the 12 regional Federal Reserve banks. Fed officious use this to colour their understanding of more formal data but few rely on it as their main guide to the state of the economy
US survey finds ‘world‐class’ phosphate in Iraq – Pg. 6 ‐ Iraq posses “world‐class” reserves of phosphate with the four biggest deposits holding 5.75bn tons, 9% of the global total, … ‐ The findings give Iraq the second biggest phosphate reserves in the world, after Morocco ‐ Oil production is the mainstay of the Iraqi economy, accounting for almost all government revenue ‐ Baghdad plans to turn the town of Akashat in Anbar province into a centre for phosphate production, with the aim of supplying export markets in Asia
ECB tipped for November rate cut – Pg. 22 ‐ Financial markets are forecasting interest rate cuts in the eurozone as early as November, in a sharp reversal of monetary policy expectations due to a deterioration in confidence surveys and growing worries about Europe’s debt crisis (Prof Note: This is not good for Europe) ‐ …market is predicting a 92% chance of a quarter point rate cut in November ‐ The best guide to interest rate expectations in the market are so‐called Eonia meeting contracts, which show the rates banks expected to charge each other for lending in euros at the time of the monthly ECB rate‐setting meetings over the next 12 months ‐ Eonia rates, which have typically traded about 60bps below the ECB refinance rate in recent months because of the large amount of liquidity the central bank has made to the banks, are forecast to fall by 23bps by the ECB rate‐setting meeting in November. This means the chance of a 25bps cut is 92%.... ‐ The UK rates are forecast to remain on hold at 0.5% over the next two years
7 September 2011
Swiss move to curb franc – Pg. 1 ‐ The Swiss National Bank stunned financial markets on Tuesday by setting a ceiling for the Swiss franc against the euro in a desperate attempt to prevent the strength of its currency pushing the country into recession ‐ Analysts said the move would intensify a global currency war as countries fought to protect their exporters and could provoke further instability in financial markets
Italy raises VAT to bolster austerity budget – Pg. 1 ‐ …the highest value added tax band would be increased to 21% from 20%; that a 3% wealth tax would be imposed on top earners; and that introduction of a later retirement age for women would be brought forward
Similar ceiling action taken in 1970s – Pg. 2 ‐ Switzerland’s reputation as a haven has long supported the currency and Tuesday was not the first time that the central bank has tried to put a ceiling on the franc’s appreciation ‐ …the central bank was forced to buy foreign currency on such a grand scale that the amount of Swiss francs in circulation rose to a level that caused inflation to rise, eventually peaking at 7% in 1981 ‐ The SNB abandoned its fixed exchange rate in 1973 for similar reasons – inflation had surged to as high as 12% in the early part of the decade. Throughout the 1970s, very loose US monetary policy – and high global inflation – not only pushed the Swiss franc higher but contributed to price pressures when the central bank tired to cap the currency’s gains
Fears over jobs toll from new capital rules – Pg. 16 ‐ Higher bank capital rules will drive up the cost of credit, hampering global growth and wiping out 7.5m jobs, … ‐ The IIF estimated that banks would push up lending rates by 3.5% as they struggled to safeguard profits while building an additional $1,300bn in capital by 2015
Western sovereign debt takes on a Japanese flavor – Pg. 23 ‐ It might only be a number or a psychological barrier for markets. But the 2% level that 10‐ year US Treasuries and German Bund yields have dived under the past few days is hugely significant ‐ The only other big western government bond market to go below 2% in recent times was Japan. Since it dropped, beneath that level in 1997, it has only risen above 2% for a few weeks in 1999 and an even shorter period in 2006. Otherwise Japanese yields have been marooned at historically low yields for the past 14 years
6 September 2011
Eurozone fears resurface – Pg. 1 ‐ German benchmark borrowing costs fell below 2% to all‐time lows and Italy’s shot up, as worries about the eurozone debt crisis and the fragility of banks intensified ‐ European lenders bore the brunt of a sell‐off in equity markets. The cost of insuring bank and government debt also hit record highs as investors fled from risky assets to safer ones ‐ Italy which has the world’s third‐largest bond market, saw the sharpest rise in its benchmark costs in almost two months with 10‐year yields leaping 27bp to 5.56%. Investors have been unnerved by the political disputes over a new austerity package in Rome ‐ The fall in German Bund yields will heighten fears that some western markets could be sucked into a Japanese‐style scenario of extremely weak growth and poor returns for shares. ‐ Since Japanese yields dropped below 2% in 1997, they have only risen above it for a few weeks
US states offer big banks deal on liability – Pg. 1 ‐ Big US banks in talks with state prosecutors to settle claims of improper mortgage practices have been offered a deal that is proposed to limit part of their legal liability in return for a multibillion‐dollar payment ‐ The talks aim to settle claims that Bank of America, JPMorgan Chase, Wells Fargo, citigroup, and Ally Financial seized the homes of delinquent borrowers illegally and broke state laws by employing so‐called “robosigners”, workers who signed off on foreclosure documents en masse without reviewing them
Unions flex muscles to test Rome’s resolve – Pg. 3 ‐ The prospect of mass protests and pressure from panicky markets is fuelling a sense of urgency in the centre‐right government, which is hoping to pass the budget as soon as possible ‐ Milan’s stock market plunged 4.83% on Monday,… ‐ Italy’s current system of industry‐wide labour agreements is seen as a big factor behind a sharp loss of competitiveness in Italian industry, where production costs have risen 25% more than in Germany over the past decade ‐ Italy – which some analysts fear will slip back into recession next year – has the dubious distinction of being the only eurozone country where per capital output is lower today than in 2000 ‐ ….employment rate of just 57% (Prof Note: LF in U.S. is 64%)
Recovery fears grow as service sector stalls – Pg. 6 ‐ The service sector recovery is suffering as much as that in manufacturing, a raft of surveys across Asia and Europe suggested on Monday, intensifying concerns about the health of the global economy
Fed ‘hawk’ reveals extent of divide over stimulus – Pg. 6 ‐ Further monetary stimulus from the US Federal Reserve would raise inflation without doing much to lower unemployment, one of the central bank’s leading “hawks” on monetary policy said… ‐ …extended FOMC meeting on September 20 and 21 when the committee will consider whether to add more stimulus for a stuttering economy, on top of its pledge to keep short‐ term interest rates close to zero until mid‐2013 ‐ The FOMC estimates that, in the long‐term, once all effects of the 2008‐09 recession disappear, the unemployment rate will fall back to about 5.4% from 9.1% today ‐ That suggests that there are about 6m unemployed people read and able to work
The end of hegemony – Pg. 9 ‐ …September 11, 2001,…..the price of Brent Crude oil was $28 a barrel, the Federal government was running a budget surplus, the US economy was turning after the dotcom crash ‐ Ten years on, the oil price hovers around $115 a barrel, the US is projected to run a budget deficit for 2011 of $1,580bn, the largest in history; the economy remains deeply troubled after the financial crash of 2008; and America’s military and intelligence services remain at war, battling insurgency and radical Islamic terrorism, … ‐ The cost of the ‘war on terror’ at more than $2,000bn amounts to twice the cost of the Vietnam conflict ‐ On a positive side of the ledger, American has so far escaped another terrorist attack on its own soil. Others have not been so fortunate. The bombings in Bali (2002), Madrid (2004), and London (2005), … ‐ In the aftermath of the attack on the Twin Towers a geopolitical re‐alignment comparable to those of 1815, 1945 or 1989 appeared to take shape ‐ Within a year, the US had lost the moral high ground. Mr Bush’s error was to make clear that regime change in Iraq was only one step for dealing with what he described as an “axis of evil” including Iran, North Korea and potentially other adversaries… ‐ Concerns rose with the publication of a revised national security doctrine in 2002, which ditched cold war concepts of containment and deterrence. In their place came a “forward‐ leaning” strategy of pre‐emptive military action, regime change, and a new kind of warfare that justified torture and denied the rights of the Geneva Convention to suspected terrorists ‐ By contrast, Sino‐US relations amount to not much more than an uneasy accommodation
Gap in US pension plans hits $388bn – Pg. 17 ‐ The funding hole in US corporate pension plans is now larger than at the height of the financial crisis, …. ‐ At eight companies, including Lockheed Martin and Ford, the pension deficit represents more than a quarter of the company’s market capitalization
Investors drawn to Japan property – Pg. 17 ‐ Some of the world’s biggest investors are scouring Japan’s property market for deals, in spite of the earthquake, tsunami and nuclear crisis in March, as they look for stable returns amid global economic uncertainty
Wave of lawsuits engulfs troubled lenders – Pg. 18 ‐ Flawed process ‐ Affordability o Repurchase claims – representations and warranties ‐ Mis‐selling o Securitization
5 September 2011
Greece hits at critics over speed of reforms – Pg. 1 ‐ Greece’s finance minister has staunchly defended his handling of the country’s relations with international lenders, accusing his critics of promoting “a mood of uncertainty and scare‐mongering” ‐ Unless government spending is slashed immediately, Greece will miss its budget deficit target, as a percentage of GDP, by at least 1.5%
Chinese consortium snapped up bulk of CCB stake sold by BofA – Pg. 1 ‐ A Chinese consortium was the biggest buyer of the China Construction Bank stake that Bank of America sold last month, …. ‐ BofA sold 13.1bn shares in Chinese lender – half of its 10% holding – generating $8.3bn in cash for the troubled US bank, and increasing its tier one capital buffer by $3.5bn ‐ Beijing asked BofA to sell only half of its holdings in CCB, China’s second‐largest bank by market capitalization
Italy in rush to finalize austerity revisions – Pg. 2 ‐ Yields on Italian bonds have risen for the past 10 trading days, despite purchases by the ECB that have amounted to 43bn (euro) over three weeks
Rich look set to escape tighter grip – Pg. 5 ‐ Last week, Italian parliamentarians rejected raising top income tax rates and the introduction of a wealth tax. Spain also steered away from a wealth tax. In the US, Republicans have taken a dogged stance against higher taxes ‐ In the UK, one of three countries to have raised its top income tax rate since the crisis, alongside Spain and Greece… ‐ In advanced economies, top central government income tax rates were commonly 70% in 1981, but had fallen almost everywhere to about 40% by the start of this century ‐ Corporate tax rates have fallen rapidly; in 2011 only three countries in the OECD operate a wealth tax, compared with 15 countries in 1995 and 10 in 1976; and taxes on the transfer of assets – inheritance and gift taxes – have also been scaled back ‐ Before the rich celebrate that their incomes are safe from the taxman, there are two reasons for them to be fearful o First is a new attack by the revenue authorities on tax expenditures, the deductions from income that do not count in tax calculations o Second, cross‐border evasion has become more difficult as offshore locations seek to avoid being black‐listed as uncooperative tax havens
US money market blow for eurozone – Pg. 16 ‐ US money market funds say they cut their exposure to eurozone banks for a second consecutive month in August, reducing the availability of credit as the stress in the region’s banking system increasingly affects stronger countries such as France ‐ Money market funds have continued to reduce European exposure even as the $2,700bn industry has attracted assets following the resolution of the battle to raise the US debt ceiling on August 2 ‐ The European banking exposure of the 10 biggest US money market funds fell to 47% of their $658bn assets at the end of July, down from 48.7% of the funds’ $698bn of assets at the end of june,…
Banks at risk of losing out to insurers in property lending – Pg. 16 ‐ The head of one of Germany’s biggest specialist commercial property lenders say banks in the sector may lose out to insurers that are increasing their own property financing because of new regulations
British lender heralds return of 100% mortgages – Pg. 19 ‐ Aldermore….is set to launch a new deal on Monday that will allow homebuyers to borrow up to 100% of a property’s value as long as they have a parent or guardian willing to support the loan (Prof Note: I thought a 100% mortgage was called “renting”) ‐ Big high street lenders typically require at least a 10% cash deposit, … ‐ Aldermore is looking to mitigate its risk by stipulating that 25% of the loan is guaranteed by a parent, grandparent or legal guardian through a charge on their own property
3 September 2011
Jobs data confirm US growth fears – Pg. 1 ‐ The US economy did not add a single job in August…raising the stakes for Barack Obama,the US president, ahead of a crucial policy speech next week ‐ A feeble 17,000 new jobs created in the private sector were offset by 17,000 government job losses, confirming recent data suggesting US growth had stalled ‐ The weak jobs data – below Wall Street estimates of a 68,000 increase – raise the chances that the US Federal Reserve will provide further monetary stimulus ‐ The unemployment rate held at 9.1% as there was an increase in employment on the separate, but less reliable, survey of households ‐ Mr Obama is likely to propose an extension – and possible expansion – of a 2% payroll tax holiday into next year; an extension of long‐term unemployment benefits; measures to encourage spending on infrastructure; and fresh ideas in areas such as housing
Brazilians say QE3 will harm the world economy – Pg. 2 ‐ …vowed to continue fighting the “currency war” as he blamed the weak dollar for crippling local industrial growth in the second quarter ‐ Last week, Ben Bernanke hinted that the US Federal Reserve would do more to support the stalling domestic economy, … ‐ The Brazilian real has appreciated by more than 40% against the dollar since the end of 2008, prompting a flurry of currency intervention by the central bank and measures by te government to force speculators out of the market ‐ …Brazil’s GDP still grew 3.1% on a yearly basis, thanks to strong consumer demand, investment and the robust services sector
Unemployed battle to survive squeeze on insurance pay‐outs – Pg. 2 ‐ At 52, John Harris did not expect to be living with his parents. But nearly two years after he lost his $150,000 a year job at a chemicals company, …. ‐ Even with a bachelor’s degree in electrical engineering from Penn State, he struggled to find work (Prof Note: As an electrical engineer myself, no sympathy! Barring an unstated family emergency, i.e. medical cost, he should have saved! Where is his graduate degree?! More skills, more options!!!) ‐ …about 7.3m US workers collect some form of unemployment insurance benefit,….with the average weekly benefit just under $300 a week. That compares with 2.8m in December 2007 ‐ Pay‐outs totaled $159.4bn in the year to June 30, 2010, … ‐ Already this year, six states have instigated unprecedented cuts to unemployment insurance programmes, trying to reduce the length of pay‐outs from the standard 26 weeks ‐ Many states have also capped the maximum amount of money they will provide through unemployment insurance ‐ Federal extensions to state unemployment benefits are also under threat ‐ There is currently a maximum of 99 weeks of benefits, though it can vary from state to state
Lawsuits loom over mortgages – Pg. 11 ‐ US financial stocks fell sharply on Friday as executives and investors braced for multibillion‐ dollar lawsuits from a government‐agency accusing banks of breaching commitments on the quality of mortgage securities sold to Fannie Mae and Freddie Mac ‐ Shares of Bank of America fell more than 7% on anticipation of yet more legal actions linked to the way banks packaged and sold mortgage securities in the run‐up to the financial crisis ‐ The September 2008 law that made Fannie and Freddie wards of the state put time limits on their regulator to bring action for alleged past abuses
US jobs and mortgages – Pg. 18 ‐ About 45,000 workers were excluded from payrolls due to a strike at Verizon, meaning the private sector added more than 60,000 jobs in total during the month…
2 September 2011
Hopes for global recovery take a hit – Pg. 1 ‐ The global manufacturing recovery appeared to have come to a grinding halt in August, …. ‐ Across Asia, Europe and the US, surveys of purchasing managers produced the lowest readings of manufacturing activity and orders since mid‐2009, when the world economy was only crawling out of recession ‐ The global purchasing managers’ index, compiled by JPMorgan, fell to 50.1 in August from 50.7 in July, indicating the manufacturing sector was again struggling to increase output, having been growing strongly at the start of the year
US deficit to drop below estimates – Pg. 2 ‐ ….the Office of OMB in its mid‐year review predicts that unemployment will stay stubbornly high, tracing above 8% into the 2012 presidential election year ‐ The OMB’s forecast of 8.3% unemployment for 2012, for example, rises to 9% under the slower‐growth scenario, and does not fall under 7% until 2015 ‐ Growth is also slower for 2011 under the more sober scenario, falling from 2.1% estimated in June to 1.7%, with a slight recovery next year ‐ The OMB’s June forecasts for the 2011 deficit will be $1,316bn, 20% lower than its estimate of $1,645bn projected in February this year, falling as a percentage of national economic output from 10.9% to 8.8%
Lesson in progress – Pg. 7 ‐ A paper by a group of economists, measuring the effect of the charter schools in Boston that stared in the 1990s, found that these new entrants have made a dramatic difference; they were able “to reduce the black‐white reading gap in middle school [11 to 13‐year‐olds] by two thirds”
Obama’s re‐election – Pg. 12 ‐ His biggest problem lies with America’s 75m‐odd owner‐occupied housing units, 65% of which come with mortgages ‐ ….deal with the roughly quarter of homes currently in negative equity
Goldman in deal to exit mortgage servicing – Pg. 15 ‐ Goldman Sachs agreed to pay fines and reduce outstanding debt for some homeowners as part of a deal with regulators that allows the Wall Street bank to exit the mortgage servicing business but leaves open the prospect of further legal action ‐ The nation’s biggest mortgage servicers are under investigation by regulators for the practice of “robosigning” – the mechanical, and potentially wrongful, processing of foreclosures without the proper legal documentation
Changing attitudes force fund managers to rethink – Pg. 17 ‐ Asset management bosses are unusually glum. Not only are markets in turmoil, but their businesses are increasingly under pressure from clients who are switching to alternative investments while pushing for lower fees (Prof Note: Abso‐F’in‐lutely! Fees are way too high for managed funds in general. Individuals need to take control of their portfolios and do it themselves! If they do not feel confident, invest in AAA Fixed Income!) ‐ The issue is global with investors in Asia and America turning to alternative investments rather than to funds. Industry experts say that more than a decade of poor returns and high fees has eaten into investors’ faith in funds
1 September 2011
DoJ stalls AT&T’s T‐Mobile takeover – Pg. 1 ‐ The Department of Justice has moved to block AT&T’s $39bn takeover of T‐Mobile USA, alleging that the deal to unite the second‐ and fourth‐largest US telecoms operators would harm consumers and hold back innovation (Prof Note: So much for my IPhone!) ‐ The agency said that T‐Mobile played a valuable and scrappy, aggressive competitor and challenged AT&T’s assertion that the deal was needed to bulk out network capacity and expand the availability of broadband in the US ‐ The deal’s demise would be a blow to German telecoms group Deutsche Telekom, T‐Mobile USA’s parent company, which has long wrestled with its relatively small US business ‐ Should the deal be blocked, AT&T could have to pay $3bn to Deutsche Telekom, as well as handing over additional spectrum and wireless data roaming arrangements under what is known as a “reverse break fee”
IMF clash with eurozone authorities – Pg. 1 ‐ IMF staff has provoked a fierce dispute with eurozone authorities, by circulating estimates that show serious damage to European banks’ balance sheets from their holdings of troubled eurozone sovereign debt ‐ The IMF’s work, contained in a draft version of its regular Global Financial Stability Report, uses credit default swap prices to estimate the market value of government bonds the three eurozone countries receiving IMF bail‐outs – Ireland, Greece and Portugal – together with those of Italy, Spain and Belgium ‐ Although the IMF analysis may be revised, two officials said one estimate showed that marking sovereign bonds to market would reduce European banks’ tangible common equity – the core measure of their capital base – by about 200bn (euro), which is a drop of 10‐12%. The impact could be increased substantially, perhaps doubled, by the knock‐on effects of European banks holding assets in other banks
Jobless rise adds to growth gloom – Pg. 2 ‐ Unemployment in the eurozone has risen for a third consecutive month while inflation has stabilized, according to official data strengthening the case for the ECB to keep official interest rates firmly on hold ‐ …EU’s statistical office, reported the jobless total rose by 61,000 in July to 15.7m on a seasonally adjusted basis. This suggests weaker growth – exacerbated by the region’s debt crisis – has already thrown into reverse the modest falls in eurozone unemployment seen since last year ‐ …the eurozone unemployment rate was 10% ‐ the same as in June, although that month’s figure was revised up from 9.9% ‐ French unemployment rose from 9.8% in June to 9.9% in July, while in Spain, with the highest rate in the EU, it increased from 21% to 21.2% ‐ Joblessness in Germany is unchanged at 6.1% ‐ Eurozone inflation in August was unchanged at 2.5%, …. ‐ Economists expect the ECB’s main interest rate to be kept at 1.5% well into 2012 or beyond
Sarkozy denies claims over cash – Pg. 3 ‐ …denied new allegations that he took undeclared campaign cash from the heiress to the L’Oreal cosmetics fortune ahead of his 2007 elections
Las Vegas jobs prove a mirage – Pg. 4 ‐ Nevada leads the US in unemployment – 12.4% of its working population have no job – and in mortgage foreclosures, which has sparked a poverty crisis ‐ …about 13% of all children in Nevada have been evicted from their homes with their families ‐ The financial crash and the crisis in lending markets brought a swift end to the hotel construction boom, which left thousands seeking jobs.
Volatility and risk aversion hit fundraising – Pg. 11 ‐ Global markets for raising capital mostly shut down in August, especially for smaller and riskier companies, amid a surge in volatility and a pullback in investor flows ‐ The high‐yield, or junk bond, market has the slowest August globally since at least 1995, ….
Short‐sellers pile on bearish US bets – Pg. 18 ‐ Short‐selling interest in S&P 500 stocks has reached its highest since November last year as investors piled on bearish bets in the past month, underlining the scale of the sharp switch in market sentiment ‐ But in the past month, loans have risen and now more than 3% of the index’s total market capitalization is out on loan, … ‐ The Federal Reserve is due to hold an unusual two‐day meeting beginning on September 20
31 August 2011
Exxon secures Arctic deal – Pg. 1 ‐ ExxonMobil has formed an Arctic exploration partnership with Rosneft, the Russian state oil group, in a strategic coup over rival BP ‐ In return Exxon, the world’s largest oil company by market capitalization, will give state‐ controlled Russian company minority stakes in projects in the US Gulf of Mexico, onshore fields in Texas and elsewhere ‐ The agreement underscores international oil companies’ determination to explor and develop the Russian Arctic, one of the few places in the world with large, untapped oil and gas reserves, and Russia’s recognition that it needs international help to exploit those resources
Top Fed member in plea for stimulus – Pg. 1 ‐ Minutes of the FOMC’s August meeting – which forecast that interest rates will stay exceptionally low until mid‐2013 – showed the Fed’s staff had cut growth forecast for the rest of 2011 and 2012 “notably” ‐ Other easing options pointed out by “some” participants included further asset purchases – in effect a third round of quantitative easing
Dispute erupts over control of Libya $65bn sovereign fund – Pg. 1 ‐ The competing claims highlight both the confusion that followed the Gaddafi regime’s rapid collapse and the challenges facing the NTC as it seeks to rebuild Libya’s institutions
Slowdown fears rise in eurozone – Pg. 2 ‐ Fears of a pronounced European slowdown strengthened on Tuesday after a survey showed eurozone economic confidence tumbling at the fastest rate since late 2008
Indian rate rises curb growth – Pg. 2 ‐ India’s pace of economic growth slowed to 7.7% in the three months to the end of June as higher interest rates hit deeper in the expansion of the world’s fastest‐growing large economy after China
Storm rages over Irene funds – Pg. 3 ‐ …Democrats promising to fight a pledge by a top republican to offset any relief funds with other spending cuts (Prof Note: This is the wrong place for the Republicans to draw a fiscal line!) ‐ Fema, the federal disaster relief agency, has announced it is suspending new projects in states hit by earlier disasters in order to meet the immediate needs of victims of hurricane Irene ‐ Congressional leaders are awaiting word from the White House about whether the dwindling $772m left in an emergency resonse fund controlled by Fema will cover the immediate needs of hurricane victims until October 1, the end of the 2011 fiscal year ‐ A little‐noticed provision in the debt ceiling legislation passed in August following protracted debate allows lawmakers to increase the federal disaster fund without violating the limit on spending included in the legislation
Consumer confidence lowest since April 2009 – Pg. 3 ‐ …outlook on jobs and economy was battered by global turmoil and political infighting over the nation’s debt deal ‐ A separate report showed that foreclosures weighted on home prices in June
Fresh suit adds to BofA woes – Pg. 13 ‐ BofA’s legal woes grew on Tuesday as the biggest US bank by assets was sued for alleged breach of contract by US Bankcorp over a $1.75bn pool of mortgages ‐ Investors have been jittery about BofA’s ability to pay billions of dollars in settlement costs. AIG this month sued BofA for $10.5bn over the sale of mortgage assets ‐ Another unknown for BofA is how much it will pay to settle with state attorney‐general and the Department of Justice in an industry‐wide deal over foreclosure practices
US earnings expectations scaled back – Pg. 20 ‐ US companies have once again shown double‐digit quarterly growth, but analysts are already ratcheting down their expectations for the next quarter ‐ Companies are still expected to grow by double‐digits, but the expected growth rate in the third quarter is now 15.2%, down from expectations of 16.9% as of mid‐July. ‐ Expectations for all sectors have fallen, but most dramatically for consumer staples and telecoms, as those groups are less able to pass on costs to strapped customers ‐ Stock traders are already pricing in such a further decline, however, and have brought the S&P’s price‐to‐earnings ratio of forward earnings down from 12.5 in July to current levels of 11.5
30 August 2011
Watchdog hits out at banks over Greed debt – Pg. 1 ‐ Some European financial institutions should have taken bigger losses on their Greek government bond holdings in recent results announcements, …. ‐ The IASB criticized the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt in a private letter sent to the European Securities and Market Authority,… ‐ Financial Institutions have slashed billions of euros from the value of their Greek government bond holdings following the country’s second bail‐out. Some banks and insurers have written down their holdings by a half but others by only a fifth
BofA to raise $8.3bn from CCB deal – Pg. 1 ‐ BofA has struck a deal to sell around half its stake in China Construction Bank to a group of investors for $8.3bn, marking another step in efforts by the beleaguered financial group t raise additional capital ‐ BofA’s shares have tumbled more than 40% this year amid concerns that the US bank’s troubled mortgage business could overwhelm its balance sheet, forcing the lender’s executives t reverse course and raise additional equity ‐ The move is the latest in a series of actions made to bring the bank into line with future capital adequacy rules set out under new Basel III standards. The CCB sale is the 30th such asset sale that the bank has announced since January 2009,…
Chinese tycoon’s plans for $100m tourism project in Iceland raises security concerns – Pg. 1 ‐ A Chinese tycoon plans to buy a vast tract of Icelandic land for a $100m tourism project which critics fear could give Beijing a strategic foothold in the North Atlantic ‐ …equal to about 0.3% of Iceland’s total area…
US consumer spending rallies – Pg. 2 ‐ US consumer spending rebounded in July as Americans bought more cats and other long‐ lasting items and disposable income rose
Not so happy returns – Pg. 5 ‐ But the fact that the “masters of the universe” have got it so wrong is a sign of how upside down the investing world is today (Prof Note: Perhaps not…perhaps a new investment paradigm is in play? One were risk is a greater return than expected return) ‐ Everyone has struggled, with two‐thirds of managers of stock funds failing to beat the S&P 500 index benchmark in the past three years (Prof Note: Perhaps it is time for people to take responsibility for their own investing?!) ‐ Bill Miller, a previous Morningstar manager of the decade, who could do no wrong through the 1990s, has struggled with poor performance since 2005. Now his Legg Mason Capital Management Value Trust is ranked last of the 840 funds in its category over the past five years by Lipper, losing 9% annually (Prof Note: Hmmmm….I bet he still earns at least a six figure salary, amazing!)
Long‐term unemployed – Pg. 10 ‐ In August, 44% of the 14m people officially unemployed have been out of work for more than 27 weeks. (During the early 1990s recession, by comparison, only a quarter of those unemployed were long‐term). Another 3m want to work but have not bothered to look for four weeks so are not included in the labour force
29 August 2011
Lagarde attacked over bank comments – Pg. 1 ‐ …accusing the managing director of the IMF of making a “confused” and “misguided” attack on the health of Europe’s banks ‐ …call for an “urgent” recapitalization of Europe’s weakest lenders, saying that shoring up the banking system was key to cutting “chains of contagion” across the region
Recapitalization call catches Europe off guard – Pg. 3 ‐ …it was her statement that the “most efficient” solution would be some form of mandatory recapitalization, potentially using the European financial stability facility to make direct capital injections into the region’s weakest banks, that surprised regulators and European policymakers
Consumer confidence – Pg. 10 ‐ Consumer confidence statistics currently make grim reading ‐ In the US, they are at lows not seen since the oil price‐inspired recession of 1980. In the UK, consumers feel only slightly less bad then they did when Lehman went bankrupt, and when interest rates soared in 1990 ‐ During the 1930s depression, the joke was that the reduced spending power of normal shoppers pushed down prices, so the rich could afford to bathe in milk ‐ These days, the elite can load up on handbags, jewellery and custom‐made saddles
Caterpillar chief attacks US – Pg. 11 ‐ The head of one of the US’s biggest manufacturers has launched a scathing attack on Washington, saying the country’s economy could be dragged into another recession because of political brinkmanship on Capitol Hill (Prof Note: Amen!) ‐ …feared that pending bilateral trade agreements and road‐building legislation could fall victim to political bickering ‐ The Caterpillar chief blamed political leaders in Washington for their inability to find agreement over the debt ceiling, an issued that contributed to Standard & Poor’s downgrading of US creditworthiness
Head of embattled Sino‐Forest steps down – Pg. 11 ‐ Sino‐Forest, the Chinese timber company facing allegations of accounting irregularities, said on Sunday that Allen Chan, its chairman and chief executive, had voluntarily resigned
German ‘bad banks’ hang back from joining Greek bond rescue – Pg. 11 ‐ German “bank bank” agencies holding billions of euros of Greek debt have yet to decide whether to join a bond swap intended to cut Athens’ refinancing burden as part of a European Union bail‐out ‐ Some of Germany’s biggest holders of Greek debt are agencies set up with public sector support to wind down toxic and unwanted assets that had to be unloaded from stricken banks during the financial crisis ‐ Greece has set a deadline of September 9 for banks to make non‐binding offers
Clouds gather over US coal‐fired plants – Pg. 12 ‐ The US power industry is facing its biggest shake‐up since the Three Mile Island accident of 1979 ‐ That incident killed of investment in new nuclear plants for a generation. This time, it is coal‐fired power stations that are under threat ‐ New Regulations….EPA could force up to 20% of those plants to shut down, …. (Prof Unpopular Note: Now is the time to loosen environmental restrictions given the current economic conditions) ‐ The first to take effect is the Cross‐State Air Pollution Rule, which cuts the permitted emissions of sulphur dioxide and nitrogen oxides, the gases that cause acid rain ‐ Companies that are predominantly gas‐fired or nuclear will probably gain because the new EPA rules will raise power prices but the coal‐heavy ones are likely to be losers
28 August 2011
China keeps its crown in IPO table – Pg. 1 ‐ China has again outshone the US as the top venue for initial public offerings despite steep share price falls on the mainland and Hong Kong stock markets, highlighting the shift in global financial activity from west to east ‐ Hong Kong retained its crown as the top bourse for the third year running, … ‐ US stock markets are ending a volatile year where they began, with the S&P’s 500 index down less than 1% as of yesterday ‐ Foreign investment banks have, however, failed to capitalize on the China boom. Goldman Sachs, the world’s leading equity bookrunner by volume, has not underwritten a single IPO on the mainland since 2009.
Successful Italy bond auction fuels hope – Pg. 1 ‐ Italy saw its short‐term funding costs fall by half yesterday, as the first big test of market sentiment since the ECB’s pre‐Christmas bid to support banks provided a glimmer of hope in the Eurozone debt crisis
Labour unrest sweeps China – Pg.a 2 ‐ Thousands of employees at an LG Display factor in eastern China went on strike this week over year‐end bonuses, part of a wave of industrial unrest sweeping the country as workers become increasingly assertive ‐ There is growing nervousness in Beijing over increasingly frequent protests
Joblessness puts Sarkozy on defensive – Pg. 2 ‐ In contrast to the resilience of Germany, a sharp rise in unemployment has underscored the gloomy outlook in France …. ‐ With joblessness now above 9% and threatening to hit one in 10 workers, … ‐ The number of jobseekers without any employment rose to a 12‐year high of 2.85m in November,….
China property – Pg. 10 ‐ China’s authorities have spent much of the past two years trying to engineer a slowdown in property prices
Population trends – Pg. 10 ‐ …seven billionth person was born on October 31 this year ‐ The event meant that the world’s population had doubled in only four decades. If present trends continue, it will hit 9bn by 2045/50 ‐ Today there are fewer than 900m people aged 60 or more worldwide. By the middle of the century that number will rise to 2.4bn. healthcare and assisted living should remain buys.
Fed seeks to curb repo market risk – Pg. 11 ‐ In the repo market, banks pledge securities as collateral for short‐term loans from money managers and other investors ‐ Its focus is the reduction of the role of the two clearing banks, which extend temporary credit late in the day to Wall Street dealers when repo trades are unwound and reconstituted
Chinese banks expected to dispose of bad loans – Pg. 12 ‐ Foreign and domestic distressed debt funds expect to come on to the market in China after at least five years in which banks largely sat on their portfolios of troubled loans ‐ The extent to which Chinese banks deal with their problem loans provides clues to the health of the economy generally. By cleaning up balance sheets, the Chinese banks will make room for new lending and financial experts suggest that any sign that China is dealing with bad debts in a commercial way is reassuring for future growth and the investment climate generally ‐ China’s big banks are under pressure to sell non‐performing loans because they face tougher reporting requirements after listing in Hong Kong ‐ …change regulations in the US – particularly the Volcker Rule banning proprietary trading – also mean that investment arms of banks such as Goldman Sachs and Morgan Stanley are no longer active, making the competitive landscape less crowded
Senior unsecured debt in decline – Pg. 17 ‐ That means bank businesses that consume the most financing could well be closed by banks. It also means banks have been more reliant on secured debt, such as covered bonds, which investors think are safer and immune to any bail‐ins
27 August 2011
Bernanke hints at more Fed support – Pg. 1 ‐ …US Federal Reserve will do more to support the stalling US economy, saying that the central bank “is prepared to employ its tools as appropriate to promote a stronger recovery” and will extend its September monetary policy meeting “to allow a fuller discussion” ‐ …offered no detailed discussion of the Fed’s easing options ‐ That suggests that the Fed is unlikely to launch a third round of quantitative easing – nicknamed QE3 – unless the economic situation gets substantially worse ‐ In a further sign of US economic weakness, estimates of second‐quarter growth were revised downwards on Friday from a annualized rate of 1.3% to just 1% ‐ He also clarified recent Fed guidance that short‐term interest rates were likely to remain low until mid‐2013, saying it was the most likely outcome rather than a certainty….
Romance loses a little of its sparkle as haven investors push up diamond prices – Pg. 1 ‐ Diamonds have emerged as a haven investment alongside favourites gold and the Swiss franc, with surging demand from Asian buyers driving prices of the precious stones ‐ Consumption from China and India has helped boost prices nearly 50% since the start of 2010 – mostly in the past six months – and pushed them to a historic highs, … ‐ Diamonds – together with gold and investments such as art – yield no annual interest. It also costs money to store and insure the gems. But in a low interest rate environment as central banks try to reactivate the global economy, that is a small price to pay
Bernanke gives policymakers dig in ribs – Pg. 3 ‐ The implicit message of those words is that, while the Fed will do everything it can, other policymakers are not taking those necessary steps ‐ The Fed’s job is to deliver low and stable inflation and economic stability, but “most of the economic policies that support robust economic growth in the long run are outside the province of the central bank” ‐ Mr Bernanke’s words reflect a growing sense that, while the Fed can and should do more to make sure inflation stays at its 2% target, tax and spending decisions have greater power to influence an economy in which consumers are still paying off debt after the financial crisis
Trading in Sino‐Forest halted by regulator – Pg. 8 ‐ Trading in shares of China‐based timber company Sino‐Forest has been halted by the Ontario Securities Commission, which alleged that senior company officials “appear” to have misrepresented its revenues and exaggerated its timber holdings ‐ The stock is halted for 15 days and can be extended after a hearing before the OSC ‐ One of the biggest investors in Sino‐Forest, John Paulson, the hedge fund manager known for racking up huge returns during the US housing market crisis, lost nearly $500m from his stake in the company
Buffet, the US investor of last resort – Pg. 9 ‐ …Mr Buffett boasts an unmatched record. Between 1965 and 2010 he has increased Berkshire’s book value per share by more than 20% a year on average ‐ Mr Buffett’s absolute control of Berkshire allows him to act swiftly
26 August 2011
Buffett invests $5bn in BofA – Pg. 1 ‐ BofA’s shares have tumbled almost 40% this year amid concerns the US bank’s troubled mortgage business could overwhelm its balance sheet, forcing the lender’s executive’s to reverse course and raise additional equity ‐ BofA’s vast book of troubled mortgages and a raft of legal issues have continued to drain confidence in its capital position, heightening speculation that it might need to raise equity – a costly move that would damage its executive’s credibility ‐ The bank said it would sell Berkshire 50,000 preferred shares valued at $100,000 each. ‐ The shares will pay an annual rate of 6% (Prof Note: Hmmmmm….if banks make money on the spread of the yield curve, that is going to be a hefty coupon!)
Short‐selling bank on bank stocks extended until end September – Pg. 1 ‐ Short‐selling bans on selected European bank stocks have been extended until the end of September in an unprecedented degree of regulatory co‐ordination ‐ French, Spanish, Italian and Belgian regulators said the bank, which cover nearly 60 companies and were first introduced two weeks ago, were still necessary to calm excessive market volatility ‐ Dealing in banned stocks has since dropped 62% from its pre‐ban spike…. ‐ Short‐selling banks tend to spark trading chaos because investors’ use of stocks and derivatives to hedge means that implementing the rules can be extremely complicated
Bernanke aims to hit right note at Jackson Hole – Pg. 3 ‐ An actual policy change, which would require the FOMC to meet and vote, is highly unlikely. FOMC meetings are regular, scheduled and announced so that they are predictable. The Fed’s bar for exceptional policy actions is high ‐ The title of the speech itself, “Near and Long‐Term Prospects for the US Economy”, suggest a compromise between the long‐term theme of this year’s Jackson Hole symposium and the need to discuss what has happened in the economy recently ‐ There has been a long run of negative economic news and data in the US; Europe’s sovereign debt problems loom as a potential financial shock for the US; and that has prompted a slide in financial markets and in some measures of long‐run inflation expectations ‐ This year, although the growth outlook is equally worrying, inflation is higher and so there is less danger of a slide into price declines ‐ He may well want to discuss the Fed’s options for further easing – but the strength of his words on potential FOMC action will be the measure of what the speech is meant to achieve
Finnish deal faces revision to save Greek bail‐out – Pg. 6 ‐ Eurozone finance ministry officials will try to rescue their 109bn (euro) Greek bail‐out deal by overhauling a controversial Finnish collateral agreement with Athens to open it up to other European creditor countries ‐ The new collateral would then be provided to all eurozone members, or at least those who wished to participate in the scheme ‐ Finland’s insistence that it receive collateral as a guarantee against Greece defaulting on bail‐out loans has threatened to sink the new rescue deal, reached last month after weeks of acrimonious negotiations ‐ …Athens would place an estimated 500bn (euro) in cash into a Finnish escrow account as collateral (Prof Note: I think the units are off. It makes more sense to me that this is 500m)
A realm dismal in its rituals of rigour – Pg. 9 ‐ If you ask why economists persist in making predictions despite these difficulties, the answer is that few do (Prof Note: This is why I consider myself a ‘capital markets’ person rather than an economist…I will venture predictions (which, for the record, are “opinions”)) ‐ The two branches of economics most relevant to the recent crisis are macroeconomics and financial economics. Macroeconomics deals with growth and business cycles. Its dominant paradigm is known as “dynamic stochastic general equilibrium (DSGE) – a complex model structure that seeks to incorporate, in a single framework, time, risk and the need to take account of the behaviour of many different companies and households ‐ The study of financial markets revolves meanwhile around the “efficient market hypothesis” – that all available information is incorporated into market prices, so that these prices at all times reflect the best possible estimate of the underlying value of assets – and the “capital asset pricing model”. ‐ A close relationship exists between these three theories
Long march to Chinese currency reforms – Pg. 23 ‐ Mr Li, who is expected to become China’s premier in 2012, announced almost half a dozen reforms to increase the flow of renminbi in and out of the mainland and to enhance Hong Kong’s role as the offshore trading hub for the currency ‐ Allowing the renminbi to be used for foreign direct investment should make it easier for companies that sell renminbi bonds – as McDonald’s and Caterpillar have done – to move money to the mainland where it can be put to good use ‐ China has many reasons to reduce its reliance on the dollar, which is used for almost all its cross‐border trade and finance. The trouble is, liberalizing the renminbi carries risks ‐ Doing so would allow money to pour into, or out of, its domestic financial system, undermining government control of financial stability, interest rates and the allocation of capital ‐ ….ultimate source of power: the control of the banking system (Prof Note: Profound!)
25 August 2011
Analysts paint rosier US fiscal outlook on bank of debt deal – Pg. 1 ‐ Congressional analysts painted a rosier picture of America’s fiscal outlook for the next decade on the bank of this month’s deal to increase the debt ceiling, but lowered their economic projections and continued to warn that more action was needed to steady US public finances over the long term ‐ Over the next 10 years the US will rack up $3,487bn in deficits, the CBO said on Wednesday, instead of the $6,737bn figure estimated earlier this year ‐ Under the projections fixed last month, real GDP is expected to increase by 2.3% this year and 2.7% in 2012. The unemployment rate will fall only gradually , from 9.1% to 8.5% at the end of 2012, remaining above 8% until 2014 ‐ Assuming current legislation remains in place, it sees cumulative deficits of $8,500bn over the next 10 years and the debt‐to‐GDP ratio reaching 82% by 2021, compared with 61% under the basic CBO baseline and the current level of 6.7%
Congress faces new fiscal tests – Pg. 2 ‐ …”supercommittee” – that has been charged with recommending by late November as much as $1,500bn in measures to shrink US deficit ‐ …next month: Congress needs to extend a new budget law funding more than $1,00bn in federal programmes and departments for the 2012 fiscal year, which starts on October 1 ‐ Failure to do so would mean the US will be once again on the brink of a government shutdown as it was in April, validating concerns about a breakdown in the political process and ringing alarm bells about the ability of the supercommittee to succeed ‐ The deal that raised the US debt limit and averted a default this month set the cap on 2012 spending at $1,043bn. That was $7bn less than the spending levels for 2011, but $24bn more than the spending limit contained in the House Republican budget, ….
Sarkozy focuses tax‐raising on rich – Pg. 3 ‐ Big companies and the rich will bear the burden of new revenue‐raising measures in a highly political budget approved on Wednesday by French president Nicolas Sarkozy ‐ Unveiling new austerity measures, launched after the country’s growth stuttered to a ahlt in the second quarter, … ‐ Though he also scaled back forecasts for growth from 2% this year and 2.25% in 2012 to 1.75% in each of these years….
Strauss‐Kahn left t count political cost of court case – Pg. 3 ‐ Though the former managing director of the IMF was smiling as he left court in the US on Tuesday, free of all charges of criminal assault on a NY chambermaid, he was visibly older than the man who just three months ago was tipped to become France’s next president
Derailment danger – Pg. 7 ‐ While Europe and the US struggle under crippling debts and high unemployment, Australia defies global trends – the nation of 23m people will soon enter a third decade of uninterrupted growth. At around 5%, unemployment is barely half that of the US and the eurozone. The government budget is forecast to return to surplus in less than two years and net debt stands at just 6% of GDP ‐ …country has hitched its fortunes to China like no other developed nation ‐ Spurred by China, Australia may be entering a particularly dangerous resource trap known as Dutch disease, from the effects of the Netherlands’ 1960s discovery of North Sea natural gas: a surging exchange rate propelled by a commodities boom leads to other parts of the economy becoming hollowed out ‐ The Reserve Bank has lifted rates seven times in two years to stand at 4.75%, the highest in the developed world. It has done so to damp inflationary pressures from the resources boom, but its action has led to a surge in mortgage costs and a slide in house prices (Prof Note: That is interesting as the data in the U.S. shows a weak but positive correlation with mortgage rates and home prices)
Moody’s and Japan – Pg. 12 ‐ The first is that there is no market taboo about discussing the deterioration of Japan’s public finances. ‐ Second, while the Japanese government has a chronic debt problem, the private sector does not: negative net worth at the general government level is more than offset by the positive positions of public and private corporations, households and non‐profit institutions ‐ Finally, Japanese politicians do not have the American conviction that Something Must Be DONE about the deficit
Gold price tumbles, but analysts refuse to call top of bull market – Pg. 13 ‐ Gold prices suffered their largest two‐day absolute fall in more than three decades, dropping nearly $150 between Tuesday and Wednesday as investors took profit after bullion prices this week hit a nominal record high (Prof Immature Note: What have I been saying? Thank god I did not buy (I will admit I was close and considering it)) ‐ Spot gold prices in London fell to a session low of $1,762.90 per troy ounce ‐ The previous largest two‐day absolute drop was in January 1980 ‐ In percentage terms, bullion has fallen by 7.7% over the past two days, one of the 10 largest corrections since the early 1980s, … ‐ In real terms, adjusted for inflation, gold prices are still a long way from their high of about $2,500 an ounce set in 1980 after the Soviet invasion of Afghanistan
24 August 2011
Shipowner threatens to seize China vessels – Pg. 1 ‐ One of Greece’s highest‐profile shipowners has threatened to seize ships belonging to china’s biggest shipping company, after it halted payments on high‐priced charter contracts
Miners and investors join rush for gold in Canada’s Yukon – Pg. 1 ‐ More than a century after the Kondike gold rush, Canada’s Yukon territory has again become a magnet for miners seeking the next bonanza ‐ Drawn by the soaring gold price, exploration companies have staked more than 85,000 claims in the territory since January, compared with 83,000 for the whole of 2010 and 10,000 – 15,000 in a normal year,…
Case against Strauss‐Kahn dismissed – Pg. 3 ‐ All criminal charges against DSK were dropped in a New York court on Tuesday, handing a victory to the former IMF chief and opening the door for his possible return to French politics ‐ …because of concerns about the credibility of Mr Strauss‐Kahn’s accuser
Confidence drains from eurozone consumers – Pg. 5 ‐ Eurozone consumer optimism has plummeted this month at the fastest rate for 20 years, while manufacturing contracted for the first time in two years, …. ‐ The European Commission said its consumer confidence indicator fell 5.4 points to minus 16.6 in August – a larger monthly fall than was seen in October 2008 after the collapse of Lehman Brothers ‐ German investor confidence has also fallen sharply this month, …
Reform of Spanish constitution seeks to cap fiscal deficit – Pg. 5 ‐ Spain will reform its constitution to limit the budget deficit and the level of public debt under a law proposed… ‐ The amendment….will be only the second since the Spanish constitution was agreed in 1978 after the end of the Franco dictatorship. The first was to comply with membership rules for the EU ‐ Germany and France, the two biggest eurozone economies, have adopted or promised similar legislation to control fiscal deficits ‐ Spain’s deficit peaked at 11.1% of GDP in 2009, fell to 9.2% last year and is targeted at 6% this year
A toxic trade – Pg. 7 ‐ America remains the world’s largest drug market, and Europe is catching up fast. It is increasingly accepted that the prohibition policy known as the war on drugs launched 40 years ago by US President Richard Nixon “has failed” (Prof Note: Legalize, regulate and tax!) ‐ At least the days when the US “certified” countries on the basis of their ability to curb drug production are gone ‐ Most of the 10,000 illegal methamphetamine laboratories seized worldwide in 2009 were also in the US ‐ El Salvador, the region’s bloodies country, suffered 71 homicides per 100,000 in 2010, ...; Brazil, 25. By comparison, the US homicide rate was less than six; Europe less than two
Bank of America – Pg. 12 ‐ The rising panic surrounding Bank of America naturally evokes the Lehman episode of late 2008. Shares in America’s largest bank by assets fell another 2.5% on Tuesday and have halved since the beginning of May ‐ ….BofA is either perfectly fine or needs to raise up to $200bn in new capital ‐ Its market capitalization is now $155bn less than its last quarterly reported book equity value, and $135bn less than its tangible book value at the end of 2010. The later is equivalent to the size of BofA’s entire home equity portfolio or half of its outstanding residential mortgage book ‐ BofA’s tier one capital ratio is about a percentage point and a half lighter than the 7% average for its peers on a Basel III basis
Bank jobs – Pg. 12 ‐ …client activity has again shrunk and the big banks are firing just as hard. The total job cuts announced, mostly in Europe but also the US, come to 60,000 in recent weeks, … ‐ Job cuts are a quick fix for a falling profits ‐ The ratio of pay to revenue at the top 20 investment banks is almost 65%
US approves exchange merger – Pg. 15 ‐ The planned merger of Deutsche Borse and NYSE Euronext has moved a step closer after a key US regulatory body approved the $9.4bn merger without objection
US bank capital concerns see bond spreads widen sharply – Pg. 20 ‐ Spreads on dollar‐denominated bonds sold by financial institutions have hit their widest levels in nearly two years ‐ Credit default swaps on senior Bank of America debt at one point traded at an all‐time high of 438bp on Tuesday, more than double where they began the month and topping the previous peak in March 2009 ‐ CDS spreads on other banks also reached the highest levels for the year but are still not close to the all‐time highs reached in the depths of the financial crisis
Sino‐Forest sees its credit rating cut after delay on fraud review – Pg. 21 ‐ Sino‐Forest, the Chinese forestry company fighting allegations of fraud, had its credit rating cut by S&P’s after delaying publication of its internal review into claims made by short seller Carson Block, causing its shares to slide
23 August 2011
CCB plans Hong Kong bond issue as part of $12.5bn fundraising – Pg. 1 ‐ China Construction Bank hopes to raise the bulk of $12.5bn fundraising in Hong Kong, boosting the territory’s nascent offshore renminbi market ‐ Renminbi deposits have soared in Hong Kong over the past year and now total Rmb554bn, but growth of renminbi bonds and other assets has been much slower ‐ Only a small portion of funds raised are allowed to flow back into China ‐ CCB’s capital adequacy ratio stood at 12.5% at the end of the first half, above mandatory 11.5% level for “systemically important financial institutions”
Poll hope still seen for Strauss‐Kahn – Pg. 4 ‐ The path to France’s presidency could still be open for DSK if he wishes to pursue it, said a leading French politician amid expectations that all charges against the former IMF chief were to be dropped ‐ Before his arrest Mr Strauss‐Kahn was considered the strongest challenger to President Nicholas Sarkozy and his centre‐right ruling UMP party, and was ahead of the incumbent in opinion polls, despite not having declared an intention to run
Finnish side deal threatens Greek rescue – Pg. 4 ‐ Greece’s new $157bn bail‐out came closer to unraveling on Monday amid a growing dispute over a side deal struck between Finland and Athens, with the Dutch government questioning the arrangement’s legality and a credit rating agency warning it could undermine all eurozone bail‐outs ‐ The Greek‐Finnish collateral deal, reached last week between the countries’ two finance ministers, would force Athens to deposit millions of euros in cash into an escrow account as insurance that Greece would not default on Helsinki’s portion of the rescue ‐ Moody’s Investor service said on Monday that the sudden proliferation of collateral requests could sap Greece of financial resources, and raised new questions about eurozone countries’ willingness to continue bailing out heavily indebted fellow members ‐ ….Netherlands, which had said it might also push for collateral deal if the Finnish plan was approved
Cash crisis pushes US Postal Service towards bail‐out – Pg. 4 ‐ The USPS has said faster than expected sales declines could leave it technically insolvent by the end of September, and unable to pay its bills by mid‐2012 ‐ If the USPS does not cut thousands of jobs, defer expenditures and reduce service, executives expect losses to accelerate, raising the prospect that the US taxpayer could be forced to bail out the second‐largest civilian employer in the country ‐ The USPS, like other national postal groups around the world, has been in decline for several years – squeezed by the inexorable substitution of physical mail by electronic equivalents and pummeled by the economic downturn (Prof Note: Even prisons now have email…I was shocked. www.corrlinks.com is the prison email system) ‐ A 2006 law has exacerbated the problem, forcing the USPS to pre‐fund its retiree health benefits with contributions totaling $59bn in 10 years – it has been crushing $5.5bn payment due in September – while restricting prices rises to the rate of consumer inflation ‐ Since 2007, mail volumes have fallen 20% and declines in first‐class mail have been far more severe than expected as recently as a few months ago. The USPS has racked up more than $20bn in losses and predicts cumulative losses of $150bn by 2020 ‐ …public sector union contracts that include no layoff provisions limit its ability to cut costs ‐ During the next five years the service plans to cut 220,000 staff – about 120,000 layoffs – and close to 300 processing centres on top of plans to shutter up to 3,700 post offices released last month
Labels and liabilities – Pg. 5 ‐ This January, Barclays was fined a record $12.7m for failing properly to explain the risks of these products to its customers (Prof Note: I have carved out a niche business explaining risk to customers that do not believe their wealth advisors. I always find it interesting when we disagree, I tend to be more micro focused) ‐ “Absolute return” funds, which aim to deliver a real return to investors in both bull and bear markets, have been gaining ground in the UK and the US as people seek to protect their capital against big losses (Prof Note: Hello….if you owned a rental property, and the value of the property went down, what happened to the rental? Did vacancy go up? Think about it, believe in yourself and what YOU can control) ‐ Until now, the focus of the British regulator has been on how products are sold, not what products are sold. It will finally enforce a long‐awaited ban on financial advisers taking commission and providers of a product when they sell it to a consumer from 2013. The move is expected to lead to a fall in mis‐selling cases, which have cost the industry billions of pounds in pay‐outs over the past decade ‐ ..the move towards ensuring products themselves are transparent and not misleading is already baffling providers who are trying to heed the regulators warning
Mortgage delinquency – Pg. 10 ‐ On Monday, the delinquency rate on one‐to‐four unit properties rose to 8.4%, …. ‐ Worse, the rate of delinquencies increased for every mortgage type, from prime fixed‐rate lending to dodgy subprime loans
Disability entitlements – Pg. 10 ‐ …8m Americans who receive disability insurance is rare compared with the cacophony over other entitlement payments. But last year disabled workers comprised 15% of all recipients of social security ‐ …social security only accounts for about a fifth of total federal non‐interest spending – or about 5% of GDP. Programmes such as Medicare and Medicaid are multiples larger ‐ If American workers outnumber retirees by five to one, disability insurance is now paid to about half of those who find it difficult to get a job ‐ Last year social security outlays exceeded revenues for the first time ever and the CBO predicts an empty pot by 2038. No spending can be off limits
22 August 2011
Merkel defies markets on debt crisis – Pg. 1 ‐ Angela Merkel on Sunday urged Europe to stand firm in the face of market pressure and the “dramatic crisis” gripping the eurozone, insisting the solution was for states to slash public debt and boost competitiveness ‐ …repeating her refusal to countenance funding indebted nations with a bond guaranteed by all members of the single currency bloc ‐ European bank shares have slumped more than 20% this month amid fears over the debt crisis and slowing growth ‐ With investors increasingly worried about the government debt in core eurozone countries, including Italy, Spain and France, calls to issue a so‐called Eurobond have grown louder
Fragile Irish recovery prey to eurozone and US crises – Pg. 2 ‐ In Ireland’s shrunken economy everyone is having to make do with less. Yet, despite cutbacks and tax rise, the country still chalked up a 1.3% expansion in GDP ‐ …concerns that a slowing US economy could hurt Irish exports, the engine of the recovery so far, and fears about the impact of the crisis in the eurozone ‐ Ireland is broadly hitting the tax and spending targets set by the EU and IMF under the terms of the 85bn (euro) bail‐out agreed last November ‐ Its budget deficit this year is projected to be 10% of GDP, after 6bn (euro) of tax increases and spending cuts. This brings the cumulative adjustment since the onset of the crisis to the equivalent of 13% of national output
Strauss‐Kahn’s accuser summoned – Pg. 2 ‐ …raising the possibility that the charges against Mr Strauss‐Kahn will be dropped at a hearing in New York on Tuesday ‐ Ms Diallo earlier this summer took the unusual step of identifying herself publicly by granting interviews to the press
Fed weighs options for more easing – Pg. 4 ‐ Barring an unscheduled and unlikely meeting of the rate‐setting federal open market committee (FOMC), Mr Bernanke cannot make policy announcements, but only set out this analysis of the economy, the Fed’s options and what he currently thinks about them ‐ His first order of business is likely to be to explain the Fed’s decision on August 9 to say that it expects to keep interest rates “exceptionally low” until mid‐2013 ‐ First, there were big cuts to growth forecasts for the second half of 2011 and drastic downward revisions to the national accounts ‐ Second, the drop in oil and other commodity prices, plus the changed outlook on growth, led to much greater confidence that today’s higher inflation is temporary ‐ Third, Fed officials felt that the downside risks of growth had risen ‐ The most dramatic option it could take is another round of asset purchases – a QE3. ‐ The FOMC remains determined to ignore political criticism, but attacks of the Republican presidential candidate Rick Perry, who called Mr Bernanke “almost treasonous” last week (Prof Note: Perry did more than that! He basically threatened the Fed Chairman! I have NO respect for Perry! Perry may have a message but his delivery requires, in my opinion, it to be invalidated) ‐ This means the option at the centre of Fed debate is some kind of “twist”, not expanding its balance sheet in size, but extending the average maturity of the assets it holds. This could be a way to get the benefits of quantitative easing – forcing investors into riskier assets by reducing the supply of safe, long‐term investments – without the downside of a larger balance sheet or greater bank reserves
The seven‐year hitch – Pg. 5 ‐ The polish economy is expected to grow by 4% this year ‐ A proposed change in the eligibility rules would make it easier for wealthier regions to grab a share of the funds as well. A new cap on funding for each member state and tough new conditions area also being viewed by many in the east as a way to keep more money in the west
What to do with all that junk – Pg. 10 ‐ Will the next Michael Milken please stand up? The disgraced “junk bond king” made his name raising money for risky companies in the 1980s but now many more bankers are vying for that title (Prof Note: See attached Milken summary for more details) ‐ ….risky junk bond issuance has soared ‐ Last week, yields on European companies rated junk hit 10% and have risen almost one‐fifth this month alone,… ‐ This jump in the cost of borrowing has already started to dissuade some companies from entering the market
Rules catch traders off guard – Pg. 12 ‐ Tough new anti‐fraud and manipulation rules for futures and swaps that came into effect last week have caught trading firms unprepared for a coming crackdown ‐ Traders are crowding into seminars and some firms are stepping up investment in surveillance technology as they seek to catch up with the rules passed last month by the CFTC ‐ The first of dozens of new derivatives regulations required by the 2010 Dodd‐Frank financial reform act, the anti‐fraud provisions broadened the rules to include swaps and made it easier for the commission to win cases by allowing it to punish attempted frauds and reckless behaviour, in addition to willful, successful price manipulation ‐ Swaps and futures traders do not have the same disclosure duties as equity issuers and many market participants interact only electronically and do not communicate directly. As a result there are concerns that the new ban on trading on illegally obtained nonpublic information could upend the normally freewheeling markets
Banks sift assets to cut pension deficits – Pg. 14 ‐ Some of Britain’s biggest banks have begun quietly ridding themselves of billions of pounds of assets they have found difficult to sell following the financial crisis, moving them off their balance sheets and into staff pension funds ‐ The moves – designed with the dual purposes of clearing unwanted assets from the banks’ own books while at the same time closing pension fund deficits – have been made as exceptional top‐up payments into the pension schemes during recent months ‐ Like many companies, all the big UK banks are running deficits, with insufficient assets to cover projected liabilities ‐ Many big banks found themselves with vast portfolios of illiquid assets, such as asset‐backed securities tied to the US mortgage market, following the 2008 financial crisis. Not only must banks mark the value of the assets, held in their trading books, to still‐low market rates, but the majority also attract higher capital requirements under new regulations. However, the rules do not apply to assets in pension funds ‐ Banks gain from capital and tax relief on the transfer transactions, while the pension fund typically securities contributions much sooner than if it were to wait for cash payments ‐ (Prof Note: This should concern those in pensions!)
20 August 2011
Yen and gold soar on recession fears – Pg. 1 ‐ The Japanese yen reached its highest level against the dollar since the second world war and gold hit a record on Friday, as continued investor concerns about a double‐dip recession stoked demand for perceived havens ‐ German and French shares closed down 2%, the S&P 500 was down 1.5% and the FTSE 100 in London was off 1%
Ominous protents for European banks – Pg. 3 ‐ Rising funding costs for European banks are stoking fears that they could be forced to cut back lending and drag down the already struggling world economy ‐ The spreads for credit default swaps – essentially the price to insure five‐year bonds – have hit all‐time highs in the past two weeks for the big French and Italian banks, as well as Spain’s Banco Santander ‐ Three‐month interbank lending rates for euros are at their highest levels since 2009, and Italian use of the ECB funding facilities doubled in July to 80bn (euro), the highest level in at least four years ‐ …US Federal Reserve has reportedly stepped up its monitoring of both US banks and US branches of overseas banks, asking them for more information about their local liquidity – the funds they need for day‐to‐day business ‐ European banks remain far more dependent on short‐term dollar funding from the wholesale markets than their US peers, so any pullback from investors tends to hit them harder. Most European banks had little trouble raising funds in the first half of the year and the largest institutions are 90% through their annual fundraising process,…
Gold standards – Pg. 16 ‐ Investors have good reasons for pessimism. Central bankers promise negative real interest rates for years to come, and the global financial system is failing the small test.
19 August 2011
Markets suffer global flight – Pg. 1 ‐ Benchmark Us borrowing costs fell below 2% for the first in at least 60 years and stock markets around the world plunged on increasing signs of global economic weakness ‐ US 10‐year Treasury bonds, the linchpin of the global financial system used to price many assets globally, yielded as little as 1.97% on Thursday, their lowest since April 1950,… ‐ There were also savage falls for both German and British borrowing costs, which hit record lows ‐ …weaker than expected US manufacturing and unemployment data ‐ Bank share prices again bore the brunt of the equity market sell‐off ‐ The S&P 500 closed down nearly 4.5% ‐ Inflation and jobless claims data were also both higher than expected… ‐ Investors are increasingly pondering whether western markets, and in particular the US, are following Japan’s example from the 1990s and entering an era where bond yields are extraordinarily low, while stock markets struggle (Prof Note: Thursday, Blythe presented this very case superimposing the U.S. market on the Japanese market…the visual correlations were evident (paper and presentation to follow….Blythe…send me the paper and presentation!)) ‐ Government bond yields came off their lows in late trading. US and German 10‐year yields were both at 2.09% while UK Gilts were at 2.32%, their lowest since 1899
Greek rescue faces fresh hurdles – Pg. 2 ‐ Two of the eurozone’s key creditor countries said on Thursday their backing for Greek bail‐ out loans might be contingent on securing concrete collateral from Athens, a move that would create fresh hurdles to Greece’s 109bn (euro) rescue ‐ The announcements by Austria and the Netherlands, two of the eurozone’s six triple A rated members, follow a tentative deal reached on Tuesday between Athens and Finland, another triple A eurozone country that for months has demanded collateral in return for its support for the bail‐out ‐ …approval of the Finnish side agreement now appears set to open a Pandora’s box, with as many as four other countries that face a bail‐out backlash at home seeking to strike similar deals with Athens
Grim data add to worries over global growth – Pg. 3 ‐ Confidence in the sputtering US economy took another blow as a raft of grim data on manufacturing, inflation, lay‐offs and housing added to escalating fears over global growth ‐ Demand has weakened as Americans strain to make ends meet, leaving businesses even more cautious about investing and hiring as the US recovery stalls and global markets gyrate ‐ Inflation has been running at an annualized rate of 3.6% over the past three months, higher than the Fed’s upper range of 2% ‐ In the housing market, sales of previously owned homes fell 3.5% in July, missing expectations of a 2.7% rise
US producer prices – Pg. 10 ‐ Core PPI, released on Wednesday for July, rose at the fastest rate for six months. ‐ Transportation prices are up between 5 and 10% versus a year ago, no doubt due to higher fuel costs ‐ …legal services (up 3.7%) were able to resist ‐ The free market is doing at least one thing well: helping producers make rational choices (Prof Note: People need to make the rational choice to delverage!)
Rates boost for US homeowners – Pg. 11 ‐ US mortgage rates have plunged to a 50‐year low, sparking a spike in refinancing that is helping grow numbers of homeowners reduce their borrowing costs (Prof Note: American’s need to deleverage NOT reduce the cost and thus attractiveness of debt!) ‐ …average US 30‐year fixed‐rate mortgage had dropped to 4.15%, down from 4.32% last week. The average effective mortgage rate is 5.3%... ‐ One large bank said about 25% of applications were being refused – many to borrowers who would have been deemed creditworthy in the recent past – because their credit scores were too low under new federal policies, or the value of their home had fallen, ….
18 August 2011
Move to curb Swiss franc’s rise backfires – Pg. 1 ‐ Traders shrugged off new measures by the Swiss authorities to stem demand for their currency, sending the Swiss franc sharply higher on Wednesday ‐ The Swiss franc jumped 2% against both the euro and the dollar in a matter of minutes…. ‐ The Swiss government also announced that it would allocate SFr2bn to help consumers, exporters and the tourism industry, which have all been hit by the currency’s rise ‐ In its effort to protect Switzerland’s recovery, the central bank has racked up losses by selling the franc. Over the past year, the Swiss franc has risen 20% against the euro and gained more than 30% against the dollar
China tackles park developers – Pg. 2 ‐ China has taken its battle against property speculation to the country’s amusement parks, announcing a ban on construction of large theme parks ‐ ….chinese consumers have seen disposable income rise rapidly in recent years, … ‐ The suspension comes amid rising concerns over local government debts accumulated due to investment in infrastructure projects undertaken as part of China’s Rmb4,000bn fiscal stimulus in 2008 ‐ It is not clear what effect the ban may have. In 2004, China banned the construction of golf courses, in an effort to limit the use of farmland and consumption of water. But according to the Chinese media, as many as 600 golf courses have been built despite the ban
Beijing boosts financial role of Hong Kong – Pg. 2 ‐ China’s vice‐premier on Wednesday announced measures to boost Hong Kong’s pre‐ eminence as China’s financial centre and its role as the offshore trading hub for the renminbi ‐ These included allowing Hong Kong financial companies to invest up to $3.1bn in mainland securities and Chinese companies to raise up to Rmb50bn in “dim sum” bonds in Hong Kong. Such quotas suggest China still intends to control borrowing and the flow of capital back into China ‐ When Hong Kong was returned to China in 1997, its executive, judiciary and legislature were guaranteed a high degree of autonomy but, as Beijing effectively anoints its candidate for the chief executive, dissatisfaction with the local government affects Beijing’s popularity
Increase in jobless fuels fears for UK recovery and leads to call for ‘plan B’ – Pg. 3 ‐ The UK’s unemployment rate nudged upwards in the three months to June, while the number of people claiming jobless benefits rose at the fastest monthly rate since May 2009, when the country was mired in recession ‐ …UK unemployment rate rose to 7.9% in the three months to the end of June, from 7.8% in the January to March period. A total of 2.49m people were out of work during the period, up from 2.45m in the three months to May ‐ Economic growth in the UK totaled just 0.2% in the second quarter and has been revised down to 1.7% for the year by the Office for Budget Responsibility. But growth elsewhere in Europe was slower in the second quarter. The German economy expanded by 0.1% in the same period and French output was stagnant at the global economy slowed
Financial regulation – Pg. 10 ‐ Banks need to strengthen their capital. The question is, who will provide it? (Prof Note: Exactly! Look to BofA….asset sales!) ‐ Traditionally, banks have turned to insurers, which seek long‐term assets to match their long‐term liabilities. Basel III reforms appear to rely too heavily on their appetite (and ability) to provide capital and buy bank debt. Insurers hold an estimated 60% of banks’ subordinated debt. The trouble is that Solvency II is not bank‐friendly. It gives different risk weightings to different assets – some higher, some lower – than Basel III. In effect, it reduces the incentive for insurers to hold longer‐term assets. The capital charge for an insurer holding a 10‐year triple B bond would be 1,260bps higher than for an equivalent one‐year bond
Nordea defends role in Pandora offering – Pg. 12 ‐ …jewelry maker which lost 70% of its market value after a profit warning this month ‐ Danish regulators on Tuesday asked police to investigate the Swedish bank over the stock offering ‐ …cut its revenue growth guidance for 2011 to zero (Prof Note: Greyhounds LOVE Pandora! Long live the Queen!!!)
China in record renminbi bond sale – Pg. 18 ‐ China has sold US$3.1bn of sovereign bonds in Hong Kong, the biggest offshore renminbi bond issuance, meeting huge demand from investors clamouring for assets in the Chinese currency ‐ …Hong Kong is currently heavily tilted in borrowers’ favour because of a dearth of investment options ‐ The institutional tranche of the tender was 4.6 times subscribed, giving five‐year bonds a yield of just 1.4% By contrast, at a domestic auction two weeks ago, the Chinese finance ministry paid 3.9% on five‐year bonds ‐ China has vowed to make the renminbi an international currency, but it is going about that with the caution of gradualism characteristic of its economic reforms of the past three decades
Asia’s currencies remain buoyant amid the storms – Pg. 19 ‐ Something unusual happened in Asia over the past month as global equities collapsed – the region’s emerging market currencies held their value against the dollar rather than tumbling as they have traditionally done in the past ‐ When the global financial crisis began in 2008, Asian currencies plunged against the dollar as trade flows dried up and investors dumped risky assets and fled to the perceived safety of the US ‐ Asian countries remain just as dependent on exports to the US and Europe as they were in 2008 ‐ The exception to the rule is China, which historically tends to peg the renminbi to the dollar in times of stress. China is able to maintain tight control of the renminbi because it restricts the flow of capital in and out of the country and has more than $3,200bn of foreign currency reserves
17 August 2011
Paris and Berlin vow to defend euro – Pg. 1 ‐ …plans to reinforce economic governance even as Germany’s economy suffered a sharp slowdown in the second quarter ‐ They pledged to prepare annual budgets on harmonized economic outlooks, work towards a common corporation tax by 2013 and proposed a twice yearly summit of eurozone leaders. They also want all 17 members of the eurozone to be obliged to make balanced budgets a constitutional requirement, and plan to revive proposals for a European wide tax on financial transactions ‐ But both leaders firmly refused to bow to pressure to reinforce the 440bn European Financial Stability fund or to consider commonly issued eurozone bonds ‐ The euro and S&P500 slipped in late trading after recent gains on the revived talk in Paris of a tax on financial transactions such as derivatives
For Fed to print money would be ‘almost treasonous’, says Perry – Pg. 1 ‐ Many Republicans, especially in its ultraconservative Tea Party wing, view the Federal Reserve with deep suspicion and would interpret any move by Mr Bernanke to stimulate the US economy as an effort to boost President Barack Obama’s re‐election chances, … ‐ (Prof Note: I am 100% in support of open gun ownership but am 100% against comments, especially by politicians, that convey “harm” to another person. Perry lost ALL of my respect (I am NOT claiming he had any prior to his disgusting comment))
Fitch maintains US triple A rating – Pg. 2 ‐ The Fitch decision shows that while there is not a vast disagreement between the agencies on the trajectory of US debt, they take different views on the recent debt‐ceiling deal, and on the potential for the US political system to produce more savings ‐ An important assumption made by Fitch is that revenue raising measures can find an extra $1,000bn. That is roughly equivalent to letting the Bush tax cuts for high earners expire ‐ ….Fitch…assumptions on revenues stabilizing at 21% of GDP (Prof Note: Hmmmm….given that there is an inability to foreclose on the U.S. government, that means a family making $100,000/year would have consumer debt equal to $500,000. Assuming the family paid 5% I/O this is $25,000/year to service. If the family pays an all‐in tax rate of 25%, that means net is $75,000. One third of net goes to debt service leaving the family to live on $50,000. Now if the family is prudent and pays down $25,000 in principal a year, this lease the family with $25,000 or $2,000/mo to live (approx). The $2000 must cover rent, groceries, car, gasoline, etc. Life is pretty darn tight!)
Slowdown spreads to central Europe – Pg. 3 ‐ Central Europe showed signs of being affected by the eurozone’s woes, as data released Tuesday pointed to a slowdown in growth ‐ The Czech economy grew by an annualized 2.4% in the second quarter, down from 2.8% in the first quarter, while Hungarian growth was an annual 1.5%, compared with 2.5% in the previous quarter ‐ Loans denominated in francs were popular before the economic crash of 2008 because of their low interest rates, but mortgage holders are now seeing much higher monthly payments
BofA eyes sale of Merrill assets – Pg. 13 ‐ Bank of America is in exclusive talks to sell the bulk of Merrill Lynch’s boom‐time real estate investments to Blackstone for up to $1bn, as the largest US bank by assets tries to clear up its balance sheet and bolster its capital ratios ‐ BofA is one of the last of the major investment banks to have pulled the plug on priave equity real estate investment,… ‐ US banks are rejigging balance sheets to comply with the Volcker rule, which restricts how banks can invest their own capital, and to reduce exposure to assets such as private equity against which they will be forced to hold more capital under the new Basel III rules
16 August 2011
ECB reveals 22bn (euro) cost of crisis move – Pg. 1 ‐ The ECB spent $32bn on government bonds last week – more than ever before – as it sought to prevent the eurozone debt crisis escalating out of control ‐ But the size of the intervention, revealed by the ECB on Monday, raised fresh questions about how long its commitment to act would last ‐ The ECB resumed bond buying on August 4 after a four‐month pause, as the crisis spread to Italy and Spain ‐ The ECB will this week seek to reabsorb the equivalent amount of liquidity from the eurozone financial system in an attempt to “sterilize” any inflation impact
Effects of Japan’s disasters linger as economy contracts again – Pg. 1 ‐ Japan’s economy contracted for a third consecutive quarter, reflecting the continued impact of the country’s biggest disaster since the second world war ‐ GDP fell 0.3% in the April‐June quarter on a seasonally adjusted basis from the previous quarter, due to a sharp drop in net exports following the March 11 earthquake and tsunami ‐ That translated into a 1.3% decline on an annualized basis, … ‐ …for every 1% fall in global GDP growth, Japanese output would fall by 1.5%
Business chiefs urge deficit action – Pg. 3 ‐ …Warren buffett, the billionaire investor, urging tax increases for the rich… ‐ The president repeated his calls for the 2% cut in the payroll tax for average workers to be renewed next year, for free trade deals to be ratified, and for the infrastructure bank to be established ‐ After a struggle last year to continue tax cuts only for households earning less than $250,000 a year, Mr Obama allowed the cuts to be extended for all Americans until next year
Confidence in US house sales remains low – Pg. 3 ‐ Confidence among US housebuilders was mired near record lows in August as fears over a slide back into recession added to troubles in the property market ‐ ….home improvement retailer Lowe’s cut its earnings outlook for the year as fewer people spent money on renovating their properties ‐ Builder sentiment was unchanged this month at 15 on a scale of 100, according to NAHB, in line with market expectations. Readings below 50 signal that more builders view sales conditions as poor than good ‐ A glut of homes for sale, amplified by the steady stream of houses in foreclosure coming on to the market at steep discounts, has sapped demand for construction ‐ At the same time, many would‐be sellers have found themselves with mortgage problems as the value of their homes has fallen
Slower growth adds to eurozone woes – Pg. 4 ‐ Eurozone gloom is being compounded by a marked slowdown in growth across the region, with even Germany’s economy losing momentum ‐ GDP data for the three months to June, to be published today, are expected to show the eurozone has not escaped the soft patch hitting other parts of the world ‐ The dangers for the eurozone in coming months are twofold: first, that sentiment collapses the eurozone “core”, including Germany, deterring investment and job creation; and second, that tensions in financial markets and weaknesses in the bank system feed into a “credit crunch” that further crimps economic growth
China rating agency comes under fire – Pg. 4 ‐ The Chinese rating agency best known for downgrading US sovereign debt last year has come under fire domestically for giving the country’s embattled railway ministry a higher rating than the government [Dagong Global Credit Rating] ‐ Dagong was praised in China for its foresight in twice downgrading the US sovereign rating before Standard & Poor’s lowered the US score this month
BofA moves to offload MBNA card businesses – Pg. 13 ‐ Bank of America has taken further steps to shed non‐core assets, in a bid to shore up investor confidence, agreeing to sell its Canadian credit cards business to TD Bank for $8.6bn and revealing it will also look to dispose of its UK and Irish cards units ‐ The US bank, the country’s largest by assets, acquired the MBNA cards business in 2006, as part of a growth spree that also saw it buy Countrywide, the mortgage lender, and Merrill Lynch, the broker ‐ BofA is struggling to reassure investors after a tumultuous share price performance last week, with a decline of almost 50% in the past year, partly over concerns about its capital levels. Its shares closed up 7.9% in New York on Monday; shares in TD closed up 1.3% in Toronto ‐ …BofA is facing difficulties in selling its 10% stake in China Construction Bank
Private investors dump US debt – Pg. 20 ‐ Demand for Treasury bonds abated after quantitative easing ended in June with private investors dumping bonds. But buying by foreign governments such as China has continued ‐ Foreign central banks slowed their purchases dramatically compared with the same time last year but were still net buyers, …. ‐ …China, the largest holder, increased its Treasuries holdings to $1,165bn in June, the highest since its record level of holdings reached last October at, $1,175bn…
15 August 2011
Berlin and Paris rule out Eurobonds – Pg. 1 ‐ Germany and France are ruling out Eurobonds as a solution to the eurozone debt crisis, despite renewed pressure before a meeting between chancellor Angela Merkel and president Nicolas Sarkozy in Paris on Tuesday ‐ Paris is hoping to make progress on proposals to improve eurozone governance
Pakistan let China see secret US aircraft – Pg. 1 ‐ Pakistan allowed Chinese military engineers to photograph and take samples from the top secret stealth helicopter that US special forces left behind when they killed OBL, (Prof Note: The one we illegally crossed Pakistan border upon, entering their airspace and sovereign land? Please tell me we are not complaining about this!) ‐ Chinese engineers were allowed to survey the wreckage and take samples of the “stealth” skin that allowed the team to enter Pakistan undetected by radar,… ‐ President Barack Obama’s national security council had been in discussions and was trying to decide how to respond, (Prof Note: How about another “We are sorry…”) ‐ Beijing has a strong military relationship with Islamabad and is a major supplier of weapons
Bachmann wins early Republican test – Pg. 4 ‐ The poll in Ames in Iowa is traditionally the first test for Republican candidates, establishing who has momentum in the state that is first to vote in the presidential nomination process. ‐ The results suggest what Iowa Republicans are looking for is an anti‐establishment candidate who will run hard from the right (Prof Note: Was this not what the American public wanted 3 years ago, only from the left? Hmmmmm…) ‐ This is an alarming development for Mitt Romney, the former Massachusetts governor considered the national leader in the race, but who recorded only 567 votes despite his name appearing on the ballot ‐ Mr Romney chose not to compete in Ames (Prof Note: Please…get your a$$ to Iowa and participate…we have had enough politicians “above it all”)
‘Inequity’ of austerity package rouses Italian ire – Pg. 4 ‐ Italy’s austerity package, passed by an emergency cabinet meeting on Friday, is facing growing criticism at home, even as it is welcomed by European Union officials ‐ ….$65bn package of spending cuts and tax increases over the next two years, which aim to balance the budget by 2013, will strangle Italy’s stagnant economy ‐ Opposition parties…say the measures unfairly target public sector employees, pensioners and mid‐income workers, leaning the wealthy almost unscathed ‐ It is calling for stronger measures against tax evasion ‐ The government’s most recent forecast for 2011 in April predicted a 1.1% growth rate, …
Again on the edge – Pg. 5 ‐ …the 60,000 redundancies unveiled in a matter of weeks by eight big banks, six of them European – an average of about 5% of the headcount of each institution – are likely to be just the start of a brutal reshaping of the industry that could result in the axing of hundreds of thousands of jobs worldwide ‐ Bankers and regulators agree they may mark a profound change in employment patterns across the world’s banking industry ‐ Many of the redundancies will be in the cut‐throat investment banking sector…first, explicit changes to pay structures to promote more deferred pay; second, the knock‐on effect of a certain more risky investment banking activities becoming prohibitively expensive under new capital rules – are leading to job losses (Prof Note: Good! A structural change is needed and excellence must be required) ‐ …before the crisis for bankers to take home the vast majority of their pay in the form of an annual bonus. Now, that equation has been changed, with a bigger proportion coming in the form of a fixed salary. Bonus payments, meanwhile are normally deferred over three to five years. Employees waiting for several traunches of prior‐year bonuses to payout therefore have reduced incentives to move to new jobs ‐ In many cases, they won salary increases of 50‐100% (Prof Note: Excessive…absolutely!) ‐ In the US, so‐called “proprietary” trading – whereby, banks make bets on the market with their own money – has been banned under Dodd‐Frank ‐ Globally, the new Basel regulatory framework will reduce the profitability of one of the banks’ most lucrative businesses since the financial crises – trading in fixed‐income instruments, particularly derivatives – as authorities impose higher capital buffers on riskier activities ‐ In a deteriorating market, the fastest way to cut costs is to cut people
Pension funds – Pg. 10 ‐ By 2008, 43% of US pension funds had assets in hedge funds, compared with only 2% in 2000 ‐ They had on average obtained a return of 1.9% a year from them – far lower than hedge fund indices, which suggested annualized returns of about 5%
Fears raised on property values – Pg. 11 ‐ Commercial real estate values have been spurred by a “lack of caution” on the back of an “astonishing” rebound in lending to the sector, …. ‐ LaSalle believes investors could be ignoring the distinctions between low‐growth and high‐ growth countries ‐ The return of investors to some more “prime” parts of global real estate – such as London and Paris – has pushed prices to near pre‐boom levels amid the belief that these represent safe havens during current market volatility ‐ (Prof Note: Listen to my predictions….Commercial real estate’s value is completely derived from leases….it is overvalued! Bottom of commercial, I predict, 2013/14)
Treasury yields cause concern – Pg. 11 ‐ US Treasury yields have fallen below a scenario used by the Federal Reserve to stress test banks, raising concerns about the financial sector’s resilience to the unusual interest rate environment caused by the rush for haven debt ‐ ….Morgan Stanley cut its earnings forecasts for US banks, warning that the squeeze on the margin between their short‐term borrowing and longer‐term lending would hit profits (Prof Note: Yield curve compression…current students note!) ‐ The scenario shows the US economy sliding back into recession, with the unemployment rate peaking at 11.1% next year and stocks and house prices falling
Compelling reasons to take the plunge – Pg. 14 ‐ Multinational companies cannot afford to ignore emerging markets. Nor can they afford to ignore the difficulties involved ‐ With about half the global economic output now coming from emerging markets, multinationals have been right to increase their investment in these countries so that they now generate about 20% of revenues from developing world compared with 10% 10 years ago ‐ The so‐called Bric economies alone – Brazil, Russia, India, and China – will add about $12,000bn to the world economy over the next decade, double the US and the eurozone combined ‐ …multinational challenges…divide into two: challenges from local companies, be they competitors or partners; and challenges arising from the general business environment, ranging from corrupt customs officials and untransparent courts to strikes ‐ Without doubt, the most significant development is the emergence of big local companies ready to deal with western and Japanese multinationals on their own terms (Prof Note: Yes….they do not want to be “owned” by western corporations, they want education and guidance and will create their own wealth, leaving the wealth in their own countries! ) ‐ …three of the world’s top 10 banks in tier one capital terms are Chinese ‐ (Prof Note: The West needs to be challenged! The financial bullying MUST end!)
13 August 2011
Investor retreat turns to ‘stampede’ – Pg. 1 ‐ One of the most volatile weeks in market history sparked a bigger flight to safety than the collapse of Lehman Brothers as global investors parked a record $50bn in money market funds this week, yanking cash out of bonds and shares ‐ The huge degree of risk aversion was revealed as global equity markets rallied, leaving many close to where they started the week. But that masked the degree of volatility that saw the Dow Jones Industrial Average ‐ Investors have spent the week worrying about anaemic economic growth in developed countries and hoping that central banks will intervene to prop up markets ‐ The ECB bought Italian and Spanish bonds on Monday while on Tuesday the US Federal Reserve said it would keep interest rates at zero for two years, sending US benchmark borrowing costs to a record low
Short‐selling ban attacked by academics and investors – Pg. 2 ‐ Fuming traders and marketmakers have scrambled to cover short positions and rejig their trading platforms after a late‐night announcement that four European countries were banning of short selling of financial stocks (Prof Note: Bring on short‐selling; If CEO’s simply did their jobs, it would not be an issue.) ‐ The ban affects equities, convertibles and equity derivatives of more than 60 banks, insurance and financial companies in Belgium, France, Italy and Spain. Credit default swaps, a form of insurance against default which are linked to debt, are not included
Move brings back memories of Lehman aftermath in 2008 – Pg. 2 ‐ What is short selling? o It is a way to profit from falling prices. Someone sells items – bank shares, for example – that they don’t actually own on the assumption that the price will fall with the aim of buying them back for less making a profit ‐ How can you sell something you don’t own? o You can borrow it. Long‐term investors such as pension funds and insurers own stocks but sometimes lend them out for a fee, which helps to boost their own returns. The borrower than sells the borrowed stock, hoping to buy it back on the cheap to return it to its owner ‐ What is now banned? o The simple answer is the short selling of a specified list of bank stocks and some derivatives linked to them ‐ Do the bans work? o Yes, in that shorts are “squeezed” and shares inevitably pop higher. No, in that plenty of academic studies show they have no long‐term effect. UK financials stocks actually increased their average daily decline in the months after the 2008 ban ‐ So what are “naked” shorts? o “Naked” means you haven’t even borrowed the stock you are shorting. Stock markets mostly ban the practice outright, but the economics of other financial instruments, such as credit default swaps, mean some straightforward trades are naked anyway
Sarkozy prepares for cuts after stall in growth – Pg. 2 ‐ …Sarkozy….must now find new savings after growth in the economy came to a shuddering halt in the second quarter ‐ After years of spending, with consumption having been one of the strongest motors of growth, French households are tightening their belts. Private consumption, which accounts for 56% of gross domestic product, fell by 0.7%, leaving an overall economic growth flat in the second quarter, … ‐ …grim picture of French economic health at the moment the country was caught up in a storm of rumour and speculation over the stability of its triple A credit rating
Republican candidates united on tax – Pg. 4 ‐ Republican presidential candidates were unified in calling for tax cuts as the answer to US economic woes during a debate in Iowa, a stance that will appeal to their political base but may be hard to sell to crucial independent voters in a general election (Prof Note: More, not less, taxes. Hmmmm….we are in financial dire straits and people are actually discussing tax cuts? Ridiculous! More taxes, more cuts, more fiscal discipline)
Index of consumer sentiment worst for decades – Pg. 4 ‐ US consumer sentiment is at its worst for more than three decades, suggesting that a destructive argument about the debt ceiling, a ratings downgrade from S&P’s and a plunge in the stock market are feeding back into an economic slowdown ‐ The Thomson Reuters/University of Michigan index fell to 54.9, far below the median forecast of 63.0 and significantly off July’s score of 63.7. The index is normally between 90 and 100 in good economic times and suggests deep pessimism among households ‐ Consumer sentiment is not always a good guide to what households will actually do, but it is disturbing sign for the economy ‐ Consumer expectations, a leading indicator of the economy as it asks how well off people expect to be a year from now, fell to an even more dismal 45.7, well below July’s 56.0
UK ‘super‐prime’ home sells for record 140m (sterling) – Pg. 4 ‐ The most expensive home in Britain has been sold to a Russian for close to $228m in a sign of the growing gulf in fortunes of a polarized property market across the country ‐ The flood of overseas buyers snapping up trophy residences in and around London shows no sign of stalling amid global turmoil, ….
Two against the world – Pg. 5 ‐ Mr Trichet and Ben Bernanke, his governors opposite number at the US Federal Reserve, had both watched with foreboding in the first week of August as weak US economic data led to a stock price slide, while in Europe investors began to run from Italian and Spanish debt ‐ The danger of a US recession may now be at its greatest since 2007, (Prof Immature Note: I have been saying the worst is to come since 2007!) ‐ The ECB went first. Close to midnight on Sunday, ….bowed to demands for more urgent reforms and France and Germany had issued a statement that gave tacit permission, the Frankfurt‐based central bank indicated that it would step in and buy Italian and Spanish debt ‐ When US stock markets opened they plunged, however, with the S&P 500 index falling by 6.7% on Monday and shares in some of the largest banks down by more than 20% ‐ The advantage of giving up the Fed’s flexibility is that, if markets know short‐term interest rates will not go up for two years, that will bring down longer‐term interest rates as well, making it cheaper to borrow and giving the economy a boost ‐ Looked at another way, central bankers are the surgeons of the world economy ‐ The surgeons have two choices: they could keep on operating, trying more radical forms of monetary policy, although there are limits to what that can achieve. The alternative is straying towards fiscal policy – prescribing drugs or radiation – and risking the malpractice suits that may result ‐ The US debt‐ceiling deal, which requires escalating budget cuts and creates a political climate in which further stimulus spending is inconceivable, raises the spectre of 1937, when a premature rush to tackle budget deficits created in the recovery from the Great Depression plunged the economy back into recession. Even worse, it does not actually tackle America’s long‐term fiscal woes ‐ …QE3 – which would be likely to mean buying Treasury bonds to drive down long‐term interest rates
Clouds looming over Asian commodities – Pg. 8 ‐ Singapore‐quoted commodity producers and traders are reveling in robust second‐quarter results but clouds appear to be gathering on the horizon
12 August 2011
Europe split on short selling – Pg. 1 ‐ European regulators failed to agree on a co‐ordinated ban on short selling on Thursday night, leaving France and other advocates of the curbs considering unilateral action to stem the recent sharp share price falls ‐ The new European Union market regulator, Esma, …. ‐ Greece and Turkey have already imposed bans on short selling ….
Food commodity prices soar as US crop forecast cut – Pg. 1 ‐ Food commodities prices surged after the US government slashed its forecast for the country’s crops due to the impact of a heatwave and drought ‐ The US is the world’s top exporter of food commodities, accounting for half the world’s corn
Public disquiet brews in Netherlands over Greek rescue – Pg. 2 ‐ Polls show the Dutch public firmly opposed to further aid for Greece or more contributions to the European financial stability facility bail‐out fund.
Concern over US borrowing costs – Pg. 2 ‐ Some 40% of US companies think borrowing will become more difficult as a result of the credit rating downgrade
Fall in confidence preceded turmoil – Pg. 3 ‐ Business leaders’ confidence in their industries and the global economy deteriorated sharply in the months preceding the latest market turmoil,… ‐ …34% of correspondents expected business conditions in the global economy to worsen over the next six months, …. ‐ Almost 70% of those surveyed said “economic and market risk” were the biggest threat to their companies, compared with about 60% three months ago ‐ …executives did not report much change in their hiring intentions: about 54% said their companies intended to increase the size of their workforce in the next 12 months, compared with 55% in the previous survey in May ‐ Geographically, executives in some emerging markets were more confident than their peers in the US and western Europe ‐ …60% in Asia‐Pacific thought conditions for their companies would improve, whereas only 48% of respondents in Latin America felt the same
Swiss consider euro peg to curb franc rise – Pg. 3 ‐ The Swiss National Bank, which has been battling to rein in the Swiss franc, has left open the possibility of pegging the currency to the beleaguered euro ‐ The currency has been driven higher as investors have sought a haven from concerns over eurozone and US government debt and worries over global growth ‐ The franc has risen more than 12% against the euro over the past month, threatening to breach parity with the single currency and hitting a record high ….
Drop in US jobless claims offers some economic cheer – Pg. 3 ‐ New claims for US unemployment benefits dropped to 395,000 last week, their lowest level in four months, offering some hope that the economic recovery continues to chug along – albeit at a slow clip
Four steps to fiscal union – Pg. 5 ‐ European Central Bank – Lender of Last resort? ‐ European stability mechanism – The long‐term answer? ‐ Eurozone‐wide bonds – Nectar or poison ‐ Economic governance – the dog that does not bark?
Lloyds in Irish property debt transfer – Pg. 14 ‐ As much as $1.4bn of distressed irish properties backed by debt from Lloyds Banking Group could be transferred to a new venture with one of the country’s best‐known property groups ‐ The aim is to help recovery the properties’ values, rather than book significant losses for the bank through an immediate fire sale ‐ The crash in values in the Irish property market, which wiped as much as 60% off property prices, has seen much of this debt exceed the value of the property ‐ The bank is unlikely to recover the full amount of its outstanding debt in Ireland, but the expectation is that the strategy could at least mitigate the eventual loss.
Mortgage‐backed debt attracts buyers – Pg. 18 ‐ The extra yield on mortgage‐backed debt sold by mortgage agencies Fannie Mae and Freddie Mac has risen to its highest level in over two years, luring investors to the sector ‐ The yield puck‐up, or spread over US Treasuries, on mortgage‐backed securities (MBS), has increased as US government debt prices have soared, a rally fuelled by the Federal Reserve’s decision this week to keep interest rates close to zero until at least the middle of 2013 ‐ Under the US mortgage system, homeowners can refinance their mortgages at any time. If rates fall, this can increase refinancing, and result in the prepayment of existing mortgages. For MBS, prepayment’s usually decrease the value of the securities – hence concerns about “prepayment risk” among MBS investors ‐ Higher underwriting standards in recent years, couples with the fact that many US homeowners have already refinanced recently, means refinancing activity is predicted to remain relatively subdued
11 August 2011
Focus of eurozone crisis turns to France – Pg. 1 ‐ Nicolas Sarkozy, the French president, gave his finance and budget ministers a week to devise new measures to cut France’s budget deficit as shares in the country’s banks plummeted in the latest bout of financial market turmoil ‐ Stock markets globally plunged on the dour outlook for growth. In NY, the S&P 500 closed down 4.4%, erasing much of the previous day’s gains, while the Dow lost more than 500 points to 10,719 ‐ The meeting came as rumours circulated about French banks and the possibility of a French credit rating downgrade, with Societe Generale plunging by as much as 23%. ‐ All three main rating agencies have reiterated that France’s triple A credit rating is stable but investors and analysts have said it could be next in line after the US downgrade last Friday ‐ Germany’s Dax 30 fell 5.2%, and the FTSE 100 was down 3.1%. US and German benchmark 10‐year bond yields fell sharply to close at all‐time lows…
China signals growing naval power with launch of its first aircraft carrier – Pg. 1 ‐ China has launched its first aircraft carrier in a sign of the country’s burgeoning naval power ‐ (Prof Note: Did Reagan not win the cold war by simply outspending the USSR? China is going to outspend us with our own money, i.e. the coupon payments on the debt they own! Oye Vei!)
UK slashes its growth forecast – Pg. 2 ‐ The Bank of England signaled that interest rates would remain on hold for much longer than previously believed as it unveiled forecasts showing that the outlook for both growth and inflation in the UK over the next two years were lower than expected just three months ago ‐ In its latest quarterly inflation report, the Bank reduced its growth forecast from 2011 from 1.9% to 1.7% while that for 2012 was lowered from about 2.5% to 2.1% ‐ But inflation, which had been forecast to fall to the Bank’s 2% medium‐term target by the end of 2012 with the help of much higher interest rates, is now forecast to fall to that level without them
China trade surplus jumps to $31.5bn – Pg. 3 ‐ …biggest is more than two years – on the back of surprising export strength, signaling that the global economy is more resilient than investors had feared in recent weeks ‐ Chinese exports rose 20.4% in July from a year earlier, faster than June’s 17.9% rise, while imports rose 22.9% in July, up from 19.3% in June, the customs administration said in a statement ‐ Chinese consumer price inflation quickened to an annual rate of 6.5% in July, the fastest in more than three years, but analysts said food price rises had leveled off
Democrat campaign fails to deliver in Wisconsin – Pg. 3 ‐ US labour unions and Democrats were dealt a blow after an expensive campaign to oust six Republican state senators in Wisconsin fell short of expectations
London weighs up damage to reputation – Pg. 4 ‐ After images of four nights of rioting and looting in British cities were broadcast across the world, business leaders and politicians began to assess the damage of London’s reputation
Oil price swings strike parallels with 2008 crisis – Pg. 18 ‐ When in September 2008 the global economy faced the threat of a depression to rival that the 1930s, Jeffrey Currie, head of commodities research at Goldman Sachs, sent investors a note saying that financial concerns were “overriding” the facts in the oil market ‐ The oil bears point to the twin factors of slowing demand and surging supply weighing down on prices for the rest of the year and into early 2012 ‐ Consumption growth has indeed slowed ‐ While consumption grew at an annual rate of 2.3m barrels a day in 2010, the IEA expects it to rise by just 1.2m b/d this year ‐ In the US, the world’s largest oil consumer, demand contracted year‐on‐year in April and May – the first two consecutive months of falls since October‐November 2009, … ‐ Riyadh, together with Abu Dhabi and Kuwait, have now almost offset the whole gap left by Tripoli. Total Opec production has risen by a hefty 1m b/d to 20.05m b/d in just three months
10 August 2011
Fed moves to tackle struggling economy – Pg. 1 ‐ The US Federal Reserve attempted to tackle a rapidly weakening economy on Tuesday by Freezing short‐term interest rates for two years and opening the door to more quantitative easing, in a move that sent the dollar and Treasury yields sharply lower ‐ The rate‐setting Federal Open Market Committee said: “The committee currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid‐2013” ‐ The Fed statement triggered one of the sharpest moves in the Swiss franc in history
Stubborn inflation sets policy dilemma for China – Pg. 2 ‐ China reported stubbornly high inflation and weaker growth data than expected for July, highlighting the policy dilemma facing the country’s leaders as worsening debt crisis in Europe and the US hit global markets ‐ China’s annual consumer inflation accelerated to 6.5% in July, up from 6.4% in June,…. ‐ Inflation was driven mostly by volatile food prices that soared 14.8% in July from a year earlier ‐ Since October, Beijing has raised interest rates five times and has lifted the amount banks must hold in reserve with the central bank nine times ‐ Prices of commodities such as oil are falling amid signs of slumping global growth ‐ The debt crisis in Europe and the US are further complicating the policy choices for Beijing as it tries t walk a fine line between reining in inflation without stalling rapid growth
Worried Fed follows in path of its northern neighbor – pg. 2 ‐ In pledging to keep short‐term rates close to zero until mid‐2013, the US Federal Reserve is following a path trodden by its neighbor to the north, the Bank of Canada ‐ Economists call such a policy “time commitment” and it works by driving down interest rates for several years into the future. If an investor knows that overnight interest rates will be zero for the next two years, then the yield on a two‐year bond should also be zero. The effect should ripple out along the yield curve ‐ If investors believe the promise is absolutely unconditional – and that the central bank will keep rates on hold no matter what happens to inflation – then it locks rates down because investors will not respond to faster growth by pushing up yields in the expectation of an interest rate rise ‐ The Fed’s commitment is less conditional…
Foreign Exchange – Pg. 10 ‐ …change is the direction of market forces. In 2008,the crisis helped move some mispriced currencies towards their fail values, as measured by the IMF. In 2011, markets are pushing some currencies even further away from fair value
Brazilian assets dumped despite robust economy – Pg. 18 ‐ Latin America’s largest economy has had the dubious distinction of being the biggest loser among the large emerging market stock markets during the sell‐off in global equities ‐ The Bovespa has lost about 30% of its value this year – on a par with debt‐ridden Greece in local currency terms – including 17% in just the past month ‐ The S&P’s downgrade of the US has provided another excuse to sell as investors become more concerned over the threat of recession in developed markets
9 August 2011
Nikkei is down over 400bps. Asian markets are opening down. 9:38pm (EST)
Stocks plummet on US downgrade – Pg. 1 ‐ US shares tumbled in their biggest fall since the depths of the financial crisis as a global growth scare caused investors to shun equities and take refuge in government debt ‐ Bank of America fell as much as 23%, Citigroup 22% and Morgan Stanly 15% as the first trading day following Standard & Poor’s downgrade of the US credit rating saw a rout in markets, with the S&P 500 falling as much as 6.7% ‐ The plunge came after the European Central Bank bought billions of euros of Italian and Spanish debt, causing their borrowing costs to drop sharply but giving little relief elsewhere ‐ Barack Obama…failed to calm markets. He said the US was downgraded not because S&P doubted the nation’s ability to pay its debt, but the political system’s ability to act (Prof Note: …and I am sure he took responsibility and resigned!) ‐ Despite the downgrade, the US government debt was one of the big beneficiaries of the sell‐ off ‐ The S&P 500 closed down 6.66% at 1,119, its worst fall since December 2008 (Prof Note: This means we need a 7.15% rise to get back!) ‐ The Vix, which tracks stock market volatility and is known as the “fear gauge” ended up nearly 50%, its highest closing level since March 2009
G7 pledge on stability gets cool reception – Pg. 2 ‐ The statement on Sunday by the Group of Seven rich countries pledging to “take all necessary measures” to support financial stability was largely dismissed by market participants (Prof Note: China is NOT part of the G7. I find it humourous that the G7 receive credibility without China and Brazil, the second and fifth largest economies, respectively) ‐ The G7 statement, and the movements in financial market assets on Monday, appeared to centre more on eurozone woes and a sense of weakness in the world economy than the US ratings downgrade
Merkel and Sarkozy lead ECB vote of confidence – Pg. 3 ‐ The central bank governors were set to give their grudging approval to buying the bonds of Italy and Spain two core members of the eurozone facing a disastrous increase in their borrowing costs ‐ France and Germany would implement exactly what they had agreed, no more ‐ ….Ms Merkel was giving a green light to ECB bond‐buying, even though the German Bundesbank, headed by Jens Weidmann, her former economic adviser, was firmly opposed ‐ There is strong resistance in the Dutch and Finnish parliaments, too ‐ Nor is it clear that the EFSF is well designed for the job. It is an inter‐governmental institution, jointly but separately guaranteed by the 17 eurozone partners, unlike the ECB and the European Commission, which are European institutions with a significant independent power of decision‐making ‐ The ECB may not cherish the role, but it will remain at the heart of crisis management in the eurozone
Swiss wrestle with surging franc amid hunt for havens – Pg. 3 ‐ The Swiss government met for a third unscheduled session in short succession on Monday as ministers grappled with curbing the surging Swiss Franc ‐ The latest surge reflects the Swiss currency’s traditional haven status, thanks to political stability and sound economic management (Prof Note: I wish we had some of that! Lucerne is one of my favorite towns on the globe) ‐ A strong currency has curbed raw materials price inflation, while the abolition in recent years of immigration quotas from the EU boosted population growth and demand ‐ Swiss exports have continued to grow, while GDP has remained robust ‐ …jobless totals were stable at just 2.8% on the Swiss measure ‐ …GDP growth this year have been trimmed to about 2.3% from 2.6% last year. For 2012, the consensus is 1.9%
Have on earth – Pg. 12 ‐ To test the effects of disorder, look at what flourished during the 2007‐09 crisis. Only five S&P 500 stocks rose from world stocks’ peak in October 2007 to trough on March 2009; one of them was Walmart. It beat the S&P 500 by 156%, thanks to superior valuation; after the nadir it underperformed by 46% ‐ Walmart consistently produced cash ‐ …it is hard to see bonds or the dollar acting as havens again
Verizon workers strike over new terms – Pg. 14 ‐ (Prof Note: Their timing could not be worse! Get back to work and be glad you have a job! There are 9.1% of Americans that would LOVE your issues!)
8 August 2011
Traders braced for more turmoil – Pg. 1 ‐ …the ECB’s governing council met last night to discuss whether to buy the debt of Italy, the world’s third‐largest bond market ‐ The ECB wants governments to indemnify it in return for buying Italian Bonds… ‐ Investors were divided about the impact of S&P’s downgrade on Friday of the US to double A plus,… ‐ In a sign of the downgrade’s limited immediate impact, the Depository Trust & Clearing Corporation, a US Securities clearing house, said it would not change its collateral rules in light of the S&P move ‐ …when trading opened in Australia on Monday, the Swiss franc hit a new high against the US dollar
Obama’s hopes for re‐election take a knock – Pg. 2 ‐ …the biggest political casualty of S&P’s move may be Barack Obama,… ‐ If the committee fails to reach a consensus, a fiscal trigger will kick in, forcing $1,200bn in automatic cuts to defense and domestic spending ‐ (Prof Note: My bets are on QE3! There must be another stimulus to get the current administration reelected. My concern is the markets will not look favourably on this package…wait and see…there will be another!)
China tells US to ‘live within means’ – Pg. 2 ‐ China’s official news agency has called for “international supervision over the issue of US dollars” and for the US to “live within its means” in the wake of S&P’s decision to downgrade America’s credit rating ‐ The remarks underscore the frustration of China, the world’s second‐largest economy and biggest holder of US debt, at having the fate of its foreign exchange reserves so intertwined with US fiscal health ‐ China has the largest foreign reserves in the world, with an estimated two‐thirds of the $3,197bn total denominated in US dollars. It stands to lose most from any fall in the value of the US dollar
Waiting for effect on shadow banking system – Pg. 3 ‐ Within an hour of the US losing its triple A credit rating on Friday night, bank regulators issued a statement that the downgrade would not affect the way the risks of US Treasury debt were calculated (Prof Note: Once again the U.S. buries its head in the sand and ignores the problem! Denial is NOT the solution) ‐ The downgrade could influence the repo market, and, therefore, the availability of credit to banks and investors. The mechanism is through the discount, or “haircut”, that is applied to US Treasuries in the repo market ‐ Repo haircuts might rise by one percentage point to 3%....with over $2,660bn of debt outstanding in the repo market, even a small change in haircuts can be significant ‐ The downgrade could feed through in two ways. First, it may trigger provisions in securitization and derivatives contracts, many of which were written on the assumption the US government was rated triple A ‐ Second, the downgrade may mean that the criteria for receiving a Triple A rating on future securitizations will be tougher
ECB faces dilemma over bonds – Pg. 4 ‐ A proposal that the European Central Bank should intervene in the bond market to buy Italian and Spanish sovereign debt presents the euro’s monetary guardian with a dilemma that has split its ruling council ‐ In future, the eurozone rescue fund will be allowed to intervene in the secondary bond market in “extraordinary” circumstances, and issue “precautionary” loans to member states in liquidity difficulties
A divisive initiative – Pg. 7 ‐ PFI works a little like the marriage of a mortgage to a full repairing lease. The public sector decides what type of project it wants. The private sector then designs, finances, builds and operates it – usually on a contract of 25‐30 years that includes full maintenance. At the end of the contract, the public sector is handed back the project in full working order. ‐ America is taking an increasingly keen interest
US of AA+ ‐ Pg. 12 ‐ …first ever downgrade of US credit…. ‐ …there are other triple‐A rated options, but it is unlikely that significant amounts of money will prefer the UK, France, Germany or even Finland over the US ‐ The biggest risk to the world economy is not a US default – the ability to print its own currency means the worst that can happen is a continued gradual weakening of the dollar over decades (Prof Note: If you are reading this far I am breaking shooting the gold bear and buying gold bull. Yes, I am doing a 180 and purchasing gold this week. This does NOT constitute trading advice) ‐ Italy and Spain, however, are hostage to the euro – a currency they cannot control
6 August 2011
Just In: the S&P downgrades U.S. credit rating from AAA to AA+. Grant emailed me a few minutes with an interesting question, “How did I feel?” My response was one word, “Sad.” This was completely preventable, current debt levels and fiscal deficits did NOT creep up on us suddenly, there was no tsunami but rather a long‐period of gluttony. Part of my sadness stems from knowing there will be no accountability. The politicians that caused this will continue earning $170,000+ while the average American worker that once made $39,000 will be left hungry. The knock‐on effects for global hunger will be even worse.
It is no coincidence that I closed all of my aggressive positions, paid off my house and ensured Passive income exceeded expenses the month after QE2 ended. Grant told me that I was the first person he thought of when he read about the downgrade. Trust me, if I saw it coming, it was completely preventable. I am saddened by this event and worried for the knock‐on effects. I can only hope the U.S. public finally holds those responsible accountable.
Grim week echoes depths of 2008 crisis – Pg. 1 ‐ Global equity markets suffered their worst week since the depths of the financial crisis, after better than expected US jobs data failed to lift the gloom ‐ But US shares rebounded as the Italian government announced a package of measures to liberalize its economy,… ‐ …tumultuous week….both the FTSE Eurofirst 300 and FTSE 100 indices had plunged 10%, their worst weekly losses since November 2008. The S&P 500 fell 7.2% for the week ‐ The US payrolls report showed the economy created 117,000 jobs in July, while figures for May and June were revised upwards by 56,000. The unemployment rate edged down from 9.2% to 9.1% ‐ ….participation in the labour force fell to a 28‐year low of 58.1%
Inflation worries pose bar to QE3 – Pg. 2 ‐ The Fed prefers to look at “core” measures of inflation that exclude volatile food and energy prices. Last autumn they were about 1% ‐ well below the Fed’s goal of 2% or a bit below – and falling. This year they are around 1.5% and rising ‐ First, monetary policy is already easier than it was last summer because the Fed has bought an extra $600bn of assets. Second, officials think that asset purchases become steadily riskier with each new round, because reversing them becomes harder ‐ If the Fed did decide to act then QE3 – another programme of Treasury bond buying – would not necessarily be the first choice ‐ A chance in balance sheet structure would most likely mean the Fed keeping its balance sheet the same size, but selling shorter‐term assets in exchange for longer‐term bonds ‐ Cutting payments on bank reserves is an unlikely option given that short‐term money markets are already struggling because of low rates
Lenders start to impose charges in face of cash influx – Pg. 4 ‐ The quest for safe assets intensified on Friday as more banks reviewed charging for deposits,… ‐ As balance sheets swell, not only do the FDIC premiums increase but banks are supposed to hold more capital ‐ The Treasury cannot issue bills with a negative yield, so the auction would not be decided on price – everyone would bid zero – but on volume. Hedge funds, which can use debt to leverage their bids, could snap up the supply ‐ The use of the European Central Bank’s overnight deposit facility has doubled in the past week to $168bn ….The facility usually pays less than market rates, suggesting banks prefer to hoard funds rather than put them to work in the inter‐bank markets
Greek sovereign debt forces global round of haircuts – Pg. 10 ‐ The eurozone crisis and the wave of selling in global equity markets left a trail of losses and disruptions in the corporate world on Friday ‐ European banks and insurers announced hefty writedowns on Greek sovereign debt holdings. Elsewhere, public spending curbs hit profits, while initial public offerings plans floundered amid market volatility
Market turbulence stokes QE3 talk – Pg. 14 ‐ The effects of QE2, whose end in June coincided in global markets, are still much disputed. Many seem addicted to the idea that QE can help ‐ US GDP grew by an annualized rate of about 0.8% in the first half of the year and many analysts have pointed out that every time it has been below the “stall speed” of 2% ‐ at least in recent history – a recession has ensued ‐ A complicating factor for investors in inflation. Figures for June suggested that US inflation was running at 3.6%, a relatively elevated level, and one that many economists and investors believe scuppers QE3 ‐ Ben Bernanke, the Fed’s chairman, made a similar point in a 2002 speech about how to head off the threat of deflation, arguing that the central bank could say rates would stay at zero for a set time or it could target a specific yield on long‐dated bonds such as 30‐year Treasuries
5 August 2011
Stock markets plunge worldwide – Pg. 1 ‐ Global stock markets plunged on Thursday as central bank interventions in Europe and Japan failed to soothe investors’ concerns over economic growth and the eurozone debt crisis ‐ The ECB bought government bonds for the first time since March, just hours after the Bank of Japan intervened in currency markets to halt the rise of the yen and the Turkish central bank cut rates to an all‐time low ‐ …most major stock indices entered “correction” territory, having fallen more than 10% this year ‐ The ECB limited its bond purchases to Irish and Portuguese sovereign debt, … ‐ …borrowing costs….US and Germany fell sharply to fresh year‐lows of 2.5% and 2.3%, respectively ‐ The ECB also said it would reintroduce emergency measures next week to boost financial system liquidity by offering banks unlimited six‐month loans amid signs of distress in funding markets
Israelis protest as housing costs mount – Pg. 2 ‐ The cost of housing in Israel has soared more than 40% since 2007, largely because of a lack of available space for building and a shortage of affordable flats
ECB chief signals tough stance – Pg. 3 ‐ The ECB was never likely to ride to the rescue of Italy and Spain ‐ The ECB’s surprise decision to resume intervening in bond markets – but limit its action to buying Portuguese and Irish bonds – made clear to Rome and Madrid that it still thought they had to do more to bring public finances under control ‐ Portugal and Ireland – both subject to international bail‐outs – are regarded in Frankfurt as making good progress in implementing turnaround strategies ‐ …CEB again downgraded expectations of more interest rate rises this year,… ‐ The Bundesbank opposed the launch of the ECB’s bond purchase programme a year ago because it feared mixing fiscal and monetary policies would create long‐term inflation threats
Call for bigger rescue fund – Pg. 3 ‐ ….eurozone’s $620bn rescue fund…. ‐ The ESM is a permanent 500bn (euro) fund that will replace the temporary EFSF in 2013
Debt crisis tests scope of IMF’s role – Pg. 3 ‐ As Europe’s sovereign debt crisis threatens Italy and Spain, the IMF, the eurozone’s authorities’ partner in its rescue missions so far, is wondering whether getting more involved will risk its cash and credibility ‐ If the fund were to maintain the one‐third share of financing it provided in the joint EU‐IMF bail‐outs for Ireland and Portugal, Spain would be a stretch and Italy out of the question for its limited resources ‐ …Spain – and to some extent Italy – are much closer to the traditional candidates for IMF funding than Greece ‐ With a relatively low ratio of debt to GDP, Spain can argue that it is illiquid but solvent ‐ One possibility for Spain is a flexible credit line, a new IMF lending facility, which can provide large sums quickly to generally well‐run economies facing sudden balance of payments problems ‐ ….Italy is too big for the fund to make a serious contribution
Lagarde to face probe over Tapie – Pg. 3 ‐ A French court has ordered a judicial investigation into the role played by Christine Lagarde, ….in a 285m (euro) arbitration payment to a controversial businessman
Sales data hide tale of two Americas – Pg. 4 ‐ Income inequality in the US has been growing since the late 1970s. ‐ The daily spending of upper‐income Americans rose to $128 from $119
Protect and revive – Pg. 5 [Japan] ‐ 20,000 … number dead or missing after March 11 earthquake and tsunami ‐ 200,000 … number of homes destroyed or badly damaged by disaster ‐ …23,000 hectares of farmland were flooded with saltwater ‐ More than 21,000 fishing boats were lost ‐ ….the shift in the earth’s plates that caused the magnitude 9.0 tremor reduced the height of land along the north‐east coast, in some places by more than a metre, making harbours and towns even more vulnerable to future tsunamis and typhoons
Pay to stash cash at BNY Mellon – Pg. 11 ‐ Accounts with an average deposit of more than $50m will be charged a 13bp annual fee on the excess and an additional fee If short‐term Treasury bills produce negative yields ‐ The $2,700bn money market industry in recent weeks placed large amounts of cash with custody banks as they prepared for potential consequences of a failure by politicians to raise the debt ceiling
4 August 2011 – Start here
Europe sparks global sell‐off – Pg. 1 ‐ European policymakers were struggling last night to contain the global market turbulence that has triggered sharp share price falls and a rush to haven assets ‐ Switzerland’s central bank made a surprise attempt to halt the rise in value of the franc on Wednesday, arguing the popular haven asset was “massively overvalued”, but the initial impact of the move faded ‐ The Swiss National Bank cut target interest rates to “as close to zero as possible” and said it would inject $65bn in liquidity in coming days as it tried to halt the franc’s relentless appreciation against both the dollar and the euro ‐ Shares in the UK, Germany and Japan all ended the day down 2% as investors continued to fret about weak growth in the US and Europe. Gold rose to a record high of $1,672.65 before easing to $1,659 while 30‐year UK bond yields fell below 4% for the first time this year ‐ In another sign of stress at Europoean financial institutions, bank deposits at the European Central Bank doubled from last Friday to a five‐month high
Job creation in US slows, and redundancies soar – Pg. 2 ‐ The US private sector added jobs for the 19th straight month in July but growth remained below the level needed for a steady recovery in the struggling labour market, while planned redundancies rose to a 16‐month high, adding to worries over the health of the world’s largest economy ‐ Wednesday’s employment report form ADP, the payroll processor, showed job creation slowed to 114,000 new positions last month from June’s downwardly revised 145,000 ‐ Friday’s labour department report is expected to show the economy added 85,000 jobs in July after June’s nine‐month low of 18,000 (Prof Note: My prediction for July is/was 25,000 – 35,000)
Fears for global outlook end US investors’ relief – Pg. 3 ‐ US investors are preparing for the worst as fears for global economic growth and the eurozone overtake any relief from the raising of the US debt ceiling ‐ ….attention in the US has moved from the politics of raising its $14,300bn debt ceiling and shrinking the US federal budget deficit to the global economic slowdown ‐ Manufacturing data for July have revealed that global activity stalled, with figures from Brazil, China, Europe, Russia, the UK and the US either dipping below or just at 50, the threshold between contraction and the expansion
Taxi strike reflects simmering unrest in China – Pg. 4 ‐ Taxi drivers in the Chinese city of Hangzhou, whose strike entered its third day on Wednesday, are angry, intermittently violent, and desperately poor (Prof Note: This could be a U.S. city soon) ‐ In one gritty, low‐income suburb of Hangzhou – far from the city’s beautiful West Lake, which has inspired generations of poets – clusters of angry strikers gathered as dust fell, watched by a few dozen nervous police
A fix that functions – Pg. 5 ‐ Sluggish growth in the US is failing to dent jobless totals ‐ Germany, the Netherlands and a few other northern European countries tell another story,… ‐ US employment figures stayed closer to the rule book. Between a high point at the end of 2007 and the second quarter of 2009, gross domestic product plunged by 5.1% ‐ Dutch GDP slumped by a similar amount – 4.8% ‐ during the recession before recoverying, less strongly than the US, to 1% below its pre‐crisis peak ‐ In Germany, the peak‐to‐trough fall in GDP, at 6.6%, was much sharper ‐ Several explanations have emerged. Some point to circumstances in Germany and the Netherlands at the start of the crisis. Both had ageing populations, which restricted the availability of skilled labour. They had also built up strong, profitable manufacturing sectors able to benefit from the continuing rapid expansion of emerging market economies, especially China ‐ The Netherlands’ “polder model” – whereby labour representatives, government and employers agree on a common approach to solving the country’s economic difficulties – allowed swift agreement on steps needed to assuage the worst effects of the 2009 recession
United Auto Workers – Pg. 10 ‐ It’s payback time for Detroit. Not for taxpayers, who will never recover all of the $100bn, lifeline they extended to the industry, but for the United Auto Workers ‐ ….110,000 members…. ‐ UAW workers earn between 5 and 25% more an hour than non‐unionized workers at “transplants” such as Toyota, Nissan, Hyundai Volkswagen including benefits (Prof Note: ….and this fact alone is why I will NOT purchase an “American” car until there is equality in labour costs! I will NOT subsidize the UAW)
US corporate bond yields hit new lows – Pg. 11 ‐ The yield on high‐quality US corporate bonds has fallen to record lows as investors seek out debt from leading companies as a relatively safe destination for their cash ‐ The rally in top‐quality corporate debt comes as stocks and riskier bonds have continued to lose value ‐ Stock markets around the world fell on Wednesday on fears of a double‐dip recession in the US and continued uncertainty about the fate of eurozone sovereign debt ‐ The uncertainty regarding the outlook for sovereign credits has meant that corporate bonds are prized by investors ‐ The plunge in top‐quality corporate bond yields reflects the sharp falls in US government bond yields
RBS to axe 2,000 jobs at investment arm as it completes ABN integration – Pg. 11
3 August 2011
Spain and Italy rush to stem bond crisis – Pg. 1 ‐ Spanish and Italian politicians rushed to formulate a fresh response to the debt crisis engulfing the two countries as their borrowing costs hit eurozone‐era highs on Tuesday ‐ The flurry of activity came against the backdrop of another big sell‐off in markets ‐ The premium France pays to borrow over Germany also hit a euro‐era high of 75bps ‐ The sell‐off follows continued uncertainty among investors about whether the European bail‐out mechanism is big enough to deal with either Spain or Italy ‐ Shares in Italian banks again dropped sharply on Tuesday….
US retreats from brink of debt default as Senate approves last‐minute deal – Pg. 1 ‐ The spectre of imminent US default on its debt disappeared as legislation to increase the country’s borrowing authority cleared its last remaining hurdle in the Senate and was signed by Barack Obama, the president ‐ …the US could remain vulnerable to a downgrade of its top credit rating for months – and possibly years – to come
Obama pays price for standoff – Pg. 2 ‐ …research poll showed that 72% of US citizens summed up the budget standoff with words like “stupid” and “disgusting”, and a third have come away from the ordeal with a diminished view of Mr Obama ‐ Obama must talk more about jobs and stop hammering points that seem out of touch ‐ If there is any silver lining to the US public’s dwindling perception of Washington, it is that the president’s rivals for the 2012 election seem largely irrelevant in the ongoing conversations
Treasury reviews liquidity scheme – Pg. 2 ‐ Officials at the US Federal Reserve and Treasury are reviewing the future of a programme to manage excess bank reserves now that a deal to raise the debt ceiling has been reached ‐ The SFP [Supplementary Financing Programme] was set up in the autumn of 2008 as a convenient way for the Fed to soak up the excess bank liquidity created by its purchases of long‐term assets. Under the programme, the Treasury sells extra short‐term bills and deposits the proceeds in an account at the Fed. The result is to transform overnight bank reserves into slightly longer‐term assets ‐ …this week’s deal only increases the debt limit in stages. The limit rises by $400bn immediately, $500bn in the autumn and $1,200bn ‐ $1,500bn more after Congress agrees a package of additional cuts ‐ The Fed also has other tools available if it needs to drain bank reserves, such as its term deposit facility, which turns overnight reserves into longer‐term deposits
Brazil acts to fend off Asian imports – Pg. 3 ‐ Brazil has stepped up its fight against cheap Asian imports, strengthening border controls and increasing antidumping measures, as well as offering $16bn in tax breaks to revive the country’s own flagging manufacturers ‐ Despite enjoying one of the highest growth rates in the world, Brazil has seen its industry shrivel over recent months as a result of the surging local currency, which has made exports less competitive and encouraged cheap imports, mainly from China ‐ …pledging to strengthen border controls and take tougher action on violations of intellectual property, the government offered a package of tax exemptions worth $16bn to help the hard‐hit textile, footwear, furniture and software industries
Pandora loses its charm as warning spurs stock slump ‐ Pg. 11 ‐ (Prof Note: Greyhounds prepare, we may need to assist!!!) ‐ Shares in Pandora, best known for the charm bracelets that it sells in 55 countries, fell 65% after it slashed its full‐year earnings outlook parted company with its chief executive less than a year after it came to market ion one of the biggest IPOs in Europe in 2010 ‐ Pandora also cited hefty increases in gold and silver wholesale prices, price‐sensitive customers, excessive production and gorged inventory list (Prof Note: Laurie…this is why I was so worried about Pandora’s hedging strategy…I saw this coming. The greyhounds stand ready to assist!!!)
NYSE Euronext profit falls on slow trading – Pg. 13 ‐ NYSE Euronext, which is in the process of merging with Germany’s Deutsche Borse, suffered a 16% fall in second‐quarter earnings as a sharp decline in trading took its toll on the exchanges operator ‐ The figures highlight how exchanges, as well as investment banks and other institutions, have struggled with low share‐trading volumes in western markets for much of the year, with an expected pick‐up in trading on the back of improving economies failing to materialize
Rush for safety sends core debt yields tumbling – Pg. 18 ‐ When benchmark German and US bond yields were last at their current low levels, the Federal Reserve had just launched its second round of “quantitative easing” and pressure was growing in the eurozone for an Irish bail‐out ‐ That was November 2010… ‐ ….bondholders….are bracing, at best, a sharp economic slowdown ‐ Data on Friday showed the US economy growing at just 1.3% a year in the second quarter, will below expectations, in a report undermined further by heavy downgrades to previous readings ‐ …US could be approaching a “1937 moment” – when authorities removed post‐Depression stimuli from still‐fragile markets and triggered another recession ‐ The European Central Bank and the Bank of England both hold rate‐setting meetings this Thursday and the Federal Reserve meets early next week
Spain faces tough bond market challenge – Pg. 19
Gold hits record as eurozone fears mount – Pg. 20
Bourses fall on renewed talk of a double‐dip recession – Pg. 20 ‐ European equities fell further on Tuesday, reacting to increased government borrowing costs for Spain and Italy, which came amid deeper fears of a slowdown in global economic growth
2 August 2011
Dash to secure US debt deal – Pg. 1 ‐ The House of Representatives was expected to vote on Monday night on proposed legislation to cut spending by $2,400bn over 10 years and increase the debt ceiling by $2,100bn until 2013 following an intense lobbying campaign by Dems and Republicans ‐ ….manufacturing survey showed the weakest pace of expansion in two years ‐ …the darkening outlook for the economy was the main driver of asset prices on Monday ‐ Stocks have fallen for the past three months, their worst run since 2008
Rhode Island city files for bankruptcy – Pg. 1 ‐ A small city in Rhode Island has filed for bankruptcy…. ‐ The filing also comes as Jefferson County, home to the city of Birmingham in Alabama, is negotiating with bondholders to avert imminent bankruptcy ‐ Only 47 US cities, towns, villages or counties have filed for bankruptcy since 1980, … ‐ That compares with more than 14,000 corporate bankruptcy filings in the US last year ‐ Central Falls, Rhode Island, the smallest city in the smallest state and one where more than 25% of families live in poverty, has struggled with underfunded pensions. Retired police and firefighters bristled at drastic cuts to their pensions to avoid bankruptcy ‐ Rhode Island last month passed legislation giving bondholders of its cities and towns certain rights that ensure that these bonds will be fully repaid in bankruptcy (Prof Note: What??? This is insane!!!)
Fears rise as global output stalls – Pg. 2 ‐ The recovery in global manufacturing is running out of steam, a series of indicators showed on Monday, raising fears that there is little momentum left in the world economy ‐ Across Asia, Europe and the US, purchasing managers reported activity in the manufacturing sector in July growing at its most feeble rate since countries clawed their way out of recession in 2009, while new orders appeared to be contracting and the growth of employment was slowing
More fiscal warfare on the horizon – Pg. 4 ‐ …annual funding targets for government departments – from Pentagon to the Treasury department, and the Environmental Protection Agency to the Securities and Exchange Commission – were established in Sunday’s deal, trimming $917bn from US deficits over the next decade
Standard & Poor’s under pressure over credit rating decision – Pg. 4 ‐ Moody’s Investors Services, S&P’s main rival in the rating business, has already indicated its top‐notch ranking of the world’s biggest economy is safe for now. ‐ But S&P has, so far, not issued any statement ‐ The main reason for this uncertainty is S&P’s comment in its review that it was looking for $4,000bn of deficit cuts to prevent the levels of US debt relative to GDP from rising too far
Obstacles to progress – Pg. 5 ‐ The impact of the $787bn Recovery Act, the package of tax cuts and “shovel‐ready” infrastructure projects Mr Obama introduced when he took office, is petering out; and the wrangle over raising the federal borrowing limit has made any talk of spending almost impossible ‐ …the US spends only 2.4% of GDP on infrastructure – less than half the average of 5% that prevails in European countries – and half the level of 1960,…. ‐ The number of miles travelled by cars and trucks has doubled in the past 25 years, but highway lane miles have increased by only 4.4% ‐ Demand for electricity has increased by about one‐quarter but the construction of new transmission facilities has decreased by 30%. The US now ranks 23rd for overall infrastructure quality,… ‐ American infrastructure investment has historically followed a user‐pays model ‐ …Highway Trust Fund, by way of a fuel tax of 18.4 cents a gallon and 24.4 cents per gallon on diesel ‐ The tax is low by international standards, and has not risen since 1993
Short‐term US funding rates stay high on debt deal caution – Pg. 19 ‐ Conditions in the short‐term US funding market remained highly constrained on Monday, with rates still elevated as investors awaited key votes on raising the federal debt ceiling ‐ The so‐called general collateral rate for the overnight financing of Treasuries in the repurchase or “repo” market shot up to 40 bps and was at about 33 bps late on Monday, higher than the 25 bps upper limit of the Federal Reserve’s overnight interest rate band
1 August 2011
Senate raises hopes for debt deal – Pg. 1 ‐ The Senate inched closer to a deal to avoid default and raise the US borrowing limit,…. ‐ It would face its first big test with investors when Asian markets open on Monday morning ‐ ….proposal to raise the $14,300bn debt ceiling by $2,400bn in two stages ‐ Under the draft deal, the debt ceiling will be extended by enough to avoid another drawn‐ out negotiation before the presidential election in November 2012, a key Democratic demand. In return, Republicans would get $2,400bn ‐ $2,800bn in spending cuts over the next 10 years (Prof Note: I want to see these “cuts”! They are most likely 0% increases in spending for certain line items!)
Lagarde pleads for European unity over new Greek rescue – Pg. 1 ‐ European authorities should stop public bickering and speak with one voice to make the second rescue package for Greece work, … ‐ Several emerging market and other non‐European countries have questioned whether the IMF should be announcing fresh money to Greece with an uncertain chance of success, expressing concern that private bondholders are being asked to take too small a writedown ‐ On July 21 the eurozone announced its second rescue plan for Greece and said it wanted more money from the IMF
China law is hurdle for global mergers – Pg. 2 ‐ When China’s antimonopoly law went into effect three years ago, there were fears Beijing would use its as formal cover for protectionism ‐ When Beijing approved a merger of Russian potash producers UralKali and Slivinit in June, it demanded the new company continue to meet the demands of Chinese customers and adhere to established pricing conventions ‐ In a sign that Chinese regulators are being taken more seriously, US and Chinese antitrust agencies last week signed a memorandum of understanding to help enhance their relationship ‐ More than 95% of all deals have been approved without any conditions
US mileage targets – Pg. 10 ‐ Having reached a compromise with Detroit and Asian manufacturers (but not Daimler and some others) on a target of 54.5 miles per gallon by 2025, double today’s standard, it appears likely that much of the progress will be met through lobbying as much as technology ‐ …mandatory mileage targets were introduced in 1975, ….
HSBC set to axe 10,000 jobs – Pg. 11 ‐ HSBC is set to shed at least 10,000 jobs or about 3% of its headcount, as the global banking group implements sweeping cost cuts aimed at reversing failing revenues (Prof Note: After my CNBC panel where HSBC completely screwed my bio, I have some suggestions for target personnel reductions!) ‐ The cuts are part of a broad overhaul that analysts estimate could see up to 30,000 jobs eliminated over time, most of them outside the UK ‐ Goldman Sachs, the US investment bank, was the first to announce a substantial cull of jobs in June, saying it was trimming 1,000 jobs after a poor performance by its fixed‐income trading division
North American pensions’ push into hedge funds fails to pay off – Pg. 11 ‐ A rush into hedge funds during the last decade has produced poor returns for North American pension plans, …. ‐ Between 2000 and 2008…..US pension plans received just 1.9% a year on average from their investments in hedge funds, after fees ‐ More than two‐fifths of pension funds reporting were invested in hedge funds by 2008, against 2% in 2000 ‐ US pension plan investments in hedge funds beat the S&P 500, which lost investors 3.2% each year between 2000 and 2008, but trailed the 5% annualized gain of the Hedge Fund Research composite index ‐ The study also finds that pension funds are, in aggregate, better than the market in investing in traditional asset classes
Ratings blow for mortgage securities – Pg. 12 ‐ …the rating agency [S&P] announced a review into the way it rates securitizations after discovering a discrepancy in its methodologies, which may impact both new and old CMBS deals ‐ The securities which pool together mortgage loans to companies, are an important source of credit for the wider US economy (Prof Note: CMBS is about $750bn industry) ‐ …default rates that are already running at about 12.9%, a rise of 2.3% from the end of 2010 ‐ The market for such securitizations may be huge at $750bn still outstanding, but new issuance has failed to keep up with maturing loans ever since 2007 ‐ In fact, net issuance has been running at about negative $30bn annually, though that had been expected to decrease to negative $15bn in 2011 because of new debt
Investors look to US job creation after soft patch – Pg. 18 ‐ …18,000 jobs created in June – and hopefully more than double the 54,000 added in May ‐ The ADP survey for July is forecast to show a rise of 125,000 private sector jobs ‐ First up is the Reserve Bank of Australia on Tuesday, which is seen holding at 4.75% given stalling consumer confidence and the strong local dollar ‐ On Thursday, the Bank of England and the European Central Bank are expected to hold at 0.5% and 1.5% respectively
30 July 2011
Obama plea as debt deadline looms – Pg. 1 ‐ Barack Obama issued an 11th‐hour appeal to reason in a bid to end the impasse over an increase in US borrowing authority, as new data showed the economy was in even worse shape than previously thought (Prof Note: Previously thought by whom? I have ALWAYS believed it is in atrocious shape!) ‐ …the US Treasury raised the possibility of delaying its benchmark quarterly debt sales in August at a meeting of major Wall Street dealers at the New York Fed ‐ ….the S&P 500 closed down 0.7% for a weekly loss of 3.9%, its worst five‐day run in a year. It has now fallen for the past three months, a streak not seen since 2008 at the height of the financial crisis
Economic rebound rate disappoints – Pg. 2 ‐ The BEA said the economy grew at an annualized rate of only 1.3% in the second quarter and revised its estimate of first‐quarter growth to only 0.4% from 1.9% ‐ Growth in 2008 was revised down to minus 0.3% from flat while 2009 growth was revised down to minus 3.5% from minus 2.6% ‐ The unemployment rate has remained stuck at 9.2%, not far below its 10.1% peak ‐ That reflects an economy that was $134bn smaller at the end of 2010 – almost a full percentage point … ‐ Consumption contributed only a 10th of a percentage point to growth in the second quarter, but that reflected a surge in oil prices and disruption to car supplies because of the earthquake in Japan, factors that should be reversed ‐ The economic weakness mans that the timing for a possible debt‐limit shock could not be worse and, if there is another quarter of disappointment from the labour market, there are likely to be renewed calls for the Federal Reserve to step in with further monetary stimulus (Prof Note: I am 100% opposed to more stimulus…we need to hunker down and simply work our a$$e$ off to get through this mess!)
Chinese banks pass stress tests in drive to cool property prices – Pg. 3 ‐ China’s banking regulator says the country’s lenders can withstand a 50% fall in property prices – a declaration aimed at boosting confidence in the government’s campaign to cool the housing market ‐ Few expect such a dramatic plunge as 50%, but prices are edging down for the first time in years in some cities, at the same time as the economy has slowed ‐ …banks are obliged to demand at least 30% mortgage downpayments, but some branches have offered generous overdrafts to help borrowers get around that ‐ Chinese property prices soared in the wake of the global financial crisis when the government unleashed a wave of monetary stimulus ‐ Mortgages and credit to property developers account for about 20% of banks’ loan books in China, so stress tests that are confined to the direct impact of falling house prices have produced only mildly negative results in the past. But property is a pillar of the economy and the indirect impact of a downturn on other sectors could be severe
Rating move rocks CMBS investors – Pg. 8 ‐ The market for mortgage‐backed securitizations, the slice‐and‐dice deals at the heat of the recent financial crisis, was rocked this week after Standard & Poor’s pulled its preliminary ratings on two transactions worth a collective $2.7bn ‐ Citigroup and Goldman Sachs were on Wednesday forced to cancel the sale of a $1.5bn securitization backed by commercial mortgage loans, after S&P said it had discovered “potentially conflicting methods” in the way it rates the securities ‐ ..agency cancelled the rating for another commercial mortgage‐backed securities (CMBS) transaction – a $1.2bn deal by the US mortgage provider Freddie Mac ‐ The $750bn US CMBS market has yet to fully recover from the turmoil of 2008, despite some new securitization deals in recent months. Net issuance of CMBS has been negative since 2007, and new issuance is needed to help refinance existing loans ‐ Fitch Ratings noted in a report on Friday that the default rate for fixed‐rate US CMBS had increased to 12.9% at the end of the second quarter of this year, up 2.28% from the end of 2010 ‐ S&P said on Wednesday that the CMBS rating discrepancy has to do with the calculation of the debt service coverage ratios (DSCRs) – a measure of whether there’s enough income to cover debt payments.
Merck looks to cut 13,000 jobs in savings push – Pg. 9 ‐ Merck, the US drug company, said on Friday that it would cut as many as 13,000 jobs as it looked to slash costs and invest in emerging markets
Haven assets sought in US debt ceiling storm – Pg. 11 ‐ …investors dumped global equities and the dollar in favour of traditional havens such as gold, the Swiss franc, the yen and German government bonds
Spain faces new downgrade after Moody’s alert – Pg. 12 ‐ Spain is facing a fresh credit rating downgrade after the country’s rising borrowing costs and indebted regions prompted Moody’s to threaten to take action ‐ Moody’s had already issued a similar warning to Italy in June, ahead of a surge in borrowing costs for the eurozone’s third‐ and fourth‐largest economies and reignited concerns of the risk they could be forced to seek international aid
Oil falls as weak growth data spark consumption worries – Pg. 12 ‐ Oil glided lower in the week, weighed down by sluggish economic growth and jitters over the outcome of the debt ceiling debate in Washington ‐ Rates on oil consumption are strongly correlated to economic activity, and the US’s 19m barrels per day of consumption make it the world’s most voracious oil consumer
29 July 2011
US debt sell‐off ahead of key vote – Pg. 1 ‐ Concern that the US Treasury may delay debt payments next week pushed yields on short‐ term bills to new peaks on Thursday, as traders and investors sold down their holdings in the face of continued political brinkmanship ‐ In a rare “inversion” of the short‐term yield curve, it was deemed more risky than the bill maturing in three months’ time, which now yields 70bps ‐ In Washington, the main sticking point remains whether to extend the debt limit beyond the 2012 presidential election, which the White House prefers, or just for six months, as demanded by Republicans ‐ The UK’s benchmark borrowing costs have dropped below those of the US several times in the past day, despite having significantly lower growth and higher inflation
Obama faces legal dilemma if time runs out – Pg. 3 ‐ …creative legal arguments, including a claim that the debt ceiling is illegal under the 14h amendment to the constitution ‐ …wartime law from 1917 that created the debt ceiling ‐ But it is also bound by laws that tell it to make various payments, including the latest Appropriations Act passed by Congress in the spring, as well as an apparent instruction in the constitution to keep paying US debts ‐ The 14th amendment, adopted in 1868, says that “the validity of the public debt of the United States…shall not be questioned.” ‐ The purpose of the clause – originally created to settle any doubt that the US would pay debts it incurred during the Civil War – was tested in a famous Supreme Court case after the US left the gold standard to fight the Great Depression in 1933 ‐ The court said that Congress could not tear up its promise to bondholder to pay them in gold and interpreted the 14th amendment as applying to “whatever concerns the integrity of the public obligations”
Positive signs as jobless data dip – Pg. 3 ‐ New US jobless claims dipped below 400,000 last week for the first time since early April
Investment banks hampered by high fixed costs as they slash jobs – Pg. 11 ‐ European investment banks are being squeezed by fixed administrative expenses even as they slash pay and staff amid weak trading conditions ‐ But the banks have been unable to trim general and administrative expenses, the day‐to‐day operating costs of an investment bank
Five questions the Fed and Treasury need to address – Pg. 18 ‐ What might the US government do to support the US money market funds if American debt is downgraded, or suffers a technical default ‐ Will the US authorities step in to the markets and act as the deal or financier of last resort, if parts of the market freeze up? ‐ What will regulators do about capital standards if some banks’ balance sheets balloon? ‐ How will regulators and risk managers respond if the “risk‐free” status of US debt starts to crumble? ‐ What rules will apply for paying interest, accrued interest and principal on Treasury bonds, if a technical default occurs?
Traders turn their guns on the dollar – Pg. 19 ‐ As the global reserve currency, the dollar dominates the 24 hour trading day of the foreign exchange market ‐ The dollar also links the global investment flows that underpin US equities and bonds and, like the performance of Asian currencies during the 1997 debt crisis, the dollar has been one of the most sensitive of all asset classes to the threat of a default and downgrade ‐ ….dollar could be at risk of losing the main pillar supporting its strength: its safe haven appeal ‐ …China’s currency is at its strongest level since 2005, within its tightly‐controlled bank ‐ A weaker dollar entails higher commodity prices, such as food and petrol, that will weigh on consumers
28 July 2011
US debt plans in chaos – Pg. 1 ‐ Republican leaders in the House of Representatives are scrambling to quash a rebellion by some of their rank‐and‐file members opposed to the party’s plan to raise the debt ceiling as the US continues veering towards a possible default ‐ Republicans want to initially raise the limit by about $1,000bn, which would require a new vote early next year. Democrats want a much bigger increase – about $2,400bn, so as to avoid a new fight before the 2012 presidential elections ‐ In the credit derivatives market, the cost of buying insurance against the risk of a US default rose to a record
Cyprus downgrade heightens fears of bail‐out – Pg. 1 ‐ Cyprus moved closer to becoming the fourth eurozone country to need a bail‐out after Moody’s downgraded its bonds to just two notches above junk, …. ‐ Cypriot banks are among the eurozone’s largest holders of Greek bonds ‐ Moody’s said it now believed there would be no growth in 2011 ‐ Standard and Poor’s cut its rating on Greek sovereign debt from triple C to double C, the same level as Moody’s, in anticipation of a selective default on some Greek bonds
Data set to confirm dismal growth – Pg. 2 ‐ The dismal growth of the US economy during the second quarter is set to be confirmed with the release of growth figures on Friday, after a fall in durable goods orders in June and weak anecdotal reports in the Federal Reserve’s Beige Book ‐ Consensus forecasts are for second‐quarter growth of 1.8% following similarly disappointing growth of 1.9% in the first quarter ‐ Of the 12 regional Fed banks, eight said that their local business contacts has reported a slowdown in growth since the last Beige Book in June, while the four other said that growth had been steady ‐ Growth weakened most notably on the eastern seaboard with every regional bank reporting a slowdown
Brazil warns IMF over Greek loan – Pg. 3 ‐ Representatives of leading emerging market countries at the IMF have warned the fund’s management against pouring more large sums of money into another Greek bail‐out with uncertain prospects ‐ Concern among shareholder countries on the fund’s executive board poses a challenge for Christine Lagarde, ….
The trickle‐up effect – Pg. 7 ‐ After a pause during the recession, bosses’ earnings are now increasing at the most sensitive time – just as tax rises and public spending cuts are eating into the already stagnant incomes of low and middle earners ‐ Chief executives at FTSE 100 companies saw their median earnings rise 32% last year, treble the rise in share prices and well above workers’ average 2% pay award,… ‐ ….pre‐tax income of the top 1% in the US, for example, from 8% of the total in 1974 to 18% in 2008 ‐ FTSE 100 chief executives’ pay was 47 times that of average employees in 1998 but had risen to 120 times in 2010,…
US groups blame tax as cash held overseas tops $500bn – Pg. 13 ‐ As much as half of US companies’ record $1,240bn in cash balances is held overseas, ...with groups wary of incurring a 35% repatriation tax ‐ Strength in overseas operations, as well as aggressive international tax planning, suggests growth in foreign cash is outpacing that at home
Real tumbles as curbs are imposed – Pg. 22 ‐ The Brazilian real tumbled on Wednesday after the country introduced measures to curb foreign exchange speculation in a bid to bring down the currency from a 12‐year high against the dollar and protect its manufacturers ‐ The government imposed a 1% transactions tax on currency derivatives, laid down new legislation whereby this tax can be increased to up to 25%, demanded that “over‐the‐ counter” currency trades be registered, and threatened further measures such as raising minimum trading margins
Investors in Asia wrestle with risk of US debt crisis – Pg. 23 ‐ If Asia’s equity and bond markets are any guide, then investors seem pretty sanguine about the risks of the US Treasury running out of cash or the eurozone debt crisis spinning out of control ‐ …Asian stocks have been rising in recent weeks,… ‐ In 2008 and 2009, as Lehman Brothers failed, global funding markets seized up and international trade collapsed, Asian stocks and bonds plunged even further than those at the centre of the storm in the US ‐ Asia remains deeply reliant on Europe and the US, most obviously through exports of goods and services to western consumers but increasingly through the financial system and capital flows ‐ Core inflation, which excludes food and energy prices, is accelerating across much of Asia, even though growth has started to slow due to a weakening in the global economy. In China, consumer price inflation hit a three‐year high in June, with prices rising 6.4% from the previous year – well above Beijing’s target at the start of the year of 4% ‐ Ominously, the ratio of credit to gdp across Asia has surged close to levels last seen just before the 1997 Asian financial crisis, ….
27 July 2011
Interbank loan probe focused on yen rates – Pg. 1 ‐ Regulators probing alleged manipulation of interbank lending rates have expanded their investigation into yen rates in London and a separate rate‐setting process in Tokyo ‐ Led by the US Department of Justice, regulators from the European Union, the UK, and the US and Japan have been examining whether the London Interbank offered rate, the reference point for $350,000bn in contracts was rigged at the height of the financial crisis ‐ Libor and Tibor are set, respectively, under the auspices of the British Bankers Association and the Japanese Bankers Association. A panel of banks are surveyed every working day at 11am local time about the rates at which they can borrow in various currencies. The top and bottom are thrown out and the remaining submissions averaged ‐ According to people familiar with the investigation, regulators are said to be probing whether traders used derivatives to place bets on future yen and dollar rates and then colluded with bank treasury departments, which help set the rates, to move the rates in their direction
Funds stash cash as D‐day looms – Pg. 1 ‐ US money market funds are stockpiling cash in case Congress fails to raise the debt ceiling, distorting the short‐term market for US government debt and raising borrowing costs for banks and other financial institutions ‐ While the funds will continue to hold US Treasuries in the event of a downgrade or default, they are building up liquidity and shunning certain securities due to fears that a failure to raise the debt ceiling could trigger client redemptions ‐ Government‐only money market funds have boosted the amount of cash available to meet redemptions within one week to 68% of assets, from 48% at the end of March ‐ Banks are also holding more cash and US corporations are postponing decisions due to uncertainty about where to invest cash amid fears that a failure to raise the debt celing would trigger a credit rating downgrade and possible default ‐ Money market funds, which hold $338bn of US government debt….
UK sticks to cuts in slowdown – Pg. 2 ‐ Britain’s coalition government has vowed to stick to its tough austerity plan in spite of data showing the economy has barely grown in the last nine months ‐ …Bank of England…the bank lending rate is 0.5%
Banks boost liquidity amid rating fear – Pg. 4 ‐ Banks are boosting their liquidity and holding more cash as expectations increase that the US government credit rating will be downgraded,… ‐ Bankers are particularly concerned about the effect on the almost $3,000bn repurchase, or “repo”, market, on which large institutions rely for short‐term funding. They pledge bonds, including government securities, as collateral for loans from investors including money market funds ‐ If US government bonds are downgraded from triple A, then banks using them as collateral might have to endure higher “haircuts” on the collateral, potentially sparking a credit crunch ‐ Wall Street has been struggling to gauge the impact of a US downgrade. Among the concerns are disruption to repo markets, a potential knock‐on downgrade to US bank debt, and the chance that banks will have to hold more capital against no‐longer‐risk‐free Treasuries
India pushes up interest rate to tackle inflation – Pg. 5 ‐ India’s central bank has raised interest rates by a higher than expected 50bps, signally its determination to battle persistent high inflation ‐ The rise, which brings the benchmark rate to 8%, is the 11th in the 18 months ‐ The government’s projection when it announced its budget this year was that its budget deficit would be 4.6% of gross domestic product for current fiscal year…
Regulators must risk more to push growth – Pg. 9 ‐ (Prof Note: Written by Alan Greenspan….but what does he know…in my opinion, he is the singular cause of this mess!)
US downgrade – Pg. 12 ‐ Section 4 of the 14th amendment to the US constitution is unequivocal: “The validity of the public debt of the United States…shall not be questioned. IN other words, America is always good for it. ‐ The Treasury can prioritize who it pays and when ‐ The reality is that US Treasuries, federally guaranteed mortgage‐backed securities and agency debt account for 53% of all triple‐A assets in the global bond universe. There are few other places to go
Brazilian stock market sees foreign buying plunge 70% ‐ Pg. 13 ‐ Fresh foreign investment in Brazilian stocks plunged 70% in the first half of 2011, dragging down a market that was one of the hottest last year ‐ Rising inflation, political interference in key sectors and measures to slow credit growth have all damped foreign investor sentiment towards Brazil’s equity market, forcing some companies to scrap public offerings despite the strength of the country’s economy ‐ One of the main reasons for this decline is inflation, which has run above the central bank’s limit of 6.5% on an annual basis since April, leading policymakers to raise the Benchmark interest rate five times this year to 12.5% and so making fixed income a more attractive option
Companies robust amid fears of US downgrade – Pg. 20 ‐ While Moody’s and Standard & Poor’s have placed the US on watch for a downgrade, both agencies have affirmed the triple A ratings of ExxonMobil, Automatic Data Processing, Johnson & Johnson and Microsoft ‐ Even some US states may be on sounder footing. Moody’s put only five of the 15 states it rates triple A on review for downgrade because of their high exposure to federal employment or federal transfers ‐ Moody’s says the four triple A‐rated US companies have just $45bn in total public debt ‐ By S&P’s assessments, round the globe, 107 corporate, local or regional government ratings exceed the rating on the sovereign in the country of domicile
26 July 2011
Investors fear rises over US gridlock – Pg. 1 ‐ The lack of public progress in resolving the debt ceiling impasse between the Republican and Democratic parties cast a shadow over markets, with frustrated investors withdrawing further into haven assets ‐ The dollar moved to an all‐time low against the Swiss Franc while gold touched a record high ‐ The IMF reiterated on Monday that the US must raise the debt ceiling rapidly as a loss of confidence in US debt would have severe knock‐on effects ‐ Republicans want to raise the debt limit in stages, initially only through early 2012, followed by a comprehensive reform of long‐term spending. Democrats and the White House have adamantly opposed a short‐term solution and want to see a deal extending beyond next year’s presidential election
US ‘spy plane’ sparks Taiwan intrusion – Pg. 1 ‐ Two Chinese fighter jets crossed an unofficial dividing line in the Taiwan Strait late last month in pursuit of a US spy aircraft,… ‐ The incident marked the first time in more than a decade that Chinese military aircraft have entered Taiwan’s side of the 180km‐wide strait ‐ China and Taiwan have long respected the middle line, which was drawn by the US when it signed a mutual defense treaty with the Island in 1954. The line functions as a buffer zone between China’s and Taiwan’s militaries, which still regard each other as enemies
Bank of Ireland set to avoid state control as investors plan $1.6bn move – Pg. 1 ‐ Bank of Ireland has been saved from possible government control by a group of overseas institutional investors that is to buy up to $1.6bn of the troubled lenders shares ‐ The involvement of new investors will limit the state’s final ownership to a maximum of 32%, leaving it alone among the country’s big lenders to remain in private hands
Japan’s job‐for‐life ethos is dying a death – Pg. 2 ‐ The middle‐class certainties of the postwar era have been eroded by the low growth and economic dislocation that followed the bursting of Japan’s 1980 asset bubble ‐ The National Tax Agency says average annual salaries, including bonuses, fell in nominal terms every year but one in the decade to 2009, sliding 12%
IMF urges Washington to resolve borrowing standoff – Pg. 4 ‐ A crisis of confidence in the solvency of the US government would cause a crunching global recession… ‐ Studies by IMF staff showed that a loss of confidence in US solvency – not necessarily a failure to raise the debt ceiling – with global knock‐on effects would plunge the world into a severe recession, with a contraction of nearly 5% in the US economy accompanied by shrinkage of between 3 and 4% in the rest of the world ‐ …the IMF said that the impact of announcements under the current quantitative easing programme, known as QE2, did not appear to have had much impact on asset prices, and that ending the campaign was unlikely to cause destabilizing capital outflows elsewhere
Made in China, undone in America – Pg. 13 ‐ Hundreds of smaller Chinese companies have accessed US investors via “reverse takeovers”, where a company goes public by taking over a traded US shell company. This circumvents much of the regulatory scrutiny which is involved in a traditional IPO ‐ US regulators are not allowed to investigate companies inside China, while Chinese regulators have few incentives to look into companies that may be defrauding foreigners ‐ This means investors must often rely on the advice of hired stock promoters, and in the past decade a huge industry has emerged to help Chinese companies to go public in the US.
Cost of Treasury futures set to rise on US debt ceiling fears – Pg. 18 ‐ The cost of trading US Treasury futures was set to rise on Monday, as the CME Group adopted defensive measures given the impasse in Washington over raising the Federal Debt ceiling ‐ The operator of the US’s largest futures exchange said it had raised margin requirements on US government debt futures and its other products linked to US Treasuries after a “normal review of market volatility to ensure adequate collateral coverage” ‐ The rise in margins could limit trading as volumes have been trailing the broader Treasury market given the focus on the debt ceiling and the auctions of $99bn in new Treasury debt this week
25 July 2011
China eyes barter to avoid Iran sanctions – Pg. 1 ‐ Tehran and Beijing are in talks about using a barter system to exchange Iranian oil for Chinese goods and services, as US financial sanctions have blocked China from paying at least $20bn for oil imports ‐ The US sanctions against Iran, which make it extremely difficult to conduct dollar‐ denominated business, mean that China might owe the oil‐rich nation as much as $30bn, ‐ China and India together buy about one‐third of Iran’s oil, the country’s economic lifeblood. China’s oil imports from Iran have risen 49% this year,… ‐ Unlike India, which exports almost nothing to Iran, China is dominant in Iranian business and could use a barter system to balance trade between the two countries. Beijing is involved in everything from building tunnels to exporting toys and has been expanding into Iran’s oil sector, where European companies such as Shell and Total have been deterred by the difficulties of operating without contravening sanctions ‐ China and Iran’s bilateral trade totaled $29.3bn last year, up almost 40% from 2009. ‐ Repeated sets of US financial sanctions, imposed in response to Iran’s continued defiance over its nuclear programme, have had a crippling effect on the country’s banking sector. Another former official said that Iran was holding up adequately, thanks in no small part to high oil prices
Europe on alert after Norway attacks – Pg. 1 ‐ Police around Europe are on increased alert against far‐right extremism as the man accused of killing 93 people in Norway’s bomb and shooting attack prepares to face charges today
Killer personifies rise of new far‐righted – Pg. 2 ‐ Experts and Norwegian politicians say that Anders Behring Breivik in many respects typifies a new breed of conservative extremists who have risen in prominence in recent years, in Norway and across Europe, supplanting longer‐established but often withering groups of mostly white supremacists
Greek rescue waits for more banks to sign up – Pg. 3 ‐ Several European banks with large exposures to Greek sovereign debt have yet to sign up to a plan for private‐sector bondholders to contribute $53bn to a second Greek rescue package,… ‐ Senior bankers said considerable uncertainty remained about the details of the Greek bail‐ out plan and its likely application ‐ Credit enhancement is the name for the mechanism by which Greece will by obliged to reinvest a fifth of its sovereign funding into an insurance vehicle collateralized with Triple A debt to guard against future default
Markets warning over US debt – Pg. 6 ‐ The White House clashed again on Sunday with congressional Republicans over a plan to raise the federal debt ceiling, even as both sides acknowledged that failure to agree could rock global financial markets this week ‐ The debt ceiling, which constrains US federal borrowing, must be raised by August 2 to avoid the risk that the US will default on its government debt ‐ Time Geithner, Treasury secretary, denied the president reneged on a deal ‐ With markets also unnerved by a debt crisis in Greece that threatens to spread
Federal default fears spark state contingency plans – Pg. 6 ‐ US states are devising contingency plans to deploy in the event of a federal default, which would threaten their budgets and stall the payments they receive from Washington ‐ California on Tuesday plans to raise a $5bn bridging loan in lieu of an annual public debt offering. Virginia is considering a short‐term loan from its own state treasury if federal transfers are temporarily delayed. Maryland, whose triple‐A debt rating has been called into question by Moody’s Investor Service over the debt ceiling crisis, last week delayed a bond sale ‐ Even if lawmakers hammer out a deal to avoid default, states and cities face another set of problems. The deficit‐cutting plans under consideration portend further cuts at a time when they are already weakened from the recent recession ‐ Standard & Poor’s last week warned that it could cut some US state and local debt ratings on the deficit‐cutting measures alone ‐ The municipal bond market has only recently stabilized after turmoil early this year as investors withdrew funds on concern about a surge in local defaults ‐ About one‐third of state budgets come from federal funds. States are particularly concerned about cuts to Medicaid, the healthcare programme for the poor whose cost is shared by states and the federal government ‐ Virginia, which is triple‐A rated, is not a big recipient of federal money for entitlement programmes, but its proximity to Washington means a large percentage of its citizens work for the federal government and the US military, so it would be affected by any large reduction in those areas
Arbiters under fire – Pg. 7 ‐ Ten days ago, the US lost its triple A credit rating. The downgrade, triggered by the huge increases in US government debt levels, was reported in the media but did not grab frontpage headlines. The agency that made the cut was not one of the big three but a small one: Egan‐Jones ‐ The reliability of credit ratings and the influence of the big rating agencies is once again causing furious debate around the world ‐ The backlash has been harshest in Europe, where recent sharp downgrades of eurozone governments resulted in severe criticism from the continent’s most senior politicians ‐ First ratings o The rating of bonds began in the US in the early 1900s with government debt and railroad bonds an early focus. o The industry began its dramatic growth in the 1970s when a rating made it easier to sell debt to a wider range of investors and regulators started using them to assess capital needs ‐ Calls for reform – reflected in the Dodd‐Frank financial regulations passed in the US a year ago – have now taken on a fresh leash of life on both sides of the Atlantic ‐ …Fitch, Moody’s or S&P, which between them account for more than 90% of ratings, were to downgrade US debt, there would probably be knock‐on cuts in the ratings of mortgage financiers, clearing houses, banks and insurance companies ‐ …this month’s downgrades of Portugal and Ireland to junk status, which signals a high chance of default and places ‐ Many observers – including the agencies themselves – argue that the best course of action would be to take ratings out of regulations. Credit ratings are used in a slew of regulations from bank capital rules to collateral requirements at central banks. In addition, many investors have mandates that only allow them to invest in securities that have a certain rating such as triple A, or investment grade ‐ …rules introduced by the Dodd‐Frank reforms require regulators to remove references to ratings, replacing them with “other standards of creditworthiness” ‐ First, there are no simple alternatives ‐ Second, the US law and the proposed European rule changes clash with parts of the Basel rules that are at the centre of global bank regulation, which rely on ratings to calculate how risky many debt assets are ‐ …alternative model – whereby investors pay for ratings, followed by small operators such as Egan‐Jones ….
US funds cut eurozone exposure – Pg. 15 ‐ US money market funds have in the past few weeks sharply cut their exposure to eurozone banks, hitting the availability of credit even in stronger countries such as France ‐ The money market funds, historically key providers of short‐term financing to banks in Europe, have withdrawn from all but extremely short‐term lending as concerns about sovereign debt have mounted
CICC to become first Chinese investment bank running a trust – Pg. 15 ‐ China International Capital Corp will become the country’s first investment bank to manage a trust company, with a new venture likely to launch this week, … ‐ It will be an important new business line for CICC, China’s oldest and most respected investment bank, which has been looking to diversify beyond its traditional strength of underwriting initial public offerings ‐ Trusts play a unique role in China, bringing together private banking, asset management and private equity operations, …. ‐ Light regulation has enabled explosive growth, with assets under management in the trust sector rising more than 50% last year ‐ There are just 65 trusts operating today
23 July 2011
Twin terror attacks shock Norway – Pg. 1 ‐ (Prof Note: Home of the Nobel Prize)
Geithner meets ex‐Treasury secretary Paulson as threat of US default looms – Pg. 1 ‐ The White House and Congress remained at odds over a broad fiscal package, as President Barack Obama and John Boehner, the Republican speaker of the House of Representantives, made last‐ditch attempts to strike a deal to reduce US debt by $3,000bn over the next decade ‐ Markets showed less nervousness among investors on Friday. The yield on the US 30‐day bond, a barometer of the long‐term fiscal outlook, was down 3bps at 4.28%. The 10‐year bond yield fell below 3%
IMF poised to take back seat role in rescue – Pg. 2 ‐ The IMF will play a declining role in the international rescue support programme for Greece as the eurozone moves towards offering open‐ended backing, … ‐ ….the fund would play an increasingly marginal role, focusing on giving its seal of approval to Greek policies rather than providing the loans ‐ Thus far, the IMF has provided about a third of the funding for the rescue packages in Western Europe ‐ The IMF’s current commitment is 32 times the size of Greece’s “quota”, or shareholding, in the fund – by far the highest multiple ever, the next biggest being South Korea’s 1997 rescue loan, which was less than 20 times its quota
Fear stalks Congress as talks continue – Pg. 4 ‐ The fear among Democrats that the president will sell them out by agreeing to Republican spending cuts without a commitment to raise more venues injected more uncertainty into negotiations ‐ Overhanging the debate is next year’s presidential election,…. ‐ About one third of House Republicans were elected in last November’s landslide victory for the party in mid‐term elections and they have vowed to abide by their commitment to cut spending and oppose taxes
Struggling consumers lift McDonald’s shares to record – Pg. 8 ‐ With an expanded menu offering, it is stealing market share from competitors such as Starbucks and Yum! Brands and luring consumers away from their breakfast tables with oatmeal and smoothies (Prof Note: What is fascinating about McDonalds is its ability to stay at the forefront of its industry. Think about Sears, Kmart, Woolworths, etc, all died, are dying a painful death) ‐ Drinks sales at McCafe, which Mr Skinner introduced in the US in 2009, increased by 29% year‐on‐year in the second quarter ‐ McDonald’s raised prices in March and May this year to keep up with soaring commodity prices ‐ McDonald’s plans to import some of its premium hamburgers that have been popular in Europe to the US, as it looks to fend off competition from increasingly popular “better burger” chains in the US ‐ The US was the slowest region of the world, with total revenues increasing by just 4%
Durex condoms suffer global supply shortage – Pg. 8 (I had to summarize this article!) ‐ A legal spa between Durex owner Reckitt Benckiser and its Indian joint venture TTK Lig has led to a severe disruption to the UK‐based consumer group’s condom supplies ‐ With Durex accounting for more than 40% of the $3.9bn global market for condoms, and TTK, which produces about 1.3bn condoms annually for Durex, halting its supply of the latest contraceptives to Reckitt from the beginning of May, consumers are having to turn to other brands
Borders collapse signals a new chapter – Pg. 10 ‐ The lossmaking book chain was sent into liquidation this week and its going‐out‐of‐business discounts,flagged in big yellow letters on Friday, dispelled the usually cosy feel of its Columbus Circle Store ‐ Bu the company’s demise – leaving Barnes & Noble as the US’s only national book chain – is about more than the end of an era in books ‐ It points more broadly to the slow death of diversity across big retail, a process that has been accelerated by the US’s seemingly unshakeable economic funk ‐ What’s also new – thanks to smartphones and comparison shopping sites – is that consumers are better informed, more canny and more eager for bargains than ever ‐ Groceries is one category where the US is not expected to see an online retailer such as the UK’s Ocada, because selling perishable goods is too difficult and expensive outside high‐ density cities
Greenback’s birthday – Pg. 16 ‐ The US dollar, which turned 150 this week, is finally starting to act its age ‐ Today the greenback is the primary reserve currency, largely because of tradition and lack of alternatives ‐ …the dollar, created to finance the Union’s war against 11 rebel states that had issued their own dollar three months earlier,…
22 July 2011
Deal on Greece bail‐out – Pg. 1 ‐ European leaders agreed a further bail‐out for Greece totaling $229bn, a third of which will come in the form of debt swaps or rollovers by private sector bondholders ‐ Greece, Ireland and Portugal would pay about 3.5% ‐ 100‐200bps lower than at present. They also agreed to extend the repayment schedules from 7 ½ years to 15‐30 years ‐ In addition, they gave the bloc’s 440bn (euro) bail‐out fund, the European financial stability facility, new powers to help countries not currently in bailouts, including precautionary lines of credit and the ability to recapitalize any struggling bank in the eurozone
US budget talks turn to savings – Pg. 4 ‐ Talks between the White House and Congress to strike a budget deal in time to avert a US default were turning back towards a more ambitious agreement to generate $3,000bn in savings over the next decade ‐ The idea of a “grand bargain” on fiscal policy, which would raise the US borrowing limit by the August 2 deadline but also steady America’s long‐term finances, had been contemplated earlier this month, but rejected by Republicans ‐ The most likely items that could quickly be included in a debt ceiling deal are $500bn in cuts identified for immediate implementation by the group. In that category are a freeze in congressional pay, the sale of unused federal property, and the repeal of a new benefit included in last year’s US healthcare reform that offered insurance for long‐term medical care ‐ Starting next year, the US would move from basing its inflation estimates on the ordinary consumer price index to the chained CPI, which would slow cost of living adjustments on a wide range of government outlays by about 0.25% per year ‐ The regular CPI assumes that consumers buy the same things every month, so if the price of pork goes up then so does the cost of their shopping. But in reality, if the price of pork goes up but the price of beef does not, then some consumers will switch. The chained CPI tries to take account to that – and it tends to rise by less on average as a result. (Prof Note: Great Mid‐ and Final‐exam question(s))
Jobless claims rise to 418,000 – Pg. 4 ‐ More Americans filed for unemployment insurance last week as the US labour market continued to struggle amid widespread uncertainty over the stalling economy ‐ While many US companies are reporting strong second‐quarter earnings this week, hiring is not likely to pick up until the productivity of existing workers begins to decline
Regulator scores big banks on capital requirements – Pg. 17 ‐ Several French and Japanese banks appear to have benefited most from the way global supervisors have decided to calculate extra capital requirements for the world’s biggest banks and face smaller than expected surchanges, …. ‐ The Base Committee on Banking Regulation announced on Tuesday that it had scored 73 of the world’s largest banks on their size, complexity, cross‐border presence and the extent to which they are irreplaceable. Twenty‐eight of them would face additional capital requirements if the new rules were applied today
IEA decides against fresh oil release – Pg. 22 ‐ The western countries’ oil watchdog made 60m barrels available for 30 days after June 23, saying this would cover the loss of Libyan output before other Opec members could raise their production ‐ Brent was trading at $118.25 on Thursday, significantly above the level seen before the IEA chose to use the stockpiles held in its member states ‐ Last month, Saudi Arabia is believed to have pumped an extra 700,000 b/d, bringing the kingdom’s total output to 9.7m b/d ‐ This helped total Opec production to climb to just over 30m b/d – slightly higher than the level before Libya’s civil war deprived the market of most of that country’s production in February
Investors eye US Treasuries amid downgrade threat – Pg. 23 ‐ The US stands apart as having both the world’s reserve currency and the paramount government bond market that serves as the “risk‐free” rate for global assets ‐ ….Standard & Poor’s warning that there is “at least” a one‐in‐two chance it could downgrade the US’s triple A credit rating, even if the $14,300bn debt ceiling is raised before next month’s deadline (Prof Note: Great examination question) ‐ A downgrade would e momentus. It would mean the global risk‐free rate, used to price billions of dollars of assets worldwide from government to corporate debt, would no longer look quite so risk‐free ‐ The real danger, however, is that lower‐rated assets and other countries would be hit harder as markets will still require a benchmark, and, even after a downgrade, this is likely to remain US treasuries and the dollar ‐ With the eurozone engulfed in a debt crisis and emerging markets economies such as China, years away from becoming legitimate global financial entities, investors insist there is really no alternative to the US at the present time ‐ A main difference between Japan and the US, however, is that much of Japan’s debt is held domestically, whereas just under half of outstanding Treasury debt is held by foreign investors
21 July 2011
Brussels wants banks to raise 460bn (euro) capital – Pg. 1 ‐ European Union rules designed to make the financial system safer would require banks operating in Europe to raise an estimated $654bn in capital by 2019 or reduce their risk and balance sheets substantially ‐ The accord forced banks to hold more top‐quality capital against potential losses and keep enough easy‐to‐sell assets on hand to withstand a market crisis ‐ The projected capital shortfall, equivalent to 2.9% of all the EU banks’ risk‐weighted assets, goes a long way towards explaining why EU banks are among the fiercest critics of the Basel III proposals ‐ The commission estimated the rules would add between 0.3% and 2% to annual economic growth by reducing the risk of another banking crisis. But the average cost of borrowing would rise 0.29% and total loan stocks would drop by 1.8% ‐ The EU rules include a minimum capital ratio plus a buffer, in effect requiring banks to hold top‐quality capital equal to 7% of their assets adjusted for risk
China calls for ‘responsible’ US – Pg. 2 ‐ China has called on Washington to bolster international faith in its economic policies amid signs that Beijing has cut its purchases of US government debt ‐ About two‐thirds of China’s $3,197bn in currency reserves, the world’s largest by a wide margin, is estimated to be invested in US dollar‐denominated assets. China considers the composition of its reserves to be a state secret ‐ It added that Chinese investments in US debt could increase in the second half of the year because the wind‐down of the Federal Reserve’s quantitative easing programme means that it is no longer a competing buyer of government bonds
Tale of two classes in Brazil as millions climb out of poverty – Pg. 2 ‐ While headline economic growth has not been as spectacular in Brazil as in China and India, at an average of about 4% a year between 2003 and 2010, the balance of income distribution has improved more rapidly in Latin America’s largest economy than in the other large emerging markets ‐ In Brazil, mean household income since 2003 rose 1.8% a year above the rate of gross domestic product growth, helped by generous increased in the minimum wage and welfare handouts. In China, by contrast, the rise in household income trailed GDP growth by 2% a year
Accounting for day of reckoning – Pg. 4 ‐ A widespread assumption is the Treasury would avoid a default on US debt by prioritizing interest payments. ‐ …the real focus in a crisis would be financial markets because Treasuries provide the reference interest rate for every asset in the world ‐ One source of danger would be money market funds, especially those that specialize in Treasuries, which regulators would monitor closely for any signs of panic ‐ Serious issues could arise in the repurchase agreement, or repo, market where Treasury securities are heavily used as collateral for short‐term loans. With that collateral in doubt, short‐term investors might reduce their repo lending. Clearing houses and exchanges would also have to decide whether and on what terms to take Treasuries as collateral
A disappearing act? – Pg. 6 ‐ …regulators who have to fill in the detail of Dodd‐Frank by writing rules, are behind schedule – and Republican members of Congress are in no mood to help by providing a bigger budget ‐ Some now say Dodd‐Frank was premature
Zillow triples in value to continue hot streak for dotcom companies – Pg. 13 ‐ Zillow, a US real estate listing website, tripled in value in its first day of trading on Wednesday, continuing a streak of successes for dotcom companies in an echo of the 1990s boom ‐ The market’s higher price puts it on par in valuation terms with the much bigger LinkedIn, which has a market value of $9.3bn ‐ Both companies are priced in about 15 times projected 2012 revenues, reflecting high hopes for rapid growth. By contrast, the broader S&P500 index is at just 1.1 times forecast 2012 sales,… ‐ Zillow is the largest company in the market for online real estate listings, with a 6% share,…
Investors warned of Chinese debt danger – Pg. 23 ‐ …almost every Chinese borrower that has tapped the international markets for funds has done so through a circuitous route that exposes investors to considerable risk ‐ The structural flaws of Chinese offshore bonds are not new and are well known to savvier investors in the market. But with more than $33bn raised through such deals since the start of 2010, five times the issuance of the entire preceding decade – the risks are more relevant than ever before ‐ China’s strict capital controls prevent mainland companies from borrowing from foreigners directly. Only the most powerful state‐owned enterprises are able to get regulatory permission to do so ‐ So to get around the restrictions, most Chinese companies issue bonds through offshore holding companies or special purpose vehicles, then send the money onshore in the form of foreign direct investment – that is, as equity rather than debt ‐ This structure carries several risk for bondholders ‐ For a start, foreign investors are essentially buying bonds from an empty shell that, in turn, owns a stake in the operating company in China; they have no direct security over the underlying assets. Since the offshore bonds are not counted as debt on the balance sheet of the mainland company, foreign bondholders are subordinated to onshore creditors, meaning they are unlikely to recover much cash if a company goes bust
20 July 2011
Goldman earnings of $1.1bn disappointment – Pg. 1 ‐ …announced 1,000 job cuts, as the bank was hit by a slowdown in trading and reduced its risk exposure to torrid financial markets ‐ The sharpest decline came in the fixed income, currency and commodities business, with second‐quarter revenues 53% lower than last year at $1.6bn
Obama’s support for debt deal prompts drop in long bond yield – Pg. 1 ‐ There was new hope on Capitol Hill that a sweeping deal to increase US borrowing authority and slash the nation’s deficits by $3,700bn over ten years was in reach ‐ Bond investors welcomed the development, with the yield on 30‐year US government bonds reversing an early sell‐off on hopes of a credible deal to alter the trajectory of America’s long‐term fiscal issues ‐ …stabilize US debt by 2014, possibly satisfying rating agencies who have threatened to downgrade the US debt rating ‐ …include $500bn in immediate deficit cuts and also create a framework for further fiscal reforms. These changes would include a “fundamental reform” of the US tax code that would reduce marginal income tax rates; abolish the $1,700bn Alternative Minimum Tax, which hits Middle class American; and reduce tax deductions and other loopholes for certain industries and individuals. It would also reform Medicare and Social Security, the government health and pension schemes
Canadian dollar soars after bank signals rate rise – Pg. 2 ‐ The Canadian dollar surged on Tuesday after the Bank of Canada unexpectedly signaled an interest‐rate hike within the next few months ‐ Canada’s economy has been one of the strongest performers among industrial countires in recent years ‐ The dollar, also known as the loonie, was trading at US$1.053 shortly after the bank’s statement, up a full cent from Monday’s close. It rose above parity with the US dollar earlier this year ‐ The Bank of Canada lifted its overnight lending rate from 0.25% to 1% during 2010 ‐ The bank said that domestic household demand remained solid and business investment robust,…
An elusive debt resolution – Pg. 8 ‐ Greece’s debt burden – expected to hit 172% of gross domestic product next year ‐ …. ‐ Problem 1 – The first rescue package was not big enough ‐ Problem 2 – German, Dutch and Finnish voters are against funding another bail‐out ‐ Problem 3 – Greek banks being dragged under by the debt crisis may also lose emergency funding ‐ Problem 4 – Fears of a Greek bond default have led to a run on Spanish and Italian bonds ‐ Problem 5 – Athens’ debt burden is potentially too big to be paid off
Chinese banks’ bad debt units given new lease of life – Pg. 17 ‐ When the four large state‐owned banks in China began to establish units to hold their non‐ performing loans in 1999, the new asset management agencies’ mandate was to try to sell or collect on as many of these troubled assets as they could. They were given 10‐year life and expected to quietly shut up shop ‐ Today, the cash the asset management companies have collected – whether from loan sales, interest on the loans or the equity they received through debt‐for‐equity swaps – helps support a wide range of financial activities ‐ They all have arms to help them diversify; arms that may include leasing, securities brokerage, real estate and trust operations
19 July 2011
Gold price breaches $1,600 on debt fears – Pg. 1 ‐ Gold burst through $1,600 an ounce for the first time as the eurozone’s escalating debt crisis sent fear through markets ‐ The eurozone crisis, combined with the possibility of a US default, have burnished the appeal of gold and other haves such as the Swiss franc and German Bunds ‐ Shares of Lloyds Banking Group and Barclays fell more than 7%, as investors digested the results of last week’s European stress tests ‐ Gold was set to register its 11th consecutive day of gains on Monday, its longest run since 1980 when an oil‐price spike and the billionaire Hunt brothers’ squeeze on the silver market drove bullion to its all‐time record. When adjusted for inflation, the record translates to $2,400 in today’s money
China property prices slow as policy measures start to bite – Pg. 4 ‐ Chinese property prices rose at a slower pace in June as government efforts to prevent a real estate bubble weighed on the marking ‐ Housing prices in 70 big cities rose 0.1% from a month earlier, down from 0.2% in May and the smallest monthly increase this year, …. ‐ Nationwide property prices rose 4.2% year‐on‐year, well below June’s 6.4% annual increase in consumer price inflation, another indicating that the Chinese housing market has started to come off the boil ‐ …increased mandatory downpayments, raised mortgage rates and made it harder for people to buy more than one home ‐ Princes in Beijing and Shanghai were up just 2.2% from a year earlier
Leaders focus on least challenging solution to crisis – Pg. 5 ‐ The big money in the budget is likely to remain untouched ‐ So far, the two sides have found consensus on roughly $1,500bn of spending cuts over the next decade – a far cry from the $4,000bn target that most economists and analysts believe would be necessary to stabilize US debt levels ‐ The biggest chunk, worth $1,100bn, is made of caps on discretionary spending, or annual outlays by government agencies, from the Pentagon to the State and Treasury departments ‐ A second area where there is a bipartisan consensus for cuts is in a separate category of spending programmes not subject to annual review by Congress, including some farm subsidies and federal workers’ pensions ‐ ..not tackle Medicare and Medicaid, the popular health programmes whose cost is projected to rise from 20% of non‐interest federal spending now to 31% in 2020
Gloom eases among US housebuilders – Pg. 5 ‐ Confidence among US homebuilders rose modestly in July from June’s nine‐month low but remained depressed levels as the housing market struggles for momentum ‐ Last month, US home prices fell 4% from a year ago, the sharpest drop since November 2009, amid declining sales of new homes, a glut of distressed properties and persistently high unemployment
A high‐risk recovery – Pg. 7 ‐ …argentina’s 2001 default on $100bn of sovereign debt, … ‐ The recovery has been impressive – the economy expanded 65% from 2002 until the world financial crisis broke in 2008; its 2011 growth forecast has just be lifted to 8.2% ‐ …public spending is outpacing tax revenues ‐ Argentina is a leading food commodities producer, with agriculture making up 35% of foreign sales. ‐ Unemployment, at 7.4% in the first quarter, is low, but investment is lackluster – 19.4% of gross domestic product ‐ Argentina’s foreign debt‐to‐GDP ratio is an enviable 35%,…
Schwab suffers as investors stay cautious – Pg. 15 ‐ US retail investors put more money to work in the market in the second quarter, but they are still avoiding risk by trading little and investing mostly in bond funds ‐ Charles Schwab, the largest US discount brokerage, reported improved earnings for the quarter on Monday due to the boost in fund flows, but it is among the first brokerages to deliver what is expected to be a depressed batch of results in the trading businesses this quarter ‐ …customers were still adding money to investments and pulling it out of cash, as the interest Schwab paid on deposits declined from 0.23% in the quarter a year ago to 0.13%, due to a Federal Reserve benchmark rate set at near‐zero
18 July 2011
Spain and Italy top results in stress tests – Pg. 1 ‐ Spain and Italy’s leading banks were the strongest performers in last week’s European stress tests, in a surprise result that could help the funding pressure that had been building on them ‐ The strength of European banks – and their ability to absorb potential losses in the event of a sovereign default – is a crucial aspect of talks between bank bosses and the continent’s political leaders of how Greek debt should be restructured
Markets teeter on default cliff edge – Pg. 2 ‐ The US bond market may be sending a false signal to Washington that it is unconcerned by the prospect of default should wrangling politicians fail to raise the Federal debt ceiling ‐ ….consensus in the bond market is for last‐minute deal ahead of the August 2 deadline, sentiment may start faltering later this month when the market is asked to absorb hefty new debt sales ‐ So far, bond investors are focused more on weak US economic data and haven buying amid the eurozone debt crisis. Not even a warning from Moody’s – placing the US triple A rating on notice for a downgrade in the event of a debt default – has shaken the bond market ‐ But any failure to raise the debt ceiling that ultimately results in a Treasury default could spark severe consequences in the crucial plumbing system that underpins global finance, given the central role played by US government bonds ‐ Treasuries are widely used as collateral for cash loans in the repurchase, or repo, market ‐ ….74% of primary dealer repo financing, about $2,100bn, involves Treasury collateral
Chinese advisers express confidence disaster will be averted – Pg. 2 ‐ As the biggest foreign creditor to the US, China stands to lose the most from any delayed payment of interest on Treasury debt or from downgrading the US sovereign rating that hurts the dollar ‐ Mr Xia said China still needed to accelerate the diversification of its foreign currency investments away from US assets because the dollar was poised to decline in coming decades ‐ China had $1,152bn in US Treasuries at the end of April, about a quarter of all foreign held US government debt, …. ‐ With Chinese foreign exchange reserves increasing by $350bn in the first half alone, ….
Lines less blurred – Pg. 7 ‐ US Authorities are investigating possible violations of the FCPA [Foreign Corrupt Practices Act] with greater intensity than ever before, bringing more cases, announcing more settlements and receiving more in fines ‐ ….investigations have proved lucrative for stretched federal coffers – as former regulators freely admit ‐ While US companies maintain that their strict rules unfairly handicap them, foreign groups complain of the extraterritorial reach of US regulators ‐ UK’s anti‐bribery law took effect on July 1 ‐ …investigations often focus on sales practices ‐ Regulators estimate that $1,000bn is paid in bribes each year, …. ‐ Another reason companies are quick to settle is that lack of knowledge is not an adequate defense ‐ The rules have two prongs: first, violations involving bribery itself; and second, books and internal control violations, which are far easier to prove ‐ Corruption today is seen as much less acceptable
Japanese exchanges – Pg. 14 ‐ …proposed merger between the Tokyo Stock Exchange and the Osaka Securities Exchange…. ‐ Better to follow the Brazilian and Russian template, merging stock and derivatives specialist to create a national champion
Regulators throw bourses off course – Pg. 16 ‐ Exchanges will have to “rethink their global strategies” because of unexpectedly strong scrutiny of proposed bourse tie‐ups from antitrust regulators, ….
Deal close on Hypo Real estate revamp – Pg. 16 ‐ EU antitrust officials are expected to sign off on the restructuring of Germany’s Hypo Real Estate today, in one of the biggest bank downsizing to result from the financial crisis ‐ HRE’s balance sheet is expected to shrink by about 85% of its pre‐crash levels – more than Britain’s Northern Rock, whose balance sheet was slashed by about 80%
16 July 2011
Obama says time to get ‘serious’ – Pg. 1 ‐ (Prof Note: Oh, now it is time to get ‘serious’?) ‐ …said he still wants a large deficit reduction plan that would cut $4,000bn over ten years, Mr Obama indicated he would consider compromise options to avoid a default (Prof Note: How about $1,500bn in cuts immediately!) ‐ Rating agencies have warned of a debt downgrade, with Standard & Poor’s saying the country faced a more than 50% chance of losing its triple‐A status even before the resolution of the budget impasse ‐ The debt ceiling has been lifted nearly 100 times over the decades, but rarely with rancor on display in an ideologically‐split Congress
US core inflation rise limits Fed’s options – Pg. 2 ‐ Core consumer prices in the US rose at an annual rate of 1.6% in June, a pick‐up in inflation that gives the Federal Reserve little scope to stimulate the economy ‐ The Fed looks at the core consumer price index, which strips out volatile food and energy prices, as the best guide to underlying inflationary pressures ….annualized rate of 2.9%....well ahead of the Fed’s goal of 2% or a bit below ‐ …highly unlikely to launch another round of quantitative easing, or QE3, while inflation is heading upwards ‐ Prices of used cars and trucks rose 1.6%, new car prices gained 0.6%, clothing was up 1.4% and rents rose 0.1% ‐ …consumer sentiment index fell from 71.5 in June to a preliminary reading of 63.8 in July,…
Seoul cuts growth forecast – Pg. 4 ‐ South Korea cut its growth forecast and raised the outlook for inflation this year, exposing a dilemma for Seoul’s policymakers who will need to cook prices rises while stimulating weak domestic consumption ‐ The Bank of Korea, which held interest rates steady at 3.25% this week, said growth in Asia’s fourth biggest economy would slow to 4.3% this year from 6.2% in 2010. It had previously forecast 4.5% growth ‐ The Bank of Korea said inflation would run at 4% this year, the ceiling of the government’s target, inching up its forecast from a previous 3.9% ‐ Policymakers are also tolerating a steady appreciation of the won, which has reached a three‐year high against the dollar
The abyss that awaits – Pg. 5 ‐ As the period of thin financial markets approaches, an August panic similar to those of 2007 and 2008 no longer appears far‐fetched. Only this time, the global economy is far less well‐ equipped to cope ‐ The series of troubling events started a week ago on Friday when Italy, the eurozone’s third‐ largest economy, became embroiled in the European sovereign debt crisis ‐ Unlike Greece, its government had not concealed its debts ‐ Unlike Portugal, its deficits were under control. Unlike Ireland, its banks had not engaged in crazy lending. And unlike Spain, there had been no residential construction boom or bust ‐ Moody’s the credit rating agency, responded on Tuesday by downgrading Ireland’s debt to junk status, … ‐ The IMF and most economists have long recommended that the US should instigate a credible medium‐term plan of spending cuts and tax rises, while limiting the immediate up‐ front austerity ‐ …the world economy has fundamentally changed: it is much less reliant on the traditional locomotives of the US and Europe than it was. Globally the recovery is on track and China’s 9.5% annual growth for the second quarter underlined its continued strength compared with weakness in most advanced nations
Sovereign debt crisis sends equities tumbling – Pg. 11 ‐ Mounting concerns about sovereign debt – on both sides of the Atlantic – nerves over European bank “stress tests” and fresh signs of weakness in the US economy drove equity prices sharply lower this week and spurred demand for gold, US and German government bonds and the Swiss franc
15 July 2011
Merkel warned on bail‐out impasse – Pg. 1 ‐ Pressure mounted on Angela Merkel, Germany’s chancellor, to decide quickly how to include private bondholders in a $163bn Greek bail‐out as Italian officials and IMF warned that continued uncertainty would undermine the eurozone
Budget talks mired in discord – Pg. 2 ‐ Republican and Democratic lawmakers are accusing each other of negotiating an increase in the US’s borrowing authority in bad faith as signs grow that the parties are still a long way from reaching a deal to avoid a possibly cataclysmic default of its debt ‐ The threat of a debt downgrade and the failure to reach a debt deal sent the dollar lower in Asian trading on Thursday but Treasury yields were largely unaffected by the developments ‐ Democratic Congress have ruled out any budget deal that would cut hundreds of billions of dollars in spending on popular programmes such as Medicare, the healthcare for the elderly, if they are not coupled with tax increases on wealthy Americans and some corporations (Prof Note: Congress is nothing but children not playing well in a sandbox. We need a kindergarten teacher to take charge! We cannot agree on tax increases…ok….no tax increases. We cannot agree on what programs to cut….ok….do not agree. We do agree that cuts have to be made…ok….the delta between expense and revenue is the amount (easy calculation). Since we cannot agree on what but do agree that a cut is needed, a pro rata cut across the board! Done….next on to the housing crisis!)
Debt fears lead US youth to question value of university – Pg. 2 ‐ The cost of higher education has soared in recent decades while median incomes have stagnated, pushing college further from the grasp of many people and limiting social mobility (Prof Note: Students STRIKE!!! Trust me, the increase is NOT going to the Professors, at least NOT me! If I, the professor, am considered the only expense in a classroom (allow me this fantasy) and the average classroom is 20 people, the school makes a net 92% profit. Students, DEMAND results for your $$$! At the end of the semester, were the goals in the syllabus met? Were your skills improved? Education remains, in my opinion, the only commodity where people (in the U.S.) want the least for their dollar. Students DEMAND results, DEMAND performance from your professors, you ARE the customers!) ‐ In the past decade, tuition rates at public universities have risen 5.6% a year above inflation, while fees at private colleges have increased 3% a year ‐ The increase in fees has not affected demand for higher education. Applications rose during the downturn, as more people deferred the search for scarce jobs and took the opportunity to get training – with what traditionally has been good reason. College graduates generally receive bigger salaries, on average earning $20,000 more a year than workers without a higher education ‐ Average starting salaries for college graduates fell sharply in the downturn, from $30,000 in 2006‐08 to $27,000 in 2009‐10,…. ‐ (Prof Note: In my opinion, Calculus, statistics, and accounting MUST all be required REAL courses, not BS electives that everyone considers a nuisance. Let us get rid of ethics classes and place them where they belong, in the kindergarten programmes where ethics are truly taught. Stop taking your neighbours pencil and when say something/do something wrong say, “I am sorry.”) ‐ (Prof Furthermore Note: Before you take on educational debt look at the salaries and security offered; if this does not support the debt which will be required, perhaps a hard decision must be made)
Cameroon The Window of Africa – Pg. 5 ‐ (Prof Note: Worth a read)
A nation taken to the limit – Pg. 6 ‐ The last time Congress failed to reach agreement on a financial rescue package – in 2008, when it initially voted down the troubled asset relief programme at the height of the banking crisis – the stock market dropped nearly 10% ‐ What is the problem? o The sharp economic downturn after the 2008 financial crisis devastated tax revenues. A $700bn stimulus programme pushed through Congress by Barack Obama inflated the deficit to more than 10%. The US now borrows about 40 cents of every dollar it spends (Prof Note: Disgusting!) o …the real trouble lies later in the decade, when the country’s ageing population will bring exploding costs in a host of popular government programmes o …federal debt would be equivalent to more than 100% of annual size of the economy as soon as 2021 and would reach nearly 190% by 2035 (Prof Note: This is “Federal” and does not include state….Oy Vei!) ‐ What if the talks fail? o A default would be logistical, economic and political nightmare o International bond investors such as China, as well as government contractors and recipients of welfare, pensions and other benefit would all have to be placed in line because of what the Bipartiscan Policy Center, a Washington think‐tank, estimates would amount to an immediate and automatic 45% cut in government spending o …could plunge the US into a fresh recession (Prof Note: Which I have been predicting consistently)
Bolton reveals losses at US‐listed Chinese holdings accused of fraud – Pg. 13 ‐ …Fidelity International, has revealed that his flagship China fund suffered losses from investments in two small US‐listed Chinese companies accused of fraud ‐ The CSS fund had liquidated its holdings in several Chinese reverse merger stocks at a loss this year,…. ‐ The fund’s share price has declined about 15% in the year to date
Alarm at OTC derivatives plan – Pg. 14 ‐ Europe’s largest industrial companies have expressed alarm at a proposal by the European Commission that they say would impose punitive capital charges on banks providing over‐ the‐counter derivatives to companies, stifling legitimate hedging activities ‐ Having won such an exemption in the Dodd‐Frank act in the US, and in similar proposed rules known as the European Market Infrastructure Regulation working their way through Brussels, such companies say that proposed capital requirements for banks’ use of OTC derivatives would make use of such financial instruments expensive, almost wiping out the benefit of the exemption in Emir
Treasuries’ strength too much for bond bears – Pg. 20 ‐ Not even the risk of a US debt default has shaken Treasury bonds. Now, even the most bearish investors on US government debt are throwing in the towel as low yields prove a stubborn characteristic of the bond market ‐ For the bears, this return to a neutral stance marks a recognition that low bond yields, which move inversely to prices, may be here for some time ‐ Notwithstanding a warning from Moody’s on Wednesday that the US may lose its triple‐A credit rating should politicians fail to agree on raising America’s debt ceiling by an August 2 deadline, few in the bond market believe the Treasury will default on its obligations ‐ Another factor likely to keep a lid on Us yields is solid demand from foreign and long term investors
Gold and silver surge higher on warning over US debt rating – Pg. 21 ‐ The yellow metal rallied to a new high within reach of $1,600 a troy ounce, while silver approached $40 a troy ounce ‐ …on Wednesday night, Moody’s put the US credit rating on negative watch, further fuelling investors’ distrust of paper currencies – and a the US dollar in particular
14 July 2011
Fed chief warns on US debt ceiling and opens door to further stimulus – Pg. 1 ‐ Ben Bernanke has outlined extra stimulus options the US Federal Reserve could use if the economy remains weak, acknowledging a possible return to monetary easing ‐ The Fed chairman’s comments helped trigger a rally in commodity prices. Gold touched a record of $1,587 a troy ounce, while oil and agricultural commodities rose sharply ‐ Brent crude rose to almost $120 a barrel,… ‐ The S&P 500 was up 1.2% in early afternoon trading and the benchmark was on course to break a three‐day losing streak ‐ Mr Bernanke said its options included keeping interest rates close to zero, buying assets in another round of quantitative easing, extending the maturity of the assets on its balance sheet or reducing the 0.25% interest that it pays banks on their reserves
IMF urges private bondholders to share Greece bail‐out burden – Pg. 1 ‐ ….”appropriate” for private bondholders to share in any restructuring ‐ The fund signaled opposition to short‐term rollover plans, such as that recently floated by France, that would not involve a reduction in the value of private sector holdings ‐ Eurozone finance ministers are trying to work out a multi‐year programme including fresh financing for Greece, and after months of wrangling have acceded to pressure from the German government to write down private investors’ holdings to reduce the amount of public funding required ‐ It called on the ECB to agree to use new government guaranteed Greek bank bonds as collateral in its market operations
Rising price of pork feeds into soaring inflation rate – Pg. 5 ‐ In the past year pork prices in China have soared 57%, and are again helping to drive Chinese inflation, which hit a three‐year high in June ‐ The Chinese are among the world’s top pork consumers, … ‐ In June, pork prices were the single biggest driver of food inflation, which hit 14.1%, and contributed 140bps to headline consumer price inflation of 6.4% ‐ …small farmers….account for about 40% of total pork production ‐ …. ‐ …cost of producing pork has also been rising
US unemployment – Pg. 8 ‐ Net job creation all but stopped in June ‐ …the number of jobs required to restore the pre‐recession rate of employment….this rose to 12.3m in June ‐ …when demand recovers, the US may find that its once‐lauded labour market has suffered structural damage ‐ Unemployment remains high not because of new sackings but because hiring is so slow ‐ The average duration of unemployment is now 40 weeks, and nearly half of the jobless have been out of work for more than 27 weeks; usually, the long‐term unemployed account for less than one in five of the total. These numbers understate the problem because they exclude those who have stopped looking for jobs altogether ‐ The US safety net is less generous than is typical in Europe, and the social consequences of persistent joblessness are harsher ‐ Washington seems paralyzed just as urgent action is required on two separate fronts. First, mend fiscal policy by maintaining short‐term stimulus while restoring medium‐term control. Second, repair and improve the safety net so that it better supports the unemployed and helps them to find work. (Prof Note: Is not innovation a result of necessity?)
Swedish watchdog raids stock exchange – Pg. 14 ‐ Swedish regulators have raided the country’s stock exchange as part of an investigation into whether Nasdaq OMX, the US‐based exchange operator, is trying to suppress competition from rival trading platforms in the Nordic region ‐ Verizon, the US telecommunications company, is also involved amid claims it helped Nasdaq OMX defend its dominant position in Sweden by excluding rival exchange operators from an important data centre ‐ Data centres are becoming battlegrounds between exchanges and freshly established rivals, often backed by banks and brokers ‐ Data centres are crucial to market structures as exchanges, banks and brokers compete to build the fastest, most efficient systems with transactions measured in split‐second
13 July 2011
Italy’s debt costs soar in Greek contagion – Pg. 1 ‐ Italy’s borrowing costs soared to their highest level in more than a decade amid highly volatile trading as market contagion from Greece forced Silvio Berlusconi to appeal for national unity and “sacrifices” to cut the nation’s debt mountain ‐ The eurozone received a further blow last night when Ireland became the third country to see its credit rating downgraded to junk status. Moody’s…cited the likelihood that Ireland would still need official help after is current bail‐out programme ends in 2013. Its downgrade follows Portugal in recent weeks and Greece last year (Prof Note: Great final examination question for tonight!)
Fed members raise prospect of fresh stimulus if growth remains weak – Pg. 1 ‐ Further monetary action would be likely to mean more quantitative easing, similar to the $600bn QE2 round of asset purchases that the Fed completed at the end of last month, aimed at driving down long‐term interest rates ‐ The economy grew at an annualized rate of only 1.9% in the first quarter, and the second quarter has been weak, with jobs growth near to a standstill in May and June ‐ The minutes suggest that the rate‐setting Federal Open Market Committee would be deeply split over any move towards further easing amid an “unusually uncertain” outlook for both employment and inflation ‐ The FOMC agreed that, for the time being, to keep policy on hold “and accumulate further information regarding the outlook for growth and inflation”
States work on ‘backstops’ for poor bank stress results – Pg. 2 ‐ Some countries in the European Union are still in the process of preparing remedial measurs should their banks fail the latest round of industry‐wide “stress tests” when the results are revealed to the public on Friday,… ‐ This year’s tests, which have been overseen by the new pan‐EU European Banking Authority, are widely expected to be more demanding than the previous two rounds and will cover 91 of the EU’s largest banks
Belgium moves to calm market fears – Pg. 3 ‐ Belgium on Tuesday sought to calm market concerns about its ability to repay its bloated debt by unveiling better than expected budget deficit projections for 2011, giving it temporary respite from contagion fears gripping parts of the eurozone ‐ …budget shortfall would be around 3.3%, compared with 3.6% forecast earlier ‐ Belgium has in recent months faced occasional spikes in borrowing costs due to its outsized debt, worth around 97% of its gross domestic product, one of the highest ratios in Europe.
Egypt’s military council under fire – Pg. 6 ‐ Thousands of Egyptians occupied Cairo’s Tahrir Square and locations in other cities for a fifth day on Tuesday, dismissing promises of reform and calling for the removal of the military council ruling the country since the regime of Hosni Mubarak, … ‐ In a nod to the demands of some of the protestors, the military said it would draft a set of regulations for selecting the 100‐member assembly that will draft a constitution
Trade deal disputes rage on Capitol Hill – Pg. 7 ‐ …passage of three US bilateral trade deals – South Korea, Panama and Columbia – which have been languishing for four or more years
Slide in job creation contradicts over data to fox analysts – Pg. 7 ‐ Analysts were caught out because the payrolls number was out of line with some other indicators, notably a more upbeat tone from business surveys about hiring plans, better news from the manufacturing sector, and the number of job adverts ‐ But it is now very hard to dismiss the weakness of payrolls as a blip or an anomaly – there is too much evidence that the slowdown is real ‐ First, payrolls report was weak across the board ‐ Jobs growth in previous months was revised downwards; average hours worked by those with jobs fell; the number of temporary jobs – which tend to precede future hiring – fell; and the unemployment rate rose to 9.2% even as people left the labour force ‐ Second, bad payrolls fit with accumulating evidence that second quarter economic growth was weak
Soaring reserves fuel China inflation fears – Pg. 7 ‐ China’s foreign exchange reserves, already the world’s biggest, soared again in the second quarter, adding to inflationary pressure and highlighting the risks in Beijing’s policy of holding down the value of its currency ‐ Reserves are a key indicator of central bank intervention in the currency market because they reflect how much foreign exchange it has purchased in order to stabilize the renminbi ‐ Consumer prices were up 6.4% in the year to June, the highest in three years ‐ The broad M2 measure of money growth was up 15.9% year on year in June, accelerating from 15.1% a month earlier ‐ China raised interest rates last week for the fifth time in eight months ‐ China’s total foreign exchange reserves stand at $3,197bn, equivalent to about 50% of gross domestic product and almost three times more than any other nation’s
Credit to redeem – Pg. 8 ‐ Despite riding one of the world’s strongest commodity price cycles, Brazil spends more than it earns and invests little. Inflation and consumer leverage are rising and Brazil’s currency, the real, has strengthened by 46% in two‐and‐a‐half years ‐ Consumer price inflation o 9.6% Russia o 8.9% India o 6.8% Brazil o 6.4% China o 3.4% US o 2.7% Eurozone ‐ Bank has increased interest rates four times this year, to a current 12.25% ‐ The mortgage sector is tiny and about 60% of consumer loans are secured against payrolls, cars or property and are at fixed rates – making them safer, ….
BATS and Chi‐X Europe in deal to extend tie‐up terms – Pg. 17 ‐ BATS Global Markets, the operator of US and European share trading platforms, and Chi‐X Europe agreed to extend the terms of a proposed acquisition of Chi‐X Europe by BATS as antitrust authorities scrutinized the proposed tie‐up ‐ The combination of BATS and Chi‐X Europe would create a group trading more stocks on a pan‐European basis than Euronext, which trades French, Belgian, Dutch and Portuguese equities. It would also account for 35% of trading FTSE 100 stocks, after the London Stock Exchange
12 July 2011
Markets rocked as debt crisis deepens – Pg. 1 ‐ Europe’s debt crisis deepened on Monday as Italy and Spain saw borrowing costs soar by record amounts, hitting bank shares and stock markets globally ‐ Italy, the eurozone’s third‐largest economy and home to the continent’s biggest bond market, saw the premium it pays to borrow over German debt rise by more than a quarter to 3%, a euro era high. Spain’s benchmark borrowing costs rose above 6%, also a euro‐era high ‐ Investors warned that Europe’s current policy would be unlikely to be able to deal with Italy,…. ‐ Stock markets fell globally, with the S&P 500 down 1.8% at the close in New York, France’s CAC 40 off 2.7% and the FTSE 100 in London slipping 1%
China’s satellites cast shadow over US Pacific operations – Pg. 1 ‐ China’s rapidly expanding satellite programme could alter power dynamics in Asia and reduce the US military’s scope for operations in the region,… ‐ Chinese reconnaissance satellites can now monitor targets for up to six hours a day, …. ‐ …could only manage three hours of daily coverage just 18 months ago, is now nearly on par with the US military in its ability to monitor fixed targets,… ‐ China’s military build‐up has accelerated in recent years, as it has developed an anti‐ship ballistic missile, tested a stealth fighter and is poised to launch its first aircraft carrier ‐ When China tested missiles near Taiwan in 1996, the US deployed two aircraft carriers to nearby waters. The PLA’s inability to locate the ships was a source of great embarrassment that helped spur china’s satellite programme
Obama pushes for budget deal – Pg. 2 ‐ ….action on a politically difficult $4,000bn deal ‐ …final deal must be reached by August 2 in order to avoid a potentially devastating US default on its debt ‐ (Prof Note: Ba‐hum‐bug….raise the debt ceiling…which we need to do and take some time to do the cuts right…this is embarrassing!)
Ascent and dissent – Pg. 5 ‐ While income distribution in Russia creeps towards Latin American levels of inequality, having widened notably since the turn of the millennium, the state has incubated an ever more entrenched and inaccessible elite that now controls government and business, and jealously guards its privileged domain (Prof Note: …and this is different from the Russia I studied in 1994 at MSU, how?) ‐ The outflow of emigrants is thought to be roughly 100,000 a year
Overseas investors target US real estate – Pg. 14 ‐ Foreign investors increased their spending in the US commercial property market during the second quarter as easier financing terms and appealing rental yields spurred activity,… ‐ Foreign investors poured $49bn into US commercial property in the period, up 56% from the second quarter of 2010,….Global cross‐border investment in commercial real estate rose 47% to $101bn …. ‐ The average yields on US office, industrial, retail and hotel properties remained above 6% during the quarter, as against an average yield of 3.3% for 10‐year US Treasury securities during the quarter,… ‐ US commercial property markets have also benefited recently from the weakness of the dollar. The US currency has fallen almost 10% since July 2010, making US assets appealing to foreign investors (Prof Note: Not to mention the need to recirculate petrol dollars) ‐ Outside the US, global property investors have been focusing on relatively fast‐growing markets such as Brazil, Russia, India and China
CME steps up Asian push with revamp of renminbi futures – Pg. 19 ‐ CME Group, the world’s largest futures exchange operator, is stepping up its move into international foreign exchange markets with a revamp of its futures contracts based on the Chinese renminbi ‐ The contracts are an indication of the Chicago‐based company’s policy on Asia ‐ The Asia‐Pacific region is becoming the centre of attention for CME after may’s launch of European clearing operations for energy derivatives ‐ At the same time CME is looking to expand beyond its traditional commodities futures markets into areas such as foreign exchange, the world’s most liquid financial markets ‐ The renminbi futures contracts will be quoted in interbank terms to reflect the number of renminbi per dollar and will launch on Monday August 22 ‐ CME faces competition for clearing from the SGX, which will start to clear the non‐ deliverable forwards of emerging Asian currencies ‐ Hong Kong Exchanges and Clearing is also planning to launch clearing services by the end of 2012
11 July 2011
EU stance shifts on default for Greece – Pg. 1 ‐ European leaders are for the first time prepared to accept that Athens should default on some of its bonds as part of a new bail‐out plan for Greece that would put the country’s overall debt levels on a sustainable footing ‐ …could also include new concessions by Greece’s European lenders to reduce Athens’ debt, such as further lowering interest rates on bail‐out loans and a broad‐based bond buy‐back programme ‐ European leaders have until now been reluctant to back any plan categorized as a default for fear it could lead to a flight by investors from all bonds issued by peripheral eurozone countries – including Italy and Spain, the eurozone’s third and fourth largest economies ‐ ….debt rating agencies warned any attempt to get bondholders to participate would represent a selective default. Rather than abandon bondholder buy‐ins, however, several European leaders have decided to return to a German‐Backed plan to push Greek debt holders to swap their holdings for new, longer‐maturing bonds
McKinsey counts the cost of ‘embarrassing’ Galleon scandal – Pg. 1 ‐ McKinsey & Co will not know for 20 years what damage the Galleon insider trading scandal has done to its brand,… ‐ Rajat Gupta, a former head of McKinsey, has been charged with civil violations by the Securities and Exchange Commission but denies wrongdoing
US deficit talks scaled back – Pg. 2 ‐ The White House and congressional leaders expressed confidence they could still reach a deal to raise the US borrowing limit and avert a default, even after talks to strike an ambitious plan to cut $4,000bn from the country’s deficit were scaled back over disagreements on tax cuts for the wealthy
US threatens to cut Pakistan aid – Pg. 4 ‐ US officials warned Pakistan on Sunday that it would not receive $800m in military aid unless it increased co‐operation with Washington ‐ The move is the most concrete sign of the deep strains in the relationship between the two countries – which is strategically vital for the US and worth billions for Pakistan ‐ But the US also argues that cutting times with Pakistan is not an option ‐ US military and civilian aid to Pakistan amounted to $4.5bn last year
Heirs and spares – Pg. 5 ‐ But Median’s families are also using new wealth to acquire a scarce local commodity: teenage girls to act as wives for the community’s growing cohorts of unmarried men ‐ A shortage of young women arising from decades of aggressive use of sex‐selective abortion in northern bread‐basket states ‐ ….is prompting families to turn to the impoverished east to secure females ‐ Three years ago, Mr Niwas paid Rs80,000 to buy Suman, now 19, from Assam state for his 35‐year old son ‐ Prostitution and forced marriage are rising in both India and China ‐ …in China there has been a spate of kidnappings of school‐age girls taken to be reared as future brides ‐ In China, the sex ratio among newborns is about 120 boys for every 100 girls, compared with the ratio of 105 boys per 100 girls that is considered normal ‐ Traditional preferences for sons are deep‐rooted in Asia, particularly in agricultural communities. Boys help till the fields and are responsible for caring for elderly parents. Girls require dowries and, once married, are expected to be loyal to a husband’s family and are therefore unable t support their own parents in their dotage ‐ India, China and Vietnam have all banned sex‐selective abortions and prohibit medics from disclosing a child’s gender before birth ‐ Some Indian states offer girls small sums for reaching life‐cycle milestones ‐ In China, sons are increasingly seen as the greater financial burden. Faced with growing competition for brides, young men must save to buy an apartment before they can marry ‐ ….growing trade in young girls and toddlers, who are abducted and sold to families to be raised as future brides (Prof Note: I will never forget my Tuk Tuk driver in Cambodia saying to me, “Mister, you want girls, I get them for you. You want 20, 19, 18 years old?” I said, “no thank you, not my speed.” He said, “Awwww, Mister, I know what you want, you want 15, I get for you.” I was horribly insulted and ended the conversation abruptly.)
Funeral directors box clever – Pg. 11 ‐ (Prof Note: When asked if I could do it all over again what profession I would choose, I always choose Funeral Home owner. Zero elasticity of good and decisions are emotional by the retail customer AND the supply chain is unending. The only issue, vertical integration can only go so far!)
China’s shadow banks – Pg. 14 ‐ …core problem was the same as in every other banking crisis: sloppy underwriting at mainstream lenders ‐ Regulators’ concerns are understandable. Of all the varieties of informal credit intermediation, the biggest – equivalent to 7% of gross bank loans, on Nomura’s reckoning – is entrusted loans. In such loans, a bank acts as an agent on a third party loan between a depositor and a borrower, and books a fee. As it does not assume any risks or rewards of the loan or the corresponding funds, it typically records it off‐balance sheet, at principal amounts. The volume of such deals exploded as China tightens controls on formal lending
Special Section – Monthly review of the fund management industry
9 July 2011
Dismal jobs data rock US recovery – Pg. 1 ‐ The US added just 18,000 extra jobs in June, the lowest in nine months, exacerbating fears that the nascent recovery is stalling in the face of high petrol prices, knock‐on effects from the Japanese tsunami and chronically weak consumer conficence ‐ The president’s push for new spending has encountered fierce resistance from Congressional Republicans, who argue that previous stimulus efforts failed to create jobs (Prof Note: Well we know how well it worked for Roosevelt!) ‐ Forecasters had expected job creation in excess of 100,000 positions for June ‐ Private sector job creation was weaker than expected, while the public sector shed 39,000 jobs ‐ With few policy options left for a quick economic lift, Mr Obama warned Americans that any recovery could be far off: “The economic challenges that we face weren’t created overnight, and they’re not going to be solved overnight” (Prof Note: Does not Mr Obama earn a salary over $400,000/year?)
Fears over Italy ramp up euro crisis – Pg. 2 ‐ The eurozone debt crisis intensified on Friday amid the first serious signs that contagion is spreading to Italy, the currency club’s third biggest economy ‐ Worries over Italy also hit the euro, which fell nearly 1% against the dollar ‐ The extra premium Italy pays to borrow compared with Germany leapt to a euro‐era high ‐ The wider Italian stock market dropped 3.5%, although some of the losses were due to a poor US jobs report ‐ Italy, which has one of the eurozone’s highest debt to gross domestic product ratios of 120%, has the biggest bond market in the currency club and a huge interest rate bill (Prof Note: I thought the Maastrict treaty limited debt/GDP to 60%? Hmmmmmm)
US jobs data add urgency to debt ceiling talks – Pg. 3 ‐ Mr Obama has set a deadline of July 22, to allow Congress enough time to put into law any agreement before the debt ceiling is reached in early August. Congress’s approval is needed to lift the country’s borrowing limit, now set at $14,300bn ‐ Without a deal, the Treasury says the US could default on its debts to its creditors, such as China, and have to stop paying welfare cheques, damaging the creditworthiness of the world’s reserve currency and dragging a stagnant economy into a new downturn
Spain and Italy risk being sucked in – Pg. 13 ‐ Protect Spain and Italy – the European Union’s aim in its messy handing of the sovereign debt crisis has always been to ringfence its third‐ and fourth‐largest economies from problems of smaller countries ‐ The yields on Italy’s government debt, by far the largest bond market in Europe, yesterday hit their highest levels since October 2002 ‐ The latest increases were sparked when Moody’s the US credit rating agency, downgraded Portugal by four notches to junk status on Wednesday night, amid continuing fears of a Greed default (Prof Note: Great Final examination question) ‐ Investors acknowledge there is a growing risk that both Spain and Italy will be sucked into the crisis
Atlantis and US debt – Pg. 18 ‐ Nasa’s annual bill of $15bn ‐ $20bn over the past two decades is real money, but at 0.5% of federal spending last year it is a rounding error in relation to the other moving parts of the debt puzzle ‐ A revealing approach to the current mess is to go back to the Congressional Budget Office’s 2001 projection that by 2011 the US government would have a surplus of $2,300bn ‐ In the intervening decade, however, America’s finances have sunk to $10,000bn in the red
8 July 2011
Eurozone governments told not to rely on banks over Greek bail‐out – Pg. 1 ‐ Eurozone governments should not assume the private sector will participate in a new Greek bail‐out deal, … ‐ Mr Trichet’s comments were the closest he has come to suggesting publicly that governments abandon attempts to involve commercial banks without rating agencies declaring a selective default
ECB raises interest rates to 1.5% ‐ Pg. 2 ‐ The European Central Bank has pressed ahead with its second interest rate increase this year, in spite of the escalating eurozone debt crisis, but it failed to give any clear signal whether a further rise would follow ‐ In a move that put it further at odds with the US Federal Reserve and Bank of England, the main interest rate rose from 1.25% to 1.50% ‐ …cited “upside risks” to inflation and the risk of price pressures becoming entrenched ‐ The ECB started tightening monetary policy in April ‐ …another rise could follow as early as October…. ‐ Eurozone inflation, at 2.7% in June, remains above the ECB’s medium term target of an annual rate “below but close” to 2%. It sees inflation falling back to its target range next year
Auctions cash in on Irish homes slump – Pg. 2 ‐ Property prices in Ireland have fallen for 41 months in succession. But an English auctioneer on Thursday attempted to put a floor on prices, selling more than 80 distressed properties in space of three hours in a public auction in a Dublin hotel ‐ But property prices are now 40% below the 2007 peak….leaving a banking sector nursing huge losses and homeowners facing hefty mortgages (Prof Note: I paid off my mortgage 100% today…I am OFF‐THE‐GRID! I will NOT be feeding the US banking/mortgage sector excess with ‘Staiger’ capital!)
Downgrade presents Brussels with rating agency dilemma – Pg. 2 ‐ Credit rating agencies have been described as a necessary evil. And that is precisely the problem faced by European policymakers as they fret over yet another inconveniently timed downgrade of sovereign debt – Portugal’s – and consider what extra legislative steps to take
Deadline looms for US debt default deal – Pg. 4 ‐ The clock is ticking and there is less than a month to go before August 3, the date on which – in the absence of a deal between feuding politicians in Washington – America could default on its debts ‐ …cuts to entitlements and new tax revenues – in order to reach a deal to change the fiscal course of the country and increase America’s borrowing authority
Again under strain – Pg. 7 ‐ As a bridge designers have learnt, the best way to prevent disaster is to implement effective stress‐testing that takes into account not just individual actions but also herd behavior ‐ Among the most scrutinized information will be unprecedented disclosure of loan portfolios and holdings of sovereign debt, including maturity profiles – particularly timely given that Greece is teetering on the brink of default and that any sovereign debt restructuring could have big ramifications for the French and German banks that are the leading holders of Greek government bonds ‐ …since the financial crisis has stress‐testing become a vital part of the regulatory arsenal ‐ As the US showed two years ago, tough transparent testing can also reassure jittery investors, particularly important with the troubles of the eurozone’s peripheral nations continuing to dominate the news ‐ The EBA’s aims are twofold: first, to strengthen the system by pushing banks that are thinly capitalized relative to their underlying risks into raising fresh equity: and second, to convince the world about the strength – helping investors, particularly from outside Europe, to differentiate among eurozone banks and stop shunning them en masse ‐ The EBA will publish bank‐by‐bank information about the impact of the economic stresses on bad debts, profits and capital levels, with the result broken down into categeories – what the outcome was at the end of last year and what it was at the end of April, by which time many banks had acted to strengthen balance sheets ahead of the tests ‐ Analysts say a key metric of the tests’ credibility this time round will be whether there are substantial numbers of banks that fall short of the 5% core tier one capital threshold once the stressed are applied ‐ Macro measures o GDP Growth o Inflation o Unemployment rate o Government bond yields o Stock prices o House prices
Only more stimulus can fix a jobless recovery – Pg. 9 ‐ The employment decline during the 2008 recession was more than twice as large as those of previous postwar recessions,… ‐ ….14m Americans will remain unemployed and some 8m will be working part‐time because they cannot find full‐time jobs ‐ About 2m discouraged workers will have stopped looking for work ‐ ….the US will face a “jobs gap” of about 21m jobs – the number of jobs needed to return the economy to its pre‐recession employment level and absorb the 125,000 people who enter the labour force each month. At the current growth rate, the gap will not be filled for another decade ‐ Real median household income in 2009 was 4% lower than its pre‐recession high and about the same as it was in 1997 ‐ In the wake of the recession households are now being forced to curb their spending and reduce their debt. The process of deleveraging has barely started. Household debt has fallen to 115% of disposable personal income from a peak of 130% in 2007,….the 1975‐2000 average was 75%, so there is a long way to go ‐ History suggests that recovery from a debt‐fuelled asset bubble can be long and painful, with much lower GDP growth and higher unemployment for at least a decade. Right now, it looks like the US is on such a course. For many Americans, the first decade of the 21st century was a lost decade for the economy. A second lost decade has begun. No wonder they think the economy is still in recession – for them, it is
Mortgage detox – Pg. 12 ‐ Lao Tzu, “…a journey of a thousand miles begins with a single step.” ‐ The first baby‐steps in weaning the US housing finance market off Uncle Sam’s generosity, which will start in only a few months when emergency extensions to what is a “qualifying” mortgage expire, look to be painful, lumbering ones. (the limit will remain one‐and‐a‐half times precrisis level of $417,000). These are the loans that can be purchased, packaged, guaranteed and resold by Fannie Mae and Freddie Mac, both wards of the state for nearly three years now ‐ ….median US home price of $165,000
Greater firepower for US regulator – Pg. 20 ‐ The main US derivatives regulator has approved rules boosting the agency’s legal firepower against market manipulation after winning only one case at trial in its 36‐year history ‐ The rules, adopted over the objections of hedge funds and the futures industry, will allow Commodity Futures Trading Commission lawyers to cite recklessness as a reason to sue traders for manipulation. Previous rules required proof that traders distorted prices (Prof Note: AMEN!) ‐ The agency has also made it illegal to trade on privileged information obtained through fraud, deception or the breach of an executive’s duty. ‐ The new rules will apply not only to commodity futures – the CFTC’s traditional bailiwick – but the over‐the‐counter US swaps markets the agency now oversees after Dodd‐Frank
7 July 2011
Brussels launches attack on Moody’s – Pg. 1 ‐ Senior European officials lashed out at Moody’s on Wednesday, questioning the timing of the rating agency’s downgrade of Portugeuse bonds this week and threatening regulatory action against the big three rating agencies ‐ …whether they have improperly attempted to influence policymaking in the ongoing debt crisis ‐ The Portuguese downgrade of four notches to “junk” status comes amid a heated debate over how hard to push private owners of Greek debt to allow Athens to delay repayments. It also rekindled fears of the debt crisis spreading to bigger European economies ‐ European markets were hit hard following the downgrade. Bond yields, which have an inverse relationship with prices, in Portugal saw on the biggest gains this year, …. ‐ Rating agencies defended their decisions. Moody’s said the agency provides “independent, objective assessments of credit risk on debt securities”
China raises rates for a fifth time – Pg. 2 ‐ China has raised interest rates for the fifth time in eight months, indicating the country’s leaders are still focused on taming politically sensitive inflation, despite evidence that the world’s second‐biggest economy is slowing ‐ Benchmark one‐year lending rates will be raised 25bps to 6.56% from today, while one‐year deposit rates will go up 25bps to 3.5%, … ‐ The rise suggests that inflation is likely to have accelerated to a three‐year high of more than 6% in June, well beyond Beijing’s comfort zone ‐ …double‐digit food prices rises, which hit the country’s poorest citizens the hardest ‐ One factor restricting Beijing’s ability to further raise interest rates is the mountain of debt racked up by provincial and city governments across the country ‐ China entered 2011 with a target of 4% inflation… ‐ Even after the rise to 3.5%, deposit rates in China remain negative in real terms
House Republicans stay defiant over tax rise plan – Pg. 2 ‐ (Prof Note: Politicians need to raise the ceiling and admit they have FAILED! Debt did not appear suddenly, the politicians have been pathetic , at best, in their jobs and now a crisis has arisen….I would suggest mass terminations…oh…wait…we cannot do that!)
Trichet looks to find way out of dilemma – Pg. 4 ‐ On the one hand, he wants to prevent the crisis becoming a threat to the eurozone’s stability. On the other, he sees the ECB’s crisis‐fighting role as near its political – and legal – limits ‐ A widely expected increase in the ECB’s main interest rate, from 1.25% to 1.5% is likely to be overshadowed as a result ‐ The ECB’s reasoning is simple: it is supposed only to accept “adequate” collateral from sound banks. Already, Greek government bonds are rated as “junk”’ it would be near impossible to maintain they were adequate collateral if the country defaulted ‐ Another escape route – especially if a selective default were shortlived – would be for Greece’s banks to obtain “emergency liquidity assistance” from the Greek national central bank, which it would authorize from Frankfurt
SEC pushes for China auditor checks to ease accounting fears – Pg. 13 ‐ US regulators will next week push for a deal that would allow them to inspect auditors based in China in an effort to ease rising investor concerns over the accounting of many Chinese companies ‐ Officials from the US Securities and Exchange Commission and Public Company Accounting Oversight Board plan to meet counterparts in Beijing to negotiate a deal ‐ The talks with China’s finance ministry and Securities Regulatory Commission will centre on allowing PCAOB inspectors into the country to review auditing firms as required under the Sarbanes‐Oxley law ‐ About 110 auditing firms based in China and Hong Kong are registered with the PCAOB ‐ The accounting board said talks aimed to strike a deal that would allow “joint inspections” ‐ …accounting discrepancies at Chinese companies listed in the US have raised concerns over diminished appetite among US investors to back small to midsize China groups
NYSE‐Deutsche Borse tie‐up set to clear US hurdle – Pg. 16 ‐ The proposal to create the world’s largest stock exchange is expected to clear its first and easiest hurdle today, with shareholders of NYSE Euronext likely to agree to a merger with Deutsche Borse. However, fears remain about the prospects for the deal in Europe ‐ DB faces stiffer challenge to win its shareholders’ approval. It has set a deadline of July 13 for shares to be tendered and needs three‐quarters of all shares to be submitted for approval
Fixed‐income trades suffer sharp fall as Fed ends ‘QE2’ – Pg. 22 ‐ Trading in fixed‐income securities such as corporate bonds and Treasuries fell to the lowest in two years in June ‐ The low volumes, coming amid still‐depressed equity trading, could weight on second‐ quarter results for financial institutions such as banks and exchanges, which start arriving next week ‐ Overall US bond trading averaged $777.8bn daily in June, a decline of 18% versus May and the lowest level since December 2009,…
Fears of fragility prompt rethink on the renminbi – Pg. 23 ‐ As concerns over the outlook for the Chinese economy intensify, currency traders have scaled down their bets that the renminbi will continue to strengthen against the dollar ‐ Investors have also ramped up purchases of hedges against the risk that Beijing could devalue its currency if the economy was to suffer an unexpectedly severe slowdown ‐ Since Beijing cut the renminbi’s de facto peg to the dollar in June 2010, policymakers have allowed the currency to rise 5.3% with little volatility ‐ While there are fears China’s property boom is about to collapse and local governments will end up defaulting on a large proportion of their $1,650bn in debt, most market participants reckon such an outcome is unlikely ‐ Non‐deliverable forwards (NDFs), which are linked to the renminbi but settled in dollars, have stopped moving in tandem with the renminbi’s rate of appreciation
6 July 2011
Currency wars ‘not over’ – Pg. 1 ‐ Brazil is preparing a range of additional measures to stem the damaging rise of the real as the global currency war shows no signs of ending, … ‐ …”struggles between countries” such as the US and China, and the global currency war was “absolutely not over” ‐ Slow growth and low interest rates in advanced economies continued to put upward pressure on Brazil’s currency,… ‐ On Tuesday, the Brazilian central bank announced a spot auction to buy US dollar in another move to boost foreign exchange reserves and stem the upward pressure on the real ‐ The Brazilian currency has been close to 12‐year highs against the dollar in recent weeks, but fell by 0.7% on Tuesday ‐ Brazil’s actions to limit currency appreciation highlight the dilemma faced by many fast‐ growing economies – including Turkey, Chile, Columbia, and Russia – since allowing currency appreciation limits domestic overheating, but also undermines the competitiveness of domestic industry ‐ Brazil has already instituted a number of measures, including taxing bond portfolio inflows, to try to curb the real’s appreciation ‐ The economy is forecast to grow by 4% this year after expanding 7.5% in 2010 ‐ Credit growth – at 15% this year – was lower than the 22% rate in 2010, he added, partly as a result of government restrictions on banks borrowing cheaply at low interest rates from the US
Temasek plans China bank sale – Pg. 2 ‐ Temasek, the Singapore state‐owned investment company, is selling its shares in two of China’s biggest banks to raise as much as $3.6bn, …. ‐ It is selling US$2.4bn of shares in Bank of China and about US$1.2bn in China Construction Bank, … ‐ News of the sale comes amid warnings of a worrying hole in china’s public finances that is likely to inflict damage on banks ‐ On Tuesday, Moody’s Investors Services said China may have understated the debt load of local governments by $541bn
Conservative anti‐tax advocate makes US deficit demand – Pg. 2 ‐ As Republicans and Democrats continue to engage in a game of brinkmanship over an increase in US borrowing authority, Chris Chocola is the man standing on the sidelines, urging conservatives not to blink
Finns talk tough on aid for Athens – Pg. 3 ‐ Finland has warned it will not provide further aid to Greece without collateral from Athens, highlighting the tough stance Helsinki intends to take in negotiations over a fresh bail‐out package for the crisis‐hit Mediterranean country ‐ Finish support for future bail‐outs was thrown into doubt when the anti‐euro True Finns party won nearly a fifth of the vote in April’s poll, from 6% at the previous election, highlighting growing resentment across northern Europe over taxpayer‐funded rescues for more fiscally profligate parts of the European Union
Booming Sweden raises rates – Pg. 4 ‐ Sweden’s central bank has raised interest rates for the seventh time in the past year as the Scandanavian country continues to experience the fastest economic expansion in western Europe ‐ Sweden last July became the first country in the European Union to start tightening monetary policy since the beginning of the global financial crisis and has continued to raise rates in an attempt to keep inflation and household borrowing in check ‐ Sweden recorded the strongest economic growth in the EU last year, at 5.7%, underpinned by a buoyant manufacturing sector and robust public finances
Land deal battle reflects Egypt’s dilemma – Pg. 5 ‐ The TMG case, seen in Egypt as the struggle of an ordinary citizen against a corrupt nexus of government and big business, epitomizes key economic policy dilemmas facing the country as it enters a new era after the revolution which toppled mr Mubarak ‐ Egypt needs sustained high rates of investment and economic growth to meet popular aspirations for “social justice”, a rallying cry of the revolt….unemployment soared to 11.9% in the first quarter of 2010, up from 9% in the preceding quarter ‐ There is little expectation the economy will return to former rates of growth until political stability has returned
UN: barriers to equality remain – Pg. 6 ‐ Women around the world are many steps closer to attaining economic and political equality – but there is still much work to be done ‐ Virtually every nation now has a growing cadre of professionally successful women, but also an increasing gap between those who are most and least prosperous ‐ Progress at the top has been especially striking in those countries that have introduced quotas favouring women in both politics and business ‐ …significant barriers remain for women to take their place as economic equals. In particular, the proportion of adult women in full‐time employment has flatlines over the past two decades: 53% of the world’s women were in work in 2009, unchanged since 1991. The report also identifies the continuing global gender gap, and notes that antiquated legal barriers remain in many countries – including 11 nations in which some jobs are restricted for being “against women’s morals”
Romance by default – Pg. 12 ‐ Debt defaults are a bit like falling in love. Sometimes there is a clear single moment: a flood of emotion, no money in the bank. But more often than not these new states of being creep in gradually ‐ The markets too are screaming “default” – the two‐year Greek sovereign bond is yielding 26%
CFTC data reveal day traders’ role in volatile oil markets – Pg. 13 ‐ …almost 95% of US crude oil futures volume generated by day trading or betting on arcane price relationships, suggesting long‐term bets on whether prices will rise or fall have little effect on energy price volatility ‐ The day traders who contribute to the majority of oil futures volume include so‐called high‐ frequency firms, which typically exit the market without a net position at the end of the day
Warning over diverging derivatives rules – Pg. 20 ‐ Proposed rules for derivatives trading could push up financing costs and create “material risks” for the global economy because of a lack of co‐ordination, the US and European Union have warned by the financial services industry ‐ The letter warns that the extraterritorial effect of separate legislative initiatives in the US and Europe could have “significant adverse consequences” for companies and for the wider global economy ‐ It also says overlapping rules will push up costs,… ‐ Proposed rules on derivatives trading are contained in the US Dodd‐Frank act, while the EU is bringing in a regime through freestanding legislation
5 July 2011
ECB ready to reject Greek downgrade – Pg. 1 ‐ The European Central Bank will continue to accept Greek debt as collateral for loans unless all four credit rating agencies it uses declare it to be in default,… ‐ The ECB would rely on the principle of using the best rating available from the agencies – Standard & Poor’s, Moody’s, Fitch and their smaller Canadian rival DBRS … ‐ S&P’s move knocked the euro and put bank shares under pressure as a week‐long rally in equities faded ‐ Fitch, the third‐largest rating agency, has also indicated it is likely to call a rollover a default. But Moody’s and DBRS have yet to comment ‐ The second bail‐out has already been delayed as countries haggle over how to get private holders of Greek debt to contribute to the rescue
Taste for fast cars and whisky casts China’s women in new light – Pg. 1 ‐ As western luxury brands rush to tap the Chinese market they are having to unlearn gender stereotypes associated with the products they sell ‐ Chinese women buy more whisky and fast cars than their western counterparts, …, while men purchase more face creams and bags
Strauss‐Kahn faces Paris sex case – Pg. 2 ‐ ..a female writer is to file a complaint for attempted rape against him, …. ‐ The prospect of the former IMF chief clearing his name in New York has led to speculation in Paris that he could yet try to win the Socialist party nomination to fight next year’s French presidential election against Nicholas Sarkozy ‐ Her claims date back eight years to when she was a budding journalist and allegedly agreed to meet Mr Strauss‐Kahn at a private apartment ‐ She claimed later that the politician tried to molest her
Battle heats up for resources as global warming opens Arctic – Pg. 2 ‐ Norway’s decision to move its military command centre 1,000km north from its former location last year highlights the rising strategic stakes in the Arctic amid predictions that global warming will unlock icebound resources and shipping routes ‐ The build‐up is fuelling fears of conflict in a region estimated to hold up to a quarter of the world’s undiscovered oil and gas
Greek bail‐out package holds ‘impossible knot’ – Pg. 3 ‐ When Greece passed a 28bn (euro) austerity package last week, it appeared that months of infighting had come to an end: Athens would get its next aid payment, avoiding sovereign default, and the European Union would sign off on a second, 120bn (euro) bail‐out to keep Greece solvent through 2014 ‐ Standard & Poor’s made clear on Monday that clearing the default hurdle could, for them, be an impossible knot indeed, warning that the most prominent French‐backed plan for bondholder participation would force them to declare a default
Problems flagged up – Pg. 9 ‐ In the past few years, many Chinese companies with only slightly more plausible business plans have sold shares to North American investors, taking advantage of the hype surrounding China’s growth and the fact that the reach of regulators does not extend across the Pacific. But in recent months, Chinese companies listed in North America have been rocked by a wave of fraud allegations that have led to dozens of suspensions and delistings from Nasdaq, the American Stock Exchange and the New York Stock Exchange ‐ Companies that conduct most or all of their business in mainland China accounted for 11 out of 12 companies whose shares were suspended from trading by Nasdaq as of July 4. More than a dozen others have been delisted or suspended from other exchanges ‐ ….why Chinese companies seem so susceptible to allegations of fraud ‐ This perfectly legal procedure allows a company with all its operations abroad to merge with an existing publicly traded US shell company and eventually raise money by selling shares to American investors ‐ The company’s ultimate goal is often to graduate from the bulletin board where it has merged with the shell to a bigger, more prestigious exchange such as the Nasdaq, where it can raise further funds ‐ Virtually all the companies mired in scandal today went public in the US through a reverse merger ‐ Some of the promoters and underwriters that are most active in bringing Chinese companies to market have a history of run‐ins with US regulators
US restaurants – Pg. 14 ‐ US personal consumption is slumping. Housing prices have double‐dipped, … ‐ …eating out less is everyone’s first suggestion ‐ Yet the habit has proved hard to break: restaurants represented just under 10% of total retail spending in 2006, ….in the past 12 months, the proportion is more than 10.5%
One in 10 European insurers fails test – Pg. 16 ‐ One in 10 European insurance companies failed to cope with a series of damaging financial market and economic shocks under stress tests carried out in recent weeks ‐ The results of the tests highlight potential vulnerabilities in the sector and foreshadow eagerly anticipated stress test results for the continent’s banking sector, expected this month, when groups that fail will be named and shamed
2 July 2011
Strauss‐Kahn free of bail terms – Pg. 1 ‐ The French political scene was in turmoil after Dominique Strauss‐Kahn was released from house arrest as New York prosecutors acknowledged that the sexual assault case against him had been weakened by doubts over the alleged victim’s credibility ‐ His supporters raised the prospect of Mr Strauss‐Kahn’s return to French politics, while snap opinion polls found strong popular support for a presidential bid from the man once tipped as the candidate most likely to beat President Nicolas Sarkozy in next year’s election ‐ The former head of the IMF walked out of court free from all bail conditions after the judge’s decision but his passport remains confiscated and the case has not been dismissed (Prof Note: I am so thrilled that justice continues to be served) ‐ The news was greeted with stunned amazement in France, where television and radio stations cleared their schedules to follow events live. The case has sparked fierce criticism of the US justice system, which is seen in France as having trampled over Mr Strauss‐Kahn’s presumption of innocence
Brazil’s soaring currency aggravates problems for Roesseff administration – Pg. 1 ‐ The Brazilian real has soared to a 12‐year high against the dollar, reigniting Brazil’s currency war fears and worsening the economic headache for President Dilma Rousseff ‐ The real traded at a high of 1.5523 versus the US currency on Friday, its strongest level since just after it was first floated in 1999,… ‐ Global equities had their best week for almost two years while benchmark Treasuries had their worst weekly performance in nearly two years as haven demand for US debt evaporated ‐ Brazil’s rapid economic growth and high real interest rates at nearly 6% make its markets a powerful draw for foreign investors ‐ Brazil has been a vocal critic of the ultra‐loose US monetary policy of “quantitative easing”, which it has blamed for pumping liquidity into the global economy. The US Federal Reserve this week ended its second round of the policy ‐ Much of this liquidity, Brazil argues, made its way into emerging markets such as in Latin America, inflating asset prices and forcing governments into defensive capital controls ‐ Central bank data show that foreign direct investment and higher commodity prices have accounted for most of the dollar inflows this year, rather than speculative investment ‐ The government has been willing to let the currency strengthen in recent months to combat rising inflation
Geithner adds to Obama debt woes – Pg. 2 ‐ Tim Geithner’s promise to remain as Treasury secretary until talks to lift the country’s borrowing limit are complete prompted a quickly stream of jokes in Washington that, given the state of negotiations, he might have a job for life ‐ Mr Geithner’s decision to signal his desire to quit comes at awkward moment for President Barack Obama,… ‐ As it grapples with the debt ceiling, the administration is also struggling to find new ways to spur the economy, which has slumped in recent months after showing promising signs of recovery earlier this year ‐ Aside from their impact on global financial markets, the debt talks also weigh heavily on the domestic economic debate – now Democrats fear that the Republicans will secure large cuts to government spending in the deal from the Obama administration, which will in turn slow the economy even further in 2012, just before the presidential poll
Global industry fortunes remain mixed – Pg. 2 ‐ The state of global manufacturing still appears volatile, with US figures for June showing faster growth for the first time in four months, and Europe and Asia slowing in the period ‐ In contrast, Chinese manufacturing fell to its lowest level since February 2009 and dipped close to 50 ‐ In the UK, slumping export orders and jobs growth pushed the country’s PMI to a 21‐month low
Rushed case falters in the face of credibility – Pg. 3 ‐ (Prof Note: there appears to still be DNA evidence which the prosecutor is referencing a s a source of strength. So, let us assume that DSK did have “sexual relations” with the hotel maid. The irony is, had he been a Seinfeld fan, he would have learned from George’s experience from his working days. It was “sexual relations” with a cleaning person that brought down George. We can all learn a little something, still, from Seinfeld)
June car sales dip as confidence fades – Pg. 8 ‐ US car sales softened unexpectedly in June under the weight of deteriorating consumer confidence and tight supplies in the wake of disruptions caused by the Japanese earthquake ‐ …total light‐vehicle sales dipped to 11.7m units at a seasonally adjusted annual rate, from 11.8m in May ‐ The Camry has held the number‐one spot for most of the past decade. Camry sales were down a quarter from June 2010 (Prof Note: When is China going to start making cars? They have 1.5bn potential purchasers!)
Record US crude sales eases global supply picture – Pg. 11 ‐ The US has sold the biggest ever amount of oil from its strategic petroleum reserve, following last week’s decision by western countries to release emergency stocks, underscoring the tight market for light, sweet crude ‐ The extra supply comes when as much as 1.5m barrels a day in production has been lost in Libya, a leading producer of low‐density crude that is easy to refine into petrol and diesel ‐ US demand for motor fuels has declined from a year ago as drivers recoil from high petrol prices and the recovery slows
Bank job cuts – Pg. 16 ‐ Banks are worried about the future again. But now they have higher fixed costs. In the US, for example, average compensation ratios have jumped by 4% of revenues since the beginning of 2009 ‐ …bosses care more about their personal fortunes (Prof Note: Truer words have never been spoken. It is disgusting but my 20 year career experience has proven that, in general, people care more about the size of their personal wallets than doing what is right for the organization that they have pledged to do what is right for!)
1 July 2011
US corn futures hit by bumper planting – Pg. 1 ‐ Corn futures have suffered their steepest fall in 15 years after record prices prompted US farmers to defy wet spring weather to plant a sharply increased acreage of the grain ‐ The decline in the corn (maize) price – if it persists – could help support the Federal Reserve’s view that the recently seen higher US inflation could be transitory ‐ Lower food prices could also bode well for the US economic outlook ‐ High prices have also begun to cut into corn consumption as meat producers shift to other feeds ‐ Corn has led major food commodities higher, rising 77% in the past year as demand from US, China and other big consumers threatened to run down supplies. It has contributed to rising meat prices, which in the US are 8.5% higher than a year ago
Royal family’s profit‐related pay plan sees no cuts at the palace – Pg. 1 ‐ …plan to put Queen Elizabeth on what might be seen as a profit‐related pay ‐ George Osborne, the chancellor, has proposed to do away with government grants to the royal household – first introduced in 1760 when George III agreed to transfer income from Crown lands to the government. They will be replaced with a 15% share of the profit that the Crown Estate pays into national accounts ‐ This would put the royal family in line to earn about $55m from the property portfolio when the first payment is made in April 2013, roughly the same amount it received from the government last year ‐ But it could result in a bumper pay‐out in a good year for the Crown Estate, which has a 6.6bn (pound) property and land portfolio that includes parts of London’s West End and the entire UK seabed up to 12 nautical miles offshore
Japan unveils social security reforms – Pg. 2 ‐ After fierce internal debate, Japan’s government and ruling parties agreed a plan to progressively double the 5% consumption tax by the middle of this decade in order to fund a reformed social security system ‐ By laying out a plan to fund rising welfare costs, the government hopes to maintain market confidence in a state with gross debt set to soar above 200% of gross domestic product this year ‐ While Japan has long defied predictions of looming fiscal meltdown and is easily able to domestically fund government borrowing, concerns about the scale of its fiscal deficit have grown amid sovereign meltdowns in Europe ‐ Rating agency Standard & Poor’s in April cut its outlook for Japan’s sovereign debt from “stable” to “negative”, citing concerns that reconstruction costs after the March 11 earthquake and tsunami would increase the fiscal strain ‐ The reform aims at achieving a “medium‐sized, high‐function social security system” in which a minimum income would be assured and other forms of taxation and insurance payment reformed in order to reduce economic inequality
US debt fears hit Senate recess – Pg. 6 ‐ Fears about the impact of a US default have prompted the Senate to cancel its July 4 recess so lawmakers can remain in session to attempt to strike a deal on fiscal policy ‐ President Barack Obama stepped directly into the negotiations this week and held a press conference on Wednesday to try to persuade Republicans to back some tax increases for the wealthiest Americans ‐ …the impact of the government being forced to cut spending by 44% overnight – and deciding which outlays, from interest to Social Security payments to veterans’ benefits, to honour first.
Graduates find internships outdo marks in labour market – Pg. 6 ‐ For the most recent graduates of US universities, getting a job has less to do with final marks and more to do with how they spent their summers for the previous three years ‐ In the US, it is common practice for interns to not be paid if they are receiving university credit. If not receiving credit, interns are often given a stipend (Prof Note: I ALWAYS have paid my interns at least $10/hour, credit or not. It is simply the right thing to do!) ‐ Some of the most prominent US companies have structured their full‐time recruitment strategy to emphasis the importance of university internship and corporate training programmes. ‐ In some industries, especially financial services, internships are one of the most crucial criteria to prove a candidate’s worth for the job within a competitive field,…
An alliance is built – Pg. 7 ‐ The US, by its own admission, does not have so much to show for its $20bn worth of help over the past 10 years and is increasingly stepping back into the bunker ‐ Some political analysts go so far as to refer to Pakistan as a “client state” of China and predict that the US will be displaced as the country’s long‐term ally ‐ Pakistan has made little secret about its fondness for Beijing ‐ China has a long history of helping Pakistan gain military hardware, notably of the kind it was denied by the west under sanctions imposed from 1990 in response to Islamabad’s nuclear weapons tests
US banks warned on cuts to risk staff – Pg. 13 ‐ US regulators are warning banks to protect their risk‐management staff and systems form any planned cost cuts as Wall Street grapples with a challenging year of meager results ‐ A slowdown in trading activity, falling asset prices, an uncertain economic outlook and a bevy of new financial services regulations have crimped profits this year, leaving executives with difficult choices on how deeply they slash expenses
Lloyds to cut 15,000 more jobs – Pg. 17 ‐ The cuts would help to generate a 12.4‐14.5% return on equity by 2014,… ‐ Unions slammed the job cuts, which come on top of 28,000 already made since the acquisition of HBOS in 2008,… (Prof Note: Hello, McFly!!! Where are most cost savings in an acquisition/merger…wake up!)
US Treasuries end quarter on sour note after jump in yields – Pg. 20 ‐ The US Treasury market has suffered a sharp sell‐off this week that has substantially eroded its first positive quarterly performance since the three months ending in September ‐ The rise in yields since then has reduced returns over the quarter by more than a percentage point ‐ July marks the start of the Federal Reserve no longer being a big buyer of Treasury debt after the end of the $600bn of bond purchases under its quantitative easing policy known as QE2. Institutional investors notably backed away from the $99bn in new debt sales this week and that has stoked concern that yields may rise further in order to accommodate the net $120bn of new debt sold every month by the Treasury in order to serve a $1,400bn budget deficit
Concern grows over ‘collateral swap’ deals – Pg. 21 ‐ Collateral swaps are simply a form of secured lending where one party lends liquid assets, such as top‐rated government bonds, to another and in return receives less liquid collateral to mitigate the risks ‐ In these arrangements the insurer lends a bank liquid securities such as government bonds, for which the bank pays a small fee, and in return the bank pledges highly rated but less liquid collateral such as mortgage‐backed securities – bonds backed by pools of loans – where the markets remain tainted by the “toxic” tag from the financial crisis ‐ The result is that the insurer gets a higher return on its safe but dull holdings and the bank gets liquid assets that it can repledge as collateral in places where its sticky securitization deals are not welcome ‐ …problem is the lack of transparency around the size or number, or even the duration of these deals
30 June 2011
Greece steps back from brink of default – Pg. 1 ‐ Greece has pulled back from the brink of default and averted a broader eurozone crisis after backing sweeping austerity measures in a knife‐edge parliamentary vote ‐ …tax increases and spending cuts ($40.4bn) ‐ Defeat could have resulted in the country being cut off from outside financial help – and in effect condemned to economic collapse ‐ In a day of drama in Athens, violent demonstrations outside the parliament building escalated after the vote, as demonstrators clashed with riot police
Pakistan shuts US out of drone base – Pg. 1 ‐ Pakistan has called a stop to US drone flights from a base that has launched strikes against Taliban and al‐Qaeda militants on its border with Afghanistan ‐ In the latest sign of US‐Pakistan tensions (Prof Note: Was it not Pakistan that asked China to build a Naval base in their country?) ‐ The White House, which refuses officially to acknowledge it carries out drone strikes in Pakistan, (Prof Note: Once again I looked to the foreign press to learn of US foreign diplomacy actions)
Obama warns of ‘headwinds’ if Congress fails to lift debt ceiling – Pg. 1 ‐ A failure by Congress to increase US borrowing authority by August 2 would have a “significant and unpredictable” impact on capital markets and the US economy,… ‐ …support of tax increases on wealthy Americans and the oil industry as part of a deal to reduce the deficit and raise the debt ceiling ‐ Mr Obama also flatly rejected suggestions by some Republicans that the US could simply pay interest on its debt. He questioned whether Republicans would agree to pay Chinese holders of US Treasuries before paying Social Security cheques or veteran benefits (Prof Note: Hmmmm….the Chinese are building a world‐class military and have their first aircraft carrier. Social Security recipients and veterans have walkers. I see a good argument for paying the Chinese first…besides the explicit and contractual agreement we have with the Chinese!)
Regulator in capital concession – Pg. 3 ‐ National regulators within the European Union should have “constrained discretion” to impose extra capital requirements on the financial institutions they oversee, … ‐ …legislation that will impose the new Basel III capital standards across the 27‐country bloc ‐ The UK, Sweden and five other countries have publicly protested, saying they want the flexibility to “goldplate” the regulations to protect their taxpayers from additional bank bail‐ outs ‐ The UK Independent Commission on Banking recently proposed forcing retail banking operations to hold top quality, core tier one capital equal to 10% of their assets – above the 7% minimum agreed by the Basel Committee on Banking Supervision last year
IMF warns US of debt ‘shock’ – Pg. 4 ‐ The IMF has warned of a “severe shock” to global financial markets if the US does not move quickly to increase its borrowing authority, adding pressure to Congress and the White House to clinch a deal on fiscal policy ‐ “these could take the form of a sudden increase in interest rates and/or a sovereign downgrade if an agreement on consolidation does not materialize or the debt ceiling is not raised soon enough” ‐ …Republicans and Democrats in Congress and the White House have so far been unable to break the political impasse surrounding fiscal policy, as they spar over spending levels and taxation ‐ In its report, the IMF said striking the right balance on fiscal policy represented the main challenge facing US economic officials. The fund said fiscal consolidation needed to proceed and losing fiscal credibility could be very damaging. It recommended that deficit reduction should begin next year – with the overall effort to include both spending cuts and tax increases through the elimination of special incentives and deductions ‐ The IMF is expecting the US economy to grow at a rate of 2.5% this year, accelerating to 2.7% in 2012 and 2013 ‐ Among the other risks to the outlook besides fiscal policy, the IMF cited the weak housing market, the potential for a commodity price shock, tight credit supply and Europe’s sovereign debt woes
China looks to Argentina as growing source of food – Pg. 4 ‐ China invested heavily in three big energy deals last year that have turned Argentina into one of China’s most important toe‐holds in resource‐rich Latin America, where it is seeking to secure energy and minerals – and now food – for its booming economy ‐ China has been increasingly active in the past five years in outsourcing agriculture, signing a series of overseas deals, including projects in Cuba, Russia, Venezuela, Brazil and Kenya, quietly spearheaded by Beidahuang, whose name means “Great Northern Wilderness” ‐ Officials deny the project is commercial colonization by China that turns Argentina – one of the world’s most efficient farming nations – into a far‐flung allotment (Prof Note: Hmmmmm….is that not what the US has done to so many nations but on a military basis?) ‐ The Chinese no longer appear to be interested in being simply Argentina’s top client in an agricultural goods market worth $4bh a year ‐ Argentina, the world’s biggest exporter of soya oil and third‐biggest of soyabeans, as well as one of the world’s top cereals producers, already sells 90% of its soya exports to China, though the relationship is marred by Beijing’s six‐month ban on soya imports last year, in retaliation for Argentine trade restrictions
Pending home sales up in US – Pg. 4 ‐ The inventory of homes for sale, many at discounts of 30% or more, has risen to a record high as homes in foreclosures flow on to the market
Pension tension – Pg. 9 ‐ …today’s one‐day stoppage by up to 750,000 teachers, lecturers and civil servants in Britain, over reforms to public sector pensions, raises fears that trade union militancy is suddenly being reawakened in a nation where it has long been dormant ‐ Yet is this not the country where Margaret Thatcher put unions to the sword in the 1980s, seeking to banish the “British disease” of strikes and shop‐floor obstructiveness with ever tighter legal restrictions and facing down stoppages including an epic, year‐long battle with Arthur Scargill’s National Union of Mineworkers? ‐ Since Lady Thatcher’s time, trade union membership and influence have waned. The number of working days lost to disputes in the year to March was the lowest since comparable records began in 1931 ‐ A civil servant retiring at 60 will now claim a pension for an average of 30 years – up from 20 years back in the 1970s, Mr Cameron said. He added that public sector workers’ retirement was being subsidized by those in the private sector, with taxpayers contributing more than two‐thirds of the cost – equivalent to 1,000 (pound) per household and rising ‐ …increase employee contributions, raise the retirement age (currently 60 in many cases) to 66 and switch public workers from final‐salary schemes into ones based on average earnings over a career ‐ Pay is being frozen for two years for all but the lowest‐paid state employees, while 400,000 jobs are expected to go by 2015‐16 ‐ Although membership has halved since 1970, unions still have much to lose in the public sector, where they represent 56.3% of the workforce compared with 14.2% in the private sector. Overall, they represent nearly 27% of employees – higher than in Germany, France,Spain, Greece and the US
BofA sets aside $14bn to cover loan claims – Pg. 15 ‐ …meet claims that loans packaged in mortgage‐backed securities leading into the financial crisis failed to meet underwriting standards (Prof Note: The U.S. Taxpayer bailed out BofA; are the u/w bonuses that were “earned” during the runup going to be clawed back? Just curious!) ‐ In so doing, the bank has paid the steepest price yet in its bid to put the crisis, and its disastrous acquisition of mortgage lender Countrywide Financial, behind it (Prof Immature Note: Recall that RIGHT HERE I stated the acquisition of Countrywide was a disaster and predicted BofA (whom I assumed was rational) would not go through with the acquisition!)
Fears rise of defaults by Chinese companies – Pg. 26 ‐ Having lent an unprecedented $33bn to Chinese companies over the past two years, international bond investors are increasingly contemplating their worst nightmare: the prospect of default ‐ …a growing number of Chinese companies listed on international stock markets have been accused of fraud ‐ …the interest rates demanded by investors to hold the bonds of almost any Chinese company have risen sharply in the past month ‐ High‐yield or junk‐rated bonds from the private sector have suffered worse than those issued by state‐owned enterprises, which tend to have investment‐grade credit ratings ‐ This year, Chinese companies, most of them from the property sector, have raised $21.5bn in international bond markets, up from $15.7bn in the whole of 2010 and an average of less than $3bn a year in the preceding 10 years, … ‐ Even “dim sum” bonds, international deals denominated in renminbi, have fallen in price this month for the first time in at least six months. But unlike the dollar market, the dim sum market has proved more hospitable to new Chinese issuers, with three companies selling such bonds this month ‐ Property developers, which have been forced to tap the offshore market for credit this year, are facing a particularly uncertain outlook,…
29 June 2011
Athens top of agenda for new IMF chief Lagarde – Pg. 1 ‐ Christine Lagarde, France’s finance minister, will next week take over as head of the IMF and will immediately face tough decisions on the troubled Greek financial bail‐out ‐ …she was appointed by consensus by the fund’s 24‐member board ‐ Ms Lagarde’s appointment was all but assured after the US and other big economie, including China, declared support for her on Monday and Tuesday.
Egypt court orders break‐up of councils – Pg. 3 ‐ A court in Egypt has ordered the dissolution of 1,750 local councils elected under Hosni Mubarak, the former president who was toppled by a popular uprising in February ‐ Protestors who brought down Mr Mubarak have been demanding the dissolution of municipal councils as a necessary step in the dismantling of his regime
California budget set to steer clear of tax rises as spending cuts top agenda – Pg. 4 ‐ California is preparing for deep cuts in public spending to close a $9.6bn budget deficit without tax increases ‐ The new budget, which includes $650m of cuts in support for the state’s universities,…. ‐ All 50 states except one, Vermont, must balance their budgets annually. A plunge in tax revenues since the recession has resulted in shortfalls since 2008. For fiscal 2012, which begins for most states on July 1, states face cumulative gaps of $86bn, …. ‐ Anti‐tax sentiment has meant spending for cone untouchable areas such as education and healthcare have been cut. ‐ States have also looked at reforming public pensions. New Jersey last week passed legislation that cut public worker benefits
A thinner throng – Pg. 7 ‐ It is America’s [Walmart] most dominant retailer and the world’s most domineering, having combined a downhome style with ruthless penny‐pinching to create a group whose $420bn of revenues last year were greater than those of any company in any sector anywhere ‐ As the place where one in every 10 retail dollars is spent, Walmart provides a compelling perspective on those deep changes affecting people who were once the world’s shoppers of last resort ‐ Walmart has more than 3,000 Supercenters and nearly 4,000 US stores in all, but their performance has lately been grim ‐ More profound shifts may be working against it, however, as consumers buy in smaller quantities, seek greater convenience and demand unprecedented price cuts ‐ …international business which now makes up one‐quarter of its revenues ‐ …no company retains its gravitational pull for more than a few decades. Take Sears, a one‐ time giant of the catalogue business, which has been fading slowly and sadly ‐ Last year shoppers spent more at Walmart globally than the world spent on buying oil from ExxonMobil or cars from General Motors, Ford and Chrysler combined ‐ Some 35‐45% of its domestic business is derived from households that earn less than $50,000 a year,… ‐ That is the poorest segment of the US population, hardest hit by unemployment and falling house prices ‐ …last year Walmart’s share of its merchandise markets fell for the first time in a decade, from 13.9% ‐ Walmart’s vast size makes it hard to grow, simply as a result of the law of large numbers…
UK banks warned to build capital before paying dividends or bonuses – Pg. 13 ‐ UK banks are facing increased pressure from regulators to use strong earnings to build up capital ahead of official requirements rather than making payouts to staff or investors ‐ The Financial Policy Committee, a new arm of the Bank of England, used its first press conference last week to highlight the need for “opportunistic capital building” … ‐ The Basel Committee on banking Supervision has given banks until 2019 to amass top quality “core tier one capital” equal to 7% of their assets,… ‐ The biggest banks will be hit with an additional surcharge of 1‐2.5% to protect them from damaging future losses ‐ The US Federal Reserve, as part of its stress testing process, has, in effect, limited dividends at large banks to 30% or less of anticipated earnings in 2011,…
Industry rides waves of buy‐out activity – Pg. 16 ‐ In Brazil, the chances are that if you eat a burger, go to college or travel to Miami, you will be putting money into the pockets of private equity firms ‐ Most of the large firms have already set up offices in Brazil,…
Chinese pullback raises doubts over commodities – Pg. 20 ‐ For the world’s biggest buyer of everything from cotton to iron ore, it has been an unusually quiet year ‐ Commodities traders and analysts say the drop in China’s imports is due to a number of factors, including credit tightening, slower economic growth, higher domestic production for a handful of raw materials, and a move to run down inventories, ‐ Tight credit conditions have also made it harder to borrow money to import commodities. The cash‐strapped atmosphere across the country, combined with high global prices for most raw materials, make it less attractive to hold large stocks of commodities ‐ New bank loans are down 12% this year compared to last year, and the government has hiked interest rates four times since October in an effort to control inflation ‐ The IMF has forecast Chinese economic growth will slow this year to 9.6%, down from 10.3% last year
28 June 2011
French lenders lead Greek debt plan – Pg. 1 ‐ European financial institutions have sketched out a plan to extend a substantial portion of Greece’s maturing sovereign debt for up to 30 years, as creditors coalesced around a French‐led replica of the Brady bonds used to bail out Latin America 22 years ago ‐ Greece has about 340bn (euro) outstanding, 100bn (euro) of which matures by the end of 2014 ‐ A special‐purpose vehicle would also be created into which banks could inject their Greek holdings
Afghan central bank governor flees – Pg. 1 ‐ The governor of Afghanistan’s central bank has fled the country in fear of his life after naming powerful individuals who benefited from a scandal at Kabulbank, the biggest lender ‐ Abdul Qadeer Fitrat told the Financial Tiems from a location in Northern Virginia that he had resigned his post and fled the US a week ago to ensure his safety (Prof Note: Whoa…that is close!)
Supreme Court ends ban on sale of violent video games to minors – Pg. 1 ‐ The US Supreme Court has backed the video‐game industry in the debate over whether violent games cause teenagers to act aggressively in real life ‐ In a key ruling, the court’s judges voted seven to two to strike down as unconstitutional a 2005 California law that banned the sale or rental to minors, backing the findings of lower courts (Prof Note: Thumbs up! Make parents be parents!!! Enough with the regulation! As a young boy growing up in the Caribbean I use to sit at the local bar while my grandmother shopped. I remember those days as very subdued!) ‐ He also said the state could not claim it was meeting the needs of parents who wanted to restrict their children’s access to violent videos. The industry’s rating system for games already largely accomplished that (Prof Note: Again…parents need to be parents!)
Europe urged to look at plan B – Pg. 2 ‐ European officials have begun debating contingency plans in case the Greek parliament fails to approve a 28bn (euro) austerity package, which will be voted on after a three‐day debate that began on Monday ‐ …signs of concern have been emerging from Berlin
Emphasis on explicit debt hides extent of China’s local liabilities – Pg. 3 ‐ Chinese local governments owe $1,650bn in debt, …. ‐ The sum is equivalent to about 27% of china’s economy and easily outstrips central government’s officially declared debt balance of less than 20% of GDP ‐ Local governments have accumulated an unprecedented mountain of debt in the wake of the 2008 financial crisis after Beijing opened credit floodgates, backing state‐owned banks to lend to state‐backed infrastructure projects ‐ The audit confirmed an explosion in borrowing in 2009 when outstanding local debt rose 62%. But it also showed that the government began to get a grip on the problem last year, with debt growth slowing sharply to 19% ‐ …China’s overall explicit debt load is about 70% of gross domestic product ‐ …some analysts believe the contingent liabilities of the government are much higher, once debts on the books of state‐owned enterprises and other entities implicitly backed by the state are included ‐ Barred from borrowing money, Chinese local governments have set up arms‐length financing vehicles in record numbers to circumvent rules.
Spectre of stagnating incomes stalks globe – Pg. 4 ‐ …prospect that the majority of their citizens will face years of stagnant wages ‐ Two questions are raised by the trends in household wages and incomes. What exactly is happening to incomes across advanced economies? And why? ‐ Starting in 1975, male US median pay has stagnated in real terms, while gross domestic product continued to rise rapidly ‐ In the US, the money flowed almost exclusively to the very richest ‐ The earnings of the US individuals with pre‐tax income in the top 1% accounted for 8% of the total in 1974, …. ‐ Rising inequality in almost all countries is being driven by trends in the labour market ‐ Exacerbating the rising income inequality has been a squeeze in the need for jobs demanding mid‐range skills.
Dreams die as good jobs fade – Pg. 4 ‐ Ms. Gordon says her essential monthly expenses leave her with almost no disposable income (Prof Note: Than lower your expenses….I am a firm believer expenses can ALWAYS be lowered!) ‐ The decline in median incomes has hit the American consumer, once the engine of the global economy
SEC shifts focus in pursuing individuals – Pg. 14 ‐ The commission sued Edward Steffelin, a manager at an investment advisory firm, alleging that he committed fraud but did not do so intentionally ‐ Defence lawyers have argued that the large losses in the crisis were the result of bad business decisions and not widespread fraud (Prof Note: I have yet to see the widespread terminations which should have resulted from these poor decisions!)
Central banks see shift from dollar – Pg. 20 ‐ The US dollar will lose its status as the global reserve currency over the next 25 years, according to a survey of central bank reserve managers who collectively control more than $8,000bn ‐ …predicted the dollar would be replaced by a portfolio of currencies within the next 25 years ‐ The result are the latest sign of dissatisfaction with the dollar as a reserve currency, amid concerns over the US government’s inability to rein in spending and the Federal Reserve’s huge expansion of its balance sheet (Prof Note: There should be concern…the US has yet to figure out basic accounting, i.e. long‐term revenue MUST exceed long‐term expense!) ‐ Holders of large reserves, most notably china, have been diversifying away from the dollar ‐ Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi ‐ The system should also make use of gold, Mr Zoelick added
US muni funding deals raise fear over hidden debt risks – Pg. 20 ‐ US municipal borrowers are increasingly turning to private debt deals for funding, raising fears over hidden risks in public debt ‐ Direct loans from banks and direct purchases of municipal securities by banks have enabled local borrowers to refinance billions of dollars of debt as public issuance has dropped ‐ The loans could contain terms that affect the borrower’s ability to pay its other debts, some of which are publicly issued, and fund operations ‐ Muni issuers are not required to disclose bank loans publicly, unless they later sell public debt ….
Downgrade worries hang over Treasuries – Pg. 21 ‐ A $100bn hit for investors. That is the price being put on the unthinkable: a downgrade of US debt should Republicans and Democrats fail to strike a deal on America’s debt ceiling ‐ …the world’s biggest and most liquid government bond market, at $10,000bn and growing, has a number of built‐in attractions, in particular its reserve currency status, that suggests it could shrug aside the loss of its top rating ‐ …given that the US Treasury market has more than doubled from $4,500bn since 2007, and faces a “daunting” budget outlook according to the Congressional Budget Office, there is growing concern that Treasury debt is on the path to losing its triple A rating ‐ This year, the ratio of US debt to the size of the US economy will approach 100% ‐ …federal debt will reach nearly 200% of gross domestic product by 2035 ‐ Given that about $4,000bn of Treasury debt is used as collateral across the financial system, any delay in raising the debt ceiling could upset the vital infrastructure that supports daily trading across bonds
27 June 2011
Economic growth must slow, warns BIS – Pg. 1 ‐ Global economic growth must slow to curb inflationary pressure around the world, the influential central bankers’ bank has warned, saying that there was little or no slack left for rapid non‐inflationary expansion ‐ …the scope for rapid growth closing, monetary policy should be quickly brought back to normal and countries should urgently to close budget deficits ‐ The spike in energy prices has cooled the global economy since January and led to fears for the recovery, culminating in the IEA’s release of 60m barrels of oil in the coming months ‐ Rising food, energy and other commodity prices underscored the need for central banks around the world to begin raising interest rates, perhaps even more rapidly than they brought them down, … ‐ The fact that interest rates have been so low for so long also introduces new risks into the world’s financial system even thought these policies were put in train initially by a desire to reduce risk,… ‐ The BIS’s recommendations are closest to the policy of European Central Bank, which is expected to raise interest rates for a second time in early July
Brussels eyes Tobin tax to aid EU coffers – Pg. 1 ‐ The European Union’s executive body is to purpose expanding its revenue‐raising powers, including new EU‐wide taxes, in its budget to be unveiled this week ‐ A tax on financial transactions or activity, a portion of which would be diverted into Brussels’ coffers, is a leading option under consideration by the European Commission, ….
Jittery investors quit Bangkok – Pg. 2 ‐ The prospect of Fresh political turmoil has prompted nervous foreign investors to dump Thai stocks ahead of next Sunday’s general election ‐ Overseas investors have withdrawn more than $1bn from the Thai stock market… ‐ Anxiety surrounding the July 3 vote has fuelled by recent opinion polls that suggest Ms Yingluck’s candidacy has given the opposition a very real chance of victory (Prof Note: Having just been in Bangkok a week ago, I will attest there is significant political controversy. There are signs with bulls heads saying a “no vote” for parliament) ‐ The primary concern is that there is going to be insecurity and large disruptions …. ‐ The Thai stock excahgne has fallen 5% since Puea Thai selected Ms Yingluck as its prime ministrerial candidate in May (Prof Note: Hmmmm…I was in Egypt in January and you see what happened…I was just in Bangkok…maybe a viable trading strategy is to short the equity markets for countries I visit!)
Obama to take over deadlocked talks to increase US debt limit – Pg. 4 ‐ The president has stepped in after negotiations broke down last week when Republicans insisted on large spending cuts but no tax increases as part of the deal ‐ Negotiations led by Mr Biden ground to a halt last week when several Republicans walked out of the talks. After Mr McConnell’s meeting on Monday, Harry Reid, the majority leader in the Senate, will head to the White House ‐ One sticking point was the Democrats’ idea that revenue had to be raised in addition to spending cuts
Ledger domain – Pg. 5 ‐ To draw a line under the country’s reckless boom‐time lending, the central bank is considering accelerating the disclosure of loans losses that are expected to hit Ireland’s financial institutions ‐ At present, banks that use one of the world’s two dominant accounting systems – International Financial Reporting Standards and US Generally Accepted Accounting Principles – need evidence that a loan or bond has soured before setting aside money to cover losses. This “incurred loss” impairment model was blamed for inflating banks’ profits – and the pay of bank executives – during the pre‐2007 boom by allowing them to disregard signs that future repayments might not be secure. Then, when conditions soured, the banks were left with too small a capital buffer ‐ ….”loan loss provisioning is one of the most challenging areas” of accounting reform… ‐ In the US, there tends to be a focus on the balance sheet, ….in the “expected loss” debate, this means an emphasis on making provisions early on. In IFRS countries, the focus is more on the income statement. This means a more staggered approach to provisioning, matching impairment with the recognition of income over the lives of the loans
If you want a better salary it really does pay to change jobs – Pg. 9 ‐ MBA graduates who looked for better‐paid jobs during the recent economic downturn were successful,… ‐ The biggest salaries were earned by those who had changed employers just once: their average salary three years after graduation was $135,600 ‐ Serial job hunters fared worst. Alumni who had worked for at least three companies since graduation were the lowest earners, reporting an average salary of $106,300
Threat of $100bn hit if US loses top rating – Pg. 13 ‐ Investors in the US government bond market could face losses of up to $100bn if the largest economy loses its triple A rating, …. ‐ A ratings downgrade that results in higher bond yields and lower prices could also mean the US Treasury paying $2.3bn ‐ $3.75bn a year more in interest on financing a $1,000bn annual budget deficit ‐ Treasury yields do not currently reflect concern about the US losing its top rating ‐ While the threat of a US downgrade is remote, it remains a possibility given the projections of large long‐term deficits and the impasse over raising the $14,300bn Treasury debt ceiling
It’s back to the 1980s as privatization fever takes a grip – Pg. 14 ‐ Firs the downturn then the sale of state assets – it is like a rerun of the 1980s ‐ Privatization is again sweeping the world with governments hauling in a record $213bn in revenues last year in a massive sale of everything from ports to phones and gambling companies to gas groups ‐ The US was the surprise leader in a stellar year for state sell‐offs in 2010 ‐ But …highlights several differences with previous surges in privatization o First, many of the largest deals last year were governments rushing to offload stakes in bailed‐out companies; more than half of the US total was raised through sales of Citigroup shares o Second, the most active purchasers have been big institutional investors and sovereign wealth funds rather than the retail shareholders that bought into denationalized companies in the 1980s o Third, there were several big infrastructure sales last year but many of the deals involved the sale of long‐term contracts rather than entire assets o Fourth, the Chinese, Indian and Polish governments were involved in a number of sell‐offs, partly aimed at promoting their capital markets
Buyers told to beware on Asian M&A – Pg. 14 ‐ Advisers are warning companies looking for growth through acquisition that deals in the Asia‐Pacific region are as likely to fail as succeed ‐ Failure is defined by the survey as a share price fall of more than 7% in the 12 months following the acquisition compared with the sector as a whole, and success as a gain of more than 7% ‐ …growth has slowed as Asian companies have realized their worth to western buyers looking to enter emerging markets – and prices have risen
25 June 2011
China in threat to block Airbus deal – Pg. 1 ‐ China has threatened to derail a multibillion‐dollar deal for 10 Airbus superjumbo aircraft, escalating its protest against Europe’s plan to bring international airlines into an emissions trading scheme ‐ Hong Kong Airlines has been due to formally announce an order for 10 A380 aircraft at the Paris Air Show earlier this week,… ‐ China and the United States oppose the European Union’s move to force all airlines flying int the 27‐member bloc to pay for their pollution ‐ China has denounced the EU proposal as a violation of national sovereignty that also contravenes aviation industry norms ‐ …estimates that the scheme would cost Chinese airlines $126m next year, …
Rising college drop‐outs hope to learn a lesson from Zuckerberg and Gates – Pg. 1 ‐ An increase in the number of students dropping out of US universities to follow their dreams and launche start‐up companies in Silicon Valley may be the latest sign of an internet bubble,… ‐ …famously successful non‐graduates such as Bill Gates at Microsoft, Steve Jobs at Apple, and Mark Zuckerberg at Facebook
ECB approves Draghi as next chief – Pg. 2 ‐ Mario Draghi, head of the Bank of Italy, was formally approved as the next head of the European Central Bank on Friday, but only after European leaders pressured the bank’s other Italian board member to promise to leave his position to make way for a Frenchman
Obama set for critical talks on raising the debt ceiling – Pg. 3 ‐ Talks on raising the US debt limit will enter critical new state next week when Barack Obama, the president, engages in direct negotiations with Congress ‐ Both sides said the talks identified more than $1,000bn of potential cuts over the next decade
US recovery struggles to take off as inflation rises – Pg. 3 ‐ US economic growth was revised up slightly to 1.9% in the first quarter as businesses restocked inventories and the trade gap narrowed, but the figures confirmed a stalling recovery and pointed to rising inflation in the world’s biggest economy ‐ Consumer spending grew at an unrevised 2.2%, compared with a stronger 4% increase in the fourth quarter
Asset prices and US economy diverge – Pg. 11 ‐ The US recovery is officially two years old next week. But as it enters what one analysts calls the “terrible twos”, there is a striking divergence between America’s economic performance and that of asset prices ‐ Economic growth, as measured by nominal gross domestic product, unadjusted for inflation, is the weakest of any recovery in the past nine decades,… ‐ But the picture is very different for asset prices. Commodities, until recently, had enjoyed their strongest ever performance in a recovery. Even after their slippage only the 1914 recovery saw faster growth in commodities prices in the past century. ‐ The S&P500 is down 4.3%, its first quarterly fall in a year. Commodities have fallen 8.2%, ….
24 June 2011
Oil release shocks markets – Pg. 1 ‐ Oil prices dropped more than 7% after western nations released the biggest amount of oil from their emergency strategic stocks since 1991, in a warning shot aimed at Opec, the oil producers’ cartel ‐ The IEA agreed to release 60m barrels of oil in the coming month to offset the daily production loss of 1.5m barrels of high‐quality oil from Libya, which is engulfed in a civil war ‐ The US led the release with its special petroleum reserve providing 50% of the crude oil. Japan, Germany, France, Spain and Italy are providing most of the rest ‐ This is only the third time in the history of the IEA – set up in 1974 as a counterbalance to Opec after the Arab oil crisis – that there has been a release. ‐ The US SPR has a record 727m barrels
Chinese premier declares inflation victory – Pg. 1 ‐ Chinese premier Wen Jiabao has declared victory over domestic inflation, saying that the government has successfully reined in price pressures ‐ Consumer price inflation has been rising since the middle of last year, reaching a 34‐month high of 5.5% in May. Politically sensitive food prices have been the main driver of headline inflation, rising more than 10% year‐on‐year in each of the past five months. Food inflation hit 11.7% in May, feeding fears that persistent price rises could exacerbate social tensions ‐ Beijing has been tightening credit conditions over recent months, raising interest rates on four occasions
Heat turned up in deficit talks – Pg. 2 ‐ Republicans have upped the stakes in negotiations over increasing the limits of US borrowing, walking out of the talks and demanding that President Barack Obama step in to resolve an impasse over taxes ‐ Global financial markets had so far been reassured by statements from both the White House and Republicans that they wanted a deal before the debt ceiling of $14,300bn is reached on August 2, but that could change if the talks stall
West’s action sends clear signal – Pg. 3 ‐ The action – and its timing – is a clear signal that, in the absence of any official action from Opec, the oil‐producing cartel, to pump more crude, western nations are prepared to act to help alleviate global supply problems ‐ It also raises question over the agency’s use of its strategic reserves,… ‐ Although the IEA’s role is not to manipulate prices, several said that they saw it as a more of a policy move designed to bring down commodity prices at a time when western governments are struggling with unemployment that remains high and consumers that are hurting from high commodity prices ‐ A decision to release strategic stocks has been taken only twice before – in 1991 when western allies attacked Iraq in response to its invasion of Kuwait, and in 2005 after hurricane Katrina – and the IEA can only release its reserves in response to stoppages in supply
Fed strengthens defences with call for banks to detail exposure – Pg. 4 ‐ US regulators have stepped up monitoring and contingency planning in their efforts to make sure the domestic financial system is ready for any crisis in Greece, … ‐ Regulators have asked banks about their direct and indirect exposures to Greece, for details of credit default swaps they have written on European banks, and about any scenario planning that they have carried out ‐ US banks have also been reducing their exposure to other “peripheral” European countries, regulators have learnt, giving bank supervisors some confidence that the US financial system could ride out broader turmoil across the Atlantic ‐ Mr Bernanke said: “A disorderly default in one of those countries would no doubt roil financial markets globally. It would have a big impact on credit spreads, on stock prices and so on.” ‐ One area of concern is the Federal Reserve’s dollar swap lines with European central banks, which are due to expire on August 1 ‐ One concern is the exposure of money market funds to short‐term debt issued by Euroepan banks that in turn have exposure to Greek credit ‐ If there were a disorderly default in Greece, it would present the first test of the new, so‐ called macro‐prudential approach to financial regulation that was adopted in the aftermath of the 2008 financial crisis ‐ Macroprudentail regulation aims to consider the risks that individual banks might pose to the whole financial system as well as to the institutions themselves
How China plans to reinforce the global recovery – Pg. 9 ‐ China has moved swiftly to fight the financial crisis, adjusting macroeconomic policy to expand domestic demand, and introducing a stimulus package to maintain growth, advance reform and improve people’s lives. By taking these steps, difficulties and laid a solid foundation for China’s development ‐ China’s gross domesticThe thrust of China’s respse to the crisis is to expand domestic demand and stimulate the real economy, strengthen the basis for long‐term development and make growth domestically driven. ‐ Between 2008 and 2010, China’s gross domestic product grew at an annual rate of 9.6, 9.2 and 10.3% respectively. ‐ The thrust of China’s response to the crisis is to expand domestic demand and stimulate the real economy, strengthen the basis for long‐term development and make growth domestically driven. We have implemented a two‐year $618bn investment programme covering infrastructure development, economic structural adjustment, improving people’s well‐being and protection of the environment ‐ China has made capping price rises a priority and introduced a host of targeted policies
Indian overseas investment doubles – Pg. 16 ‐ Investments by Indian companies overseas have more than doubled in the past year, highlighting their widespread expansion outside of their fast‐growing but corruption‐ stricken home market ‐ The Reserve Bank of India on Thursday released data showing that foreign direct investment by Indian multinationals surged to $43.9bn in 2010‐11 fiscal year, compared with $18bn in the previous year ‐ The central bank said that the rise reflected regulatory liberalization – such a greater freedom to invest overseas – to allow leading Indian companies to globalize. It also reflected the drive by many Indian companies to raise capital more cheaply overseas at a time when rupee borrowing costs in India are rising ‐ The heightened outward investment comes as concern deepens that Indian companies are not investing sufficiently in their domestic market
Treasury yields signal deflation risk – Pg. 20 ‐ The US bond market raised the odds of renewed deflation risk on Thursday, with a key benchmark Treasury yield falling below the current core rate of inflation ‐ The decline in Treasury yields on Thursday came as oil prices tumbled and eurozone debt contagion fears flared again
HK to start daily renminbi benchmark – Pg. 20 ‐ Hong Kong will start settling a daily benchmark price for the renminbi against the dollar next week, boosting the fast‐growing offshore market in the Chinese currency ‐ Market participants have been pushing for a daily fixing rate for the renminbi since last summer when the Chinese currency became freely tradable in Hong Kong following landmark reforms ‐ The new reference rate will be an “essential element for the further expansion of Hong Kong’s renminbi offshore businesses”, … ‐ The People’s Bank of China, the central bank, provides a daily fixing for the tightly controlled onshore renminbi exchange rate, but until now there has been no such benchmark for the offshore market ‐ The fixing will be calculated each day at 11am Hong Kong time by averaging the rates provided by the banks, after excluding the highest and lowest two quotes ‐ Trading in renminbi forwards averages an estimated $400m each day ‐ International use of the renminbi in cross‐border trade deals surged from almost nothing over the past two years as China introduced a series of reforms designed to reduce the country’s reliance on foreign currencies, in particular the US dollar ‐ Hong Kong, a special administrative region of China with its own laws and open to international investors, was chosen by Beijing as the launch pad for the renminbi’s expansion beyond the mainland ‐ Renminbi deposits in Hong Kong totaled Rmb510bn at the end of April, according to the Hong Kong Monetary Authority, a fivefold surge from a year earlier
23 June 2011
Fed holds rates on inflation concerns – Pg. 1 ‐ The US Federal Reserve gave a downbeat assessment of the world’s largest economy on Wednesday, pointing to slower than expected growth and higher inflation ‐ ….FOMC stripped out all reference to “subdued” measures of underlying inflation and said the economy is growing “somewhat more slowly than the Committee had expected” ‐ The Fed cut the centre of its forecast range for 2011 growth from 3.2 to 2.8%. It also trimmed its 2012 forecast from 3.85 to 3.5%, suggesting that it expected fiscal tightening next year to be a drag on growth ‐ …..no hint that the central bank will consider further asset purchases, or “quantitative easing”, to stimulate the economy ‐ The Fed said that interest rates would remain on hold at 0 to 25bps for an “extended period” and it would continue to reinvest in its securities portfolio. That will keep the Fed’s balance sheet at about $2,800bn (Prof Note: Great examination question!) ‐ The change in tone on inflation acknowledges that core prices, which exclude food and energy, rose strongly at an annualized rate of 2.5% in the three months to May ‐ Equities steadily lost stream and the dollar climbed as investors reacted to the Fed’s revised outlook. The S&P 500 closed down 0.6%. The dollar index was up 0.4% late in New York
Watchdog voices concern on debt burden – Pg. 2 ‐ The US federal debt burden will more than double over the next 25 years and pose a serious threat to economic growth, unless there is a significant shift in likely tax and spending plans, … ‐ …plausible scenario for tax and expenditure policy would see a persistent current deficit driving the federal debt from about 70% of gross domestic product now to nearly 190% by 2025 ‐ The office makes two predictions: an “extended‐baseline” scenario predicated on the continuation of the current structure of taxes and spending , and more realistic “alternative scenario” ‐ The alternative scenario assumes tax cuts first made in 2001 and recently extended will be extended further, and that the so‐called “alternative minimum tax”, a provision to ensure highly paid Americans contribute at least a certain proportion of their income to the government, will again be adjusted to prevent it affecting more lower‐income households
US households face tax rises, says study – Pg. 2 ‐ US households face higher taxes or lower government spending that will persist for decades in order to meet unfunded public pension promises,… ‐ Without policy changes, each household faces an additional tax bill of $1,400 a year above any rise in revenues from economic growth,…
Fewer fall behind on US home loans – Pg. 2 ‐ Fewer home owners are falling behind on mortgage payments, helping to cut the number of distressed homes on the market of soon to be listed for sale,…
Default scenarios go from bad to worse in world of uncertainty – Pg. 5 ‐ Bond investors are already pricing Greece’s government debt as though it has defaulted ‐ Disorderly default ‐ Orderly default ‐ Staggering on ‐ Leaving the euro (Prof Note: Do not discount this possibility! Look at the history of Greece as it is long a defaulting nation!)
Brazil’s state lender eyes Asia office – Pg. 6 ‐ The Brazilian Development Bank, which is larger than the World Bank, is considering opening an office in Asia to support the international expansion of the country’s top companies ‐ The world’s second largest development lender after the China Development Bank, BNDES has been one of the pillars of Brazil’s rapid economic growth in recent years, doubling its loan book to $230bn between 2007 and 2010
China repo rate at 3‐year high – Pg. 22 ‐ China’s most important gauge of short‐term funding costs has risen to a three‐year high, illustrating the severity of the government’s monetary tightening and the stress it is placing on businesses ‐ The seven‐day repurchase, or repo rate, hit 8.9% on Wednesday, up more than 500bps from its average in May ‐ With companies accounting for about 60% of China’s gross domestic product, their troubles could lead to wider fallout for the economy ‐ The central bank acted after Chinese inflation hit 5.5% in the year to May, just shy of the three‐year peak
22 June 2011
Greeks turn savings to gold amid fears of default and run on banks – Pg. 1 ‐ Greek citizens are emptying savings accounts and buying gold as they brace themselves for the possibility of a sovereign default and a run on the banks ‐ Sales of gold coins have soared as savers seek a safer and fungible source of value ‐ Monthly bank withdrawals were running at $2.2bn ‐ $2.9bn in the first quarter ‐ Others put their savings into land when prices fell after Greece’s first European Union‐led rescue last year
IMF warns Spain of setbacks – Pg. 2 ‐ The repair of Spain’s crisis‐stricken economy is incomplete and the risks of further setback are “considerable”, the IMF said Tuesday, amid continued nervousness in the eurozone over possible contagion from the Greek crisis ‐ …IMF mission credited the Spanish government….with its moves to cut the country’s budget deficit, restructure the banking system and agree a draft reform of the pension system ‐ The IMF predicted a modest export‐led recovery and said growth was expected to rise gradually to reach 1.5‐2% in the medium term. But it pointed to “downside risks”, including further stress in the financial system – reflecting rising concerns about sovereign risk in the eurozone – that would feed back into the real economy
G20 set to avoid tough decisions – Pg. 3 ‐ The G20 group of leading nations is set to sidestep the most contentious issues in global agricultural policy, including biofuel subsidies and export bans, as a deep split hampers efforts to reach a broad agreement at this week’s first meeting of the group’s agriculture ministers ‐ …countries such as US, Russia, Argentina, the UK, France and Brazil are divided about how to respond to record high food prices around the world ‐ …fact that the debate on biofuels is pitting the US and Brazil, which transform corn and sugar cane respectively into fuel, against France, the UK and several developing nations
A road less travelled – Pg. 7 ‐ Except during demobilization from a world war, no British government had ever tried such radical surgery to the state. No other country in the world is willingly embarking on something so ambitious ‐ The backdrop to Britain’s austerity debate is the global financial and economic crisis of 2008‐09. In the decade to 2007, UK gross domestic product per person had grown faster than for any other member of the Group of Seven leading developed economies, generating expectations of continued rapid expansion and buoyant tax revenues to support a rapidly rising public expenditure ‐ But as the recession hit and real output plunged by 6%, so did tax receipts, leading to the largest peacetime deficit Britain had ever experienced ‐ By mid‐2010, the government borrowed one in every four pounds it spent, while borrowing exceeded 11% of the national income and public sector net debt grew more in sterling terms in the two years of 2008‐09 and 2009‐10 than in the entire time from the “glorious revolution” in 1688 to Labour’s general election victory in 1997 ‐ Apart from pensioners and recipients of overseas aid, who have been spared pain, austerity is spread widely – hitting the rich through higher taxes and the elimination of benefits for children, the poor through lower annual increase in benefits and curbs on housing and employment subsidies, students through the elimination of most state support for tuition and everyone as a result of cuts to many services ‐ Unemployment at 7.7% has been stable despite the stagnation. Tax revenues have also remained on track in spite of weak growth in output
Bank book values – Pg. 12 ‐ …bank of America and Citigroup are trading at half and two‐thirds of book value respectively ‐ In theory, if reported book values (total assets minus liabilities) are accurate, there is an easy arbitrage. Buy at a discount, liquidate the balance sheet at book and pocket the difference ‐ Roughly half of Japan’s Topix index has traded below book value seemingly forever ‐ But for banks, book value is the small difference between two large numbers. Market values can shift quickly, especially when there is no trust (post‐bubble Japan) or visibility (US mortgages and other loans today)
Madoff’s yacht in the Monaco sales – Pg. 13 ‐ The 90ft powerboat, “one of the fastest ever built”, is being discreetly offered for $4.3m this week… ‐ The price tag makes the boat, the “Bull”, the most valuable item from Mr Madoff’s personal fortune to be auctioned in order to raise money for victims of his $65bn Ponzi scheme (Prof Note: I am offended, “personal fortune”, how about stolen funds held in private accounts!) ‐ The boat can sleep up to six guests and includes an “owner’s stateroom”.
Sino Forest is hamstrung by its secrecy – Pg. 14 ‐ While Sino Forest defends itself against accusations of fraud, it is hamstrung by a critical weakness: it is either unable or unwilling to identify the trading partners at the heart of its business (Prof Note: Is this not what Ponzi did? Fail to identify his trading partners? See attached….is Sino a Ponzi?) ‐ The real concern is to whom exactly the company sells its trees (Prof Note: This was EXACTLY the concern for Ponzi….to whom was he exchanging international postage for capital?) ‐ Sino Forest sells standing timber to so‐called authorized intermediaries. A legacy of rules that used to limit foreign companies’ ability to trade directly, the company says, these partners are responsible for paying taxes on timber transactions ‐ Naming these partners would perhaps allow others to replicate Sino Forest’s business model of investing in timber rights then selling the trees on to the thinly capitalized trading partners a few years later (Prof Note: This is EXACTLY Ponzi’s argument!)
Shell floats plan to harvest stranded gas – Pg. 17 ‐ The breakthrough – floating liquefied natural gas terminals – will enable gas to be recovered from fields that were in the past considered too small or too far offshore to warrant the infrastructure required to pipe the gas onshore to LNG plants
Beijing to double gold Panda output – Pg. 20 ‐ China’s central bank will produce more than double the quantity of gold Panda coins this year than it had planned, in response to a surge in buying from Chinese investors (Prof Note: As a gift, Wilson, the private equity investor in China gave me a silver panda at our first meeting. )
21 June 2011
IMF ties Greek aid to bail‐out pledges – Pg. 1 ‐ The IMF is blocking a critical $17bn aid payment to Greece just weeks before it is due, insisting it cannot go through without concrete assurances from European officials on a new Greek bailout ‐ Recent public commitments stating the European Union would ensure Greece remained solvent through next year were thought to be enough to secure the backing of the IMF, due to disburse 3.3bn (euro) of the aid payment ‐ Concern over the Greek crisis has caused mounting alarm in the US. ‐ IMF policy prevents it from disbursing aid to a country that cannot pay its bills in the next 12 months
Walmart ruling hands big victory to business over class action suits – Pg. 1 ‐ The US Supreme Court has handed a significant victory to business by ruling that a sex discrimination case against Walmart cannot go ahead, a decision that could make it harder to file class action lawsuits against corporations ‐ The case was of vital importance to business because it was the first time in more than a decade that the court had considered the standards that plaintiffs needed to meet to mount class actions ‐ Walmart which employees more than 2m people worldwide, was accused of payig women less than men and of passing them over for promotion in the US
China uses extra rights to lure riot informers – Pg. 5 ‐ …police notice…offered rewards to individuals who provided information on suspected rioters, including up to $1,545 in cash, a “good citizen” award, and for migrant workers, a local household registration ‐ The offer of residency rights is particularly attractive because China’s outdated household registration, or hukou, system grants access to education, healthcare and other social benefits only to local families ‐ It has been criticized for depriving an estimated 153m migrant workers of basic rights and fuelling social discord
Paulson fund loses $500m on Sino stake – Pg. 15 ‐ Paulson & Co has lost more than $500m after selling its entire holding in Sino Forest, the Chinese forestry company fighting allegations of fraud ‐ Paulson & Co was the largest shareholder in Sino Forest…
JPMorgan and RBS sued over sales of mortgage‐backed bonds – Pg. 15 ‐ JPMorgan Chase and Royal Bank of Scotland have been sued for more than $800m by the US credit union regulator for alleged mis‐selling of mortgage‐backed securities in the first of an expected series of lawsuits seeking to recover “billions” of dollars ‐ In court filings, the NCUA said the sellers, issuers and underwriters made “numerous material misrepresentations” in the offering documents, which “caused the corporate credit unions that bought the notes to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial” ‐ The NCUA, which guarantees credit unions’ funds much like the FDIC guarantees bank deposits, is continuing to try to settle its claims with other banks out of court
Doubt cast on BATS purchase of Chi‐X – Pg. 17 ‐ The UK’s Office of Fair Trading has referred the proposed acquisition by BATS Global Markets of Chi‐X Europe, a pan‐European share trading platform, for further scrutiny, throwing the tie‐up into uncertainty ‐ The move is a sign that competition authorities in the US and Europe appear to be flexing their muscles as a wave of exchange mergers is challenging longheld assumptions about the appropriate level of competition in market structures such as trading platforms ‐ After the London Stock Exchange, Chi‐X Europe and BATS Europe, the European platform operated by US‐based BATS Global Markets, are the two most popular MTFs for trading UK equities. Chi‐X has about 21% of trading in FTSE 100 stocks, with BATS on 6.6%, …. ‐ If the UK’s Competition Commission approves the BATS‐Chi‐X deal, it would create a platform trading more stocks on a pan‐Eurpean basis than Euronext, and just behind the LSE. It would value BATS at $1.2bn
20 June 2011
Brazilians take up slack in luxury yacht market as Europe runs dry – Pg. 1 ‐ Ferretti, the Italian luxury yacht builder….company plans to boost its Brazilian workforce from 600 to 1,000 and increase sales by up to 15% annually during the next three to four years… ‐ Brazil is fast becoming one of the top new investment destinations for the yachting industry thanks to surging salaries, the country’s 7,400km of coastline and year‐round warm weather ‐ Revenue from the Mediterranean region is only a third of what it was before the global financial crisis hit
US budget talks hit tense stage – Pg. 2 ‐ Budget talks between the White House and both parties in Congress enter an intense phase this week, with all sides expecting them to go beyond the initial early July deadline set for resolution ‐ The Treasury department has warned that in the absence of a deal to lift a debt ceiling, the US could default on its debt, damaging irreparably the creditworthiness of the world’s reserve currency and potentially plunging a sputtering economic recovery into a new recession ‐ At the least, the sides could agree a short‐term increase in the debt limit to the beginning of next year, ….
Brazil credit bubble fear as defaults rise – Pg. 2 ‐ Consumer defaults in Brazil are expected to increase by a third by the end of this year, …fueling concerns over a boom in lending that some economists fear could turn into a credit bubble ‐ The level of loans overdue by 90 days has risen rapidly in recent months to 6.1% and is expected to reach 8% by the end of December,… ‐ The growing number of defaults in Brazil comes as lenders in emerging markets from India to China and eastern Europe are braced for an increase in consumer bad loans ‐ In most countries, defaults are coming off a cyclical low, but credit quality is expected to come under pressure again as central banks increase interest rates to fight rising inflation ‐ State Bank of India, the country’s largest bank, … ‐ In Brazil, while consumer defaults remain low by its historical averages of more than 10% and are still considered to be within reasonable levels, they are higher than in most other emerging markets ‐ Brazil’s central bank has increased interest rates five times this year to 12.25%, to cool inflation that is exceeding the upper limit of its 6.5% target ‐ Brazil’s rapid economic growth has lifted more than 30m people out of poverty in recent years ‐ Brazilian banks expected double‐digit increases in credit growth this year, in spite of charging an average interest rate of 39%
Exodus leaves its mark on Tokyo – Pg. 5 ‐ For a section of Tokyo’s large foreign community, however, life is far from normal. Many fled the city after the disaster and, while most have returned, a second exodus appears to have started, particularly among those with young families ‐ About 80% of expat professionals left Tokyo immediately after the disaster,… ‐ Such concerns have driven fresh demand for skilled expatriate staff in Tokyo,… ‐ …agencies see a shift in the type of customer seeking homes. While expat families are leaving their big, four‐bedroom homes, which are let for more than $18,700 a month in upmarket areas, new tenants tend to be couples without children and single people ‐ With record demand from foreign residents wanting to leave Japan, the relocation business is booming
Siemens chief warns on US skills shortage – Pg. 5 ‐ A mismatch in the US labour market between the skills of unemployed people and the jobs available is making it hard for some companies to find the right staff despite an unemployment rate of more than 9%, … ‐ The US labour market does not in general show signs of tightness: the average wage growth in the year to the first quarter of 2011 was just 2%
18 June 2011
Berlin concedes on Greece rescue – Pg. 1 ‐ Germany has backed down from its confrontation with the European Central Bank over bondholders’ participation in a new Greek rescue plan, throwing its weight behind a voluntary roll‐over of Greek debt rather than a full‐scale debt exchange with extended maturities ‐ US stocks broke a six‐week losing streak, the euro appreciated against the dollar and US Treasuries – a safe haven beneficiary from the recent bout of nervousness over Greece – edged down ‐ …Moody’s warned it was placing Italy on review for a possible downgrade of its credit rating, citing challenged for economic growth due to structural weaknesses
China’s army of migrant workers grows restless – Pg. 2 ‐ In the past two weeks, China’s southern industrial heartland of Guangdong has been shaken by two large and violent protests sparked by separate and seemingly unrelated incidents ‐ …the standoff between police and angry citizens quickly descended into violence. In both cases the rioters were mostly workers who had migrated from the Chinese countryside ‐ For the communist party, the common thread linking these apparently isolated incidents represents one of the most pressing problems it faces on the eve of its 90th anniversary on July 1: the plight of millions of poor migrant workers ‐ The extraordinary growth in the Chinese economy over the past 30 years has been driven by rapid urbanization and a seemingly endless supply of cheap migrant labour flowing from the countryside into the cities ‐ …estimated 153m people have left their homes in the countryside and moved to cities to work on construction sites, in restaurants and in factories ‐ …China’s outdated discriminatory hukou, or “household registration” system, these people are mostly not entitled to the healthcare, education, housing support or social security benefits provided to their urban cousins ‐ While a new wave of younger, more demand migrants emerges, those in the previous generation are still treated as second‐class citizens and must endure daily indignities ‐ A government report, republished on Tuesday, warned that if the swelling ranks of migrant workers were not integrated property into cities then they could pose a threat to social instability ‐ “under out country’s current bifurcated urban‐rural system, rural migrant workers are still treated as interlopers in cities, and they cannot enjoy the same treatment as urban residents”, said the report from the Development Research Centre of the State Council, a top government think‐tank
Prolonged battle likely over regulators’ plans to rank banks – Pg. 8 ‐ Senior bankers warned there would be prolonged wrangling over additional capital requirements for about 30 of the world’s biggest banks, as global regulators plan to group institutions by their size and structural complexity in the hope of avoiding another financial crisis ‐ Regulators are poised to place large banks into separate tiers or “buckets” with the biggest and most complex businesses attracting a capital surcharge of 2.5% of their assets, adjusted for risk, on top of the 7% minimum capital ration agreed in the new global bank capital framework, known as Basel III ‐ First tier (see yesterday’s summary) ‐ …second tier down, which include Goldman Sachs, Morgan Stanley, UBS and Credit Suisse, face a surcharge of 2%, ….another 10 to 15 banks would face a surcharge ranging from 0.5% to 2% along a sliding scale,… ‐ Regulators may be placing too much importance on size, and failing to give enough weight to some institutions’ risk profiles,… ‐ Capital requirements – existing core tier one capital ratios o Citigroup – 11.3% o Royal Bank of Scotland – 11.2% o Barclays – 11.0% o HSBC – 10.7% o JPMorgan – 10.0% o Deutsche Bank – 9.6% o BNP Paribas – 9.5% o Bank of America – 8.6%
Hong Kong Property – Pg. 16 ‐ From Mumbai to Melbourne, real estate prices are stalling as higher interest rates take hold ‐ Not in Hong Kong, though, where the widely followed centa‐city leading index of residential prices is still rising, prompting a fourth round of correct measures from the central bank earlier this month ‐ Over the past 10 years the Hong Kong dollar has depreciated against everything bar the Mexican peso ‐ For mainland Chinese, a 22% gain for the renminbi since 2001 is reason enough to go long Hong Kong
17 June 2011
Biggest banks face new capital clampdown – Pg. 1 ‐ Global regulators are poised to set a new tiered regime of additional capital requirements for about 30 of the world’s biggest banks, in the latest effort to ensure the next financial crisis can be contained ‐ …”bucket” carrying a particular surcharge based on bank size, global reach, structural complexity and whether other banks could absorb its business ‐ Banks could move between categories as their size, structure and risk appetite change ‐ At least eight banks – three from the US and five from Europe – are being targeted for capital surcharges of 2.5% of their assets, adjusted for risk, on top of the “Basel III” minimum of 7% set by global regulators last year ‐ …Citigroup, JPMorgan, BofA, DB, HSBC, BNP Paribas, Royal Bank of Scotland and Barclays would have to maintain core tier one capital ratios of 9.5%,… ‐
Corrupt officials smuggled $124bn out of China, says Beijing report – Pg. 1 ‐ Corrupt Chinese officials smuggled an estimated $123.6bn of ill‐gotten gains out of the country over a 15‐year period,…. ‐ For higher‐ranking officials who managed to abscond with large amounts of money, the US was the favourite destination, while Canada, Australia and the Netherlands were also popular ‐ Lower‐ranking officials tended to escape to countries bordering China, …. ‐ Overseas casinos were commonly used to launder money out of the country in collusion with gaming operators, … ‐ Chinese capital controls are supposed to limit individuals to annual remittances of just $50,000 in or out of the country
EU urged to double bail‐out funds – Pg. 2 ‐ Europe’s emergency bailout funds should be doubled in size to convince financial markets of governments’ commitment to defending the euro,… ‐ The European Union now has some 750bn (euro) in bail‐out funds, comprising 440bn (euro) from the year‐old European financial stability facility, 60bn (euro) in other EU funds and 250bn (euro) from the IMF ‐ The ECB continues to provide unlimited liquidity to Greek banks
High price of petrol steers US towards tapping into reserves – Pg. 4 ‐ The US now has 726.5bn barrels of fuel in reserve, close to the tanks’ full capacity ‐ The reserves have been tapped for emergency reasons only twice – after Hurricane Katrina in 2005 and in 1991 after the first Gulf war ‐ There is one other option. Instead of declaring an emergency and making an official drawdown, the administration could “borrow” oil from the reserves…
India acts on stubborn inflation – Pg. 6 ‐ Stubbornly high inflation has forced India to raise benchmark lending rates for the 10th time in 18 months as its central bank struggles to curb rising prices in the absence of tough fiscal action ‐ In May, inflation was 9.1%, almost double the level in neighouring China ‐ …Reserve Bank of India..it raised the repo rate – the rate at which the central bank lends to commercial banks ‐ to 7.5%, while the reverse repo was increased to 6.5%
Fed faces condundrum as foreclosures drive inflation – Pg. 6 ‐ Here is a mystery: house prices in the US are going down and yet house prices are driving up the core rate of inflation ‐ …Case‐Shiller index, US house prices fell at an annualized rate of 4.2% in the first quarter of 2011; …..CPI, house prices rose at an annualized rate of 1.4% over the past six months, (Prof Note: hmmmmm….The Case‐Shiller is published privately but the government publishes CPI….inflation is good for the government….conspiracy, possible…tampering with data, hmmmmm) ‐ …what is driving inflation indirectly is the foreclosures that are devastating the US housing market ‐ Foreclosures have pushed more people into a limited supply of rental housing ‐ That has prompted a recovery in rents ‐ In calculating the CPI, however, the Bureau of Labour and Statistics uses rents not just for those houses that are actually rented, but also to measure the implicit price of all the houses that are actually occupied by their owners ‐ This has a big effect on the inflation data because actual and implied rents amount to about 30% of the consumer price index ‐ Using rents rather than house prices meant inflation did not rise nearly so far during the housing boom, or fall so fast during the bust ‐ Until 1983, the BLS used a measure based on house prices, but changed over to use rents ‐ ….US rental market will be the best performing housing sector for the next five years with rents rising 2 to 4% a year
Lewd images cost Weiner his job – Pg. 6 ‐ (Prof Note: I am offended by this belief…he lost his job NOT due to the images but the fact he went on American TV and lied about it to the mainstream media….Weiner is a BOLD FACE LIAR. It should and MUST be a CRIME for a congressman to boldly lie as Weiner did! Cut off his tongue, then lets see the honesty come forth from Congress!)
IASB rules to hit profit reporting – Pg. 18 ‐ Companies that follow international standards will no longer be able to pad their reported profits by predicting strong returns on investment held by their pension schemes, and will not be able to “smooth” earnings by averaging investment gains and losses over several years, under new rules unveiled Thursday ‐ The IASB, which sets rules aimed at making it easier for investors to compare the results of companies based in different jurisdications, …
Express route to Chinese riches goes into reverse – Pg. 23 ‐ Chinese securities listed on the world’s most reputable stock markets, including New York, Hong Kong and Toronto, have tumbled in recent weeks as investors have balked at almost anything Chinese ‐ Forged bank statements, fictional assets and customers and undisclosed transactions with related parties are just some of the alleged problems that have been uncovered at other foreign‐listed Chinese companies in recent weeks and months ‐ Many Chinese companies slipped into US stock exchanges by acquiring shell companies that were already publicly traded. These deals, known as reverse mergers, or back‐door listings, allowed them to bypass the scrutiny of an initial public offering
16 June 2011
Disunity deepens Greek crisis – Pg. 1 ‐ George Papandreou, Greece’s prime minister, announced that he will form a new government today and seek a vote of confidence later this week, … ‐ The IMF had said it would not provide its part of the next tranche under Greece’s existing bail‐out programme until eurozone governments had pinned down exactly how they would fill Athens’ funding gap for 2012, a process that had been dead‐locked over a dispute on whether to restructure Greek debt ‐ In return, the iMF and the eurozone want the Greek government to promise it will secure cross‐party support for new budget‐consolidation measures
Chinese property dip forecast – Pg. 2 ‐ The outlook for the Chinese property development sector was downgraded to negative by Standard & Poor’s on Wednesday, as the rating agency pointed to worsening credit conditions and the likelihood of a fall in transaction volume ‐ Residential property sales in China grew 17.7% in May compared to the previous year, in term f total area sold, after falling more than 10% in April ‐ Moody’s, the rating agency, cut its outlook for China’s property developers from stable to negative in April because of deteriorating credit conditions, falling sales and predicted oversupply of residential housing ‐ Moody’s forecast a 25‐30% fall in sales for first‐tier and most second‐tier Chinese cities this year but most developers plan to increase sales 20‐40%
India business warns central bank on rates – Pg. 2 ‐ …highest inflation of any leading emerging market ‐ With inflation running at an annual 9.1% in May, the RBI is expected to raise benchmark lending rates 25bps at its mid‐quarter monetary review meeting today ‐ India has the highest inflation of any big emerging market and has struggled to bring it under control for two years. ‐ Last month, the RBI raised the rate at which the central bank lends to commercial banks 50bps to 7.25% ‐ ….they say borrowing costs of 13% will deter business from investing to expand badly needed supply to meet surging demand among a population of 1.2bn
CPI rise ties Fed’s hands on further easing – Pg. 7 ‐ Core US consumer prices rose at their fastest rate for five years in May, making it almost impossible for the Federal Reserve to ponder further monetary easing ‐ Excluding volatile food and energy prices, the consumer price index grew 0.3% from April to May, the most rapid increase since 2006 ‐ The Fed concentrates on core inflation, which reflects underlying pressures in the economy, as the best guide to how prices will move
Voters put $10 monthly limit on their commitment to green energy – Pg. 7 ‐ US votes support increased use of renewable power but would pay only about $10 per month extra for it ‐ The results suggest that higher‐cost forms of alternative energy – such as offshore wind, some types of solar power, new nuclear reactors and emissions‐free “clean coal” plants – are likely to come under growing political pressure
Prospects pit up for new graduates in US – Pg. 7 ‐ The job market for the class of 2011 is steadily improving in the US, with hiring increasing in most sectors and the national unemployment rate for recent graduates dropping ‐ The picture for financial services, consulting and industrial sectors is improving, but some industries, including legal services, are still feeling the pain of the crisis ‐ Those graduating with an MBA are seeing a significantly improving job market ‐ This recovery has not been as marked for law students – one of the other fields hit especially hard by the recession ‐ Law school graduates from the class of 2010 had an overall employment rate of 87.6%, the lowest it has been since 1996, …
Conduits of contention – Pg. 9 ‐ In Hong Kong 24 years ago, authorities and local banks were forced to bail out the territory’s clearing house after it became clear that it would not have the resources to deal with the possible mass defaults among traders on the futures exchange as their bets on the Hang Seng index turned sour. It was a rare example of the near‐failure of a clearing house ‐ …[clearing houses] handle the arcane “plumbing” that takes place after trades are agreed, such as a share deal between two parties on the New York Stock Exchange, a futures contract changing hands in Chicago’s dealing rooms or when a Spanish government bond is traded in London ‐ The shift [Dodd‐Frank’s requirement to clear otc products] is set to concentrate new risks in the clearing houses, since it will create systemically important institutions that could become “single points of failure” ‐ …clearing houses, also known as central counterparties (CCPs) ‐ A CCP acts as buyer to every seller and seller to every buyer in a transaction. It uses funds posted by its members – known as margin, or collateral – to ensure deals are completed in the event of default. It helps reduce risk in the financial system by simplifying a web of multiple exposures through a process known as “netting” ‐ The notional value of OTC derivatives trades outstanding is about $600,000bn, … seven times larger than exchange‐traded futures markets ‐ Singapore’s exchange has already started clearing Singapore dollar swaps, highlighting how some Asian financial centres are muscling in on the new opportunities ‐ …ownership and governance, specifically whether ensuring that robust risk management is best served by clearing that is organized as a for‐profit business, or as a quasi‐utility owned by market participants ‐ …concentration of market power at the biggest CCPs
Experience of the region becomes a vital asset – Pg. 22 ‐ Knowledge of Asia is becoming a vital took for the global executive ‐ Cultural differences have meant companies place a premium on those with a history of working within or alongside both western and Asian businesses ‐ Structure and order is an integral part of east Asian business culture, which does not fit well with western business, where the focus is on efficiency and where structures within an organization are likely to be challenged and are always evolving ‐ …a contract does not hold the same binding agreements in the east as it does in the west. Those in Asia view a contract as an outline of the principles which all parties agree to work by. Companies expect flexibility – something those in the west would view as deviation from a contractual agreement ‐ Language can be another serious barrier. For this reason Hong Kong and Singapore tend to be the main landing ground for expatriates, which they use as a springboard into China
15 June 2011
Bernanke hits out at impasse on debt ceiling – Pg. 1 ‐ Ben Bernanke on Tuesday lashed out at Washington’s pitched battle over an increase in the federal debt limit, calling it the “wrong tool” to force changes in fiscal policy ‐ The US reached the $14,300bn ceiling on borrowing set by Congress in May. …US could default if the limit is not raised by August 2 ‐ Failure to raise the debt ceiling on time “could cause severe disruptions in financial markets and the payments system, induce ratings downgrades of US government debt, create fundamental doubts about the creditworthiness of the US, and damage the special role of the dollar and Treasury securities in global markets in the longer term”
German plan for Greece raises fear of fresh 20bn (euro) bank rescue – Pg. 1 ‐ A German‐inspired plan to reschedule Greek debt could force eurozone governments to provide up to an extra $28.9bn to avoid a meltdown of its financial sector,… ‐ …extra money may be needed to recapitalize Greek banks following a proposed maturity extension of Greek government bonds, which would be classified by rating agencies as a “selective default” ‐ A further cash reserve may be required for emergency Greek bank liquidity if the European Central Bank refuses to accept downgraded bonds as collateral ‐ The most drastic is for a voluntary debt exchange, involving an extension of maturities on Greek government bonds to buy time for Athens to cope with its debt crisis ‐ The second and third options are for voluntary “rollover” of bonds, less likely to trigger bond downgrade, and therefore favoured by the ECB and France, in particular
Fischer dismayed at IMF blow – Pg. 2 ‐ …decision … to exclude him from the race to become the body’s new managing director, insisting he would have been a “natural” candidate for the job ‐ …regulation that sets an age limit of 65 for new managing directors. Mr. Fischer is 67
Markets wait for next move as QE2 draws to a close – Pg. 2 ‐ From the moment the US Federal Reserve began its second, $600bn round of quantitative easing last autumn, its June meeting was circled on the market’s calendar ‐ QE2, as it is called, will be complete by the end of June ‐ But after a recent “soft patch” in US economic data, the June meeting is likely to be an anticlimax ‐ Growth in the first quarter came in at only 1.8% ‐ compared with the minimum of 3% needed to bring down unemployment – and the second quarter looks unlikely to be much better ‐ …the Fed is set to keep its language of low rates “for an extended period” and continue to reinvest early repayments from its portfolio of asset‐backed securities ‐ The FOMC may therefore trim its 2011 growth forecast of 3.1 to 3.3% next week because, even if growth reaches that pace in the second half, it will not compensate for the weaker start to the year ‐ On inflation, the plateau in oil prices and a reversal in some measures of inflation expectations has eased fears ‐ The overall soft patch in the data has prompted calls for the Fed to consider a “QE3” but, with a larger Fed balance sheet to start with and inflation heading upwards, the hurdle to further asset purchases is high
Inflation sparks fears of unrest – Pg. 5 ‐ Headline inflation in China increased at the fastest rate in nearly three years last month, amid concern that persistent price rises could exacerbate discontent and violent protests ‐ China’s consumer price index rose 5.5% in May compared to the same month a year ago, the sharpest increase in 34 months,… ‐ …central bank to again raise the proportion of deposits banks must hold in reserves, a move that reduces liquidity in the economy by cutting the amount banks have to lend ‐ Food inflation hit 11.7% in May, up from 11.5% in April ‐ Inflationary pressure has been fuelled by the fact that China’s one‐year benchmark rate stands at just 3.25%, meaning savers face a deeply negative real interest rate
European property – Pg. 14 ‐ …property is Europe’s best‐performing sector ‐ The valuations of a property group’s buildings are typically based on a discounted cash flow of their future income streams. That means the fair value of one share should theoretically be the group’s net asset value per share. ‐ Yet, the large property groups currently trade at or above their NAV ‐ … ‐ The ECB is set to increase rates again. Property speculators, and others jumping on the wagon, could once again become the victims of cheap money
Mortgage chief to quit bank after loan problems – Pg. 16 ‐ JPMorgan Chase’s mortgage chief…. ‐ …mis‐steps at the bank that included overcharging active‐duty military personnel on loans and lax foreclosure procedures that may have led the US lender to improperly seize homes
Nine Dragons doused by S&P move – Pg. 18 ‐ Nine Dragons Paper, the recycled paper group controlled by China’s richest woman, saw its shares tumble 17% in HK after S&P’s withdrew its credit rating on the company ‐ …withdrawn…because it had been given “insufficient access” to management in the past six months although it had repeatedly requested meetings ‐ The level of concern is so great that even the Chinese companies untainted by accusations of wrongdoing have seen their shares underperform the wider stock market
Wary investors spy trouble in Brazilian bonds – Pg. 25 ‐ It is accepted wisdom in developed markets, particularly in the US, that a prolonged inversion of the bond yield curve is a sign of trouble to come ‐ When interest rates on short‐term bonds move higher than those on longer term bonds – so the theory goes – then the economy is in for a sharp slowdown or even a recession ‐ …countries with the most severely inverted yield curves are the European debt crisis economies of Greece, Ireland and Portugal…next in line are emerging market favourites of Brazil and India ‐ In recent weeks, the yield curves in both of these countries have inverted – in Brazil’s case more fully along the curve – as central banks increase rates to try to compensate for rising inflation, causing some investors to predict that a downturn is on the way ‐ Emerging markets have been engaged in an increasingly aggressive battle with inflation ‐ Brazil’s central bank has increased rates five times this year from 10.75% to 12.25% ‐ This has maintained Brazil’s position as the economy with the highest real interest rates in the world ‐ India’s sharp monetary tightening to combat high fuel and food prices is affecting overall economic growth and curbing discretionary spending on goods such as cars
14 June 2011
Suspicious pre‐deal trades fall sharply – Pg. 1 ‐ The level of suspicious trading ahead of UK mergers and acquisitions fell sharply last year to 21%, the lowest level since 2003, as regulators around the world intensified efforts to combat insider trading ‐ Last year, timely trades – defined as abnormally large share price movements in a company in the two days before a regulatory announcement – preceded 25 of 118 UK announced deals ‐ ….FSA, the only major jurisdiction to report publicly on the cleanliness of its markets,… ‐ The FSA has also intensified its enforcement. Five people have recently been convicted, including the first‐ever prosecution of an active banker
S&P cuts Greece’s rating one step closer to default – Pg. 1 ‐ Greece was downgraded close to default on Monday, sending yields on its 10‐year bonds near to fresh euro‐era highs and stoking fears over the eurozone debt crisis ‐ Greece is now the lowest‐rated sovereign in the world, below Ecuador, Jamaica, Pakistan and Grenada ‐ The S&P move comes as more problems emerged over the second rescue package for Greece
US mirrors sluggish global trend in job creation – Pg. 4 ‐ Job creation in the US will not accelerate in the third quarter of the year as confidence in hiring remains “tenuous and fragile”, … ‐ Among US employers, the number that said they planned to hire exceeded those that planned to cut staff by 12% ‐ A separate report released on Tuesday shows increasingly gloomy sentiment among US small businesses, which account for half the workforce ‐ The employment outlook survey suggests hiring intentions are also flat in Mexico and Argentina, with the number of job‐cutting plans increasing in Brazil, Peru and Panama ‐ In Asia, job creation will slow in India, Taiwan, Singapore and Japan in the third quarter, with incrementally improved sentiment among Chinese employers, hiring plans suggest ‐ In Europe, employers plan to cut jobs in Italy, Ireland, Spain and Greece, although the pace of job losses in Greece is likely to slow from the current quarter
Dutch law set to axe religious slaughter – Pg. 8 ‐ The Dutch parliament is preparing to pass a law that would end religious slaughterers’ exemption from rules requiring animals be “stunned” or anaesthetized before they are killed ‐ Because Jewish and Muslim rules do not permit animals to be unconscious when they are killed, the law would in effect ban kosher and halal slaughter
Europe bail‐out bond in demand – Pg. 22 ‐ Europe’s rescue fund is expected to attract billions of euros of orders from investors for its latest bailout bond offering,… ‐ Greece was downgraded three notches to triple C by S&P on Monday…
Commodity traders hit back at planned US futures curbs – Pg. 22 ‐ …pushed back against US rules that would restrict who would receive exemptions from trading limits in markets from oil to wheat ‐ The rules, required under last year’s Dodd‐Frank financial reform law, would retain exemptions from the caps for companies using futures and swaps markets only to offset physical risks, such as the price of warehouse stocks of grain. Until now exemptions have been granted for trades that “normally, but not necessarily” represented a substitute for cash market transactions, … ‐ Physical traders are often the first to know when crops are falling short or energy cargoes are interrupted, giving them an edge over others
13 June 2011
Banks in desperate battle over US tax law – Pg. 1 ‐ Banks and foreign governments are mounting an increasingly desperate push against a sweeping US tax law that will force overseas institutions to report their American clients to the Internal Revenue Service ‐ The Foreign Account Tax Compliance Act was passed by Congress last year and comes into force in 2013. ‐ …banks, which have to identify US citizens with accounts of more than $50,000 ‐ The legislation is part of a global push against tax evasion that has caused unease among US citizens overseas.
Wall Street to cut reliance on Treasuries amid debt ceiling fears – Pg. 1 ‐ …have more cash on hand to put up as collateral against derivatives and other transactions, decreasing the financial system’s reliance on Treasuries ‐ Investors worldwide own large amounts of the $9,700bn of debt that has been sold by the US government as part of their portfolios. But nearly 40% of the existing US Treasury debt – about $4,000bn – is used to back deals in the repurchase, futures and swap markets,… ‐ It is this key role that Treasuries play as collateral for the wider financial system where turmoil could follow any missed payment resulting from the debt ceiling fight. The top quality and liquidity of Treasury debt means it can be used to back transactions relatively cheaply, with banks or clearing houses only requiring a small “haircut” or discount on the value of the debt to reflect credit risk ‐ …US could default on its debt by August 2 ‐ ….”A default could trigger a wave of margin calls and widening of haircuts on collateral, which in turn could lead to deleveraging and a sharp drop in lending”
Stanley Fischer enters race for IMF leadership – Pg. 3 ‐ …Israeli central bank governor, made a surprise entry to the race to become the next managing director of the IMF, ….
Greek debt crisis stirs fears over safer bank rules – Pg. 4 ‐ Concern is growing among regulators that efforts to minimize the knock‐on effects of a Greek government default would undercut the global drive to make banks safer by forcing them to hold more capital ‐ Under current rules, most banks do not have to hold capital against sovereign bonds stocks because they are considered to be very safe. A default would normally trigger a change in risk‐weighting and prompt higher capital charges ‐ They have identified two possible loopholes in the global rules and the European law that implements them in the 27‐member bloc. One gives regulators the authority to provide guidance on what constitutes a default, and another defines a default as a failure to make payments for 90 days or more
Pressure mounts on Weiner to resign – Pg. 8 ‐ With no end in sight to the scandal (Prof Note: People need to learn there are consequences to lying…why should a congressperson be exempt?! The sin was not the texting, that seemed consensual, but rather the blatant lying to the American public…disgusting!) ‐ …corresponded briefly via Twitter with a 17‐year‐old girl (Prof Note: he is guilty of poor judgment….Termination!)
The Fed flood slows to a trickle – Pg. 11 ‐ A 90% rebound in the S&P 500, the main US share index, since its low point in March 2009 has coincided with the Fed’s two QE programmes. Commodity prices, ….are up 67% over the same period, while the dollar has fallen 17% ‐ With unemployment stubbornly high and growth stubbornly low, more than a few investors question whether the initiative had much real economic impact – or might instead just have encouraged speculation ‐ ….the Achilles heel of QE2 for many has been the deep decline in the value of the dollar and the corresponding jump in commodity prices ‐ QE will in any case carry on. The Fed will reinvest any maturing assets – about $20bn a month – into Treasuries, keeping its balance sheet stable at about $2,900bn (Prof Note: Remember….the Fed Balance sheet started at about $700bn)
America prefers fiscal idiocy to framing intelligent choices – Pg. 13 ‐ (Prof Note: No….I did not author the article and the title is not an ‘exact’ quotation of mine)
11 June 2011
Gingrich puts a brave face on staff defection – Pg. 3 ‐ …senior staff resigned en masse on Thursday, citing “differences” over the campaign ‐ …outmanoeuvred by Bill Clinton, then president, in budget talks that culminated in the temporary shutdown of the government, he resigned as Speaker and from Congress in 1999 ‐ …forced to respond to leaks that he had once had a $500,000 line of credit at Tiffany, the upmarket jeweler
French agree to debt rollover – Pg. 4 ‐ French banks have agreed in principle to subscribe to new issues of Greek sovereign debt to replace maturing bonds, in effect rolling over existing commitments, on condition that all creditors do the same…. ‐ The French proposal coincides with the thinking of the European Central Bank, which has indicated that a rollover of Greek debt, rather than a “reprofiling” with extended maturities, would be an acceptable way for private creditors to be involved in a new deal ‐ French banks are among the largest creditors to Greece, and the French government had sounded them out on their willingness to commit to a rollover
A deepened disillusion – Pg. 5 ‐ The German Chancellor was sitting down to a state dinner in her honour, having just been awarded the Presidential Medal of Freedom, the highest US civilian award, by Barack Obama ‐ …Ms Merkel’s centre‐right coalition government is on the defensive ‐ In Nato, where Germany is normally regarded as the most loyal of allies, Ms Merkel’s decision not to join in military action against Muammer Gaddafi in Libya has been greeted with dismay ‐ Take the eurozone crisis. From the moment the Greek drama developed in late 2009, German politicians have insisted that Athens’ woes must not become a reason to turn the EU into a “transfer union” where the fiscally prudent nations of the north constantly bail out a spendthrift south ‐ Frankfurt and Paris say that requiring private creditors – even voluntarily – to extend the maturity of their bonds and loans may precipitate the default it is supposed to avoid
Bank investors feel trapped in political limbo – Pg. 9 ‐ …Lloyds Banking Group should sell “substantially” more branches than the 600 already ordered by a European ruling on state aid; and that UK banks should be forced to ringfence core operations, such as domestic deposits, in an effort to safeguard them ‐ Fidelity now has 2.2% of Lloyds,…
Financials rack up losses as Dow slips below 12,000 – Pg. 11 ‐ Wall Street tumbled into its sixth consecutive week of losses helped lower by financial stocks as investors continued to turn from risk assets on worries about the strength of the US economy ‐ The S&P500 index lost 1.4% to 1,270.98, leaving the index teetering just 1.1% from entering into negative territory for the year
10 June 2011
German banks cut Greek exposure – Pg. 2 ‐ German banks have cut their holdings of Greek government bonds more than previously thought, making it easier for them to participate in any sovereign debt restructuring but casting doubt on a pledge last year to maintain their exposure as a gesture of solidarity ‐ German insurers have also cut their holdings of Greek sovereign debt ‐ Berlin is the guarantor of a state “bad bank” to wind down some banking sector assets, leaving it holding more Greek bonds than any Germany bank as well as playing a key part in official loans to Athens
France trims growth forecast – Pg. 2 ‐ The Bank of France scaled down its forecast for second‐quarter national economic growth to 0.4% from 0.5% on a quarter‐on‐quarter basis
Treasury punishes banks for mortgage errors – Pg. 4 ‐ The Obama administration is withholding payments to large mortgage servicers after identifying failures in their processes for dealing with distressed borrowers looking to take advantage of a government loan modification programme ‐ Wells Fargo, Bank of America and JPMorganChase are being punished by the Treasury,… ‐ The Treasury pays $1,000 to a servicer when a homeowner enters permanent modification and an additional $1,000 if the modification is sustained ‐ There have been 690,000 permanent modifications, well short of the 3m – 4m borrowers that the Treasury originally said Hamp could help. Officials say that the 4.8m total modifications since 2009 should be celebrated
Lagarde woos China to back IMF bid – Pg. 6 ‐ The Beijing visit comes near the end of a tour aimed at rallying support from emerging markets for her candidacy ‐ China, India, Brazil and Russia in May issued a joint statement saying the IMF should abandon the underwritten practice of always picking a European as its head ‐ The Chinese government did not comment on Ms Lagarde’s candidacy on Thursday
Aborted IPO marks milestone for China – Pg. 20 ‐ The first cancelled initial public offering in the short history of China’s stock markets is being seen as a sign of maturation ‐ …in 2009, the government began to change the rules. In the primary market, the China Securities Regulatory Commission limited the portion of shares that big companies could acquire and required issuers to be more transparent about pre‐IPO valuations
Subprime hangs over securitized debt revival – Pg. 21 ‐ Perceptions are not the industry’s only problem. Investors are returning only slowly and largest chunks of the buyer base in both the US and Europe, such as banks’ off‐balance sheet vehicles, have gone for good ‐ New sales of private sector mortgage‐backed bonds remain largely absent
9 June 2011
Saudi push on Opec output blocked – Pg. 1 ‐ Opec dashed expectations that it would boost oil output when Iran rallied five member countries on Wednesday to block Saudi Arabia’s attempt to increase production quotas ‐ ….one‐month high of $118.59 a barrel ‐ …Opec’s official quotas, ….bind 11 members to produce no more than 24.85m b/d
US military operations in Libya hit spending rate of $2m a day – Pg. 1 ‐ …$60m a month ‐ Pentagon officials said the US had spent about $550m on Libya… ‐ Although it is working underneath Nato, the US is by far the largest contributor to operations Unified Protector. As of Mid‐May it was conducting 70% of reconnaissance missions, more than 75% of refueling flights and 27% of all air sorties. The US has about 75 aircraft, including drones, involved in the operations as well as several ships in the Mediterranean
Fed report eases fears of double dip recession – Pg. 4 ‐ The reports suggest that a recent soft patch in the US economic recovery has not yet caused widespread damage to economic and business confidence ‐ Real estate and construction “continued to show widespread weakness” but demand for rental housing increased. This confirms the impression that foreclosures are pushing more people into rented property and pushing up rents
Realtors see the door closing on torrid times in housing market – Pg. 4 ‐ A separate index compiled by CoreLogic that tracks prices in 6,507 postal codes rose slightly in April compared with March – the first such increase since a homebuyer tax credit that helped prop up the market expired in April 2010 ‐ From January through to March, home prices fell so far that they are now back to levels not seen since the middle of 2002,… ‐ Most predictions call for at least a 5% price decline this year and no bottom until 2012
China becomes leading user of energy – Pg. 6 ‐ China overtook the US as the world’s largest consumer of energy last year, during which global consumption growth was at its highest rate since 1973,.. ‐ ..China accounted for 20.3% of consumption, surpassing the US, with a 19% share of the global total (Prof Note: From my 49th floor hotel room in the Marriott, Shanghai seems like a scene from Blade Runner with the billboards and lights) ‐ Oil remains the world’s leading fuel, at 33.6% of global energy consumption, but it lost market share for the 11th consecutive year
Senate blow for banks over card fees – Pg. 17 ‐ Banks and card‐payment networks suffered a big blow in Congress on Wednesday as the Senate failed to delay the implementation of price caps on debit‐card fees charged to retailers ‐ The law instructs the Fed to ensure the fees are “reasonable and proportional” to the cost of processing transactions, a reduction of more than 70%
Shoplifting gangs raise stakes for US retailers – Pg. 20 ‐ US retailers lost $15bn‐$30bn of merchandise to theft and fraud last year as a record number were hit by criminal gangs that are growing in scope and sophistication,… ‐ Organized crime affected 94.5% of retailers questioned by the federation,… ‐ The most targeted items include digital cameras and X‐box games, jeans and Sudafed decongestants, Victoria’s Secret lingerie and pregnancy ‐ If criminals are caught red‐handed more of them are resorting to violence when confronted,…
China’s buying of Japanese government debt at new high – Pg. 26 ‐ China has bought the most Japanese longer‐term bonds and notes since at least 2005,….raising speculation it might be taking a more strategic approaching to investing in JGBs ‐ At the end of March, China’s official foreign exchange reserves topped $3,040bn, equivalent to about 50% of China’s 2010 gdp ‐ Signs of a shift into longer maturities “hints” at a more strategic rather than tactical approach,… ‐ The moves come at a time when diversification of foreign currency reserves has become a theme, not least because the idea of risk‐free sovereign debt is being undermined ‐ While Japan is not without its problems, particularly in terms o the government’s debt pile, it maintains a current account surplus and can fund that debt internally
Gilts investors look to return of ‘QE’ in the UK – Pg. 27 ‐ All of a sudden “QE2” has become a big talking point for gilts investors ‐ …renewed fears of a double‐dip recession in the UK…
8 June 2011
Bernanke dashes hopes of new easing – Pg. 1 ‐ Ben Bernanke sent a strong signal that the US Federal Reserve is not planning to loosen monetary policy despite weaker economic data, saying that the recovery “appears to be proceeding at a moderate pace” ‐ “The US economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets,”… ‐ …annualized growth in the first quarter of the year was only 1.8% ‐ Under quantitative easing, a central bank buys assets in an effort to drive down long‐term interest rates once it has already cut short‐term rates to zero
Race for IMF job heats up as Carstens hits at Europe over debt – Pg. 1 ‐ Mr Carstens, Mexico’s central bank governor, is battling Christine Lagarde, French finance minister to lead the IMF ‐ Ms Lagarde, who has won the support of several European countries including the UK, is touring Asia this week to secure backing from India and China
Angry reaction to Geithner over call to follow US on regulation – Pg. 1 ‐ Bankers and regulators in the UK an Asia reacted with anger to warnings from Tim Geithner, US Treasury secretary, that the rest of the world must follow the US lead on tougher financial regulation ‐ In Asia, market participants were exercised by Mr Geithner’s pronouncement that it was essential for Asian jurisdictions to fall into line with the US on derivatives regulation ‐ The Monetary Authority of Singapore robustly rejected any suggestion that it was weak on regulation, arguing its banking and derivatives trading rules met or exceeded international norms ‐ The Hong Kong Monetary Authority agreed that international co‐operation was important but said that banking supervision in the Chinese territory was already tighter than international standards
Asia defies Geithner’s warning – Pg. 2 ‐ …Geithner’s warning that the world might face another global financial crisis unless Asia adopts US regulations triggered a largely critical response in the region ‐ …concerned that Hong Kong and Singapore might try and lure business with softer rules ‐ …only a fraction of the notional $600,000bn of outstanding OTC contracts represents business done in Asia, regional financial centres have made clear that they see the sector as a legitimate area for expansion ‐ The Singapore Exchange moved quickly to set up both trading an clearing facilities for derivatives contracts, and Hong Kong Exchange and Clearing,. The parent body of the Hong Kong Stock Exchange, has made clear that it plans to go down the same route ‐ There are no such proposals [Dodd‐Frank] in Asia, so US banks would be at a disadvantage there
Lagarde fails to secure India’s backing for IMF bid – Pg. 2
Obama views spiraling debt crisis as ‘disastrous’ for US – Pg. 4 ‐ ….he appeared to side with the ECB, which fears a restricting of Greek debt could unleash a financial crisis ‐ Germany’s commercial banks indicated on Tuesday that they were not prepared to be part of a private sector contribution to solving Greece’s debt crisis but left the door open for a partial restructuring of some of Athens’ sovereign bonds ‐ German banks have collectively some of the largest holdings of Greek sovereign debt outside Greece, …
Danes try to block use of death drug – Pg. 4 ‐ A Danish pharmaceutical company is to impose tough conditions on distributors of its epilepsy medicine in an effort to prevent it being used to kill US prisoners
Obama seeks means to restart recovery – Pg. 7 ‐ …consider extending some of the stimulus measures enacted late last year in the wake of growing evidence that the economic recovery had stalled ‐ The administration cut payroll taxes and extended tax breaks for business in a deal with Republicans last December after their victory in November’s mid‐term elections ‐ Mr Obama’s options to boost the economy are limited, with no chance that Congress will countenance another stimulus plan based on new government spending ‐ No sitting president has won re‐election with the unemployment rate above 7.2% since the mid 1930s
Boom and trust – Pg. 9 ‐ Indonesia…Voracious global demand for commodities is raising hopes that – this time – a rapidly expanding economy can be converted into sustainable progress,..
D Borse and NYSE sweeten merger offer – Pg. 19 ‐ ….sweetened their offer to shareholders with a $910m special dividend as they see to win approval next month for their planned merger ‐ NYSE needs majority support in a vote, set for July 7, while 75% of Deutsche Borse shareholders must agree to tender their shares by mid‐month
Wanted: the next big investor idea in commodities – Pg. 23 ‐ The current buzzwords among commodities bankers are “active” and “dynamic” – referring to strategies that alter exposures to different commodities based on the state of the markets ‐ The first investable commodity‐tracing indices were the Goldman Sachs Commodity Index – now the S&P GSCI – and the index now known as the Dow Jones –UBS ‐ As commodities indices trade out of expiring contracts, they can lose value if new contracts cost more – a futures market pattern known as “contango” ‐ A second generation of strategies – “enhanced indices” in the jargon – tried to soften the costs of maintaining an index strategy by holding more favorable points of the futures curve ‐ A further barrier for the new indices is conceptual: many investors have put money into commodities as a way of balancing out other risks in their portfolio. As the new products move away from benchmark commodity indices, some investors are concerned they may lose diversification benefits
7 June 2011
Geithner warns on light‐touch oversight – Pg. 1 ‐ …warned overseas regulators against undercutting American financial legislation, citing the “tragic” example that the UK set in light‐touch oversight ‐ …Geithner called for a global deal on derivatives. He also endorsed the idea of forcing the world’s largest banks to hold more equity capital, but cautioned such a surcharge need not be “excessive” ‐ …there is concern Hong Kong and Singapore could try and lure business with softer rules ‐ …Geithner called for global agreement on how much collateral, or “margin”, to impose on uncleared derivative transactions ‐ But there remain differences on how to regulate uncleared transactions
Maid to testify in Strauss‐Kahn case – Pg. 2 ‐ DSK pleaded not guilty…. ‐ The next court date was set for July 18 as lawyers for the defence and the prosecution agreed to proceed with “discovery”, the process that gives the defense access to the evidence and testimony that the prosecution has accumulated
EU to set target date for Croatian entry – Pg. 3 ‐ Croatia will take a big step towards becoming the European Union’s 28th member state when it wins approval this week from the European Commission for accession, with a target date of July 1 2013 ‐ Brussels’ consent comes after a negotiating break‐through on four policy areas, or “chapters”, that had held up Croatian accession, notably on judicial matters and competition policy
German regular hits out over banking stress tests rules – Pg. 13 ‐ Germany’s senior bank regulator has sharply criticized the European Banking Authority for its conduct of this year’s bank stress tests, accusing it of acting without legitimacy in setting controversial rules that define bank capital ‐ The stress tests are intended to underline the robustness of Europe’s banks by improving on last year’s much criticized exercise, failed by only seven of 91 banks months before Ireland’s banking system imploded ‐ But Germany has criticized the EBA for excluding from this year’s tests certain forms of hybrid capital that are often used by the country’s banks
SWFs take direct route to investment since crisis – Pg. 14 ‐ Sovereign wealth funds have reacted to poor performance during the financial crisis by undertaking more direct investment, rather than investing through third‐party asset managers, …. ‐ Funds are making more direct investments, in smaller sizes than previously seen… ‐ Of the 30 funds, 21 made direct investments last year, up from 17 in 2008 ‐ Estimates for the overall size of the sovereign wealth fund sector range from $3,000bn to $4,000bn as much as twice the assets controlled by hedge funds
Gold rises to highest level in a month on US growth fears – Pg. 22 ‐ The price of gold rose to its highest level in a month as investors fretted about the outlook for growth in the US and Europe ‐ …peak of $1,553.30 a troy ounce….
6 June 2011
China says ‘peaceful rise’ policy holds firm – Pg. 1 ‐ Hundreds of Vietnamese protested at the weekend in Hanoi and Ho Chi Minh city against perceived Chinese aggression ‐ Mr Gates said the US would maintain a strong presence in the region, including sending a new combat ship to Singapore. He dismissed suggestions that US fiscal woes coupled with rising Chinese military budgets meant the US presence would ebb (Prof Rant: Mr. Gates, back this up with cash! Where exactly is the money coming from? More borrowing from China?)
IMF offers $3bn to alleviate Cairo ‘bottleneck’ – Pg. 2 ‐ ….$3bn standby facility in budget support for the current fiscal year ‐ The funds will help bridge the widening gap in Egypt’s finances that opened up as a result of the political turmoil accompanying the popular uprising that toppled Hosni Mubarak, president ‐ The Egyptian government has seen its revenue slashed this year as tourists and investors fled and exports fell by half ‐ The loan is to be repaid in five years…the interest rate is 1% ‐ The allocation of salaries for Egypt’s 5.8m civil servants and public sector workers has been increased by 20% in the proposed budget, and the government has introduced a minimum monthly wage of $117, as well as increased spending on health, education and low‐cost housing ‐ …the deficit is expected to widen to 10.9% of gross domestic product from 8.6% in the current fiscal year
Fall in lending to eurozone banks – Pg. 2 ‐ Lending to banks in the eurozone fell sharply in the last quarter of 2010, particularly to those in Greece, Ireland, Portugal and Spain, even before the latest round of concerns about sovereign debts took hold,…
‘Bankrupt’ claim heightens Spanish regional debt fears – Pg. 4 ‐ The central Spanish region of Castilla‐La Manca is “totally bankrupt”, …. ‐ Spain’s 17 autonomous regions and its more than 8,000 municipalities, with $220bn of accumulated debt between them, have become the latest worry for investors in Spain and its sovereign bonds ‐ …regional debt has doubled since 2008 ‐ Spain was able to meet its overall public sector deficit target of 9.3% of GDP in 2010 only because austerity at the centre compensated for regional overspending
US data chief sees tend in weak jobs growth – Pg. 5 ‐ Bad US payrolls data for May appear to reflect a “general weakening in job growth” rather than any temporary distortion,…
Push‐button perils – Pg. 7 ‐ There are well over 2,500 of them [ETFs] and they offer the chance to profit from movements in anything from top stock market indices to the world’s waste management industry. Called Exchange Traded Funds, they have emerged from nowhere in recent years to become hugely popular among big institutions and private investors alike ‐ Unlike other funds, they can be bought and sold at any time, just as individual stocks are, and for lower fees. As a result, the ETF industry has expanded by 40% a year for the past decade and now has nearly $1,500bn of assets under management ‐ …detractors….they could be the next systemic risk – with striking parallels to the credit derivatives that sparked the financial crisis (Prof Note: CDS are NOT responsible for the crisis…how about ‘ignorance’?!) ‐ But the estimated 2,670 ETFs in existence by the end of April relate to just about every asset in sectors and markets with varying degrees of specialization and complexity ‐ It also raises questions about how aware all who hold them are about the structure and risks of ETFs (Prof Note: STOP TRYING TO REGULATE IDIOCY AND IGNORANCE…BUYER BEWARE!!!) ‐ …”flash crash”……ETFs accounted for 70% of the cancelled trades that ensued – despite representing only 11% of securities in the US ‐ A related worry is that the rise of ETFs has coincided with an increase in correlation between asset classes. That means different markets such as equities, commodities, currencies and bonds increasingly move in lock‐step – what is called “risk‐on, risk‐off” trading. The BIS report worries that heavy withdrawals from ETFs could cause correlation to intensify even more, magnifying any sell‐off (Prof Note: Sounds like an opportunity for the educated investor!) ‐ Generally, ETFs can be divided into two types. The original and simplest are known as physical or plain‐vanilla ETFs and seek to replicate the index they track by buying all or most of the securities in that index ‐ …increasingly popular in Europe are synthetic ETFs, which represent nearly half of the market, where the fund providers buy a derivative known as a swap, often from their parent bank. The swap gives them the return from the index without having to own the underyling shares. In return, the bank gives the fund provider shares and sometimes bonds as collateral, although they are often of a completely different nature to the assets in the index a fund is tracking ‐ The rise of synthetic ETFs in Europe and Asia has led to many of the worries from regulators globally
Hong Kong banks – Pg. 16 ‐ The problem is that few expect the redback to stop rising against the greenback, and hence the pegged Hong Kong dollar. Consensus forecasts are for a further 3% appreciation this year, then another 9% by the end of 2013. That has led to strong retail and corporate demand for renminb deposits ‐ Put simply, while everyone wants to save in an appreciating currency, no one wants to borrow in it. The reverse naturally applies: while dollar loans are flying out the door, dollar deposits are shrinking ‐ The asset/liability mismatch is bothering the Hong Kong Monetary Authority, which has warned of rising dollar loan/deposit ratios and a shift towards less sticky demand deposits, raising banks’ sensitivity to capital flows
Paulson fund falls 6% in May – Pg. 17
Boost for Gulfstream as demand from Bric markets take off – Pg. 18 ‐ The trend is being driven by greater business links between emerging market nations as more Brazilian busienesspeople fly to long‐haul destinations, such as China – which is now the Latin American country’s biggest trading partner
Interbank sterling loan rate promises more secure system – Pg. 18 (Prof Note: Article ripe for examinations) ‐ A new interbank lending rate, to be launched today, could help protect bank balance sheets from fluctuating interest rates and, its backers hope, will lead to a more secure financial system ‐ The rate, created for sterling loans, will help UK banks and building societies as well as international institutions, which also trade in the pound, to improve hedging of their rate risks ‐ The repurchase Overnight Index Average, to be published by the Wholesale market Brokers’ Association, which represent interdealer brokers, is a secured rate ‐ This means that it is the rate that banks charge each other for loans using collateral ‐ Secured lending, considered safer since collateral can be used to offset losses in the event of a loan not being repaid, has jumped in volumes compared with unsecured lending since the financial crisis in 2008 ‐ Ronia has an advantage over Libor because it is an actual rate banks charge each other for loans and is therefore considered a better reflection of bank funding costs (Prof Note: Current classes…this is a GREAT examination question) ‐ Libor, by contrast, is a rate, based on a survey of banks, which in recent months has come under fire as doubts have crept in over how accurately it reflects true borrowing costs between banks ‐ Euronia has already established itself as a benchmark for secured lending in euros, while, in the US, the Depository Trust and Clearing Corporation, the clearing and settlement utility, recently unveiled new benchmarks for secured lending, called GCF repo indexes
4 June 2011
Jobs data stoke US recovery fears – Pg. 1 ‐ The US added just 54,000 jobs in May, confirming fears that the recovery of the world’s largest economy has stalled ‐ …165,000 forecast… ‐ The unemployment rate rose by a 10th of a percentage point to 9.1% ‐ Job creation was weak in almost every sector of the economy, pointing to a general slowdown in growth… ‐ The data will raise fears of a double‐dip recession, although it is more likely that the economy will continue to grow at an anaemic pace ‐ The recent rise in oil and food prices – and the resulting damage to consumption and business confidence – is a more likely explanation for Friday’s weak job numbers ‐ Private sector employment rose by 83,000, but that was offset by a 29,000 decline in government payrolls as budget cuts bit ‐ Crude oil eased below $100 a barrel while gold rose above $1,540 an ounce, shy of last month’s record of $1,563
Greece hopes to receive next bail‐out tranche – Pg. 3 ‐ The three international organizations responsible for Greece’s 100bn (euro) rescue programme said they are likely to release the next tranche of bail‐out payments to Athens next month, the clearest sign yet that leaders close to the second bail‐out of Greece in 13 months ‐ The ECB insisted it come from loans by eurozone countries and the IMF, while Germany wants private bondholders to contribute through a rescheduling of debt payments or a voluntary rollover of current bond holdings
Edwards indicted over donations allegations – Pg. 4 ‐ …indicated on Friday by a grand jury over allegations of a misuse of campaign donations following more than two years of a federal investigation ‐ …charges that money given by political donors was used to conceal an extramarital affair…. ‐ “Personal expenses” are not a legitimate use of campaign donations
Shipwreck champagne sells for record price of 30,000 (euro) – Pg. 4 ‐ ….1841 Veuve Clicquot salvaged from a shipwreck in the Baltic Sea
Walmart to buy back more shares – Pg. 8 ‐ Walmart is to buy back $15bn of its shares as it seeks to improve returns to investors in a decision that is likely to lift the stake of its founder’s family to more than 50% (Prof Note: What does this signal to the market? Good/bad? What does a buyback signal? (1) No better use for funds or (2) Equity is to low?) ‐ The Walton family’s ownership of Walmart stock has remained stable, but due to buy‐back effects, its stake as a percentage of total shares had increased from 38% in March 2003 to 48% this March ‐ Companies on the New York Stock Exchange that have a majority shareholder can claim “controlled company status”, which allows them to escape particular governance requirements including the need for a majority of independent directors
Watch out for Revenge of the Bears – Pg. 11 ‐ The 10‐year US Treasury bond yield – probably the most‐watched figure in the financial markets – dropped below 3% for the first time since December. American house prices officially entered double‐dip territory, having now fallen more from their peak than in the Great Depression ‐ Behind all this was the confirmation that the global economy is slowing again, just as it did last year ‐ …global equities, even after this week’s fall, are down only 4.7% from their post‐crisis peaks ‐ The Vix index, known as Wall Street’s “fear gauge” as it is a proxy for the cost of insuring against falling shares, jumped from 16 to almost 20, before falling back – and is nowhere near last May’s 48 ‐ Last month margin loans for shares on the NYSE hit $320bn, their highest since just before Bear Stearns collapsed in 2008 – having been growing at an annual rate of 50% recently
Private equity debt cycle is starting to wobble again – Pg. 11
3 June 2011
Further subpoena for Goldman Sachs – Pg. 1 ‐ Goldman Sachs was subpoenaed by Manhattan prosecutors seeking details on its conduct during the financial crisis, opening a fresh legal front for a bank facing probes from federal and state officials (Prof Note: A GREAT thesis for a graduate student would be the parallels between Enron (energy) and Goldman (financial). I was in energy when enron went down and finance now….GREAT thesis!) ‐ Its shares have fallen 20% this year (Prof Note: Trading opportunity? Look what happened to Enron???) ‐ Goldman was also recently subpoenaed by the New York attorney‐general’s office, which is probing US banks’ mortgage securities activities ‐ The SEC has concluded its review of Goldman’s collateralized debt obligations and will not bring charges against the bank,…
Trichet envisages a common ministry of finance for EU – Pg. 1 ‐ …bolder steps towards controlling fiscal and economic policies, suggesting long‐term goal of establishing a European ministry of finance ‐ Such a ministry would not necessarily have a large budget. But it would exert surveillance of “both fiscal policies and competitiveness policies”, and have a veto right over specific spending decisions ‐ It would also enforce regulation of the union’s “integrated financial sector”
Rise in evictions sparks deadly violence – Pg. 3 ‐ The nasty byproduct of China’s real estate boom over the past decade has been rampant corruption and collusion between developers and officials and the use of police and hired thugs to evict under‐compensated residents and farmers ‐ …the real estate frenzy prompted by China’s post‐financial crisis stimulus package – the bulk of which was channeled into residential housing – has taken this trend to a new level ‐ In China, all land is ultimately owned by the state and the government is the only entity that can change the designation of land from “rural” to “urban” in order to take advantage of the huge price gap between the two ‐ But in recent years the Communist party has decided that China’s future food security depends on maintaining a “red line” of at least 120m hectares of farmland within the country’s borders and so requisitions have shifted to rural residential land instead. This has led to an increase in evictions in the countryside and an increase in violent confrontations ‐ Government figures from 2006, the latest available, estimated that 3m farmers a year faced losing their land in the latter half of the past decade. ‐ One of the most popular online games in China at the end of last year was called ‘Nail Household Fighting Against Demolition Squad’ ‐ No matter how skilful the player is, eventually the demolition crews are victorious and the house is demolished – as is almost always the case in real life
Moody’s warns of US default risk – Pg. 4 ‐ …warned of a “very small but rising risk” that the US could default on its debt, adding to pressure on Congress and the Obama administration to overcome severe political divisions and stroke a deal on fiscal policy ‐ The starkest message from Moody’s was that if politicians in Washington did not make progress on raising the country’s $14,300bn borrowing limit in the next few weeks, it could put the US rating on review for a possible downgrade ‐ The Treasury department has warned that if the country’s debt ceiling is not raised by August 2, the US will exhaust its capacity to pay its bills ‐ Moody’s said that if the debt ceiling was increased, America’s triple A rating would be maintained ‐ New claims for unemployment benefits stayed above 400,000 for the eighth successive week in a further sign that the US economy has hit a soft patch
Opec to consider raising oil production targets – Pg. 15 ‐ …responding to fears about the economic damage caused by prices above $100 a barrel ‐ Any rise in quotas is expected to be in the range of 1m to 1.5m barrels a day ‐ The present quotas, agreed in December 2008, theoretically bind Opec’s 12 members – apart from Iraq – to produce no more than 24.85m b/d ‐ The violence in Libya has removed a net 1.3m b/d from the market ‐ The cartel’s spare capacity, totally some 4.5m b/d, is concentrated in Saudi Arabia, Kuwait and the United Arab Emirate ‐ A barrel of Brent crude, the most important benchmark, sold for $115.20 on Thursday, against an average of $80 last year
Investors wary as correlation leaps – Pg. 22 ‐ Stocks, corporate bonds, metals, currencies and other assets are again moving in tandem with the dollar, with measures of correlation surging in May to their highest in six months (Prof Note: Current students….TAKE NOTE!) ‐ The sharp rises in correlation – and a return to the “risk‐on, risk‐off” trading patterns that have dominated since the financial crisis – area cause for concern, because they make it more difficult for investors to avoid losses if prices fall
Investors remain fearful after new US data – Pg. 24
2 June 2011
Fears over recovery bolster Treasuries – Pg. 1 ‐ The yield on US benchmark debt fell below 3% on Wednesday, its lowest level in six months, as weak economic data fanned fears that the US recovery is stalling ‐ …estimate by ADP, the payroll processor, that US private sector only created 38,000 new jobs in May – well below a forecast gain of 175,000 ‐ The decline in Treasury yields indicates investors are shrugging off the possibility the US could default as early as August if Congress does not agree to raise the country’s borrowing limit (Prof Note: Or investors are more worried of a double dip and are seeking “safety” (relative)) ‐ …double dip in the housing market before the end of the Federal Reserve’s quantitative easing policy, or QE2, this month ‐ The S&P500 suffered its worst one‐day fall since August, losing 2.3%, its poorest start to a month since October 2009
ECB backs Greek debt rollover scheme – Pg. 2 ‐ The ECB has backed the idea of encouraging banks to rollover Greek bonds as a way of helping the country out of its financial plight ‐ A scheme by which investors would buy new bonds replacing maturing securities “could be a way of involving the private sector in financing Greece”,… ‐ Private sector banks would have to be given considerable incentives to reinvest funds in Greek bonds – the ECB, which holds about 45bn (euro) in Greek government debt, would not itself buy new bonds ‐ …Moody’s Investors Service on Wednesday downgraded Greece’s local and foreign currency bond ratings to Caa1 from B1, and assigned a negative outlook to the ratings ‐ Greece has come under pressure to accept international involvement in tax collection and privatization of state assets – areas where it has failed to meet EU‐IMF targets – in return for 60bn – 70bn (euro) of French financing over the next two and a half years
Data heighten recovery fears – Pg. 4 ‐ US manufacturing, the main engine driving the economy this year, stalled in May, heightening fears that the recovery is faltering. ‐ Employment also decelerated, falling to 58.2 from 62.7 in April, the lowest level since October ‐ The service sector added 48,000 jobs, less than half April’s 141,000. Employment in the goods producing sector fell for the first time in seven months, shedding 10,000 jobs, with manufacturers losing 9,000 positions ‐ Estimates for the government’s non‐farm payrolls report, due on Friday, averaged a net rise of 180,000 jobs in April, with 209,000 new private sector jobs offsetting a fall in government positions, …
Housing glut and weak demand threaten to make a downward spiral – Pg. 4 ‐ Oversupply and depressed demand are combining to throw the US housing market into a downward spiral that could derail the broader economic recovery ‐ …foreclosure created a glut of vacant homes that is weighing on the market ‐ The census bureau estimates there are 10m vacant homes – about 1.5m more than would be the case in a normal market. Of these, about 2.3m are in foreclosure and 80,000 are being repossessed each month ‐ Distressed homes tend to sell for about 30% less than normally expected ‐ About a third of all sales now fall into this distressed category, meaning financial difficulties have forced the owner into foreclosure or to put the house up for sale for less than they owe on the mortgage ‐ …proportion of distressed sales to rise to 40% before peaking in 2012 – meaning they will act as a weight on prices for months, if not years… ‐ Sales of new and existing homes are running at an annualized rate of about 5.3m, about 1m fewer than would change hands usually,.. ‐ …creation of households by younger people – has greatly eased, because many of these people, who suffered more than average from unemployment during the recession, have moved in with friends and family to save money ‐ During normal times, about 1.25m households would be created each year, but that figure plunged to 300,000 in 2010 and now stands at 750,000 ‐ The number of borrowers falling behind on mortgage payments is starting to decline, the home prices in April, the start of the spring selling season, showed their first month‐over‐ month increase since a homebuyers’ tax credit that artificially propped up the market expired last year…. ‐ …government‐backed loans drop in September to $650,000 from $729,000 in the highest cost regions, making it more difficult and expensive to get a mortgage
Land price fall threatens local finances – Pg. 5 ‐ The average transaction price for land sales across the country fell 32% in April from a month earlier and has dropped 51$ since the start of the year,… ‐ In some cases, local government land auctions have failed as bids fell short of the minimum level required ‐ …china relies on property as a source of both growth and of revenue to finance its sparkling infrastructure ‐ Just over a decade ago, most Chinese lived in homes provided by their danwei, or work unit, and there was no housing market to speak of. However, after Beijing decided to privatize the housing stock, the market took off and local governments began selling land for residential developments that fetched higher and higher prices ‐ That [land] amounts to more than 70% of total local government revenues,… ‐ Following tax reforms in the 1990s, local governments received only 46% of all tax receipts, with most going to Beijing. But at the same time, they account for 77% of public spending and their responsibilities are growing,… ‐ Now land sales are being discouraged as a source of finance, Beijing may have to rework all public finances and come up with another formula for paying the infrastructure and the social safety net that the country so desperately needs ‐ At the same time Beijing has ordered local governments to ensure at least 70% of all land sales are for subsidized housing, slum redevelopment and small and medium‐sized flats ‐ This, in turn, has deterred some local governments from selling their best land and is , …a contributing factor to drop in the average land price this year
Index of 100 cities gains ground as better reflection of trends – Pg. 5 ‐ But the country’s official gauge of property prices, an index of the top 70 cities, had edged up only 1.5% year‐on‐year ‐ The statistics agency abandoned the 70‐cities index this year. It not publishes price changes in individual cities without any reference to a nationwide average
Dithering as America’s risks a double dip – Pg. 9 ‐ Homes are the largest single asset of the American middle class, so as housing prices drop many feel poorer. Consumer confidence is also down ‐ The problem is on the demand side. Consumers cannot and will not buy enough to get it moving ‐ …state governments – starved for revenue and constitutionally barred from running deficits – continue to cut programmes
Sales of small cars sputter in the US – Pg. 16 ‐ US light vehicle sales decelerated last month to their slowest rate this year as higher prices and lower incentives kept some car buyers away from showrooms
Funding shortfall for debt‐laden real estate – Pg. 20 ‐ In short, many other owners of property also need to raise new debt to replace their expiring facilities. Yet banks are reluctant to lend and the market for new securitized debt is virtually closed (Prof Note: Discussing Germany) ‐ …could mean a combination of new debt, equity and an extension to existing debt ‐ …there was about $300bn of European CMBS, which is facing the same challenges but often in more complex circumstances, given the scores of institutional investors, banks and hedge funds that bought bonds ‐ …banks broadly looking to reduce real estate loan books and the CMBS market failing to restart, there is still debt and equity to support investment with some banks remaining open for business and new entrants, such as insurers and mezzanine fund providers
1 June 2011
Europe’s top financial regulator warns US to speed up bank reform – Pg. 1 ‐ The European Union’s top financial regulator has warned the Obama administration that it must speed up and toughen its new banking rules in order to prevent American banks from having unfair advantages over their European counterparts ‐ The US moved quickly to pass the so‐called Dodd‐Frank act, the legal underpinning for the new US regulations, but EU officials argue that the Obama administration has not moved quickly enough to implement the regulations necessary to give the new laws legal teeth ‐ US officials argue European regulators give their banks too much latitude on capital definitions ‐ The US has yet to fully implement Basel II
Fate for real estate is global concern – Pg. 2 ‐ It is not until the Chinese government decided to privatize much of the country’s urban residential housing stock in 1998 that most people in China had even considered the possibility of owning their own home ‐ 89%....official rate of home ownership in China’s cities ‐ By some estimates, China consumes up to 50% of key global commodities and materials such as cement, iron ore, steel and coal, and Chinese real estate is the main driver of that demand ‐ For example, construction directly accounts for about 40% of Chinese steel usage ‐ But when home appliances, property‐related infrastructure and other property‐dependent sectors are included, as much as two‐thirds of total steel consumption in China is broadly driven by property spending ‐ …Beijing has launched an unprecedented campaign to build tens of millions of state‐ subsidized apartments to provide housing for the majority of Chinese citizens who can no longer afford to buy or rent their own home in the cities ‐ Some analysts estimate that actual home ownership in big cities is probably closer to 45% than the official 89%... ‐ Local governments rely heavily on land sales to real estate developers for a huge portion of their revenues and the requisition of land belonging to ordinary citizens is probably the single biggest source of serous unrest in the country
Rate increase likely despite bloc inflation dip – Pg. 4 ‐ Eurozone inflation has dipped unexpectedly, but the fall is unlikely to be sufficient to prevent the ECB from raising interest rates again, probably in July ‐ Annual inflation to the 17‐country region fell to 2.7% in May from 2.8% in April… ‐ …the annual rate remains above the ECB’s “below but close” to 2% goal, … ‐ ….Germany….jobless rate to 7%...
House prices drag on US economy – Pg. 6 ‐ US house prices are in a double dip that has erased all of their bounce since the recession and threatens to derail a stuttering economic recovery ‐ Declining house prices may cause households to rein in both consumption and home buying plans, leading to further falls in house prices and overall weakness in the economy ‐ House prices are 33% below their peak in 2006 – a sharper fall than the 31% drop during the Great Depression,… ‐ House prices dropped in 18 out of 20 cities in March. ‐ Based on measures such as the ratio of prices to rents, housing was somewhere close to fair value,… ‐ Even though consumer incomes were boosted by a one‐off cut to payroll taxes of 2% this year, higher prices have absorbed most of the increase
Debt limit vote emphasizes divide – Pg. 6 ‐ The first vote to increase the $14,300bn US borrowing limit was destined to fail, highlighting the persistence of deep divisions between Republicans and Democrats over budgetary policy two months ahead of a crucial deadline to avert a potential default
Case‐Shiller – Pg. 14 ‐ On average, only those who bought a home in the US before 2002 are now sitting pretty (Prof Note: Unless of course you live in the DC bubble. “let them [the rest of the nation] eat cake!”) ‐ Case‐Shiller cannot help falling volumes. But me mindful too that the index is a lagging one ‐ ….31% of all US bank assets are loans secured on residential real estate, only a smidgen below peak levels. What is more, the number of delinquent real estate loans remains elevated
China bulls reined in by fears on economy – Pg. 23 ‐ Just two months ago, Chinese stocks were on a roll. The Shanghai Composite was Asia’s best performing equity index for the year to date and almost every broker in the region was predicting further gains. ‐ Chinese manufacturing production growth fell to a 10‐month low in May, … ‐ Most economists, nonetheless, expect a “soft landing” for the Chinese economy, forecasting real gross domestic product growth of about 9% in 2011, down from 10.3% last year ‐ Rising prices, especially for food, trigger riots and have been identified as a factor in the Jasmine Revolution that toppled dictatorships in the Middle East ‐ Growth in the M2 money supply has fallen from a peak of nearly 30% in 2009 to an average of 16% in the last two months ‐ A one‐year loan from a commercial bank costs only 7.4% ‐ an attractive rate in an economy growing at more than twice that rate in nominal terms
31 May 2011
Germany to close nuclear plants – Pg. 1 ‐ Germany will close its 17 nuclear power plants – which generate one‐quarter of the country’s electricity – by 2022, following the partial nuclear meltdown at the Fukushima Daiichi plant in Japan in March ‐ …Merkel committed Europe’s largest economy to doubling the amount of electricity from renewable sources to 35% this decade ‐ Share prices for renewable surged on the news
Wall Street mispriced LinkedIn IPO, says prominent tech investor – Pg. 1 ‐ …the average underpricing for IPOs is round 15%,… ‐ In the coming months, several internet companies such as Groupon, Zynga, Twitter and Facebook, are likely to be in the position to demand more favourable terms from bankers
US real estate recovers amid pick‐up on the jobs front – Pg. 2 ‐ The US commercial property market is stabilizing as businesses begin t hire again, highlighting the role of job creation in the wider economic recovery ‐ Vacancies will decline up to one percentage point over the next year, with offices and apartments benefiting most as companies hire workers and Americans relocate for jobs… ‐ …push vacancies down one percentage point to 15.3% in 2012. Rents are projected to rise 0.3% this year and another 4.3% the next ‐ Retail vacancies are expected to fall half a point to 12.6% next year
A high price to pay – Pg. 7 ‐ Year‐to‐year figures for the latest months available show inflation is fast‐growing Bric nations of 6.5% in Brazil, 8.7% in India, 9.6% in Russia and 5.3% in China. The International Monetary Fund predicts this year’s emerging market average rate will be 6.9%, compared with just 2.2% for the developed world ‐ The IMF forecasts 6% gross domestic product growth rate for 2011 for emerging economies – three times higher than in the developed world. ‐ …nations where fiscal, monetary and banking policies are chronically lax are close to inflationary crisis. In Argentina, …economists reckon inflation is running at 25%.... ‐ The main driver of inflation in the past 18 months has been the soaring rise in oil, food, and raw materials prices, powered by growing demand from China, India and other emerging countries. Food accounts for just 8% of consumer spending in the US. In China, the figure is 30%; in India, 45% ‐ Higher commodity prices are having knock‐on effects in domestic economies, especially those where supply and demand are tight, and labour costs are rising – including Brazil, India and China ‐ Infrastructure, too, is under pressure, notably in India, where construction lags far behind that of the other Brics ‐ The IMF says core inflation – excluding commodities – has risen from 2% to 3.75% “suggesting that inflation is broadening” beyond commodities‐linked increases ‐ Central banks in most emerging economies have responded by raising interest rates and imposing quantitative controls on bank lending. In Vietnam, official rates have doubled in six months to 15%. In India, among the first to take action last year, rates have risen nine times to 6.75%. In China, following four increases, they are at 6.31% ‐ In the four largest emerging markets, the Brics, credit is still growing at 17‐20% annually, with only China experiencing a serious slowing in the past six months ‐ …credit in emerging economies is growing from low levels. It is just 46% of GDP in Brazil and 60% in India. But in China, it is already at 140%. All are well short of America’s 360% for 2010 – but the gap is closing ‐ Complicating life for emerging market policymakers is the flow of cheap funds generated by the developed world’s easy money policies ‐ Emerging market governments were loath to let their currencies rise last year, sparking fears of currency wars. But this year they have allowed limited appreciation to counter the rising cost of imported commodities
Low rates put pressure on money market funds – Pg. 13 ‐ US money market funds are struggling to make returns after short‐term interest rates fell to record lows in the wake of regulatory changes and a big decline in Treasury bill issuance ‐ The recent drop in rates has compounded the already low level of returns money market funds have made since the Federal Reserve set overnight rates in a band of zero to 0.25% in December 2008 ‐ The low interest rate environment means a growing number of funds are losing business and coming under mounting pressure to consolidate ‐ The amount of cash invested in money market funds has fallen from its peak of $3,900bn in January 2009 when investors fled risky investments. It now stands at levels last seen in August 2007… ‐ Nearly a third of the $2,750bn that sits in US money market funds is invested in the repurchase or repo sector, where trading has been hit by a new charge levied on banks at the start of April by the FDIC ‐ The fall in short term rates has also been driven by the drop in US Treasury bill issuance as the Treasury seeks to stay under the Federal debt ceiling, a move that has created a shortage of securities to soak up the cash in the financial system
Derivatives – Special Section
28 May 2011
Three stock exchanges enter battle for control of London clearing house – Pg. 1 ‐ Three of the world’s largest exchanges entered a battle for control of LCH.Clearnet as a wave of consolidation sweeps up Europe’s largest independent clearing house, … ‐ NYSE Euronext, Nasdaq OMX and the London Stock Exchange are pursuing the London‐ based clearer, underscoring the urgency felt by the world’s bourses to buy businesses that will allow them to profit in reformed financial landscape ‐ Clearing houses have long been part of the unglamorous back office processes that ensure deals are completed in shares, bonds and derivatives ‐ All three bidders want control of LCH.Clearnet since it operates, with big banks, a clearing serve for OTC interest rate swaps called SwapClear, which recently entered the US to compete in derivatives clearing with CME Group,… ‐ Ownership of a clearing house gives exchanges quasi‐monopoly and clearing by locking out competitors in so‐called “vertical silos”
Barnier rejects criticism of EU action over Basel III – Pg. 3 ‐ …criticism of the way that Brussels was implementing new rules designed to beef up the safety of the European Union’s banking system ‐ Basel III is the new set of guidelines agreed globally last year, toughening up the amount of capital which banks must hold, in an effort to make the sector more robust after the 2008 financial crisis ‐ Allegations that some signatories to the Basel III agreement might be looking to water it down could have particular resonance because of lasting bitterness over the Basel II rules. The US, after helping drive those risk‐based standards through the Basel process, failed to implement them for its own banks for many years
Rising fuel costs force US lifestyle changes – Pg. 4 ‐ …US, where petrol prices have risen almost 40% in the past year and are averaging $4 a gallon ‐ …retail petrol prices will average 85 cents a gallon more in 2011 than in 2010 and antoher 3 cents a gallon more in 2012, on the back of rising oil prices ‐ …demand fell 2.2% in April
Risk assets ride out eurozone contagion fear – Pg. 11 ‐ Gains on Friday ensured that global equities had their first positive week in four, while the euro recovered from a two‐month low against the dollar to make progress over the five days ‐ The prospect of China buying eurozone bail‐out bonds was a key factor,…
27 May 2011
Basel III break for banks in EU – Pg. 1 ‐ Banks in the European Union could evade part of the tighter Basel III capital requirements under draft legislation implementing the new globally agreed standards across the 27‐ member bloc ‐ It will also allow some banks to continue issuing hybrid capital – preference shares and other debt‐like instruments – for longer than expected ‐ The Basel Committee on Banking Supervision agreed last year to tighten the definition of capital and require all banks to maintain core tier one capital equal to 7% of their assets, adjusted for risk ‐ But is up to the national regulators and the European Commission to implement the rules ‐ The Basel III compromise limits the use of insurance capital to 10% of each bank’s total capital stock. It forced banks to gradually reduce their reliance on hybrids, which largely proved useless in absorbing losses during the financial crisis. It prohibits them from counting any hybrids issued after the Basel III standards were announced in 2010
Mladic is caught after 16‐year hunt – Pg. 1 ‐ Ratko Mladic, the former Bosnian Serb general, who is one of the world’s most wanted war crimes fugitives, has been arrested in Serbia, ending a 16‐year manhunt that had often been denounced as halfhearted ‐ He was in a farmhouse owned by a cousin and did not resist arrest (Prof Note: Guilty of AT LEAST poor judgment…do NOT hide in a farmhouse owned by a family member!)
Worried tourists turn backs on Egypt – Pg. 3 ‐ The drop in hotel occupancy has been particularly sharp in Cairo and the Pharaonic destinations of Luxor and Aswan (Prof Note: Egypt is so rich…I highly recommend traveling. However, stay at a western hotel (I vote JW Marriott), contract ALL tours through the concierge, and INSIST that an English speaking individual is with you at ALL times. Tip large and you will be safe) ‐ 46% decline in Egyptian tourist arrivals in the first quarter of 2011 ‐ 45% average hotel occupancy in Sharm El Shelkh, down from 80% in the same period last year ‐ $12bn tourism receipts in the fiscal year ending June 2010 ‐ 11.5% Indirect contribution from tourism to GDP ‐ (Prof Note: For all on the list‐serve starting your global adventures…Egypt is a GREAT place to start. Rich in culture….rich in history…I felt as if it was almost the starting point of world religion. Go but we wary and very conservative. Women….COVER yourselves. My driver could barely contain himself seeing the western teen girls in short shirts. I will forever remember the elbows to my arm with “Mr. Sir, Mr. Sir...” ‘a not‐so‐subtle point’ and an eyebrow raise or wink.)
Strauss‐Kahn’s lawyer cries foul at media coverage – Pg. 4 ‐ DNA said to have been left by DSK during his alleged sexual assault has dominated the press coverage…
Weak US data fuel fears of slowing recovery – Pg. 4 ‐ The US economy has stumbled deeper into the mud of another soft patch, with revised data showing a weaker pattern of growth in the first quarter ‐ …growth estimate at an annualized 1.8%, dashing hopes that it would be revised upward ‐ Jobless claims have ‘nudged up as companies have responded to the rise in oil prices’
Investors protect against US default – Pg. 20 ‐ Traders and investors have stepped up purchases of insurance against a US sovereign debt default, amid heated political wrangling over raising the US debt ceiling ‐ The gross value of derivatives contracts that pay out in the event of a US default has doubled form year ago levels,…. ‐ The US derivatives positions are dwarfed by the size of the US Treasury debt market, which adds up to about $9,500bn
26 May 2011
Libya fund suffers big losses – Pg. 1 ‐ One of the most striking losses, outlined in an internal report for the Libyan Investment Authority, was a 98.5% fall in the value of the sovereign wealth fund’s $1.2bn equity and currency derivatives portfolio ‐ Investments in products bearing the names of JPMorgan, Credit Suisse and BNP Paribas also showed significant falls in market value ‐ Structured products are typically derivatives‐based transactions tailoring investments to a client’s specific demands ‐ Many of the LIA’s assets are frozen under the international sanctions against the regime. The US and Britain have frozen more than $55bn, out of a total Libyan foreign assets estimated at $150bn. The LIA is also a shareholder in Pearson, owner of the Financial Times
Lagarde launches big to lead IMF – Pg. 1 ‐ Christine Lagarde, the French finance minister, has launched her bid to become the next managing director of the International Monetary Fund ‐ The former US‐based corporate lawyer, 55, is the front‐runner to succeed Dominique Strauss‐Kahn, who resigned after a charge of sexual assault ‐ Ms Lagarde failed to win an immediate endorsement from Washington ‐ She has won the formal support of the UK, Germany and the European Commission
Draghi warns on global recovery – Pg. 2 ‐ Mario Draghi, the Italian central bank governor widely expected to become the head of the European Central Bank in November, has warned that rising inflation and ballooning public debt could hamper the global recovery
Forestry bill stokes fears for Amazon – Pg. 3 ‐ Brazil’s Congress has passed a controversial forestry bill that environmentalists warn will speed up the clearing of the Amazon and threaten marketability of the country’s beef and soy exports in developed economies ‐ …grants amnesty for past illegal clearing of forests, but that could spark open conflict with Congress ‐ ….like the earlier law, the new code states that forest cover in landholdings in the Amazon must be maintained at 80%, it grants an amnesty to all small farmers who illegally cleared areas before July 2008 ‐ It also exonerates large land holders who cleared forest in officially protected areas before July 2008, such as territory close to rivers ‐ Equally controversially, the new code gives more power to the states to police the forestry code. Since many states rely on farmers for taxes, they will naturally be more lenient towards illegal deforestation,…
OECD presses for early rate rises – Pg. 4 ‐ The Federal Reserve and the Bank of England should follow the European Central Bank and implement “early” rises in interest rates, (Prof Note: I agree) ‐ The US economy is forecast to grow by 2.6% in 2011 and 3.1% in 2012, with 2% growth in the eurozone both years ‐ Unemployment will remain high across most advanced economies and stay significantly higher than before the crisis ‐ …deflation risks have faded ‐ The OECD said the Fed should raise its main policy rate significantly faster than market expectations, with the first increase in mid‐2011 and a total rise of 1% in the rest of the year ‐ The OECD reserved particular criticism for the US budget deficit, which it described as a “highly unsustainable position, risking serious adverse reactions in financial markets”
Republican plans for cuts suffer big setback – Pg. 6 ‐ Mr Ryan proposed phasing out Medicare, which provides health coverage for people over 65, and replacing it with a voucher programme allowing elderly people to buy insurance to cover their medical costs ‐ Medicare is one of the three large entitlement programs that all parties agree will have to be reformed as part of any larger plan to rein in the deficit ‐ The Ryan plan will not affect anyone over 55 but Democrats say it will eventually destroy Medicare, by replacing guaranteed care with a system that caps government financial support for seniors’ health
A contested quarry – Pg. 11 ‐ …the IMF’s involvement in increasingly controversial crisis lending programmes in Greece and Ireland – and now in Portugal – could prove a disadvantage to Ms Lagarde’s candidacy ‐ Europe’s main contribution appears to be its influence on the IMF’s managerial style ‐ Yet the economic philosophy that shapes its lending programmes has owed a great deal more t the US. In the 1970s, when the IMF transmogrified from underpinning the Bretton Woods fixed exchange rate system to a more general purpose crisis lender, its dominant model became what some Europeans disparagingly called “Anglo‐Saxon” economics. The fund instinctively favoured securitized financial markets over the long‐term banking model of Rhineland capitalism and pushed an all‐encompassing view of globalization, encouraging financial sector deregulation and the liberalization of capital accounts ‐ Europeans have frequently complained that the US Treasury on Washington’s 15th Street – just four blocks from the fund’s 19th street headquarters – exercises undue influence over IMF policies. Although the US holds only 17% of votes on the board, its greater determination and intellectual confidence has usually prevailed ‐ During the 1990s, the IMF developed a standard operating procedure of issuing large rescue loans contingent on extensive “conditionality” – generally including tight fiscal policy, widespread privatization and other structural reform ‐ The approach contrasted with the instincts of Germany, for example, which pushed for stricter limits on lending to prevent “moral hazard” in borrower countries. ‐ Facing the first of a series of capital market crises, the IMF and US put together a rescue package of almost $50bn for Mexico in 1995. ‐ The application of this philosophy in the Asian financial crisis of 1997‐98 caused lingering resentment among some emerging market borrowers forced to undertake extensive medium‐term restructuring of their economies in return for short‐term crisis loans ‐ …germany and other European governments concerned about moral hazard had long called for private investors to be “bailed‐in”, and made to take writedowns or “haircuts” in the value of their holdings of sovereign debt, as part of IMF rescue programmes ‐ With sovereign debt fears spreading to western Europe in 2010, the IMF has become a minority partner in two of the largest rescue packages on record, for Greece and Ireland
IMF – Born in Bretton Woods – Pg. 11 ‐ The International Monetary Fund was born out of International discussions at Bretton Woods. New Hampshire, in 1944 and opened for business in 1947. Its original aim was to lend to governments to smooth balance of payments problems arising under the pegged exchange rates system named after the 1944 conference. With the breakdown of the regime in the early 1970s, the IMF shifted inot more general lending to governments, increasingly emerging markets. It was heavily involved in Latin American debt crisis of the 1980s and the Asian and Russian crises of 1997‐98. But its focus has swung back to Europe, where it has assisted governments that have built up huge fiscal deficits or been forced to rescue their troubled banking systems
The Arab spring is at risk without aid now – Pg. 13 ‐ Both Tunisia and Egypt faced serious youth unemployment even before the US recession turned global ‐ Tourists have been scared away (Prof Note: I was in Egypt in January days before the crisis…I was worried then!) ‐ The US spent $3,000bn on the war n Iraq. (Prof Note: that is $18,000/tax paying citizen; do we see cheaper gas prices? What was our Return on Investment?)
China to buy Europe bail‐out bond – Pg. 26 ‐ Asian investors including the Chinese government are expected to represent a “strong proportion” of the buyers of Portuguese bailout bonds when the eurozone’s 440bn (euro) rescue fund begins auctioning them next month,… ‐ Chinese officials have expressed interest in investing in European assets as a way to diversify holdings in their sovereign wealth and other investment funds, which have historically concentrated on dollar‐based assets
Investors wary of a post‐QE2 bear trap for dollar – Pg. 27 ‐ Dollar bears are getting nervous. ‐ Many investors remain short dollars, especially against commodity‐linked and Asian currencies ‐ …dollar became an attractive way to fund “carry trades”, in which low‐yielding currencies are sold to finance the purchase of higher‐yielding assets such as commodities, equities and commodity‐linked currencies
25 May 2011
Trades charged by CFTC over oil price – Pg. 1 ‐ The US commodity regulator has charged a trading house and two individuals with manipulating oil prices in 2008 by amassing dominant positions in the physical market that created the impression of a shortage (Prof Note: Hmmmmm…sounds Enronesque…remember the “FatBoy” strategy?) ‐ The CFTC alleged that two traders at the company amassed large positions in the physical market at Cushing, (Prof Note: Hmmmm….ISO Hub congestion issue….Enronesque (I miss those days!)) ‐ The buying created the impression of a shortage and pushed up the price of WTI futures on the New York Mercantile Exchange ‐ In an interchange of e‐mails, one of the traders said the dumping of oil into the market – which he described as an “inevitable puking” – was having the “desired effect”
Key role for Buffett over utility’s fate – Pg. 1 ‐ Warren Buffett’s Berkshire Hathaway is poised to play a key role in deciding the fate of Texas utility Energy Future Holdings, the former TXU, which was taken private four years ago in the biggest leveraged buy‐out ever, ….
China looks at lifting barriers for Brazil – Pg. 6 ‐ China is in talks with Brazil on lifting trade barriers that would allow the Latin American country to sell it more processed agricultural goods,… ‐ The move is the first stage in a plan to sell more value‐added goods to Asia ‐ Iron ore, soyabeans and petroleum account for about 80% of Brazil’s exports to China, partly because more heavily processed goods are restricted by higher tariffs ‐ Economists have warned that if Brazil cannot soon start exporting more processed goods, it is in danger of falling victim to “Dutch disease”, whereby commodity‐driven currency appreciation crushes local manufacturing ‐ Brazil also called on China to promote the sale of Brazilian luxury shoes and jewelry in its domestic market ‐ Brazil said this month it would delay granting licences to imported vehicles in an attempt to reduce the number of cars from abroad, causing outrage in Argentina, the biggest vehicle exporter to the country
Frankfurt’s dilemma – Pg. 7 ‐ Nothing in the rule book says it must prop up countries at risk of economic collapse ‐ Because members would share a currency but not spending and tax policies, governments were meant to take responsibility for their own finances – the “no bail‐out” principle was enshrined in a European Union treaty ‐ Mr Trichet has piled pressure on Athens to reform its uncompetitive and overregulated economy, especially through an accelerated privatization programme ‐ The ECB attracted far more controversy when it decided to start buying eurozone government bonds ‐ Although accounting together for only about 5% of the eurozone gross domestic product, Greek, Irish and Portuguese banks today take about 242bn (euro) of ECB liquidity – 55% of that provided to the eurozone financial system
Fears of debt contagion return to the eurozone – Pg. 21 ‐ Italy and Spain, the third and fourth largest economies in the euro, have been thrust back into the eurozone debt crisis. ‐ …nagging worries over whether the single currency area’s problems could spread from the three countries to have been rescued have resurfaced ‐ Italy has the biggest debt market in Europe and therefore accounts for 24% of the IBoxx eurozone sovereign bond index, a popular tool for investors. Spain represents 10%, while Portugal and Ireland are 3.5% combined and Greece is no longer even included
24 May 2011
Euro and bonds hit by fears of contagion – Pg. 1 ‐ The euro and the Spanish and Italian bond markets came under pressure on Monday amid growing investor fears that the problems with Greece are hitting the bigger economies of Europe’s single currency ‐ The euro fell to record lows against the Swiss franc and two‐month lows against the dollar, while Spain’s cost of borrowing for 10‐year debt rose to highs last seen in September 2000 ‐ Italian 10‐year bond yields also jumped ‐ Signs that the eurozone crisis is spreading to Italy and Spain are deeply worrying, say strategists, because any bail‐out of these two economies, the third and fourth largest in the currency club, would stretch international financial institutions to the limit ‐ The extra cost Spain pays above Germany to borrow over 10 years rose to 2.48% ‐ …Standard & Poor’s said it had cut the outlook on Italy’s A‐plus rating to negative because of worries over the economy ‐ Fears of contagion have been the main cause of a 6% fall in the euro against the dollar since the start of the month
Full‐year loss of Y260bn forces preliminary filing from Sony – Pg. 1 ‐ Sony has reported a surprise $3.18bn net loss…. ‐ The full‐year loss, revealed in a preliminary earnings report on Monday, was technology and entertainment group’s third in as many years as its largest under Sir Howard Stringer, chief executive since 2005 ‐ Sony stressed that it remained in the black at the operating level, and the accounting charge would not drain cash
California told to set 30,000 prisoners free – Pg. 2 ‐ California has been told to release more than 30,000 prison inmates after the US Supreme court upheld an order to ease overcrowding and improve medical treatment ‐ The verdict has stunned America’s most populous state, which is grappling with high unemployment and preparing painful cuts in public services to address a $15bn budget deficit ‐ A reduction in the state’s prison population was required by the US constitution to address violations of inmates’ human rights, …. ‐ The order mandates a prison population of no more than 110,000. There are more than 143,000, in a prison system designed for 80,000 ‐ California has recently spent a larger proportion of its revenues on prisons. Thirty years ago, 10% of the state’s general budget went on higher education and 3% on prisons; since the, spending on prisons has risen to 11% of the state’s revenue, while higher education’s share has slipped to 7.5% (Prof Note: We are getting dumber…even our criminals are getting dumber as they are getting caught!)
Spain warned on high debt costs – Pg. 6 ‐ Spain should not accept the high cost of financing its sovereign debt for too long because the economy would be deprived of much‐needed credit, … ‐ Earlier this year, bond market investors said Spain had “decoupled” from the weaker peripheral nations in the eurozone, which have seen rescues by the European Union and the International Monetary Fund ‐ Spain was credited with having brought its public sector deficit under control and embarking on a costly restructuring of its savings banks
Eurozone looks set for slower growth – Pg. 6 ‐ The eurozone appears likely to experience a spell of slower economic growth after May data showed the sharpest deceleration for more than two years ‐ Higher oil prices and inflation, the eurozone debt crisis, fiscal austerity and the impact of Japan’s earthquake on supply chains could all have taken their toll…
Europe’s grip on IMF attached as race for leadership picks up – Pg. 7 ‐ The tradition that the head of the International Monetary fund is always a European has been attacked by a potential candidate, as the rate for the top job begins to take shape ‐ Nominations to be the next IMF managing director are due by June 10 and the process is meant to finish by June 30 ‐ Voting power at the IMF is heavily biased on favour of Europe and developed economies, so if emerging countries split among candidates they would have little chance ‐ Europe has about a third of the total votes, whereas China has only 3.8%, India 2.4% and Brazil 1.7%
People’s Bank of China – Pg. 14 ‐ Through the PBoC’s manipulation of the exchange rate, its balance sheet has grown to about $4,000bn almost as big as the economy itself ($5,000bn) ‐ The consequences are twofold: a shortage of credit to those who need it most (tales of small companies failing to pay utility bills are multiplying) and the disintermediation of the formal banking system
Banks mortgage probe widens – Pg. 15 ‐ The New York state attorney‐general’s investigation into mortgage practices at large banks has expanded …. (Prof Note: How about the public school system’s curriculum expanding to including mortgage finance calculations?!)
Sharp fall in orders for UK builders – Pg. 18 ‐ The value of work awarded to UK construction companies fell sharply during the past year, raising concerns that the impact of government spending cuts will be far worse than previously feared ‐ …the real impact of the public sector spending cuts has yet to hit activity levels, as builders work through part constructed or already awarded projects ‐ The squeeze on workloads has led to a rise in so‐called ‘suicide bidding’, where builders take on projects at lossmaking terms as a way of generating cash
Gold advances to record in euros – Pg. 22 ‐ The price of gold jumped to a record in euros as renewed fear about the eurozone debt crisis drove investors to move money out of the single currency and into gold ‐ A rise in gold prices at the same time as the dollar is strengthening against the euro is a reversal of the usual inverse relationship between the two ‐ The jump in euro‐denominated gold prices was spurred by a combination of negative economic and political news that put peripheral eurozone bond markets under renewed pressure
Concerns grow over Denmark’s bail‐in rules – Pg. 22 ‐ Investors nicknamed it “Armageddonbank” after the 108‐year old Danish lender went belly‐ up in February, clipping senior creditors for the first time in Europe’s history ‐ The bankruptcy of Amagerbanken has turned Denmark’s financial system into a test case for the controversial practice of “bailing‐in” senior unsecured creditors of failed banks ‐ Holders of the bank’s senior unsecured debt swallowed a 41% haircut on their investment, the first time in Europe that bail‐ins reached senior debt, which ranks highest in the pecking order of who gets paid first in bank insolvencies
Search for yield gives big boost to emerging debt – Pg. 23 ‐ …Hungary is considered a safer borrower than Spain, in spite of remaining one of eastern Europe’s most indebted economies ‐ Rock‐bottom interest rates in the western world have encouraged many institutional investors to increase their allocation to emerging markets
Record defaults predicted for US commercial mortgage debt – Pg. 23 ‐ Default rates on US commercial mortgage‐backed securities will hit record levels this year after a 20% jump in defaults on such bonds in 2010… ‐ Total defaults rose to 10.6% by the end of 2010, up from 6.6% in 2009. Fitch expects the default rate to exceed 12% by the end of 2011
Commodities – Special Report
23 May 2011
Lagarde takes lead in race to run IMF – Pg. 1 ‐ Christine Lagarde, France’s finance minister, has emerged as the leading contender to run the International Monetary Fund after being strongly endorsed by her German and British counterparts, eager to extend Europe’s 65‐year grip on the global financial institution ‐ Fresh questions also arose on Sunday over Ms Lagarde’s handling of one of France’s longest‐ running business scandals, after a critical Court of Auditors report was leaked by the Media‐ part website
Pakistan asks China to build a naval base at south‐western port – Pg. 1 ‐ Pakistan has asked China to build a naval base at its south‐western port of Gwadar and expects the Chinese navy to maintain a regular presence there, a plan likely to alarm both India and the US ‐ Until now, the Chinese government has shied away from moves that might alienate the US, the incumbent global military power, and Beijing’s neighbours, such as India, Malaysia and Indonesia
Greece fails to pay medical bills – Pg. 5 ‐ The Greek government has fallen sharply behind on payments to healthcare companies just months after restructuring its $7.6bn debt to suppliers, raising doubts about patient safety while revealing the looming cash flow crisis faced by the state ‐ The pharmaceutical industry says only 30% of 1.2bn (euro) in payments owed by public hospitals since the start of last year have been made. Of debt due from the start of 2011, just 1% has so far been paid ‐ The cash crunch in the health sector adds to the urgency of measures planned by the Greed government to raise revenue through a pledge to sell 50bn (euro) of state‐controlled assets. Fears are mounting in eurozone capitals, however, that the socialist leadership of George Papandreou, prime minister, is not committed to the painful measures necessary to meet revenue targets ‐ The concerns are shared by other medical suppliers, many of which have tightened payment terms and some of which are themselves struggling to continue operating ‐ Many companies that received zero‐coupon government bonds last December in lieu of past debts have sold them off at substantial discounts. The bonds, issued to cover unpaid debt for 2007‐09, are trading informally at a 35 – 40% discount, reflecting increasing concern reflecting increasing concern that Greece may have to restructure its sovereign debt ‐ The situation has raised fears of shortages of life‐saving medicines, while some products, such as disposable surgical items, are already in such short supply that elective surgery is being postponed
Saudis lend Egypt $4bn – Pg. 7 ‐ Saudi Arabia has agreed to lend Egypt $4bn in emergency funding in the form of soft loans, deposits and grants
Rivers of riches – Pg. 9 ‐ …Barack Obama urging US business in February to “get in the game” and spend some of the $1,900bn sitting idly on balance sheets ‐ Corporate expansion is of particular importance for investment banks, which after a dealmaking drought are thirsty for the return of the fees that have been made a large contribution to their overall revenues ‐ If leverage returned only to the average level of the past decade, they estimate, companies would have an extra $2,700bn to spend ‐ Cash represents the biggest proportion of total assets in the US than at any time in the past half century ‐ …most of the pressure on companies so far to spend their cash is coming not from shareholders – who largely remain content to give executives some time to come up with investment plans – but from politicians ‐ Signs of caution can also be seen in the funding mix for deals. Buyers are by historical standards using more shares than had been used to fund deals in the run‐up to the crisis in 2007,…. ‐ That year, 70% of deals were funded all in cash; in 2011 to date the figure is 58% ‐ down further on last year ‐ Another cause of caution is distrust of banks, after the financial crisis prompted many lenders to withdraw credit lines or push up what they cost
Brazil & China – Special Section
21 May 2011
Tensions rise over Greek reform plan – Pg. 1 ‐ Tension in the financial markets about Greece’s ability to rein in its mounting public debt grew on Friday as Athens missed deadline for presenting economic reform plans ‐ Greek bond yields rose to euro0era highs and the euro fell against the dollar amid worries that Athens’ determination to implement its recovery plan was waning, as well as rising fears of contagion to the bigger Spanish economy ‐ Fitch, the rating agency, hit Greece with a multi‐notch credit downgrade, warning that the country faced big challenges in turning round its economy ‐ The country missed its deadline for presenting a reform plan to parliament for approval following demands by its European partners and the IMF for bolder spending cuts and a timetable for planned privatizations
From power to accused in five hours – Pg. 2 ‐ It took only five hours for Dominique Strauss‐Kahn to be transformed from a global power broker – a man en route to a meeting with German chancellor, and perhaps later to campaign to become France’s next president – to an accused sex offender bound for Rikers Island, New York’s main jail complex (Prof Note: Be thankful, it takes a lifetime to build what we have but a lapse of judgment can ruin it instantly) ‐ Sofitel did not call 911, the police emergency number, to report the alleged assault until 1.32pm, …. ‐ It is not clear why there was a delay, but there is speculation that staff at the French‐owned hotel may have hesitated to report allegations against such a high‐profile guest ‐ Had he not made those calls [two calls back to the Sofitel for his cell phone], police would not have been able to locate him,
A sovereign’s debt – Pg. 5 ‐ (Prof Note: Good summary of Irish/English history)
Soros sharpens gold bubble debate – Pg. 11 ‐ …billionaire financier has dumped a large portion of his gold investment,… ‐ The main reason for some investors’ caution is the impending end of the second round of quantitative easing in the US ‐ First, it suggests increased confidence in the economic outlook – typically a bearish indicator for gold ‐ Most important, the end of QE2 opens the door to a rate increases ‐ Investment demand for gold shows a strong inverse correlation with inflation‐adjusted interest rates, which are currently deeply negative in most parts of the world. As rates start to rise, inflation‐adjusted returns on other assets, such as bonds, become more attractive and so divert investors money from gold ‐ One factor supporting prices is a surge in consumption in Asia, especially China and India, the two largest consumers of gold
Cheap debt sees record sales of US corporate paper – Pg. 11 ‐ There was a sales boom this week in the corporate bond market as companies lined up to take advantage of cheap debt after a drop in US borrowing costs ‐ US Treasury bonds, the benchmark for dollar‐denominated corporate debt, have rallied since the middle of April, sending yields to levels not seen since late last year ‐ Sales of risky corporate debt, or junk bonds, were also strong after their yields reached a record low of 6.64% this week ‐ Google, the world’s largest search engine which was sitting atop $36.7bn of cash at the end of march, sold its first issue of corporate bonds… ‐ A portion of Google’s cash resides overseas, and bringing that back to the US can mean a large tax bill
Pound and euro take different paths as rates outlook clarifies – Pg. 11 ‐ Sterling and the euro took diverging paths this week as the outlook for interest rates in the UK and the eurozone assumed more clarity ‐ Inflation in the UK was shown on Tuesday to have hit its highest annual rate since 2008 in April at 4.5%, up from 4% in March ‐ The yen fell this week, as Thursday’s growth data showed the Japanese economy slipped into its third recession in a decade
20 May 2011
Europe pushes for IMF job – Pg. 1 ‐ European policymakers scrambled yesterday to shake the continent’s claim to provide the next leader of the International Monetary Fund, after the resignation of Dominque Strauss‐ Kahn as managing director (Prof Note: Please let this be a lesson to all of us….we work our lives to build careers and accomplishes and yet, they can all be lost with a single act (or alleged act). Appreciate what we have!) ‐ …granted bail, but he was also indicted for trail and will be kept under 24 hour armed guard at home while we awaits it ‐ The IMF’s executive board, on which European countries hold just over 30% of the votes, will probably appoint the next managing director within the next month of two, with candidates nominated by member countries. The US holds 17% ‐ Officials from Europe which has provided every managing director since the IMF started to operate in 1946, said that the difficulties in western European economies argued for the tradition to continue ‐ Emerging market governments including China and Brazil said they wanted a fair and open process
Amazon turns new chapter as e‐books sales surpass print titles – Pg. 1 ‐ Amazon said it is selling more e‐books for its Kindle electronic reading device than paperback and hardback print editions combined, … ‐ Publishers reported that US e‐book revenues had grown 146% in March over the same month a year earlier
Berlin stands firm on bail‐outs – Pg. 2 ‐ The participation of private bondholders in any future debt‐rescheduling in the eurozone is a “red line” for the German government in setting up a permanent rescue fund…. ‐ With little more than a month to go to finalize the details of the $713bn European Stability mechanism (ESM) before it has to be approved by European leaders at their June summit, Germany is fighting a furious rearguard action against a majority of eurozone members and the European Central Bank on the issue ‐ Germany wants language written into the ESM treaty that would require private bondholders to participate in any rescheduling of debt to ease the liquidity problem for a eurozone member and to take a haircut in any outright restructuring ‐ Germany, which will provide 29% of the 780bn (euro) capital and guarantees for the fund, already appears to have made one concession to the fears of investors. It has agreed to drop any reference to the seniority of loans made by the ESM over the privately‐held bonds from the articles of the treaty
Companies’ outlook begins to brighten – Pg. 3 ‐ Twice as many business leaders say that the world economy is going to improve in the next six months than thing it is going to get worse,… ‐ Rising oil prices, higher interest rates and increases in other commodity prices were ranked as the top three concerns of businesses in the next six months,…
Jobless insurance claims decline in US – Pg. 3 ‐ Fewer Americans have filed for unemployment insurance for a second consecutive week, but the four‐week moving average has hit its highest level since November, suggesting the recovery of the job market remains weak,… ‐ A separate report showed sales of previously owned homes unexpectedly feel in April as foreclosures and lack of credit weighed on a sluggish real estate market ‐ First‐time claims for jobless benefits had fallen by 29,000 to 409,000 in the week ending May 14, from a revised 438,000 the week before, … ‐ Home resales slipped to a seasonally adjusted annual rate of 5.05m
Brazil plans credit history registry – Pg. 5 ‐ Brazil’s Senate has approved the creation of a positive credit registry in an important move for the country’s booming consumer lending industry, which some believe needs closer monitoring to avoid becoming a bubble ‐ The registry will enable banks to review the credit history of all borrowers, not just those who have defaulted, as at present, enabling them to offer better terms to those with a good repayment record ‐ Brazilian private sector credit remains low compared with developed countries at nearly 50% of gross domestic product, but it has grown quickly in recent years ‐ The availability of credit, coupled with strong demand from new consumers, high commodity prices and foreign fund inflows, has pushed up inflation, which last month exceeded central bank’s upper limit of 6.5%
Us debt limit seen as chance to insist on some ‘real cuts’ – Pg. 5 ‐ Attacking the Treasury department’s warnings on the US debt limit has been Pat Toomey’s defining mission since he took office in the 2010 Republican landslide ‐ The US reached its debt limit of $14,300bn this week and began to take what it calls “extraordinary measures” to preserve cash and avert a potential US default, … ‐ The Treasury warns that, in the absence of congressional action to raise the debt ceiling, the country will no longer be in a position to pay its obligations and could plunge into a double‐ dip recession
A shield asunder – Pg. 7 ‐ …two biggest jurisdictions for financial services, the US and European Union, seemingly minor differences are becoming critical, … ‐ The resulting concerns centre on the three main aspects of how the world’s financial system, for better or worse, has come to operate: o Capital – What should be different for groups deemed ‘systemically important?’ o New Basel III standards agreed by regulators require stronger buffers – with banks holding a minimum ratio of 7% in high‐quality capital to their portfolio of loans and other assets, as adjusted for risk o There is also concern about the form the capital surcharge would take o Derivatives – What will be traded and cleared where – and at what cost? o The G20 agreed in 2009 to drive over‐the‐counter trading of standardized derivatives through clearing houses to contain risk and “where appropriate” to push trading from bilateral deals to more transparent trading platforms o …technical but important issues such as how regulators define new trading platforms, the ownership of clearing houses and who will have to post collateral
IMF succession – Pg. 12 ‐ Will this be the first time in its 65‐year history that the IMF choose a non‐European boss? Until the eurozone sovereign debt crisis broke, such a historic change looked likely ‐ The institution was becoming less European in its capital structure and voting rights, and even Europeans agreed that the time for a change was coming soon ‐ But a non‐European would not only make the IMF more global – he or she might bejust what the eurozone needs. The currency bloc has enough resources and has had enough tie to deal with the problems of its weaker members – without any more prodding and coddling from the IMF
IEA urges Opec to increase oil output – Pg. 13 ‐ These tools are limited to reducing demand for oil – and drawing on strategic reserves held by member governments, which total 1.6bn barrels. ‐ The IEA can only release its reserves in response to stoppages in supply ‐ …Opec….members, who retain some 4m b/d of spare capacity,
Chinese set new standard in buying gold bars and coins – Pg. 13 ‐ China overtook India to become the largest market for gold bars and coins in the first quarter of this year, as rising inflation inspired a surge of bullion investment ‐ George Soros’s hedge fund sold almost all its holdings in the largest gold exchange‐traded fund,… ‐ India, the top buyer of gold jewelry, remains the largest overall consumer of the yellow metal, although Chinese jewelry consumption is rising rapidly ‐ The rise in Chinese gold consumption has been stimulated by the deregulation of the country’s gold market, which has led to an increase in the number of banks importing gold and the number of specialist shops that sell it
Defensive stock laggards move into the lead – Pg. 21 ‐ “Risk‐off” is not so simple any more. As investors have moved out of riskier assets over the past month, US equities have stayed resilient. The reason? Defensive stocks have become a big draw ‐ The end of QE2 will leave the private sector with the burden of leading the recovery
US states forced to tap reserve funds to pay ‘tobacco bonds’ – Pg. 21 ‐ Trouble could be brewing for a corner of the $3,000bn municipal bond market backed by money related to a landmark legal settlement between US states and tobacco companies over healthcare costs
Banking and Finance – Special Section
19 May 2011
ECB hits out over Greek debt plan – Pg. 1 ‐ The European Central Bank has criticized proposals for a possible restructuring of Greek sovereign debts, laying bare a behind‐the‐scenes dispute between ECB technocrats and European Union politicians over Greece’s debt crisis ‐ ECB officials instead want Greece to accelerate its privatization programme ‐ Berlin is pushing for a legal commitment to be written into the treaty establishing the European Stability Mechanism – the 500bn (euro) permanent rescue fund to be set up from 2013
Fed discussion turn to monetary tightening, April minutes show – Pg. 1 ‐ The Federal Reserve is set to keep interest rates on hold for the rest of the year but the minutes of its April meeting showed how discussion has turned towards tigthtening rather than further easing of monetary policy. A “few” participants thought that the central bank might need to raise rates or sell assets during 2011, but “some” others felt that “an early exit could unnecessarily damp the ongoing economic recovery” ‐ The committee also confirmed that it planned to stop reinvesting principal payments on its Treasury securities “simultaneously or soon after” it stopped MBS reinvestments ‐ …the Fed could promise to sell a quantity of assets over a fixed period, just as it promised to buy $600bn over eight months in its latest “QE2” programme of asset purchases.
Lack of unity of IMF successor – Pg. 4 ‐ Emerging nations have yet to unite behind a candidate to take over as the head of the International Monetary Fund, even as they reiterate their long‐held stance that the position should not be reserved for a European (Prof Note: Here Ye, Here Ye) ‐ Brazil and South Africa have expressed a desire for an end to the tradition of the IMF’s managing director’s job going to Europe, just as they question the convention that head of the World Bank is always an American ‐ Chile and China also have said that the position should be filled “on merit”, … ‐ The IMF board, which is expected to meet on Friday, has the power to remove him from the position, should its members decide to do so
Red tape strangles hopes for ‘short sales’ of US homes – Pg. 15 ‐ US banks are stumbling in efforts to clear inventories of unsold homes through a strategy known as “short sales” – in which distressed borrowers are given approval to sell properties for less than the value of their mortgages ‐ Analysts say an unexpectedly large number of prospective housebuyers are walking away from such deals rather than endure a closing process that is so complicated it can take up to two years to complete ‐ …short sales have accounted for only 10% of house sales this year – half as much as expected ‐ “The main problem is getting the bank to agree on the terms of the sale. There is a list of 50 things that have to be negotiated, including whether there will be forgiveness on the loan, and getting that list down to zero can take forever” ‐ Banks said they were not at fault. They point to the difficulties in closing a transaction in which the seller has also taken out a second mortgage, also known as a junior, or the mortgage has been packaged into a security sold to investors ‐ Banks tend to recover 20% more when a house is sold short, compared with homes sold at foreclosures
UK banks warned on tough rules on bonus and dividend disclosure – Pg. 15 ‐ Future bonus and dividend payments by UK banks will depend on convincing regulators that the handouts will not dent capital reserves or undermine sound risk management, … ‐ Banks would also be forced to make public detailed information about their holdings that they currently share only with regulators, …
Europe asset‐backed debt boosted – Pg. 22 ‐ Europe’s securitization market has lifted off with the launch of the first commercial property‐launched of the first commercial property‐backed deal and one of the largest sales of packaged mortgages since the financial crisis
Caution urged over muni bond rally – Pg. 22 ‐ The $3,000bn municipal bond market where US states and cities raise money was long an insulated world dominated by local investors ‐ Defaults in the four months to May 1 this year were $605m,…
US investors pile into ETFs as active fund appetite falls – Pg. 22 ‐ US investors are piling into exchange‐traded stock funds even as they become more bearish and pull back from actively managed funds ‐ Investors pumped a net $14.2bn into equity ETFs by the middle of the second quarter, nearly double the pace of investment in the first quarter,… ‐ The increased investment in ETFs reflects a shift away from actively managed products, such as mutual funds, into passive indices, which make up the bulk of ETFs ‐ Actively managed mutual funds have experienced prolonged outflows for the first time since the Federal Reserve began buying in additional $600bn of bonds in the second round of “quantitative easing” ‐ Retail investors’ bullish sentiment has also dropped sharply from seven‐year highs reached at the end of last year, … ‐ Assets in ETFs amount to just 12.1% of assets in mutual funds, or about $1,000bn versus $8,500bn… ‐ ETFs in all asset classes have grown 12.6% so far this year, versus 10.5% growth in mutual funds
18 May 2011
Pressure monts on IMF head to resign – Pg. 1 ‐ Senior European officials are calling on Dominque Strauss‐Kahan to quit as managing director of the International Monetary fund after he was denied bail in New York on charges of sexual assault ‐ The IMF said that diplomatic immunity would not cover its managing director in this case
Fed seeks annual US bank stress tests to curb excessive dividends – Pg. 1 ‐ The Federal Reserve wants to subject US banks to annual stress tests, reserving the right to veto dividend pay‐outs if they do not pass (Prof Note: That is BS! How about veto bonuses to high‐level employees?! Why harm the innocent investors!) ‐ Stress tests conducted by the Fed in 2009 helped rebuild confidence in the battered US financial system. In March, the central bank reviewed capital plans submitted by the country’s 19 largest lenders ‐ The Fed signed off on a series of dividend increases and stock buybacks from many of the biggest US banks, while prompting others – including Bank of America – to acknowledge they would have to resubmit capital plans rejected by the regulator ‐ European regulators are applying stress tests to 90 banks across the region, representing the top two‐thirds of the sector
Video evidence to prove vital – Pg. 2 ‐ …depend partly on “what comes back from the lab, in terms of physical evidence from the victim, the crime scene and the defendant (Prof Note: I would like a leave of absence until there is hard evidence...if there is hard evidence, i.e. semen, at least it would be known he was guilty of poor judgment before a prolific career is dashed by a chamber maid! I still remember Duke University lacross!) ‐ …another crucial factor would be video evidence, if it exists, of the alleged victim soon after the alleged incident… ‐ The prosecutor said on Monday that he had seen a video of Mr. Strauss‐Kahn leaving the hotel and that “it appears to be a man who was in a hurry” (Prof Note: There you go…GUILTY!!! I am never rushing again for fear of a rape accusation!)
Finns to urge bigger bail‐out burden for private investors – Pg. 3 ‐ Finland will demand private investors play a bigger role in future eurozone stabilization efforts after giving its approval to the 78bn (euro) bail‐out for Portugal, … ‐ Finland has a key role in eurozone stabilization efforts because it si one of the six euro members with a triple A credit rating whose guarantees are needed for the European Union bail‐out fund to borrow cheaply for international markets. It is also the only EU country that requires approval from its national parliament to take part in bail‐outs, giving Finnish lawmakers a de facto veto over eurozone aid packages
Kohn apologises for Fed role in crisis – Pg. 4 ‐ The former vice‐chairman of the US Federal Reserve has said he “deeply regretted” the pain caused to millions of people around the world from the financial crisis, admitting that “the cops weren’t on the beat”
Oversupply fear – Pg. 4 ‐ Construction of new homes dropped 10.6% in April as oversupply in the housing market sapped demand for new buildings ‐ Housing starts fell to a seasonally adjusted annual rate of 523,000 from an upwardly revised 585,000 in March
House price boom raises spectre of Brazil bubble – Pg. 4 ‐ Property prices are soaring, consumer credit is booming and bank profits swelling. But there are concerns over whether Brazil is becoming addicted to this windfall of easy money… ‐ …there are signs of an economy running at full capacity ‐ Brazil unemployment has fallen to a historic low, exacerbating shortages of skilled labour ‐ In Sai Paulo, house prices have nearly doubled since 2008 ‐ …overall financial leverage of the Brazilian economy is low. Private sector credit is about 40‐ 50% of gross domestic product – a fraction of the pre‐credit bust levels of say, the US or Spain ‐ Mortgages, while growing fast, remain a novel product and mortgage debt still only comprises 4% of GDP. Nore does Brazil have any of the complicated “subprime” derivatives that derailed the US economy ‐ Finally, the central bank, alert to dangers, is introducing curbs on consumer credit and foreign loans, while steadily increasing benchmark interest rates, which at 12% are among the highest in the world ‐ Brazil’s current account deficit is still a manageable 2.3% of GDP
New York lawmakers warn Bernanke over derivatives rules – Pg. 4 ‐ …new derivatives rules that impose “significant competitive disadvantages” on US banks ‐ The Fed and other banking regulators recently proposed reforms that would force the non‐ US divisions of US banks to collect collateral, or “margin” in the form of cash or securities, regardless of their location
Tokyo has no option but to cleave to China – Pg. 9 ‐ The robust US‐Japan alliance will continue to be central to peace and security for the Asia‐ Pacific region ‐ The road to deepening mutual trust between Japan and China will not be smooth; new thrusts for investment and mergers and acquisitions between the two countries could engender an antiChina backlash among Japanese people
A bear in an American shop – Pg. 12 ‐ The situation is more nuanced. China must buy dollar‐denominated assets – though not necessarily government debt or any fixed income instrument for that matter – to maintain exchange rates ‐ China has reduced its share of outstanding debt to below 8%, the same level as two years ago
Doubts on Hong Kong secondary listings – Pg. 21 ‐ Hong Kong looks set to become the next hot destination for secondary listings but history appears to cast doubt on the benefits of such moves ‐ In spite of the lack of proven financial benefits, a number of companies have decided to undertake secondary listings on the Hong Kong stock exchange ‐ History suggests a fad, as Hong Kong becomes one of the world’s hottest financial markets because of its position as a gateway to China ‐ In the 1970s – when stocks and bonds were still traded in paper form – London was the leading destination ‐ Tokyo was the place to be in the 1980s, as global companies rushed to take part in what turned out to be a vast bubble in Japanese stocks ‐ In the 1990s and 2000s, the number one place to crosslist was New York
Europe rules out permanent ban on ‘naked’ CDS shorting – Pg. 21 ‐ Europe’s finance ministers have backed short selling curbs that fall short of a permanent ban on the “naked” shorting of sovereign swaps ‐ …the rules would allow such restrictions to be imposed temporarily in exceptional market conditions
17 May 2011
IMF chief denied $1m bail – Pg. 1 ‐ Dominique Strauss‐Kahn, the head of the International Monetary Fund, was denied bail on Monday after being formally charged in New York court over the alleged sexual assault of a maid at a hotel in the city
Nasdaq and ICE drop bid for NYSE – Pg. 1 ‐ Nasdaq OMX and the IntercontinentalExchange have abandoned their $11.3bn break‐up bid for NYSE Euronext after a US competition regulator threatened to sue the companies to block the potential deal ‐ The Department of Justice said combining NYSE’s stock market operations with Nasdaq’s would “substantially eliminate competition” in listings, trade reporting and other areas
US debt limit deal expected to go to wire – Pg. 3 ‐ As the US reached its $14,300 debt Limit on Monday, … ‐ …August 2 deadline estimated by the Treasury department to be when America would stop paying its creditors – from bond investors and contractors to some government salaries ‐ A solution that may prove palatable to both sides might impose tough fiscal rules, capping spending and triggering automatic across‐the‐board deficit reduction if discipline is seen as lacking ‐ Achieving agreement on $2,000bn in spending cuts may seem difficult without tackling programmes such as Medicare, Medicaid and Social Security, where there are still fierce divisions between the parties ‐ If all else fails there is always the possibility of a deal on a short‐term extension of the debt limit to avert default
Battle commences for IMF’s top job – Pg. 4 ‐ An American has traditionally headed the World Bank while a European heads the IMF ‐ The number two job at the IMF, held by an American, will also become vacant soon … ‐ Emerging market countries argue that it is unacceptable for Europe and the US to continue to stitch up the top jobs even as they take a growing share of the global economy ‐ However, even European countries that were willing to consider an emerging markets candidate for the IMF this time are having second thoughts, now that the fund is central to short‐term European Interests
District attorney outlines seven charges – Pg. 4 ‐ …seven charges for an alleged sexual assault on a maid at New York’s Sofitel hotel, for which he could spend up to 25 years in prison ‐ The criminal sexual act charge – a violent felony that is the most serious levied… ‐ Attempted rape is punishable by up to 15 years in prison, while sexual abuse is punishable by up to seven years in prison ‐ Mr Strauss‐Kahn had been booked for several days on the flight he was pulled off because he was due to meet Angela Merkel,…
Reshape of Greek debt rejected by Merkel – Pg. 8 ‐ Angela Merkel, German chancellor, has spelt out her strong opposition to restructuring debt in any member state of the eurozone, contradicting speculation that Germany was pushing such a solution in Greece ‐ Private creditors should not be drawn into potential debt‐rescheduling until 500bn (euro) European stability mechanism was established in 2013,… ‐ European finance ministers last night pressed Greece to accelerate its privatization programme and take more steps to shore up finances
Demand for US debt eases as China continues T‐bond sales – Pg. 22 ‐ Demand for US government debt and other securities eased in March as China sold Treasuries for the fifth straight month, (Prof Note: China is seeking a Return OF Capital…not good considering the U.S. borrows 40 cents of each dollar spent) ‐ Foreign holdings of US Treasury bills declined $21.9bn, while purchases of Treasury debt with a maturity of least two years were $26.7bn, down from $30.5bn in February, and the lowest since October ‐ Among the major holders of US Treasury debt, China reduced its holdings in March to $1,145bn from $1,154bn in February, and down from a peak of $1,175bn in October ‐ Much of the decline in China’s holdings in recent months has come from a reduction of their holdings in short‐term Treasury bills ‐ China’s purchases of US mortgage and agency debt climbed to $3,579bn in March, up from $1,923bn in the previous month ‐ Japan increased its Treasury holdings to $907bn, up from $890bn, in the aftermath of the earthquake and tsunami that struck the country in March
Rates on municipal bonds fall as new debt sales dry up – Pg. 23 ‐ Yields on US municipal bonds have fallen back on levels last seen in autumn when investors began stampeding out of the market, as concerns about mass defaults recede
16 May 2011
US Treasury urges debt ceiling action – Pg. 1 ‐ …starkest warning yet that f Congress does not quickly raise the US’s debt limit to avoid a default, investors will punish the country and further damage its fiscal position ‐ The potential for a default will move closer today when the US reaches the $14,300 borrowing limit mandated by Congress. Because of a series of special cash management measures, the Treasury has said it can delay a default until August 2, while bitterly divided Republicans and Democrats negotiate a deal to increase the debt ceiling ‐ Investors continue to have strong appetite for US debt,…
IMF bail‐out talks test Athens – Pg. 2 ‐ The International Monetary Fund has dismissed fears that talks with Greek officials on a revamped bail‐out package are close to collapse over the socialist government’s reluctance to push ahead with privatization ‐ …accelerated timetable and sales of 100% of state‐controlled enterprises – despite strong opposition within the cabinet and the governing Pasok socialist party ‐ The prospect of four more years of austerity has sent the socialists’ approval rating to its lowest level during 20 months in power,…
Huckabee adds to Republican despair – Pg. 3 ‐ The decision by Mike Huckabee, the former preacher and governor of Arkansas, not to seek the Republican nomination or the 2012 presidential election has reshape overnight what was already a wide open race ‐ At the top of the mainstream list is Mitch Daniels, Indiana governor, known best for his skills in managing budgets. Another potential candidate is Michele Bachmann, a Minnesota congresswoman who is popular in Iowa, a favourite with the Tea Party and one of the best fundraisers
Crisis threatens influence of Europe at IMF – Pg. 4 ‐ Dominique Strauss‐Kahn’s arrest may have little immediate effect on the International Monetary Fund’s operations. Yet it may well force the organization’s member countries to confront wider issues of European influence over the fund, even as it prepare to extend more huge rescue loans to western European
The walls have ears – Pg. 7 ‐ Authorizes are also stepping up their game, using sophisticated data mining, dawn raids and – in the US – wiretaps and body microphones, techniques traditionally reserved for Maria cases and violent crime ‐ Not only did the financial crisis shake the confidence of investors in the system, but evidence is also mounting that well‐connected insiders such as Mr Rajaratnam have routinely been trading ahead of corporate announcements, creaming off profits that would otherwise go to ordinary “buy and hold” investors
Tax fears prompt M&A rush – Pg. 15 ‐ US multinational companies are stepping up efforts to deploy their overseas earnings in crossborder mergers and acquisitions as they seek to avoid the tax hit from repatriating their so‐called “trapped cash” ‐ The activity has prompted debate among bankers over whether tax issues are distorting business decisions, potentially leading US companies to favour overseas investments over opportunities at home ‐ Use of cash in international deals by US buyers is at record levels, … ‐ Cash‐only deals accounted for 90% of international deal activity this year and last, and about 60% of global deals ‐ Companies rarely disclose the source of cash used in deals ‐ Companies are also becoming more creative in seeking to use their overseas cash in the US without suffering adverse tax consequences,… ‐ Some credit rating agencies only give companies partial credit for cash overseas, assuming they would lose a chunk to the government were they to bring it onshore
Investors back wealthy US shoppers – Pg. 18 ‐ The valuations of US companies that sell yoga shorts, organic wine and other penchants of the well‐off have risen far beyond their peers as investors seek exposure to those consumers who are least vulnerable to volatile petrol prices
Car loan providers move into subprime – Pg. 19 ‐ North American car loan providers have stepped up sharply their exposure to risky subprime buyers as economic conditions improve and lenders seek better profit margins ‐ …credit score of new‐car buyers reached a five‐year low in early May. Buyers with scores below 670 on the widely used Fico scale – which ranges from 300 – 850 – made up 14.5% of the total ‐ The used‐car market has been especially strong since the global recession as buyers have sought less expensive options ‐ Leasing, which contracted dramatically during the recession, has also bounced back
14 May 2011
New fears over entitlement plans – Pg. 1 ‐ The financial health of Medicare and Social Security is deteriorating faster than expected, …. ‐ The trustees of the two government health and pensions schemes for elderly forecast on Friday that Medicare will exhaust its funds in 2024, five years earlier than predicted while Social Security will be insolvent in 2036, one year sooner than thought ‐ The new projections – largely the result of the slow economic recovery – came three days before the US set to reach its debt ceiling of $14,300bn
Germany and France power ahead to outpace US and highlight weaker UK – Pg. 1 ‐ Germany and France powered an unexpectedly strong eurozone growth spurt at the start of this year that outpaced the US and cast a shadow over the UK’s much weaker recovery ‐ Germany’s economy grew 1.5% in the first quarter, …France announced 1% expansion in gdp… ‐ …17‐country region from its debt crisis… ‐ Across the eurozone, economic activity expanded by 0.8%, twice as fast as first‐quarter growth in the US ‐ The US has also seen economic activity back above its pre‐crisis peak. In contrast, the UK’s GDP must grow 4% before its economy produced the same as it did three years earlier
BATS files for IPO as it yes growth opportunities – Pg. 9 ‐ BATS Global Markets, the US trading venue, has filed with US regulators for an initial public offering that would transform the six‐year‐old group into one of the world’s largest publicly held stock exchange operators (Prof Note: This is one to watch) ‐ The move comes as exchange consolidation creates upheaval among incumbent US and European exchanges ‐ The likely valuation will in part be based on BATS’ position as operator of the third‐largest US stock exchange, on 10.8% market share, after the New York Stock Exchange (NYSE) and Nasdaq, as well as it having agreed in February to acquire Chi‐X Europe – already the second‐largest pan‐European equities trading platform after Euronext ‐ BATS is owned by a consortium of investors comprising Bank of America Merrill Lynch, Citigroup, Credit Suisse, Deutsche Bank, Getco, JPMorgan, Lime Brokerage, Morgan Stanley, Tradebot Systems and Wedbush ‐ The group has grabbed US market share by offering lower fees and faster trading. It has 114 employees compared with more than 6,000 from the putative merger between NYSE Euronext and Deutsche Borse
Threat of stagflation rears its head – Pg. 15 ‐ High inflation, low growth. Sound familiar? The spectre of 1970s‐style “stagflation”, banished for decades, has crept bank into investors’ consciousness ‐ With recovery still fragile in the US and many parts of Europe,… ‐ Forecasts for growth and inflation in the UK are striking ‐ The Fed recently increased its forecast for US inflation to 2.1‐2.8% for this year and cut growth expectations to 3.1‐3.3% (Prof Note: Wait…does this not mean that the Fed is doing a bad job? The Fed’s goal is promote growth while controlling inflation at or near 2.00%...is this not the opposite?) ‐ Inflation may held with “deleveraging”, or cutting debt, as it reduces the sum to be paid back (Prof Note: ‘relative’ sum) ‐ Strategists say one simple way to hedge against stagflation is to bet that inflation will rise sharply by trading inflation swaps while at the same time betting equity markets will fall, using equity futures, due to stagnating growth
13 May 2011
Big banks to take hit on capital surcharge – Pg. 1 ‐ The world’s biggest banks are likely to be hit by capital surcharges that increase progressively based on lender’s size, how connected it is to other banks and how easily it could be replaced in a crisis ‐ Banks had feared that there would be a single large surcharge and warned that it would cut sharply into profitability and could dampen lending and innovation ‐ The biggest European and US banks are expected to be hit with big surcharges because of their complex structure and global reach, while Chinese and Japanese banks might face lower requirements ‐ Second‐tier European and US banks may also benefit from lower surcharges
Dispute looms at helm of ECB – Pg. 2 ‐ The expected appointment of Mario Draghi as European Central Bank president threatens to trigger a dispute over composition of the bank’s leadership
Greece can privatize more, says IMF – Pg. 2 ‐ Greece has far more potential than other countries to use privatization to win back investor confidence, with sales plans amounting to less than a fifth of possible asset disposals,… ‐ With financial markets fearing a debt restructuring, eurozone policymakers have come to focus on privatization as an escape route for Greece. Revenue would be used to reduce the amount of help needed under a revised bail‐out plan ‐ IMF and European Union officials are reviewing progress on Greece’s $157bn rescue plan, …. ‐ The IMF offered support for the European Central Bank but warned that it might have to extend its policy of providing banks with unlimited liquidity
Rising prices wipe out efforts to cut fuel subsidies – Pg. 3 ‐ The rise in global oil prices has “more than offset” the strenuous efforts of developing countries to reduce the cost of fuel subsidies, … ‐ Governments spent $342bn on holding down the prices of petrol and domestic fuel in 2009 – six times more than the $57bn they devoted to subsidizing renewable energy ‐ The cost of a barrel of oil averaged $80 last year, compared with $61 in 2009, rendering it more expensive to hold down retail prices for consumers ‐ The Middle East’s main oil producers, notably Saudi Arabia, are among the biggest spenders on fuel subsidies. With governments across the region threatened by social unrest, they are even less willing to court unpopularity by reducing this burden ‐ If oil prices continue to rise, however, renewable energy will become more competitive
Silver price swings led by Shanghai trades – Pg. 13 ‐ Chinese speculators have emerged as a big driver of silver’s spectacular rally and subsequent crash with trading in the metal in Shanghai soaring nearly 30‐fold since the start of the year ‐ The commodity, nicknamed “the devil’s metal” for its wild price swings, surge d175% from August to a peak of almost $50 a troy ounce two weeks ago ‐ The surge in silver prices has attracted investors the world over, from china and India to the US, where the metal has become the investment of choice for Americans distrustful of the actions of the government and central bank
Wall St banks to launch renminbi funds – Pg. 16 ‐ Goldman Sachs has signed an agreement to establish a renminbi‐denominated private equity fund with the Beijing city government on Thursday, its first single‐country fund, as rival Morgan Stanley prepared to launch its own Chinese fund next ‐ They will also face competition from a rising number of homegrown Chinese funds that have sprung up as a result of government policies aimed at encouraging domestic private equity funds and investment ‐ The Chinese government has been deeply suspicious of private equity investors, especially the big foreign funds ‐ Renminbi‐denominated funds allow the foreign groups to raise money directly from deep‐ pocketed Chinese investors and access a faster, simpler regulatory approval process ‐ The groups also hope that local currency funds will give them access to the industries in which foreign investors are prohibited or subject to restrictions, such as media, telecoms, steel and transport
IASB to change joint venture accounting – Pg. 16 ‐ A controversial change to the way joint ventures are accounted for will reduce the reported sales of some companies in Europe and elsewhere ‐ …IASB…plan to abolish one of the two methods used to account for some joint ventures ‐ …jettison the proportionate consolidation method for most jointly controlled entities in favour of mandatory equity accounting ‐ Proportionate consolidation boosts a company’s reported sales by recognizing joint‐venture contributions higher up the income statement than would be the case under equity accounting ‐ It also adds to assets and liabilities ‐ The change will affect companies who report under the IFRS accounting norms followed by listed companies in the European Union ‐ Other countries that use IFRS include Australia, South Africa, Brazil and Canada. The IASB said change would make IFRS more consistent and more closely aligned with US domestic accounting rules, furthering its goal of creating a global language for financial reporting ‐ The new rules extend IASB guidance issued during the financial crisis, as banks and other parties struggled with the question of how to value complex assets in illiquid markets
China lifts Japanese bond holdings – Pg. 20 ‐ China bought the most Japanese long‐term bonds and notes since at least 2005 in March, sparking speculation that the country may be diversifying its foreign exchange reserves into the yen ‐ The yen would be an attractive option because it is a highly liquid market outside the US dollar and the euro….
12 May 2011
Rajaratnam found guilty – Pg. 1 ‐ ….convicted of insider trading on Wednesday, handing the US government its biggest victory in a generation… ‐ …14 counts of securities fraud and conspiracy ‐ Mr Rajaratnam, 53, faced up to 19 and a half years in prison when he is sentenced on July 29 ‐ He remains out on a $100m bond (Prof Note: Hmmmmm…does Sri Lanka have extradition? Hmmmmmmmmm…..)
Oil and fuel prices fall after US supply report – Pg. 1 ‐ Oil and fuel prices plunged in furious trading on Wednesday after a government report said US supplies of petrol had reversed a weeks‐long decline ‐ The severe drop underscored the volatility that has returned to oil markets
City fortunes in flux as exchanges merge – Pg. 3 ‐ In the centres of Paris and Brussels two neoclassical buildings, each with the world “Bourse” engraved above their entrances, tell a story of once‐proud national stock exchanges, their floors teeming with traders…..but for years the buildings have been empty… ‐ NYSE Euronext is trying to finalize a planned $9.4bn merger with Deutsche Borse, of Germany ‐ This would create by far the largest exchange in the world, sprawling entity including the New York Stock Exchange and NYSE Euronext’s four European stock markets of Paris, Brussels, Amsterdam and Lisbon, with the German exchange’s Frankfurt Stock Exchange ‐ The Borse’s big Eurex derivatives business would be combined with the NYSE Liffe futures exchange, which is based in London ‐ …NYSE rival Nasdaq OMX has teamed up with another US exchange, IntercontinentalExchange, or ICE to thwart the merger ‐ The London, Paris, Frankfurt and Amsterdam share markets lost their near‐monopoloies in share trading with the enactment by the European Commission in 2007 of the Markets in Financial Instruments Directive (Mifid) ‐ That created competition for the first time, provided largely by London‐based upstarts and giving the UK financial centre a boost at the expense of its smaller rivals
UK gloomier on growth and inflation – Pg. 4 ‐ …Bank signaled that there was likely to be a rate rise this year ‐ Its forecast showed that inflation would remain higher than its 2% target if it kept policy on hold ‐ On Wednesday, it forecast that the recovery would build to an annual growth rate of 2.8% ‐ …Bank now expects the sustainable level of UK output to be 1.7% lower in 2014 than it previously thought ‐ In the short term, the Bank is forecasting that inflation is likely to hit 5% later this year as expected rises in gas and electricity bills add to oil, food price rises and tax increases, all of which have pushed inflation far above the Bank’s 2% target
Economy slows as China battles price rises – Pg. 4 ‐ Chinese inflation remained stubbornly high in April even as evidence mounted that economic growth may be slowing more than expected ‐ The benchmark consumer price index rose 5.3% in April from a year earlier
Surging oil prices nudge trade deficit up to $48.2bn – Pg. 6 ‐ Greater imports of oil and a $6 increase in the price per barrel added $5.8bn to the deficit. That overshadowed a solid 4.6% rise in exports, which finally recovered to their pre‐ recession level ‐ The trade deficit was higher than the $47bn forecast by analysts
US university MIT sets sights on $750m century bond sale – Pg. 22 ‐ MIT, the elite US university founded in 1861, was looking to price the bonds later on Wednesday (Prof Note: The yield must be tracked! I venture to say that MIT is more risk‐ free the US Treasuries…MIT will always have a market, always be able to increase class sizes and raise tuition. The yield MUST be watched) ‐ MIT carries triple A ratings ‐ Century bonds have appealed to investors, such as pension funds and insurance companies, which have very long‐term liabilities that they want to match with long‐term assets (Prof Note: Duration matching!) ‐ Proceeds of the MIT bonds will finance part of a plan by the university to upgrade its facilities, construct new research buildings and make other real estate investments, …. ‐ MIT’s current 100‐year bonds are being offered to investors at a risk premium, or a spread to 30‐year Treasury bonds, of about 130bps….
Islamic Finance – Special Section
11 May 2011
Floods set to force up price of petrol – Pg. 1 ‐ US gasoline futures prices are rising faster than crude oil, threatening higher prices at the pump as political authorities face rising public anger over energy costs (Prof Note: I cannot fill my car anymore! Service stations are cutting me off at $75! What is up with this???!!!) ‐ Gasoline futures strengthened relative to crude on Tuesday, as a flood crest flowed down the Mississippi river towards refineries in Louisiana ‐ The average retail price of US petrol is $3.97 a gallon, the highest since mid‐2008 ‐ Analysts said the strength of petrol reflected declining inventories resulting from a series of US refinery outages. ‐ Brokers on the New York Mercantile Exchange pointed to a 17% leap in the gasoline “crack” – or indicative profit margin for refiners ‐ ….
Pressure on China over trade surplus – Pg. 1 ‐ China recorded a large trade surplus in April as imports of commodities and raw materials slumped and exports surged, renewing pressure on Beijing to allow faster appreciation of its tightly controlled currency ‐ The renminbi has gained about 2.3% against the US dollar over the past six months ‐ China’s trade surplus reached $11.4bn in April, ahead of expectations ‐ China’s fastest‐growing exports are labour‐intensive, low‐margin products whose competitiveness would suffer from a dramatic appreciation of the renminbi
Canada boosts claim to northwest passage – Pg. 3 ‐ …no other country supports Ottawa’s claim to the routes through the passage: the US, the European Union and Russia all contend that it is an international waterway ‐ Should the passage open up to commercial traffic, it would cut shipping times between Europe and Asia by several days compared with the Panama Canal
Weak dollar sends foreign tourists flocking to New York – Pg. 3 ‐ Foreign tourists are flocking to New York to take advantage of the weak dollar, .. ‐ The result is an uncoupling of the economy from the fortunes of Wall Street. In contrast with previous recoveries, tourism and retail rather than finance are leading the rebound,… ‐ Retailers cut 7.7% of their workforce across the US from December 2007 to February 2010, but shed just 0.1% in New York. The city’s leisure and hospitality sector grew 3.5% during the downturn, compared with a 4.5% national fall
Finland keeps EU waiting on Lisbon bail‐out – Pg. 4 ‐ Finland has postponed a decision on whether to back the European Union bailout for Portugal, casting fresh doubt over the chances of unanimous approval…. ‐ Unlike other eurozone countries, Finland requires approval from parliament to take part in EU bail‐outs
Paris resists Ireland’s low corporate tax – Pg. 4 ‐ France will refuse a cut in the cost of Ireland’s European bail‐out loans at next week’s meeting… ‐ Ireland pays on average 5.8% on its $122bn bail‐out agreed with the European Union, IMF and the EU’s stability fund ‐ President Nicolas Sarkozy has attacked Ireland’s 12.5% corporate tax rate as a form of “fiscal dumping”, accusing Dublin of using unfair methods to attack foreign investment and compete against the European partners who bailed the country out of its severe banking crisis
UK headhunters pledge new focus on gender – Pg. 8 ‐ British headhunters are putting the finishing touches to a code of conduct to counter accusations that they are hindering women’s entry into boardrooms ‐ …proportion of female non‐executive directors has remained stuck at 12.5%. If that percentage does not double to 25% by 2015, company bosses have been threatened with mandatory quotas such as those adopted by France this year ‐ Quotas requiring women to occupy 40% of board seats by 2015 in all companies with a minimum of 500 employees and $72m turnover have given French headhunters an immediate incentive to change their behavior ‐ A finite pool of suitable women is cited as the main reason for the paucity of female board members in Britain (Prof Note: Oh please! What a crock of $hit!)
Bricks and water – Pg. 14 ‐ Home price tracker Zillow reported that prices dropped 3% in the first quarter and more than 8% year on year – their steepest rate of decline since the months after Lehman Brothers collapsed ‐ Even if price declines are heading towards uncharted territory (only the Great Depression was worse)… ‐ Less clear is what the rising number of “underwater” homeowners – those with negative home equity – will do to the economy. Zillow estimates that an incredible 28% of US homeowners, up from 22% a year ago, are in this situation. For perspective, in the UK during the mid‐1990s, a period often remembered as the slump of housing slumps, 11% of mortgages were in negative equity ‐ Being underwater, whether or not one is able to service a mortgage, change’s one’s incentives. The penalty for walking away is usually limited to a damaged credit rating, in most cases (Prof Note: This is exactly what is wrong with society! Bring back debtor prisons! Put deadbeats that walk that could have serviced their mortgages in a Federal Supermax bunking with murders and rapists….we will see how many walk! If this happened…I would run, not walk, to the bank to pay off my home!) ‐ Owners in this situation may be tempted to collect “squatters rent” by living in their homes for months or even years without paying interest or principal on their mortgages
US regulators look at relaxation of restrictions on capital‐raising – Pg. 15 ‐ Washington regulators are looking at relaxing rules around companies raising capital after criticism that tough regulations are hindering the growth of start‐ups and eroding the appeal of US public stock markets
Nasdaq in offer to Paris over NYSE bid – Pg. 16 ‐ Nasdaq OMX, the US exchange group, has offered to restore the name “Paris Bourse” to France’s stock market, if it wins the battle for control of NYSE Euronext, current operator of the Paris exchange ‐ Nasdaq and ICE are trying to break up a $9.4bn agreed merger between NYSE Euronext and Deutsche Borse, unveiled in mid‐February
Investors count the cost of any default by Athens – Pg. 23 ‐ Financial markets are pricing in the once unthinkable. ‐ These scenarios include voluntary, or soft, restructuring of Greek debt, and a hard restructuring that would force losses on to debt holders by writing down the value of Greek government bonds
10 May 2011
Default fears spur fresh credit for Greece – Pg. 1 ‐ Standard and Poor’s has cut Greece’s credit rating by two notches, warning that any voluntary debt restructuring would amount to a default ‐ The downgrade to B, six notches into junk territory, …. ‐ On Monday the European Central Bank became the latest institution to throw its weight behind revamped assistance ‐ The ECB also does not see an extension of maturities – referred to as a debt re‐profiling by some politicians – as feasible or effective
Republican overtures to Wall St – Pg. 2 ‐ Next week the US will hit its borrowing limit, and the Treasury has warned the country would face a potentially devastating default on its debt by the beginning of August unless Congress took action to increase it
You’ve been contago’d – Pg. 14 ‐ …commodity futures are quite different. The argument was that they offered two additional legs of return: interest on collateral, and a positive “roll yield” – the profit that can be made from selling futures contracts at expiry and using the returns to buy the next contract if its term structure is backwardated or downward‐sloping ‐ Even better, modern portfolio theory showed that the low correlation of commodities with bonds and stocks allowed investors to generate the same return with less risk
BofA to halve $850bn bad loans – Pg. 15 ‐ Bank of America Merrill Lynch plans almost to halve its $850bn portfolio of troubled home loans over the next three years as it seeks to quicken the pace with which it resolves problems related to the housing crisis and its disastrous purchase of Countrywide Financial ‐ BofA owns about $118bn of the problem loans outright. It services the rest, which means it collects payments from borrowers and initiates foreclosure proceedings ‐ Mortgage holders will deal with a single bank employee and should receive a decision within 30 days, about one‐third of the time it now takes to determine eligibility ‐ Shares of BofA have lost about a quarter of their value in the past year and are still trading at below the book value of the bank
Tysons warns on rising food costs – Pg. 18 ‐ Tyson Foods, the US meat producer, warned on Monday that rising foods costs were eating into consumer confidence and said that higher grain prices would cost the company half a billion dollars this year ‐ During the second quarter Tyson raised prices by 12.3% from a year ago and on Monday maintained its 2011 outlook of $32bn in sales, up from $28.4bn last year ‐ …Tyson increased beef prices by almost 20% during the quarter,….
US equity volumes tumble after Citigroup reverse split – Pg. 22 ‐ Citi shares opened the day with only one‐tenth of the number of shares outstanding on Friday, after it completed a reverse split with a one‐for‐10 exchange of its 29bn shares, leaving 2.9bn outstanding ‐ That puts it more in line with Dow Industrial Average groups, which have an average of 2.6bn shares outstanding ‐ Citi shares have become a pillar of US trading volumes in recent years ‐ One some trading days in the past three years Citi shares made up as much as 10% of US volume. It was average about 6% daily volume in 2011
Asian debt boom leads to fears of bond indigestion – Pg. 23 ‐ In the sober world of debt investing, few products are racier than perpetual bonds. With no maturity date, they allow the issuing company to pay the money back any time it wants ‐ Asian bond yields tend to be much higher than the “risk‐free” interest rate on US government debt. Any rise in US borrowing costs would therefore hit the Asian bond market hard ‐ …forecasts that Asian dollar‐denominated corporate bond issuance will quadruple between 2009 and 2014, with annual issuance running at or above $100bn by 2014 ‐ The surge in demand for cash by Asian borrowers is driven by the region’s rapid economic growth – but also, increasingly by companies aggressively ramping up capital expenditure and building war chests for overseas acquisitions ‐ …US and European investors have been rebalancing their portfolios towards Asia
9 May 2011
Greek bail‐out heads for revamp – Pg. 1 ‐ …concluding that Athens would be unable to raise money in the markets early next year,…. ‐ Greece needs to raise 25bn – 30bn (euro) next year to meet debt repayments that would not be covered by its current bailout loan. In addition to selling bonds to the EU rescue fund, Athens could also propose a voluntary extension of maturities on debt due to expire next year,….
Biggest commodity hedge fund loses $400m in oil price collapse – Pg. 1 ‐ Clive Capital, the world’s largest commodity hedge fund, …. ‐ London‐based Clive – which manages an estimate $5bn of client money – is the biggest of several big hedge funds believed to be reeling after the unexpected sell‐off hit markets last late last week ‐ Commodity hedge fund are used to volatile portfolio moves. In spite of similar historical setbacks, Clive has a record of returning, on average, 27% on investors’ capital a year
SEC reform proposal threatens ‘dark pools’ – Pg. 4 ‐ …considering a proposal to move more trading back on to exchanges from alternative venues such as “dark pools”, … ‐ SEC staff will assess the impact of off‐exchange trading on volatility and less‐liquid stocks ‐ Since the current market rules were introduced in 2006 the share of US trading volume on exchanges that display prices, which includes the Nasdaq and the New York Stock Exchange, has dropped about 70%. The rest are executed in markets where prices are not displayed, known as “dark pools”, the largest of which are operated by Credit Suisse and Goldman Sachs, or matched internally by banks and market making firms such as Citigroup, UBS and Knight Capital
States improve on S&P’s federal outlook – Pg. 4 ‐ …agency gave its top rating to Nebraska and Wyoming ‐ S&P’s stance is based on the rationale that its state ratings do not assume any direct federal backing of debt ‐ Local governments have their own taxing power, too, and rely more on aid from states than the federal government, ….
China and the US – Pg. 12 ‐ …China’s currency is appreciating and its trade surplus is falling, two of the traditional flashpoints have dimmed. Next on America’s agenda: China’s habit of channeling cheap credit to its huge state‐owned enterprises, fueling “trade tensions”
Apple overtakes Google as top brand – Pg. 13 ‐ Apple has overtaken Google to become the world’s most valuable brand with an estimated brand value of more than $153bn,…. ‐ The ranking covers everything from cars to clothing and banks to telecoms providers ‐ Apple has increased its brand value by $137bn, or 859% since 2006,… ‐ …stock market capitalization of $319.4bn, which is nearly five times higher than in 2006 ‐ Google’s market capitalization is $172.4bn ‐ …Apple had succeeded in emulating luxury goods brands: making its product more expensive had increased their desirability
Muni debt set for $29bn refinancing – Pg. 14 ‐ US states, cities and other local entities are gearing up to refinance a record $29bn of expiring bank guarantees this quarter, which have to be completed to avoid potential credit rating downgrades and defaults ‐ If the guarantees are not refinanced, borrowers such as states or cities, could have to pay much higher interest rates on the bonds backed by the guarantees and be forced to repay them more quickly ‐ Almost all of the bank guarantees that expired in the first quarter have been refinanced,… ‐ New Basel III rules could make lending more expensive. As a result, most guarantees have a shorter lifespan than pre‐crisis deals, which means new deals cut now will have to be refinanced sooner
Insurance for groups to restore reputations – Pg. 17 ‐ The full cost of a tarnished reputation are impossible to calculate, but a clutch of the world’s largest companies are about to be offered insurance that will help pay for advertising, lobbying and public relations that could help restore one ‐ Aon, one of the world’s biggest insurance brokers,… ‐ BP is thought to have spent in the region of $300m on advertising, lobbying and PR since…
7 May 2011
US jobs rise eases fears on economy – Pg. 1 ‐ Robust US jobs data on Friday eased fears about the health of the global economy and prompted a bounce‐back in commodity prices after a frantic sell‐off the day before ‐ The US economy added 244,000 in April, well ahead of the 185,000 forecast by market analysts,… ‐ In the currency markets, the dollar rose above $1.44 to the euro, a rally of five cents in two days,… ‐ The jobs numbers eased fears that the world’s largest economy might be heading for another slowdown after weak growth in the first quarter and a series of downbeat data releases led to a sharp fall in commodity markets on Thursday ‐ The unemployment rate edged up to 9% from 8.8% in March but analysts read little into the rise because it is still well down on the 9.8% recorded in November
Strong job creation eases fears of a swoon – Pg. 3 ‐ Earlier this week there was a jump in new claims for unemployment insurance and a weaker number from the ISM survey of the services sector. ‐ Creating more than 200,000 jobs a month should be enough to keep up with population growth and bring down the unemployment rate over time ‐ Job creation was also spread across a range of industries. There were 57,000 new jobs in retail, 51,000 in business services, 37,000 in healthcare, and 29,000 in manufacturing ‐ The recovery started almost two years ago, however, and in past recoveries there was a rapid employment growth at this stage. This time around the level of employment is still barely above its trough ‐ Job growth continues to be held back by the industries that suffered most during the recession – construction and finance – and by fiscal retrenchment from state and local governments ‐ Construction added only 5,000 jobs, financed added only 4,000, and government shed 24,000 workers largely at the state and local level ‐ ….even if the rate of jobs growth picked up to 300,000 a month, there would still be “considerable slack” in the labour market by the end of next year
Nervy investors dump commodities – Pg. 15 ‐ The great commodities “correction” of 2011 began in a quite niche market that rarely makes front pages: silver ‐ Its 175% price surge since August appeared at odds with improving, but unspectacular, supply and demand fundamentals. ‐ Bankers and traders say a large proportion of the long positions were held by momentum following funds that trade using computer algorithms aiming to exploit market trends ‐ …bankers say some commodity – focused hedge funds have suffered sizeable losses in oil, silver and aluminium
6 May 2011
Oil leads plunge in commodity markets ‐ Pg. 1 ‐ A record plunge in oil prices led the sharpest sell‐off in commodities in two years on Thursday as investors fled the market amid mounting concern over the strength of the global recovery ‐ Fears about the strength of the US economy have retuned following weaker‐than‐expected growth and jobs figures. US petrol prices are approaching $4 a gallon, hitting households and squeezing disposable income ‐ The steep slide in everything from cocoa to silver and other metals, including copper and tin, could mark an end to the impressive bull run that has taken the prices of many commodities to record highs ‐ The sell‐off came a day after Glencore, the world’s biggest commodities trader, unveiled details of its multibillion‐dollar floatation. Some investors drew comparisons with the initial public offerings of Goldman Sachs and private equity group Blackstone, which marked the top of their respective markets ‐ The euro also fell against the dollar, down 2.1% to $1.4510 late in New York
Brazilian imports of US ethanol soar – Pg. 1 ‐ US Export of ethanol to Brazil have soared during the past year as the real’s rise against the dollar and the high price of sugar have undermined the competitiveness of Brazil’s domestically produced biofuel ‐ The share of the Brazilian market taken by US exports is still small but the steep rise in sales to the world’s second‐biggest producer reflects the US industry’s growing commercial strength, which is also driving political pressure for the removal of state subsidies ‐ Brazilian ethanol made from sugarcane has been the cheapest biofuel for years ‐ ….the US has now established itself as the world’s second‐largest ethanol exporter, selling to the Middle East, Europe and Canada, with its products made competitive by the fall in value of the dollar
ECB cautious over rate rises – Pg. 4 ‐ The European Central Bank has ruled out a further interest rate increase in June but could raise official borrowing costs later this summer in its battle against surging eurozone inflation, … ‐ The ECB, which is confident the overall eurozone economic recovery will continue, thinks last month’s rate increase sent a powerful signal that higher inflation caused by soaring oil and commodity prices should not become entrenched ‐ Eurozone inflation hit 2.8% in April, above the ECB’s target of “below but close” to 2%
Recovery at risk in US as jobless claims rise – Pg. 4 ‐ The US labour market is faltering again, with new unemployment claims rising last week to their highest level in eight months ‐ First‐time claims rose by 43,000 to 474,000…. ‐ A number of one‐off factors pushed up jobless claims, including a spring break holiday at New York schools, an emergency benefits programme in Oregon and shutdowns at car manufacturers after the Japanese earthquake ‐ (Prof Note: this just in…the economy added 244,000 jobs and unemployment rate edged up to 9.0%)
Talks pave way for US debt deal – Pg. 5 ‐ The White House and congressional leaders have expressed optimism that budget talks will yield an agreement to increase the US debt limit,… ‐ The escalating costs of Medicare; Medicaid, the health plan for the poor; and social security, the government retirement scheme are considered the main threats to America’s fiscal position
Paulson’s credit strategy reaps solid gains in volatile conditions – Pg. 21 ‐ Credit strategies are leading the way for hedge fund managers as funds adjust to volatile trading conditions ‐ Credit is the best performer so far this year,…
Cinco de Mayo 2011
Mexico buys 100 tonnes of gold as emerging nations shift from dollar – Pg. 1 ‐ …central banks embark on their biggest bullion buying spree in 40 years ‐ …emerging market economies intent on diversifying reserves away from the faltering US dollar. China, Russia and India have acquired large amounts of gold in recent years, while Thailand, Sri Lank and Bolivia have made smaller purchases ‐ The reversal of two decades of gold selling marks the end of an era characterized by widespread faith in paper currencies and sovereign debt. The dollar has plunged 10% against the world’s major currencies since January and is trading near an all‐time low ‐ Robert Zoellick, president of the World Bank, has suggested that leading economies consider a return to a modified gold standard
Banks in line for up to 12bn (euro) – Pg. 2 ‐ As much as 15% of Portugal’s $115.7bn financial rescue package will be used to shore up the country’s banks, with up to 12bn (euro) to be injected into banks that fail to reach new higher capital ratios over the next 18 months under their own steam ‐ Under the terms of the European Union‐International Monetary Fund bailout deal,…banks that fail to hit a 9% core tier one capital ratio – a key measure of financial strength ‐ by the end of the year, and 10% by the end of 2012, will be forcibly recapitalized with government money ‐ The new targets go further than the 8% end‐2011 ratio stipulated recently by Portugal’s central bank. The banks will have until the end of next month to outline their plans to hit the target ‐ …an attempt to put Portugal’s banks on the road to normalized liquidity funding
Treasury in debt ceiling warning on US bonds – Pg. 3 ‐ The US has warned of possible changes to Treasury bond auctions if Congress does not increase the country’s debt ceiling by beginning of August, in the latest sign that the budget fight could herald big disruptions to capital markets ‐ Later this month, when the US formally hits its $14,300bn debt ceiling, the government will declare a “debt issuance suspension period” that will allow it to redeem bonds held in a special retirement and disability fund for civil servants. The Treasury has also said it may have to suspend the reinvestment of debt held by the Exchange Stabilization Fund, which is used for currency interventions
Brazil stays resolute on rate rise strategy – Pg. 3 ‐ Brazil will increase interest rates as long as necessary to quell headline inflation, its central bank chief has said, but he added that there was already some light at the end of the tunnel, with monthly price rises expected to begin slowing this month ‐ Brazil’s central bank increased interest rates 25bps to 12% two weeks ago in an intervention that was initially interpreted as dovish by markets. But the bank has since said it will “prolong” these rate rises until inflation looks like converging to the official target, probably some time next year ‐ The government has increased taxes on lending and financial transactions in an effort to deter flows of speculative “hot money” into Brazil from abroad ‐ Under this policy, investors are forced to deposit a portion of their money with the central bank for a period to incur or incur a fee for early withdrawal
US set to regain industrial crown – Pg. 8 ‐ ..rising wage growth in many parts of China, which is reducing the incentive to base production in that country for anything other than selling to the large domestic market ‐ ….unlikely to enable the nation to regain its title as the world’s biggest manufacturer, which it held for more than a century until China overtook it last year ‐ Last year, China accounted for 19.8% of world manufacturing output, fractionally ahead of the US, with 19.4%, ….In 1990, China accounted for only 3% of the total (Prof Note: In 1995 when studying for my MA International Transactions degree my professors were forewarning of China…) ‐ …employee costs typically account for 20 to 30% of overall manufacturing expenses, with other costs such as covering equipment often no lower than elsewhere, by 2015 China is unlikely to have a cost advantage over US factors in making many products for the US market
Chinese poised to amass over $1,000bn of foreign assets – Pg. 8 ‐ Chinese direct investment offshore is at the beginning of an exponential take‐off, …. ‐ Chinese investment into the US is already doubling every year and the failure of the US to capitalize on a wave of future flows will damage its economy and jobs market,… ‐ By the end of 2009, the total stock of Chinese investment offshore stood at about $230bn, on a par with Denmark and slightly higher than Taiwan ‐ The Chinese already have a business presence in 35 of the 50 states in the US, with the largest concentration of investments in Texas, New York, and Virginia. The largest category by value is industrial machinery
Online shopping jumps in US as cost of fuel curbs trips to malls – Pg. 17 ‐ Online shopping grew by its fastest rate in nearly four years in the US last month, as rising fuel prices prompted Americans to cut trips to malls and buy on the internet instead,… ‐ The average national price was $3.96 a gallon on Wednesday, up from about $3.10 at the end of February
UK interest rate rise prospects pushed back on economy fears – Pg. 25 ‐ Expectations of UK interest rate rises have been pushed back to next year as gilt yields dropped to lows for 2011 amid worries about the economy
4 May 2011
US lays bare mistrust of Pakistan – Pg. 1 ‐ (Prof Note: I have been criticized for not providing my views on OBL so here goes….I am offended by celebration of a death. I am bothered by the revelry in the streets by youths that were too young to remember 9/11. What makes the deal of OBL legal under U.S., our lack of recognition of his organization? I thought Reagan banned assignations by executive order in 1981? Further, this criticism of Pakistan seems grossly premature without facts (of which I have read none). It was an American author who wrote The Purloined Letter which had the premise that the best hiding place was in plain sight. It took the sleuth Dupin to find the letter, perhaps Pakistan simply was not a ‘Dupin’? Could Poe have been wrong???)
Portugal reaches deal with EU and IMF over terms for bail‐out – Pg. 1 ‐ Portugal has reached an agreement with the European Union and the International Monetary Fund on a financial rescue package, become the third eurozone country to be bailed out of a debt crisis after Greece and Ireland ‐ …three‐year programme would not involve any additional fiscal measures in 2011 and would set out less demanding deficit targets than previously fixed by the government
States of denial – Pg. 12 ‐ The boldest proposals (and sharpest battles) on pension reform are shaping up in traditional Democratic and union strongholds New Jersey, Wisconsin and Ohio
US banks warn proposals put European trade at risk – Pg. 13 ‐ Wall Street banks are warning they could have to cede much of the European derivatives market to the likes of Deutsche Bank and Barclays capital if Washington regulators follow through on proposals to apply new regulations beyond US shores ‐ The Federal Reserve and other regulators recently proposed rules that would force the non‐ US arms of US banks to collect collateral, or “margin”, in the form of cash or securities, “without regard to whether the counterparty is located inside or outside the United States” ‐ As in the US, European hedge funds, insurers and asset managers would have to put up “initial margin” on trades with a US swap dealer that does not use a clearing house. At the moment most large counter‐parties in over‐the‐counter deals are given millions of dollars of credit
Russian lenders fail stress test – Pg. 15 ‐ Nearly a third of Russia’s banks are ill‐prepared for a repeat of the global financial crisis,… ‐ Few domestic lenders went bankrupt during the crisis, thanks to nearly $40bn in state support ‐ …more than 300 of Russia’s 900‐plus banks would see their capital requirement fall below the 10% minimum – and therefore have their licenses revoked – if they found themselves in a similar downturn marked by a rapid outflow of deposits and a paralysis in interbank lending
ECB suffers setback in debt buying – Pg. 20 ‐ Since launching its controversial government debt‐buying programme a year ago, the ECB has insisted it was not embarking on “quantitative easing” ‐ By reabsorbing an equivalent amount from financial markets, it was able to counter fears expressed by Germany’s Bundesbank that the programme was creating inflation risks ‐ Last week, the ECB also failed to reabsorb the required amount. In total such operations have failed five times in the past year ‐ The latest setback was the result of higher market interest rates, which deterred banks from parking funds at the central bank. It could fuel ECB nervousness about its bond buying ‐ The ECB’s apparent inability this week to “sterilize” its bond purchases could make it harder for it to justify the programme politically, …
‘ET’ stokes fears about sweeping swaps rules ‐ Pg. 20 ‐ Short for ‘extraterritoriality”, the legal term under which people or companies are exempt from local laws, the ET theme is becoming a hot topic in the global derivatives market as swaps become subject to regulation ‐ Derivatives have grown into one of the biggest parts of the capital markets, ….at last count, derivatives contracts worth nearly $600,000bn were outstanding globally ‐ Among rules on margin and capital requirements from the Federal Reserve and other banking regulators, one says that these requirements “shall not apply to any foreign non‐ cleared swap or foreign non‐cleared security‐based swap of a foreign covered swap entity”. But the definition of such a “swap entity” suggests that non‐US subsidiaries of US banks will not be exempt, while non‐US subsidiaries of foreign banks are ‐ This could mean that if a German car manufacturer were to do an interest rate swap with a US bank’s London arm it would have to cough up “margin” – cash against outstanding positions. But, if the German carmakers did the swap with a British bank that also traded in the US, it would not have to. This anomaly has raised fears among US banks of losing business ‐ The CFTC, for example, only released rules on what would count as a swap last week
Prospect of lower Treasury bill issuance pulls down yield – Pg. 20 ‐ Interest rates demanded by investors to hold short‐term Treasury bills sank to record lows on Tuesday and were approaching zero, amid the prospect of lower sales by the US Treasury in coming months ‐ The issuance of Treasury bills is now pegged at $142bn versus an original estimate of $298bn ‐ Investors in government bills now face, the prospect of near‐zero interest rates well into the summer amid a debate over raising the Federal debt ceiling ‐ The fall in T‐bill yields spells further pain for money market funds, where $777bn of the total $2,727bn held in cash is invested in government‐related securities ‐ The introduction of a new fee on banks in April by the Federal Deposit Insurance Corporation has led to reduced activity in the government repurchase or “repo” market, which has sent a lending benchmark, known as general collateral, towards zero
S&P warns of increase in debt defaults by European companies – Pg. 21 ‐ A boom in high‐yield bond issuance, most notably in Europe, has allowed many highly indebted companies to refinance loans put in place before the credit crunch took hold in late 2007.
3 May 2011
US jubilant at bin Laden’s death – Pg. 1
Finns threaten Portugal rescue plan – Pg. 7 ‐ A Finnish eurosceptic party that made big gains in last month’s general election has renewed its opposition to the proposed EU bail‐out for Portugal as talks get under way to form a government in Helsinki ‐ The anti‐EU True Finns, previously a fringe populist party, won 19% of the vote in April 17 poll, …. ‐ &nbs p; ; Finland, unlike other eurozone countries, requires parliamentary approval for EU bail‐out measures, raising the possibility of Finnish lawmakers holding up the Portuguese rescue, which can only go forward with unanimous EU support ‐ A new government is expected to be in place by May 19
Treasury revises US default estimate – Pg. 8 ‐ The US Treasury department pushed back its estimate for a potential US default to the beginning of August, … ‐ ; The first special step to be taken on Friday involved suspending the issuance of special Treasury bonds designed for state and local governments to better manage their finances,… ‐ With little prospects for a deal to be struck by May 16, the Treasury has been ramping up its efforts to delay a potential default for as long as possible ‐ Mr Geithner said that on May 16 he would declare “debt issuance suspension period” allowing the government to redeem debt held in a civil service retirement and disability fund. He also said it might become necessary to suspend the reinvestment of Treasuries held in the Exchange Stabilization fund, a tool used in currency interventi on
Golf developers stay out of rough despite ban – Pg. 9 ‐ …facilities….have become also a potent symbol of the hypocrisy and corruptio n inherent in Communist rule ‐ Ch ina introduced a ban on the construction of golf courses in 2004 in an attempt to preserve dwindling fa rmland, save water and reduce the huge number of villagers thrown off their land as luxury real estate is developed ‐ But despite the ban the number of golf courses in china has more than tripled from 170 in 2004 to nearly 600 now,… ‐ ; …most golf developmen ts in China do not include the word “golf” in their name or anywhere on their planning documents, and instead refer to themselves as “health and entertainment clubs” or “country clubs” ‐ Golf was completely banned in China as a bourgeois “rich man’s game” until 1984, but toda y is a favourite pastime for the country’s wealthy elite, many of whom are government officials ‐ As well as developers are well connected they can ignore warnings from regulators, who wil l rarely risk their careers by enforcing laws that could offend powerful interest groups higher up the food chain
Conga contemplation – Pg. 11 ‐ …little moves in the bond world without Pimco 217;s involvement ‐ ….30‐year bull market for bonds ‐ At Pimco – which began life in 1971 with three people and $12m – portfolio managers are rewarded for their contribution to the firm’s overall performance, rather than their pay being linked to revenues of a specific fund as is common elsewhere ‐ Two‐thirds of managing directors have held the job for less than five years ‐ Of Pimco’s 1,800 employees, 75 so far work directly in the equity business, enough to look after more than 10 times the less than $4bn equity assets under management currently
Firing and hiring – Pg. 16 ‐ The average non‐farm payroll gain of 160,000 a month over the past three months i s the fastest since early 2007
US becomes net exporter of fuel as buyers struggle at the pump – Pg. 17 ‐ The US has become a net exporter of fuel f or the first time for nearly 20 years as dri vers struggle with high petrol prices ‐ Energy department data show the world’s largest oil consumer in February shipped out 54,000 barrels more petroleum products each day than it purchased on th e global market ‐ After a five‐year decline in net imports the US became a net exporter in late 2010, a trend analysts say is confirmed by the latest data ‐ … Barack Obama…has called for an end to oil company tax breaks ‐ For years, the US was not only a net importer of crude oil but also of refined fuels. But oil demand of 19m b/d while on the rebound, remains 2m b/d below pre‐recession levels ‐ The leading customers for US oil products are in Latin America, where refineries often cannot keep up with fuel consumption. Mexico relies heavily on US‐made fuel. Ecuador, a member of the Opec oil cartel, is also a buyer
Drive for global standard on banks’ lending risks – Pg. 20 ‐ Senior banking regulators are starting to press for a new international standard to assess lending risk in order to ensure that the drive to strengthen the global banking system is not defeated by fragmented national standards ‐ UK regulators, in particular, are urging reform of the way in which risk‐weighted assets are calculated. RWAs form the denominator of the key measure of banks’ capital strength – the so‐called core tier one ratio – with equity as the numerator
‐ Inaccurate calculations of risk weightings can have a highly disruptive effect on capital ratios, potentially making a nonsense of a global minimum capital ratio; The Basel III rules require banks around the world to maintain a 7% core tier one ratio as a minimum ‐ American banks still calculate risk weightings on the simplistic but more prescriptive measures laid down by the original international capital standards, dubbed Basel I ‐ But the complex Basel II risk weighting formulas used by European banks are open to much more subjective interpretation by the banks and their regulators
2 May 2011
US jubilant at bin Laden’s death – Pg. 1
Finns threaten Portugal rescue plan – Pg. 7 ‐ A Finnish eurosceptic party that made big gains in last month’s general election has renewed its opposition to the proposed EU bail‐out for Portugal as talks get under way to form a government in Helsinki ‐ The anti‐EU True Finns, previously a fringe populist party, won 19% of the vote in April 17 poll, …. ‐ Finland, unlike other eurozone countries, requires parliamentary approval for EU bail‐out measures, raising the possibility of Finnish lawmakers holding up the Portuguese rescue, which can only go forward with unanimous EU support ‐ A new government is expected to be in place by May 19
Treasury revises US default estimate – Pg. 8 ‐ The US Treasury department pushed back its estimate for a potential US default to the beginning of August, … ‐ The first special step to be taken on Friday involved suspending the issuance of special Treasury bonds designed for state and local governments to better manage their finances,… ‐ With little prospects for a deal to be struck by May 16, the Treasury has been ramping up its efforts to delay a potential default for as long as possible ‐ Mr Geithner said that on May 16 he would declare “debt issuance suspension period” allowing the government to redeem debt held in a civil service retirement and disability fund. He also said it might become necessary to suspend the reinvestment of Treasuries held in the Exchange Stabilization fund, a tool used in currency intervention
Golf developers stay out of rough despite ban – Pg. 9 ‐ …facilities….have become also a potent symbol of the hypocrisy and corruption inherent in Communist rule ‐ China introduced a ban on the construction of golf courses in 2004 in an attempt to preserve dwindling farmland, save water and reduce the huge number of villagers thrown off their land as luxury real estate is developed ‐ But despite the ban the number of golf courses in china has more than tripled from 170 in 2004 to nearly 600 now,… ‐ …most golf developments in China do not include the word “golf” in their name or anywhere on their planning documents, and instead refer to themselves as “health and entertainment clubs” or “country clubs” ‐ Golf was completely banned in China as a bourgeois “rich man’s game” until 1984, but today is a favourite pastime for the country’s wealthy elite, many of whom are government officials ‐ As well as developers are well connected they can ignore warnings from regulators, who will rarely risk their careers by enforcing laws that could offend powerful interest groups higher up the food chain
Conga contemplation – Pg. 11 ‐ …little moves in the bond world without Pimco’s involvement ‐ ….30‐year bull market for bonds ‐ At Pimco – which began life in 1971 with three people and $12m – portfolio managers are rewarded for their contribution to the firm’s overall performance, rather than their pay being linked to revenues of a specific fund as is common elsewhere ‐ Two‐thirds of managing directors have held the job for less than five years ‐ Of Pimco’s 1,800 employees, 75 so far work directly in the equity business, enough to look after more than 10 times the less than $4bn equity assets under management currently
Firing and hiring – Pg. 16 ‐ The average non‐farm payroll gain of 160,000 a month over the past three months is the fastest since early 2007
US becomes net exporter of fuel as buyers struggle at the pump – Pg. 17 ‐ The US has become a net exporter of fuel for the first time for nearly 20 years as drivers struggle with high petrol prices ‐ Energy department data show the world’s largest oil consumer in February shipped out 54,000 barrels more petroleum products each day than it purchased on the global market ‐ After a five‐year decline in net imports the US became a net exporter in late 2010, a trend analysts say is confirmed by the latest data ‐ Barack Obama…has called for an end to oil company tax breaks ‐ For years, the US was not only a net importer of crude oil but also of refined fuels. But oil demand of 19m b/d while on the rebound, remains 2m b/d below pre‐recession levels ‐ The leading customers for US oil products are in Latin America, where refineries often cannot keep up with fuel consumption. Mexico relies heavily on US‐made fuel. Ecuador, a member of the Opec oil cartel, is also a buyer
Drive for global standard on banks’ lending risks – Pg. 20 ‐ Senior banking regulators are starting to press for a new international standard to assess lending risk in order to ensure that the drive to strengthen the global banking system is not defeated by fragmented national standards ‐ UK regulators, in particular, are urging reform of the way in which risk‐weighted assets are calculated. RWAs form the denominator of the key measure of banks’ capital strength – the so‐called core tier one ratio – with equity as the numerator ‐ Inaccurate calculations of risk weightings can have a highly disruptive effect on capital ratios, potentially making a nonsense of a global minimum capital ratio. The Basel III rules require banks around the world to maintain a 7% core tier one ratio as a minimum ‐ American banks still calculate risk weightings on the simplistic but more prescriptive measures laid down by the original international capital standards, dubbed Basel I ‐ But the complex Basel II risk weighting formulas used by European banks are open to much more subjective interpretation by the banks and their regulators
1 May 2011
America’s ‘rust belt’ states lead recovery – Pg. 1 ‐ Traditional “rust belt” states have seen the largest gains in American manufacturing jobs over the past year, ….. ‐ Michigan, the centre of the US motor industry, has been the success story, creating a seasonally adjusted 29,800 net new factory jobs in the past 12 months. It accounts for about 4% of US manufacturing employment but about 15% of the net job creation in industry over the past year ‐ Manufacturing is the strongest sector of the US economy, growing at an estimated annual rate of 9.1% in the first quarter, compared with 1.8% for the economy as a whole ‐ The states that have continued to lose manufacturing jobs in the past year are led by New York, New Jersey and Maryland in the north and east of the US….
Buffett admits mistake over Sokol – Pg. 1 ‐ …on Saturday he called the purchases “inexcusable and inexplicable”, and appeared to have succeeded in winning shareholder support
Paris tests passport‐free pact on Italy frontier – Pg. 3 ‐ Border controls between Italy and France are officially a thing of the past, abolished by a 1995 agreement to create passport‐free travel within much of the European Union
Hard to hold the line – Pg. 7 ‐ A year after agreeing a 110bn (euro) European Union and International Fund bail‐out and economic reform plan, times are hard. Greece is in deep recession: its economy contracted by 4.5% last year; a further 3% fall is expected in 2011. The capital’s boarded‐up shops and piles of uncollected rubbish testify to the scale of economic shock and the angry mood of trade unionists ‐ Greece’s plight has wider global significance because its bail‐out package was followed by similar moves to rescue Ireland and Portugal, and where fears about “reform fatigue” and the need for further billions of euros in outside help could quickly spread ‐ ….public debt soared to 143% of gross domestic product last year, the highest in the EU ‐ ….one of the most generous in Europe (it allowed workers at public corporations to retire in their late 50s on 90% of their final salary). Average pensions fell by more than 20% and the retirement age was raised to 65. Civil servants’ salaries were slashed by 15% and their Christmas and Easter bonuses cut. In total, fiscal saving measures equivalent to 8% of GDP were achieved
Disclosure pressure on Wells Fargo rises – Pg. 16 ‐ A sharp decline in Wells Fargo’s mortgage business and the unexpected departure of its chief financial officer have reignited calls for the bank to provide more disclosure about core operations ‐ Wells Fargo has historically disclosed the least financial information of the large banks
Slowdown in US growth set to weigh on jobs data – Pg. 22 ‐ Non‐farm payrolls dominate the data calendar next week, and investors will probably be keeping their powder dry ahead of the Friday release of the latest report on the US labour market ‐ Analysts expect some slowing in April from the rate of growth in the previous two months: 216,000 in March and 194,000 in February ‐ Consensus estimates put the April jobs rise at 175,000,…
29 April 2011
Growth data cast doubt over recovery – Pg. 1 ‐ Doubts have been cast over the strength of the US economic recovery after output grew at an annualized rate of only 1.8% in the first quarter ‐ A surge in oil prices held back consumption growth, while public spending fell at every tier of the US government ‐ At this stage of recovery, growth often rebounds by between 4 and 5%. Expansion of less than 2% will not create enough jobs to keep up with population growth and cut the US unemployment rate of 8.8% ‐ The dollar fell further on release of the growth numbers as investors judged that weak growth would cause US interest rates to stay lower for longer ‐ Initial claims for unemployment insurance rose to 429,000…..
Snub for US over Indian jet contract – Pg. 1 ‐ India has shortlisted European jet fighters, in preference to US and Russian rivals, in a hotly contested $11bn competition to supply the Indian air force with advanced combat aircraft ‐ The winning bid is expected to shape India’s air power for the next three decades…. ‐ The US had pitched Boeing’s F/A‐18 Super Hornet and Lockheed’s F‐16 Super Viper against the Eurofighter Typhoon, Dassault’s Rafale, Sweden’s Saab Gripen and Russia’s MiG‐35 ‐ Defence experts considered the US fighters to be less advanced than some of the competition
Record fall in Japan’s output prompts cut in growth forecast – Pg. 3 ‐ Japanese factory output suffered a record decline in March as last month’s tsunami crippled supply chains across the world’s third‐largest economy and prompted the central bank to cut its growth forecast for the fiscal year ‐ Government statistics show production fell 15.3% in March from February,…. ‐ It does expected the economy to start recovering in the second half thanks to spending on reconstruction, and kept monetary policy unchanged with interest rates still close to zero ‐ Toyota said recently that restoring its global production volume to normal levels would take eight months
Argentina seeks curbs on land sales to foreign investors – Pg. 3 ‐ Argentina, a leading food producer, wants to ensure Chinese and other foreign investors do not snap up one of its key resources: land ‐ …seeking to limit to 20% the amount owned by foreigners ‐ The bill proposes a 1,000 hectare limit on foreign ownership but will not be retroactive
Soaring petrol prices shake US confidence – Pg. 4 ‐ …higher commodity prices are holding the economy back ‐ US consumer had much more money in their pockets in the first quarter because of a temporary 2% cut in payroll taxes agreed by president Barack Obama’s administration and congressional Republicans last year ‐ Lower defence spending knocked 0.7% off growth – a decline that is almost certainly temporary ‐ What happens next depends greatly on oil prices ‐ Average US petrol prices are now $3.88 a gallon
Jobless claims spark recovery worries – Pg. 4 ‐ New claims for unemployment benefits in the US unexpectedly jumped to the highest level since January, raising concerns about the pace of the labour market recovery ‐ It was the third week in a row that claims came in above the 400,000 level … ‐ The US government is due to release its April report on employment growth next Friday, May 6 ‐ House sales were 11.4% lower than a year ago, reflecting the rush of buyers in 2010 to meet the deadline for the government’s homebuyer tax credit
Russia to cut petrol exports as fuel crisis hits – Pg. 5 ‐ …Putin has ordered a big rise in export tariffs for petrol after fuel shortages hit the world’s largest oil producers ‐ …expected to force the country’s oil companies to provide more fuel to domestic markets by making petrol exports prohibitively expensive ‐ …became world’s biggest oil producer last year….
Exelon/Constellation – Pg. 12 ‐ Exelon’s all‐share $7.9bn bid for Constellation Energy would cement its status as the largest US nuclear plant operator ‐ So why does the deal work? Because Exelon can offer something like cheap debt: expensive shares. Not only do investors value Exelon’s earnings more highly than Constellation’s but they pay a 70% premium per megawatt of owned generation. Exelon has simply been a far more stable, better‐run company than Constellation (Prof Note: Of course it has….Mayo is a deal maker NOT an operator! He is the WRONG man to run Constellation…he is the RIGHT man to sell Constellation….look at his resume!)
Deutsche Borse and NYSE stand by deal terms – Pg. 16
Banks braced for knock‐on effect of credit downgrades – Pg. 20 ‐ Reduced confidence in the creditworthiness of developed economies’ government finances has caused significant knock‐on downgrades of the debt of banks and other companies in the countries concerned ‐ …$8,400bn worth of debt was downgraded in the first quarter of 2011, versus just $367bn worth of upgrades ‐ …growing incidence of cuts in sovereign ratings ‐ In the first quarter of 2011, 17 sovereign issuers were downgraded by S&P and 40 corporate issuers, including banks, also had their ratings lowered ‐ The links between sovereign ratings and financial strength stem from three factors… ‐ First, banks are usually big holders of the debt sold by their home countries ‐ Second, banks rely on debt markets much more than most non‐financial companies do, ‐ Third, weak sovereign ratings often coincide with a weak economy ‐ The country whose rating back the most debt is the US. S&P’s decision to change its outlook on the debt of the US to negative means that there is now a one‐in‐three chance the US will be downgraded in the next two years ‐ A US downgrade to below triple A would not affect S&P’s rating of the four US companies with triple A ratings: ExxonMobile, Johnson & Johnson, Microsoft and ADP. S&P does not tie its US state and local government ratings directly to the US rating because they have the power to raise taxes and cut expenditures independently ‐ …S&P revised its outlooks on the debt of government‐backed mortgage financiers Fannie Mae, Freddie Mac, the Federal Home Loan Bank system and the Farm Credit System Banks to negative
28 April 2011
Inflation to run above target, says Bernanke – Pg. 1 ‐ The Federal Reserve forecast that inflation would run above its objective this year but the US central bank’s chairman, Ben Bernanke, told a first‐of‐its‐kind news conference that the rise in prices was likely to be temporary ‐ …headline inflation is expected to rise to 2.1 to 2.8% in 2011, compared with a much lower earlier estimate of 1.3 to 1.7% ‐ …confirmed that the US will complete its $600bn “QE2” programme of asset purchases in June as planned ‐ The six‐month programme was designed in November to stave off a potential slide into deflation, and a recent rise in prices seems to guarantee that the Fed will not pursue any additional monetary easing ‐ …dollar fell to its lowest in nearly three years ‐ …forecast slower growth and lower joblessness
Bernanke makes Fed history, not news – Pg. 2 ‐ No Fed chair – a position labeled the second most powerful in America – has given a scheduled conference before
UK data signal stalled economy – Pg. 4 ‐ Britain’s economy has stagnated over the past six months, ….with output no higher in the first quarter of this year than in the third quarter of 2010 ‐ With the value added tax rising 2.5% to 20% in January, economic weakness was always expected at the start of 2011
German inflation surge adds to ECB rate rise pressure – Pg. 4 ‐ German annual inflation has surged to 2.6% this month, the highest level in more than two years, … ‐ The rise, from 2.3% in March on a European harmonized basis, will add to inflationary angst in the eurozone’s largest economy, where evidence is emerging that strong economic growth is allowing businesses to pass on higher costs to their customers ‐ Economists reckon a further quarter percentage point increase could come in July, or possibly June ‐ Inflation across the eurozone has accelerated in recent months largely as a result of soaring energy and commodity prices
S&P sounds alarm on Japan debt over rebuilding costs – Pg. 5 ‐ Standard & Poor’s has downgraded its outlook for Japan’s sovereign debt from “stable” to “negative”, citing concerns that reconstruction costs after March 11 disaster will increase fiscal deficits ‐ In January, S&P cut Japan’s credit rating for the first time since 2002 to double A minus from double A ‐ The rating agency expects that costs related to the quake, tsunami and nuclear accident will raise Japan’s fiscal deficit above previous estimates by a cumulative 3.7% of gross domestic product up to 2013
Extra time granted on US reforms – Pg. 20 ‐ So‐called “over‐the‐counter” derivatives , hose not traded on exchanges, have proved one of the thorniest areas of last year’s Dodd‐Frank financial reforms ‐ The Commodity Futures Trading Commission, the US futures market regulator, and Securities and Exchange Commission are struggling to agree a raft of rules amid intense pressure from financial and non‐financial companies ‐ Republicans have argued the agencies cannot property write the rules in time for a July deadline and the whole process should be delayed for 18 months, a delay that is unlikely given opposition by Democrats in the Senate and the Obama administration ‐ Insurance products, heating oil contracts and commodity‐related forward contracts would not be regulated under either definition,…
Inflation battle tests investors in Brazil – Pg. 20 ‐ For investors in Brazilian equities, a verbal barrage from the government against inflation this week could hardly have been better timed ‐ Inflation is this month set to test the upper limit of the central bank’s target range of 4.5%, plus or minus 2% ‐ Latin America’s biggest stock market last year looked close to revisiting its pre‐crisis highs of May 2008, … ‐ Last week, JPMorgan downgraded Brazilian stocks to “underweight” and Morgan Stanley lowered its rating on the market,…
Bearish bets put dollar on track for record lows – Pg. 21 ‐ The sell‐off in the US dollar continues apace. Bearish bets by investors against both the economy and credit standing of the world’s reserve currency are pushing the dollar to within sight of record lows ‐ On Wednesday, the Fed said that QE2 would end as planned in June, but also maintained it was in no rush to start tightening policy ‐ The stance contrasts sharply with many other central banks and explains why, since June, the dollar has fallen 17% against its major rivals on a trade‐weighted basis ‐ On Thursday, economists expect confirmation that the US economy grew less than 2%, on an annualized basis, in the first quarter
27 April 2011
Draghi poised for ECB job – Pg. 1 ‐ Mario Draghi, governor of the Bank of Italy, has taken a big step towards succeeding Jean‐ Claude Trichet as head of the European Central Bank after being strongly endorsed by France’s Nicolas Sarkozy,…. ‐ Angela Merkel, the German chancellor, is also expected to approve Mr Draghi’s candidacy, … ‐ As head of Italy’s central bank since 2005, Mr Draghi has proved himself a rigorous regulator, ….
Chinese elite faces curbs on US visas – Pg. 1 ‐ The US government may make it more difficult for China’s ruling elite and their families to receive visas following a series of diplomatic snubs by the Chinese government,… ‐ Until now, Washington has informally allowed the Chinese foreign ministry to nominate people for expedited visas through a “courtesy channel”. Those nominated include diplomats, senior officials, executives of state enterprises, journalists from state media and children of party leaders
ECB looks set for tough new style – Pg. 3 ‐ …Jean‐Claude Trichet, whose eight‐year mandate expires on October 31, the ECB secured an inflation‐fighting reputation in the tradition of Germany’s Bundesbank ‐ During the eurozone debt crisis, the ECB acted as a crucial backstop, pumping liquidity on a huge scale into the banking systems of Greece, Ireland, Portugal and Spain. More recently, it has taken a much tougher line in insisting politicians take action themselves ‐ …curriculum vitae…..PhD in economics from MIT (Prof Note: he has my vote!)
Nervous Wall Street warns on debt limit – Pg. 6 ‐ The warning over the debt limit is the strongest yet to come from Wall Street, highlighting growing nervousness among investors about the US political system’s ability to forge a consensus on fiscal policy ‐ …threshold will be reached by May 16,….
House prices down in dumps – Pg. 6 ‐ US home prices in February approached their lowest since the 2009 housing bust as deep discounts on homes in foreclosure weighed on the market
Greek debt yields soar on deficit fear – Pg. 22 ‐ Greek bond yields soared by more than 1% to fresh euro‐era highs as Athens failed to meet deficit targets and an adviser to German chancellor Angela Merkel warned the country would have to restructure its debts ‐ The deficit was above the government’s February estimate of 9.4%, although below the 2009 shortfall of 15.4% of gross domestic product, … ‐ The cost of borrowing for Ireland and Portugal also rose to euro‐era highs….
Prospects bleak for revival in appetite for US ‘muni’ bonds – Pg. 22 ‐ The prospects are bleak for a significant revival in investor appetite this year for mutual funds that buy the debt of US states, cities and local bodies, …. ‐ Investors have been abandoning muni mutual funds since November amid fears of rising defaults in the wake of economic recession,… ‐ Individual investors comprise about two‐thirds of the $3,000bn market, holding bonds either independently or through mutual funds
Investors devour Hong Kong’s ‘dim sum’ bonds – Pg. 23 ‐ Four years after coming into existence, Hong Kong’s nascent market for renminbi‐ denominated bonds – a core plant in China’s drive to internationalize its currency – has burst into life ‐ The so‐called dim sum bond market, named after the bite‐size delicacies served in Hong Kong tea houses, … ‐ Beijing’s strict capital controls mean that interest rates on renminbi debt, as well as the value of the renminbi against the dollar, can – and do – vary dramatically between the mainland and Hong Kong, a special administrative region subject to its own laws and open to international investors
26 April 2011
Barrick in $7.6bn bid for miner Equinox – Pg. 1 ‐ Barrick Gold, the world’s biggest gold producer, has made an agreed $7.6bn offer for Equinox Minerals, the Australian‐Canadian copper miner that has been the target of a hostile bid from China’s Minmetals Resource ‐ The big highlights the global scramble for control of raw materials and signals Barrick’s ambitious expansion plans ‐ …gold touched a new nominal record above $1,518 a troy ounce, with investors seeking a haven from weakening currencies and political risks
Britain’s poor white pupils lag behind other ethnic groups – Pg. 1 ‐ White British children in England’s poorest communities perform worse than pupils in the same neighbourhoods from any other large ethnic group,…
Caution urged on bank fines – Pg. 2 ‐ Banks will be fined for failures that led to the foreclosure debacle but regulators should avoid “dangerously large” penalties, ….
US states face rising pensions funding gap – Pg. 2 ‐ US states face a funding gap of at least $1,260bn for the retirement benefits they have promised teachers, firefighters and other public sector employees, …. ‐ For the first time, the pension funding shortfall surpassed the funding gap for healthcare and other non‐pension benefits, such as life assurance, that were estimated to cost $635bn
Baltimore makes the grade with school incentive scheme – Pg. 2 ‐ The turnaround process is one of the signature strategies ….it revolves around a simple but controversial notion: giving incentives for innovation ‐ Race to the Top awards money to school districts that can prove they have new strategies for improving teaching and results ‐ Aside from turnaround schools, the city’s teachers in October 2010 voted for performance‐ related pay based on pupil’s test scores, (Prof Note: BAD Policy! How about teaching children to think rather than how to pass a test! Business and self‐reliance is about thinking and innovation NOT passing examinations!!!)
Beijing to give wealth fund $200bn – Pg. 4 ‐ China Investment Corp, the sovereign wealth fund, will soon receive $100bn to $200bn in new funds from the Chinese government,… ‐ The reserves, already the largest in the world grew by nearly $200bn in the first quarter to top $3,000bn for the first time, … ‐ CIC was established in 2007 with the mandate to invest some foreign reserves in riskier offshore assets. At that time, China had less than $1,500bn in its foreign exchange coffers
SEC and EU in talks to resolve ratings impasse – Pg. 6 ‐ Fresh EU rules to clamp down on the behaviour of rating agencies have cast doubt on the extent to which “third country” ratings – ratings compiled outside the EU – can be used for regulatory capital purposes within the 27‐country bloc ‐ EU officials could decide that surveillance of rating agencies in a third country matched the same standards as in the EU, in which case those countries would be deemed “equivalent”. Alternatively, an EU‐approved rating agency could “endorse” – and take full responsibility for – ratings performed by a sister organization outside the EU, provided these were arrived at by a process that was “as stringent as” the domestic one
Only tax rises can fix America’s budget mess – Pg. 9 ‐ There is no way the US can continue to deliver expected health and retirement income without higher taxes ‐ …effective tax rate for the 400 highest‐income Americans dropped from 26% in 1992 to 17% in 2007, in large part because of this 15% provision ‐ (Prof Note: Let us not discount two additional sources of revenue from two new businesses: (1) Prostitution and (2) Drug Legalization. If legalized, I am not above purchasing a fedora!)
Investors wary over inflation and dollar – Pg. 20 ‐ In thin and volatile holiday trading, gold rose to a new peak while US crude oil touched its highest level since September 2008, as the dollar extended its weakness
LATIN AMERICA – China is now region’s biggest partner ‐ (Prof Note: this is huge. My master’s thesis was about my prediction for an AFTA (think NAFTA including Latin American). Could I have been more wrong?!)
25 April 2011
NYSE to boost case for deal with Borse – Pg. 1 ‐ NYSE Euronext is set to increase by up to a third its forecast for cost savings from a deal with Deutsche Borse, as the US exchange operator raises the stakes in efforts to counter an $11.3bn bid from Nasdaq OMX and Intercontinental Exchange ‐ …NYSE and Deutsche Borse estimated that their biggest customers would save at least $3bn through the combination of the exchanges’ two European derivatives platforms ‐ The comments come as NYSE seeks to defend its agreed deal against a break‐up bid from Nasdaq and ICE, worth about 13% more than the Deutsche Borse offer at current share prices
Prices for second‐hand business jets left under a cloud despite recovery – Pg. 1 ‐ Prices of some of the world’s best known business jets have plunged to remarkable lows as the stumbling global economic recovery puts a brake on spending by even the wealthy ‐ A one‐year‐old Learjet, that costs up to $13m new, can now be bought for as little as $8m, (Prof Note: A bargain!!! Where is my checkbook???) ‐ Their prices slumped during the financial crisis that savaged the business jet industry, and have failed to recovery, …. ‐ …larger jets are being bought by those more immune to the downturn, including governments and wealthy buyers in fast‐growing economies such as China and Russia
Risk fears force bank in India to scrap home loan – Pg. 4 ‐ The State Bank of India, the country’s largest commercial bank, has been forced to withdraw “teaser” mortgage loans amid fears of repeating the lending follies of the US subprime crisis ‐ India’s mortgage market is growing fast as property prices strengthen. Developers in the fastest‐growing large economy after China are marketing apartment‐complexes heavily to offer modern city living to a growing middle class ‐ Teaser loans offer initially low repayment rates over one to three years that then escalate ‐ Two products have come under scrutiny in what is already a highly regulated economy. Alongside the teaser loans, collateralized debt obligations have drawn concern ‐ CDOs package up different mortgages of varying risk, slices of which are then sold off to financial institutions. They are notorious for being difficult to rate for risk and have a big “handle with care” sign stamped all over them after wreaking destruction in the world’s financial markets
US counts the cost of keeping elderly in jail – Pg. 6 ‐ …shifting US debate: how to reconcile the fast‐rising costs of keeping the old and sick behind bars with long‐standing public support for lifetime sentences ‐ …average cost of $70,000 a year, three times that of regular inmates…some cost as much as $1m a year ‐ The total number of elderly inmates is predicted to increase between four and seven times in the next 20 years, the fastest growing prisoner age group ‐ …one‐third of the entire US prison population, which currently houses 1.6m people, will be more than 55 years old by 2030 ‐ …$68bn spent every year on corrections, which goes to keeping one in every 100 adult Americans behind bars, accounts for about 7% of state budgets (Prof Note: Let us break down the numbers….that is $223/year for every US citizen AND $412/year for every taxpayer. Instead, why not liberalize gun laws and arm every citizen. Lock and Load!!!) ‐ …US…largest and most expensive prison system in the world… ‐ After 40 years in prison elderly inmates can often find themselves with no family, few friends and little incentives to leave an institution that spends up to $70,000 a year on their health
Academia strives for relevance – Pg. 11 ‐ Are business schools relevant? ‐ British academics, he added, should concentrate more on teaching rather than publishing research in US journals (Prof Note: Academia is big business! There is a reason why the US’s largest university is owned by a hedge fund. As more and more Universities focus on evaluations of professors, professors are forced to provide students (the customer) with what they want/demand. Is it not the professor’s job to provide the students with what they need?! Are business schools falling into the same rut as Wall Street, i.e. focusing on short‐term gains rather than long‐term fundamentals? It might be years before a student realizes the value of the rigour and exercise and by then the evaluations are completed, filed, and forgotten!)
PepsiCo anger over Fed inflation guide – Pg. 18 ‐ The Federal Reserve’s preference for the core price measure that excludes food and energy has stirred controversy as commodity price rises have accelerated and companies have had to judge how much they can pass on costs to hard‐pressed consumers ‐ Food prices have climbed nearly 3% in the past year and petrol prices have increased nearly 30%, …. ‐ During the same period, “core prices” rose 1.2% ‐ The Fed argues that core prices are a better guide to underlying price pressures in the economy and therefore to future inflation – if it responded to headline prices, then it would have been forced to raise interest rates sharply in 2008 just as the economy was going into recession
23 April 2011
Fuel price strike rattles Beijing – Pg. 1 ‐ Chinese authorities were locked in negotiations on Friday with stroking truckers who have besieged the country’s largest port, in a bid to prevent the unrest from spreading to other cities ‐ …reinforce government fears about the destabilizing impact of rising prices ‐ Chinese officials have warned that soaring prices and rampant official corruption pose the greatest threat to Communist party rule. While the government has repeatedly raised interest rates, the measures have failed to rein in inflation, which last month hit a 32‐month high of 5.4%. China has raised fuel prices twice this year, biting into the revenues of truckers, cab drivers and farmers who use diesel for tractors
Breaking up is no longer hard to do as US rebound eases money worries – Pg. 1 ‐ In a perverse sign of the economic recovery, the US divorce rate, which dipped in the recession, has bounced back, … ‐ A stronger economy, lower unemployment and a housing market that – while still weak – is no longer in free fall are all contributing to a rebound in divorce filings ‐ During the recession, couples who were out of work or unable to sell their house stayed married to save money. The percentage of the population 15 years and older who counted themselves divorced dropped to 9.7% in 2009, from 9.9 three years earlier,… ‐ So‐called underwater homes, that are worth less than the balance on their mortgage, are flummoxing judges who cannot decide whether to treat them as an asset or a liability
Obama seen as failing on economy – Pg. 3 ‐ People are sensing a lack of connection between their troubles and the priorities of their elected officials, … ‐ Americans’ alleged attention deficit will be more problematic for Mr Obama now than ever before. He is leading Democrats into tough congressional negotiations over the size and scope of government and the future of healthcare
Portugal goes on holiday as bail‐out talks begin overtime – Pg. 4 ‐ …details of the country’s $116bn bail‐out agreement ‐ By the time Portugal goes back to work on Tuesday, the plan to rescue its debt‐ridden economy on condition of tough austerity measures and structural reforms should be close to conclusion ‐ As well as tax increases, wage cuts and a pensions freeze, the package is expected to include measures to liberalize labour, rent and energy markets to tackle Portugal’s problems of weak growth and low productivity
Hedge funds reap post‐crisis gains – Pg. 17 ‐ …assets under management….had skipped past the $2,000bn mark
21 April 2011
China tax move to narrow wealth gap – Pg. 1 ‐ China is to lift the exemption threshold for personal income tax payments in an effort to redistribute the spoils of rapid growth and reduce a widening wealth gap ‐ The level at which Chinese citizens must pay income tax will be raised from $305/month to $450/month ‐ Raising the threshold to this level will cut the number of taxpayers from 400m people to 350m and reduce government tax revenues by about Rmb99bn ‐ Other major policies include a promise to raise average wages by 15% a year in order to double average wages by end of 2015 (Prof Note: Rule of 72)
Gold hits record amid west’s debt woes – Pg. 1 ‐ The price of gold leapt to a new record above $1,500 a troy ounce and silver soared past $45 as the huge debt burden of western countries burnished the appeal of the precious metals ‐ Investors are focusing on fears of the debasement of paper currencies amid rising inflation from China to Europe and a warning by Standard & Poor’s that the US could lose its triple A credit rating ‐ The apparent political deadlock over the US government’s ballooning debt has knocked many American’s confidence in the dollar and driven them to hard assets ‐ In Utah, the state government last month passed a bill making gold and silver coins legal tender, while the US Mint’s sales of silver coins have been running at record pace
Cheap Asia imports hit domestic industry – Pg. 3 ‐ As inflation rises in Brazil – it hit 6.44% as of mid‐April, only a fraction short of the upper end of the central bank’s upper limit of 6.5% ‐ … ‐ Cheap imports from Asia help to reduce the price of household goods but they are also accused of undermining domestic manufacturers ‐ Fuelled by rapid credit growth in the lead‐up to last year’s presidential election, Brazil’s economy expanded 7.5% in 2010 ‐ The government is now forecasting that it will grow about 4.5% this year, … ‐ To augment, the interest rates increases, the government is implementing capital controls that seek to dampen consumer credit growth – one of the sources of overheating in the economy ‐ It is also introducing taxes that aim to discourage companies from borrowing dollars abroad at low interest rates and then repatriating the proceeds to Brazil, a trend that is strengthening the real ‐ …China accounted for about 14% of total imports to Brazil last month by value, ….
Profits rise 48% at Wells Fargo – Pg. 17 ‐ The fourth‐largest US bank by assets….. ‐ To grow, Wells Fargo, like other US banks, will need to lend more to small businesses and consumers and also recoup lost fees from checking and credit card customers
London funds seek to stay ahead – Pg. 19 ‐ …group of four hedge funds that dominate the quantitative investment world – using cutting‐edge technology and complex mathematical models to power computers that trade the world’s markets around the clock and ratchet up huge returns for their investors ‐ London’s big four – Man Group, Winton Capital, BlueCrest and Aspect – between them manage assets of about $60bn, … ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 20 April 2011
Obama hits at rating move – Pg. 1 ‐ The Obama administration has fought back against Standard & Poor’s decision to lower the US credit rating outlook, arguing that there is no danger of a downgrade and that a deficit reduction deal in Congress is within reach ‐ Mr Geithner said there was “no risk” that the US triple A credit rating would be downgraded, in contrast to S&P’s assessment in a note on Monday that implied a one‐in‐ three chance of a downgrade as it switched the outlook for the country’s debt from “stable” to “negative” ‐ …Japan – saying treasuries remained “attractive” (Prof Note: Exactly what is the second largest foreign holder going to say? Anything less harms their investment!)
Singapore aims to be renminbi trade hub – Pg. 1 ‐ Singapore has made a move to become the first overseas hub for trading renminbi, marking a new stage in the internationalization of the Chinese currency ‐ About 7% of China’s international trade was settled in renminbi in the first quarter of this year ‐ The clearing bank is expected to be either Industrial and Commercial Bank or Bank of China, which have the largest Chinese banking operations in Sinapore ‐ The only place outside mainland China bank is Hong Kong, where Bank of China has been appointed by the PBoC to clear mainland market trades
British Airways head lets fly at one‐size‐fits‐all security checks – Pg. 1 ‐ Calling for a “risk‐based approach to security rather than a one‐size‐fits‐all based approach”,… ‐ Some would describe this as profiling,… ‐ He praised the US Global Entry system that lets approved passengers pass through immigration queues faster for a $100 fee, once they have passed a series of checks ‐ (Prof Note: I travel often and security, in my opinion, needs adjusting. There simply must be a better way!)
China signals unease after S&P warning – Pg. 4 ‐ The two biggest foreign holders of US Treasuries appear to be taking diverging views of Standard & Poor’s stark warning on the US debt rating ‐ …China’s foreign ministry on Tuesday urged Washington to protect investors in its debt ‐ China’s foreign reserves increased by $197bn in the first quarter to $3,050bn, exceeding the symbolic $3,000bn mark for the first time. The reserves are the world’s largest by far and although their exact composition is regarded as a state secret, about two‐third are believed to be invested in the US dollar assets ‐ According to US data, China held $1,154.1bn in US Treasuries at the end of February, making it the largest foreign holder of US debt ahead of Japan’s $890.3bn. The Federal Reserve is the largest overall holder of US Treasuries with $1,368bn on its books ‐ …sheer size of China’s reserves means there are no other asset markets in the world large or liquid enough for China to stash its increasing cash pile ‐ Japan accounted for almost 60% of Asian demand for US Treasuries in the 12 months through February, … ‐ This year, S&P downgraded Japan’s long‐term sovereign debt rating to double A‐, … ‐ Japan’s gross debt is this year poised to rise to more than twice the size of the economy
Brazil job figures fuel inflation fears – Pg. 4 ‐ Brazil’s unemployment hit a record low for March, underlining concerns about rising inflation in Latin America’s largest economy, where the central bank is expected to increase interest rates today ‐ Last month’s unemployment rate was 6.5%, said the government statistics agency, compared with the 6.7% most economists were predicting ‐ “Anyone who wants to work can,”…. ‐ But wage growth and lower unemployment are driving demand for goods and services, leading to higher inflation that is testing the central bank’s target range of 4.5%, plus or minus 2% ‐ Prices appear to have risen particularly quickly in the services sector over recent months ‐ Brazil’s benchmark interest rates, at 11.75%, are among the highest of any of the world’s large economies
When timing is all – Pg. 7 ‐ The QE2 purchases will be complete at the end of June; that is likely to be the end of Fed asset buying ‐ How soon the Fed follows the European Central Bank in raising rates will affect everything from the strength of the dollar to the sustainability of the US recovery ‐ The Fed launched QE2 not because unemployment was high and inflation was below its goal of “2% or a bit below”. It acted because unemployment was becoming no better and inflation was moving way from its objective – creating the risk of a slide into outright price declines that could have dragged the US into a Japanese‐style lost decade ‐ Core inflation, excluding food and energy prices, hit a trough last December with a year‐on‐ year rise of 0.7% and has since bounced back to about 1% ‐ A negligible risk of deflation means there is little case for further asset purchases, although if there were a shock that again halted the recovery and pushed inflation to new lows, a large majority of the FOMC would consider fresh action ‐ At the moment, the target federal funds rate is set at 0‐0.25%, but the Fed also has about $1,600bn in extra long‐term assets on its balance sheet, with more to come before the end of QE2 ‐ A Fed rule of thumb is that buying an extra $200bn of assets in the same as taking 25bps off the funds rate. That means current interest rates are, in effect, about minus 2% ‐ …hawks is that keeping rates low for too long is encouraging financial speculation and storing up a crisis for the future (Prof Note: Is this not what Greenspan did after 9/11???) ‐ It may therefore make sense to reduce the balance sheet earlier or faster. One way to do that is to stop recycling early repayments from the Fed’s portfolio of asset‐backed securities – which it receives when someone pays off their mortgage early ‐ A second difference is that the Fed now has a surplus of Treasuries as well as a surplus of asset‐backed securities
Nasdaq and ICE sweeten bid for Euronext NYSE – Pg. 13 ‐ The move comes little more than a week after the NYSE Euronext board rejected Nasdaq and ICE’s initial $11.3bn approach and backed NYSE’s already agreed $9.4bn merger with Deutsche Borse, citing concerns that the rival deal would not be completed ‐ US antitrust regulators are likely closely to scrutinize Nasdaq’s merger with NYSE, which would give it a monopoly over US company listings
Hedge funds surge to peak of $2,002bn in managed assets – Pg. 20 ‐ …exceeds the $1,930bn peak of June 2008, just months before the collapse of Lehman Brothers triggered big losses and huge investor redemptions in the industry’s worst‐ever crisis ‐ At its nadir, the hedge fund industry’s assets were just $1,330bn in the first quarter of 2009 ‐ …2010, when the average hedge fund returned just 10.26%
19 April 2011
S&P sounds alarm on US debt – Pg. 1 ‐ Standard & Poor’s issued a stark warning to Washington on Monday, cutting its outlook on US sovereign debt for the first time and stoking the raging political debate over America’s swollen deficit ‐ The agency kept America’s credit rating at triple A but, for the first time since it started rating US debt 70 years ago, cut its outlook from “stable” to “negative”. A negative outlook means there is a one‐third chance of a downgrade in the next two years ‐ The outlook cut highlights the damage to US creditworthiness from a decade of unfunded tax cuts and spending increases followed by massive fiscal stimulus by massive fiscal stimulus during the recession ‐ The US will have a deficit of 10.8% of gross domestic product during 2011,….net government debt will exceed 70% of GDP ‐ The cut also reflects deep uncertainty about whether the polarized US political system is capable of thrashing out a deal to tackle the long‐term fiscal costs of an ageing population ‐ …gold surged more than $10 towards $1,500 an ounce
Wake‐up call for Washington – Pg. 1 ‐ Since it introduced its outlook system in 1991, it has never put the US on negative outlook ‐ Over history, downgrades happen to a third of credits within six to 24 months after they go on negative outlook ‐ …nine notches to go before the US would lose investment grade status
Populist Finns’ rise threatens to derail bail‐outs – Pg. 3 ‐ A populist anti‐euro party has demanded changes to the proposed European Union bail‐out for Portugal after making big gains in the Finnish general elections, increasing the uncertainty over efforts to tackle the eurozone debt crisis ‐ …Helsinki could block the Portuguese deal because of Finland, unlike other eurozone countries, requires parliamentary approval to take part in bail‐outs, which can go forward only with unanimous EU support
US credit outlook – Pg. 12 ‐ Should anyone care that S&P has put US sovereign debt on negative credit outlook? The answer should be plainly “no” ‐ And the fact that Treasury yields fell after S&P’s announcement shows just why US politicians get away with their profligacy – if the rest of the world seems risky, there are still few alternatives to the US.
Citi in bad assets sale as Basel III rules loom – Pg. 13 ‐ Citigroup as taken radical action to cushion the impact of new global capital rules for banks, putting up for sale $12.7bn portfolio of bad assets that were responsible for some of its huge losses during the financial crisis ‐ Citi said the assets, which are believed to include subprime loans, mortgage‐backed securities and corporate bonds, carried a “disproportionately high” risk weighting under the new capital rules known as Basel III ‐ The new regime will require banks to hold at least 7% of equity as a ratio of risk‐weighted assets, with riskier assets such as mortgage‐backed securities requiring more capital
Muni bond risks grow after S&P’s DeKalb cut – Pg. 20 ‐ KeKalb County, GA….not it is not rated by S&P, having been sharply cut in a recent move that threatens to have wide‐ranging implications for the municipal bond market ‐ S&P cut DeKalb by five notches from double A minus to triple B, … ‐ Disclosure, or the lack of it, is a raw nerve in the $3,000bn muni market, which has become rattled by fears of rising local defaults. Municipalities are not required to register their securities with the Securities and Exchange Commission and are not therefore subject to the same disclosure requirements as corporate bond issuers. Further, there are more than 50,000 issuers of munis, including counties, cities, school districts and other local bodies making problems hard to spot
18 April 2011
Bair eyes tougher rules for big banks – Pg. 1 ‐ American banks should ringfence their riskier investment banking operations,… ‐ She warned that regulators now had the authority to demand that US banks break themselves into smaller parts – and it “could and should be used” ‐ Ms Bair is in her last few weeks as head of the powerful bank regulator and is making a final push to end the “too big to fail” syndrome by reaching international agreements on how to wind up large financial groups and by pressing for further structural reform
Fed to signal end of monetary easing – Pg. 1 ‐ An end to global monetary policy easing is on the horizon, with the US Federal Reserve set to signal it will cease asset purchases at the end of June ‐ Silence on a follow‐up “QE3” at next week’s meeting would therefore signal that their current intention is to complete the $600bn QE2 programme and then stop ‐ Quantitative easing is an attractive policy tool after short‐term rates have been cut to zero. By buying securities such as Treasury bonds, a central bank can drive down long‐term interest rates as well in an effort to stimulate the economy ‐ Core inflation, excluding volatile food and energy prices, is still below the Fed’s goal of “2% or a bit below” but it now appears to be rising rather than falling ‐ The European Central Bank has already raised interst rates and an end to quantitative easing by the Fed would leave the Bank of Japan – which fears that last month’s devastating earthquake has tipped the economy towards recessions – as the last important central bank still easing policy
Finnish voters in EU backlash – Pg. 2 ‐ The rise of the True Finns party has highlighted growing public resistance in several northern European countries to taxpayer‐funded rescue packages for less fiscally prudent parts of the eurozone ‐ Unlike in most other eurozone countries, the Finnish parliament has the right to vote on the state’s contribution to Eurpean Union bail‐outs. This gives Finnish lawmakers a de factor veto because each use of bail‐out funds requires unanimous EU approval
Uncertain prospects – Pg. 7 ‐ A wave of challenges from regulators, investors, competitors and indeed mortality is forcing the biggest buy‐out firms to diversify into new businesses and new markets and take on more risk ‐ As a result, the “face of capitalism” may lose some of its attraction in coming years ‐ Private equity firms have become a big force in the capital markets. They compete with industrial companies as they scour the world for attractive merger and acquisition candidates. In good years, the presence of a potential bid from the buy‐out firms supports stock market valuations and drives activity in the junk bond market ‐ …power of the top‐tier buy‐out firms has depended on three factors. One, the rates of return “turned out to be better than almost anything else you could do with your money”. Two, the pension funds that invested in private equity groups needed those returns because they were badly underfunded, given their huge and growing liabilities. And finally, the model included taking 20% of the upside of any deal ‐ …these firms used very little of the equity capital in their own funds, preferring to load their acquisitions with borrowed money – the “leverage” in leveraged buy‐outs ‐ Sovereign wealth funds, another popular source of capital, are also demanding concessions and better terms ‐ Today most of the big buy‐out firms are investing more outside the US in an attempt to escape the competitive landscape and falling returns of developed markets
Fears over CFO changes at banks – Pg. 15 ‐ This wave of change is uncommon for corporate America where CFOs tend to stay for several years and play a crucial role not only in companies’ internal workings but also as a linchpin in their relationships with investors and regulators (Prof Note: Hmmmm…perhaps it is time for me to reconsider my career path as a CFO…..hmmmmmmm)
16 April 2011
Emerging markets inflation surge – Pg. 1 ‐ Data released on Friday showed a surge in Chinese and Indian inflation, highlighting the threat to the global economic recovery as emerging markets overheat and commodity prices rise ‐ Consumer prices in China increased 5.4% year‐on‐year in March – their biggest jump since July 2008 ‐ Headline inflation in India, meanwhile, rose to almost 9% ‐ Emerging market countries are tightening fiscal policy to combat inflation, potentially reducing an important source of global demand for advanced economies already struggling with high unemployment and fiscal cutbacks ‐ One side‐effect of surging inflation is a stronger incentive for Beijing to let the renminbi rise in order to lower the price of imported commodities ‐ But in the US, core inflation, stripping out volatile food and energy prices, rose by a less‐ than‐expected 1.2% compared with a year ago. That suggests that high unemployment is forcing US workers to accept higher petrol prices without being able to demand more pay in response ‐ Responding to inflation fears, the European Central Bank last week raised interest rates for the first time in three years,…
Germans plan for Greek debt shake‐up – Pg. 2 ‐ Germany is drawing up plans to restructure Greece’s sovereign debt in the event that Athens’ economic reforms fail to heave the country out of its budget crisis ‐ One idea is to encourage bondholders to swap risky Greek sovereign bonds at about market prices for safer paper guaranteed by the eurozone – akin to “Brady Bonds” issued to South American countries in the 80s ‐ Alternatively, a eurozone trust, ‐ possibly the European financial stability facility ‐ could buy bonds and extend their maturities or retire them, a system used to help poor states in the IMF’s HICP programme ‐ Although it would profit from a debt cut, Athens, like the ECB, is wary of the damage even a voluntary scheme might do to domestic banks, which own a lot of its bonds, and to the government’s future access to markets
G20 to agree criteria for countries set for IMF scrutiny – Pg. 2 ‐ ….agree on Friday the criteria by which they would assess whether countries should receive special scrutiny by the International Monetary fund ‐ Other g20 officials said the list of countries, which is not certain to be published – would include all largest and important economies and those which account for more than 5% of G20 output ‐ The list would include the US, China, Japan, Germany, France and Britain individually, but also the eurozone as a bloc
Beijing poised to let renminbi rise to fight inflation – Pg. 3 ‐ China has imposed strict price controls on basic consumer items and is expected to allow faster appreciation of its currency after annual inflation reached its highest level for nearly three years ‐ Chinese consumer prices rose faster than at any time in the past 32 months in March, up 5.4% ‐ The economy grew a faster‐than‐expected 9.7% from a year earlier in the first quarter – ‐ Beijing has allowed the renminbi to appreciate against the US dollar about 4.4% since June, when it removed a de factor peg introduced after the global financial crisis
Democrats feel shift in their favour – Pg. 4 ‐ …Mr Obama held two presidential fundraisers, reaffirming the view the 2012 election campaign is now under way
Space shuttle leaves trail of opportunity in its wake – Pg. 4 ‐ Discovery is being retired from low‐Earth orbit flights, its mission outsourced to private enterprise ‐ Nasa will now focus on its resources on “deep space exploration”, such as potential landings on asteroids and, eventually, Mars ‐ Nasa will aim to fly two shuttles to the space station by July – Endeavour on April 29 and Atlantis by the end of June – and then close the programme ‐ The administration has also decided not to fund a replacement rocket capable of sending people into space this year
Bank of America hurt by pressure from mortgages – Pg. 14 ‐ Disappointing results from Bank of America and Google weighed on the financial and technology sectors,…. ‐ Bank of America reported a 36% decline in first‐quarter profit as the foreclosures crisis continued to squeeze its home loan business ‐ Bank of America Shares have fallen 33.9% in the past year, the worst‐performing stock in the 24‐company BKX banking index, thanks partly to worries over its mortgage liabilities
15 April 2011
Geithner seeks to reassure on US debt – Pg. 1 ‐ …US had made a “fundamental shift…that makes it very hard for future presidents, future congresses to decide that you can live with the risk of higher deficits in the future”
G20 gulf widens on source of fragility – Pg. 2 ‐ The US strengthened its rhetoric on inflexible exchange rates as the main cause of economic imbalances, while China’s president insisted that the most pressing concern was inadequate development of emerging economies
China cements top Brics role – Pg. 2 ‐ The Brics group of big emerging nations – comprised of Brazil, Russia, India, China and, for the first time this year, South Africa – is becoming a China‐dominated forum in which Beijing can push its evolving global agenda without the overbearing presence of the US ‐ The presence of South Africa as the newest Brics member is very much thanks to China, which championed its inclusion even though it is only the 12th largest emerging economy behind Mexico, South Korea, Turkey, Indonesia, Poland, Saudia Arabia, and Taiwan ‐ Beijing argued that South Africa should be included as a representative of the whole of Africa and , given its large and rapidly expanding interests in the continent, this makes great geopolitical sense to China ‐ China already accounts for about 12% of trade in the rest of the Brics countries… ‐ Probably the biggest unifying factor among other Brics members I the concern that their trade is excessively unbalanced in China’s favour, with exports to china made up largely of natural resources and imports from China mostly composed of finished manufactured goods
Wen keeps a wary eye on soaring food prices – Pg. 3 ‐ In a country [China] where the average household spends about a third of its disposable income on basic foods, persistent food inflation of more than 10% is a serious concern ‐ The nation was founded in 1949 after the Communists swept to power amid hyperinflation stoked by their Nationalist foes’ economic mismanagement ‐ Inflation was considered a factor that led to the 1989 Tiananmen Square protests, when Mr Wen was a senior government aid ‐ Already the largest in the world, the reserves rose $197.4bn in the first quarter to $3,045bn
World Bank warns on threat of social unrest – Pg. 3 ‐ Soaring food prices have created a “toxic brew of real pain contributing to social unrest”, …. ‐ The World Bank estimates that 44m people have fallen into extreme poverty, living on less than $1.25 a day,
Surprise jump in US jobless claims – Pg. 5 ‐ New unemployment insurance claims in the US unexpectedly rose last week to their highest level in nearly two months, sparking concern about the strength of the labour market recovery
US deficit – Pg. 12 ‐ The expected 2011 US budget deficit of 8% of gross domestic product is at a level normally associated with wartime
E‐books overtake print sales in US – Pg. 15 ‐ Trouble at bricks‐and‐mortar book retailers has combined with booming sales of e‐readers and tablet computers to make e‐books the biggest‐selling category of the US publishing industry for the first time, … ‐ Sales of e‐books in February tripled over the previous year to $90.3m, ….exceeding adult paperback sales of $81.2m
14 April 2011
Obama calls for $4,000bn in cuts – Pg. 1 ‐ Barack Obama has called for Congress to create a budgetary straitjacket that would restrict future deficits, …. ‐ …cutting $4,000bn from deficits in the next 12 years, shrinking discretionary spending and the defence budget, and reducing government outlays to Medicare and Medicaid, the largest federal healthcare programmes ‐ The White House plan assumes a three‐to‐one ratio of spending cuts and interest savings to tax increases, primarily for wealthy Americans, whereas House Republicans are proposing no new revenue ‐ The Republicans want to repeal the 2010 health law and plan radical transformations to Medicare and Medicaid – shifting the risk of higher medical costs away from federal coffers to seniors and state governments ‐ The White House said that its proposal would bring US deficits down to 2.5% of GDP by 2015, and decline further from there
Goldman and Deutsche Bank criticized in US Senate report – Pg. 1 ‐ The SEC has already settled with Goldman over allegations that it defrauded investors on the composition of a structured credit product known as Abacus. The bank agreed to pay $550m in the settlement ‐ The report is the last major US probe into the causes of a crisis that devastated the US economy and global capital markets and forced governments to spend billions of dollars to bail banks out
Wall St executives enter debt debate – Pg. 2 ‐ A vote to increase the $14,300bn debt ceiling is expected to occur in coming months
Lenders ordered to change mortgage practices – Pg. 2 ‐ US banking regulators on Wednesday ordered 14 large mortgage servicers to overhaul their foreclosure practices and set up a process to provide restitution to borrowers who improperly lost their homes ‐ Federal and state officials launched investigations into bank foreclosure practices last fall, after it was disclosed that some banks used “robo‐signers” to rubber stamp court documents without personally verifying the facts ‐ Banks will have to hire an independent consulting to conduct a review of foreclosure practices from January 1, 2009 to December 31, 2010
IMF ‘decouples’ Spain from periphery – Pg. 2 ‐ Spain is a “completely different” case from the rest of the troubled eurozone periphery and is persuading investors that it has addressed its financial fragility,… ‐ The report highlights the falling credit default swap spreads on Spanish sovereign bonds since the new year, in contrast to spreads for Greece, Ireland and Portugal ‐ …$3,600bn “wall of maturing debt” coming due in the next two years across the globe, with Irish and German banks facing the greatest difficulties in rolling over funding ‐ The IMF repeated its call for systemically important banks to amass larger capital buffers to protect themselves against losses and shortages in liquidity ‐ While advanced economies should seek to reduce high levels of government and household debt, emerging economies needed to “guard against…overheating and the build‐up of financial imbalances”
A tricky transition – Pg. 9 ‐ …the detention on Tuesday of Hosni Mubarak and his sons Alaa and Gamal (Prof Note: Did not Saddam have two sons???? Hmmmmm) ‐ …while the military rulers – headed by Mohamed Hussein Tantawi, the defence minister – may be Mubarak appointees they have tended to respond, albeit hesitantly, to prodding from the street ‐ There are also fears that sectarian tensions between Muslims and Christians – who make up 10% of the population – that simmered under Mr Mubarak’s repressive rule may now increase, nourished by a politically fluid situation ‐ …after decades of dictatorship following an arm coup of 1952, Egyptian sense an opportunity to forget their future through politics
Gold forecast to reach $1,600 level – Pg. 24 ‐ Investors have become nervous that prices are nearly a peak, triggering some selling ‐ Gold prices hit a nominal all‐time high of $1,476.21 an ounce on Monday, up 28.4% over the last year ‐ However, in real terms, adjusted by inflation, gold remains well below the peak set in 1980 of more than $2,300 an ounce
Chinese equities recover as Beijing battles inflation – Pg. 25 ‐ After falling more than any other leading Asian equity index in 2010, the Shanghai Composite has jumped almost 9% this year – making it the region’s best performer ‐ Too high an inflation number would raise the prospect that the People’s Bank of China, the central bank, will need to tighten monetary policy more aggressively than expected ‐ In the past, mainland stock prices have been strongly influenced by the amount of money and credit sloshing around the economy ‐ Official data showed consumer prices rose 4.9% in February from a year earlier, exceeding the government’s full‐year target of 4% ‐ Last week the central bank raised interest rates for the fourth time in five months, increasing the deposit rate to 3.25% and the lending rate to 6.31% ‐ Chinese banks issued $1,200bn in new renminbi –denominated loans in 2010, ….
13 April 2011
US lacks credibility on debt, says IMF – Pg. 1 ‐ The US lacks a “credible strategy” to stabilize its mounting public debt posing a small but significant risk of a new global economic crisis, … ‐ In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011 at a time when its economy was growing fast enough to reduce borrowing ‐ To meet the 2010 pledge by the Group of 20 countries for all advanced economies – except Japan – to halve their deficits by 2013, the US would need to implement tougher austerity measures than in any two‐year period since records began in 1960,… ‐ …on its current plans the US would join Japan as the only country with rising public debt in 2016, creating a risk for the global economy
Saudis ‘throttled back’ oil production – Pg. 1 ‐ Opec’s response to the loss of 1m barrels per day in Libyan oil supplies has been “limited”, … ‐ Saudi Arabia, which controls about three‐quarters of Opec’s spare capacity, increased output in the first quarter to an average of 310,000 barrels a day more than in the final quarter of 2010 ‐ …Saudi production stayed flat in February and March, averaging 8.9m b/d in both months
Obama ready to set out alternative fiscal vision – Pg. 3 ‐ …cut $3,900bn from US debt by 2020
Investor ‘majority’ backs bank reform – Pg. 4 ‐ Most UK fund managers support the reform drive sweeping Britain’s banking sector, in spite of the vocal criticism of a few institutions,…
High and dry – Pg. 7 ‐ In the past decade, many manufacturers have shifted component production to multiple contractors, often in low‐wage Asian nations. This is to cut costs but it is also part of a general shift to slim operations and concentrate on what they regard as core areas, such as product development and marketing ‐ …concurrent movies towards “lean production” – shaving inventories to the minimum and pushing parts through the system as fast as possible to cope with sudden variations in demand – have made supply chains increasingly susceptible to the kind of disruption seen in recent weeks in Japan (Prof Note: Precisely why I am NOT a fan of JIT) ‐ In electronics, about 80% of basic component production, along with a great deal of final assembly, is based in China ‐ But in other sectors, particularly in engineering, where expertise in production is spread more widely and pricing pressures are less intense, many companies are instituting strategies to insulate themselves at least partially
WTI vs Brent – Pg. 12 ‐ …every futures contract is rooted in a physical delivery (even if it is actually settled in cash) ‐ Airline, truckers and utilities are reeling from a sharp gap in the price between refined products and the West Texas Intermediate crude futures, which are based on the price at the physical delivery point in Cushing, OK
Companies win partial victory on derivatives – Pg. 13 ‐ Large US companies such as Boeing and IBM that are fighting to escape expensive rules on derivatives trading have won a partial victory ‐ …exempt non‐financial companies from a requirement to post margin, or collateral in the form of cash or government securities, against derivatives transactions ‐ Banks trading with a non‐financial company would have to assess tis credit risk and only demand margin above a certain threshold ‐ “High risk” financial groups such as hedge funds would have to post margin, while the likes of community banks would be exempt below a threshold
Property groups spur rise in Chinese borrowing overseas – Pg. 13 ‐ Chinese companies have embarked on an unprecedented borrowing spree in international bond markets, a trend starved of credit by state‐owned banks
Goldman triggers commodity retreat – Pg. 22 ‐ Oil prices tumbled sharply, leading many commodities lower on Tuesday, after Goldman Sachs suggested investors should take profits and amid worries that higher energy costs could drag on the global recovery
US farmland proves fertile ground for investors – Pg. 22 ‐ Land prices in fertile heartland states have been climbing at a stunning pace as record or near‐record prices for corn, soyabeans and wheat translate into more profit per acre. Farmers, flush with cash, are bidding loudest at frenzied auctions, but institutional investors from pension funds to wealthy foreigners are increasingly part of the scene ‐ US nominal farmland values have roughly doubled since 2000 58% after inflation, the Federal Deposit Insurance Corp says…. ‐ More than 50 investment funds have been formed to buy crop land in areas from Brazil to eastern Europe, ‐ The pitch: land is a hedge against inflation, a bet on tightening commodity supplies and an asset that does not move in sync with other markets ‐ The appearance of investors who have never driven a tractor has contributed to worries that the boom could end as painfully as a previous one in the 1970s, which left a foreclosure wave in its wake after interest rates rose (Prof Note: For the record, I have driven a tractor) ‐ In some places investors cannot buy land because it is illegal ‐ Several states, including Iowa, Kansas and Minnesota, have for years prohibited outside corporations from buying farmland in laws that bear comparison to proposed curbs on farmland ownership in Brazil, which has vast tracks of uncultivated land ‐ The same farmland is now $10,000 per acre….
12 April 2011
UK banks proposals closer to US rules – Pg. 1 ‐ Global banking regulation took a step towards convergence after a UK commission proposed measures that will bring the country’s financial rules closer to the US, reducing fears that British lenders will flee London for New York ‐ The proposed changes – which met with broad political support and will be finalized by September – are similar to regulations in the US, where banks are limited in the amount of deposits they can use for investment banking and commercial banking activities ‐ The UK plan goes further than the US, where banks do not face the same capital requirements for their retail units
EU and IMF to drive Portugal bail‐out terms – Pg. 2 ‐ European Union and International Monetary Fund officials will begin talks in Portugal today on a programme of austerity measures and economic reforms as a condition for an $115bn bail‐out ‐ Labour market reforms, tax increases and public sector wage freezes or cuts are among the most politically sensitive measures that the EU and IMF are expected to insist on in return for aid ‐ Sweeping privatizations, state spending cuts and the liberalization of energy and other markets are also likely to be at the top of the agenda,… ‐ These envisage almost halving the deficit this year from 8.6% of gross domestic product in 2010 to 4.6%, with further cuts to 3% of GDP next year and 2% in 2013
IMF predicts steady economic recovery – Pg. 3 ‐ The global economic recovery is proceeding steadily but with few signs that underlying current account imbalances are being reduced,… ‐ …world gross domestic product projected to expand by 4.4% this year and by 4.5% in 2012 ‐ …fund said that countries with large external surpluses, such as Japan and China, had made little progress in rebalancing demand in the medium term and were still too dependent on exports ‐ …rich economies such as the US needed to adopt more credible plans for fiscal consolidation to prevent a loss of confidence in their assets and a rise in long‐term interest rates ‐ Economies such as Brazil, Colombia, South Africa and Turkey have seen upward pressure on their exchange rates, as other emerging markets such as China continued to hold down currencies for competitive reasons
Stage set for US debt limit fight – Pg. 3 ‐ …agreed on Friday to a last‐minute deal to cut spending by $38.5bn over the next six months, ….took positions for the next round of highstakes negotiations on the debt ceiling, set to begin in the coming weeks ‐ In the absence of a deal, the US could face a default, roiling international financial markets ‐ The Treasury department estimated the US would hit its debt limit no later than May 16, but would not face the prospect of default until early July, because of the government’s ability to pursue a range of cash‐management options to maintain enough money in its coffers
Fed officials talk down tightening – Pg. 3
A test of strength – Pg. 7 ‐ …France has been forced to play second fiddle to its closest partner ‐ Since the greed debt crisis triggered a fundamental debate on the future of the euro, it has been Berlin that has determined the focus – and pace – of crisis management
Repo fee hits money market funds – Pg. 20 ‐ Hundreds of billions of dollars invested in money market funds face almost zero returns after sharp falls in short‐term interest rates ‐ Nearly a third of the $2,750bn that sits in US money market funds is invested in the repurchase or repo sector, trading in which has been hit by a new charge levied on banks at the start of the month by the Federal Deposit Insurance Corporation ‐ The amount of cash invested in money market funds has fallen from its peak of $3,900bn in January 2009, when investors fled equities and other risky investments, to levels last seen in August 2007, ….
Carry trade pitches US dollar near record low – Pg. 20 ‐ The return of the carry trade in currency markets has the potential to push the dollar down to record lows as US monetary tightening lags behind that in the rest of the world ‐ The carry trade, in which low‐yielding currencies such as the dollar and the yen are sold to finance riskier, higher‐yielding assets, such as equities, commodities and emerging market and commodity‐linked currencies, has returned with vigour
Pimco’s Gross ups bet against debt issued by US government – Pg. 21 ‐ Bill Gross, manager of the world’s largest bond fund, is now actively betting against the value of debt issued by the US government ‐ He argues that the Fed expects buyers such as Pimco to step in once it stops purchasing Treasuries at the end of June
11 April 2011
Obama acts to seize budget initiative – Pg. 1 ‐ The White House will this week propose radical reforms to public spending, an attempt to regain the initiative after a last‐minute deal on Friday to avoid a federal government shutdown ‐ Republicans have said they will use a forthcoming vote on raising the federal debt limit, without which the federal government will be prevented from further borrowing, to try to force further reform
UK banks escape restructure – Pg. 2 ‐ Britain’s biggest banks are set to escape a draconian restructuring as a government‐ appointed commission will today outline reforms that will keep institutions intact, meanwhile providing more protection for retail deposits and operations focused on consumers ‐ These could have included formally separating their investment and retail banking operations or restricting their share of the highstreet market ‐ The commission is due to say, however, that it will look in greater detail at the benefits of forcing Lloyds Banking Group, which holds 30% of the current account market in the UK, to sell more of its branches than the 600 it is already having to divest under state aid rules, …. ‐ It is also expected to lay out a series of proposals to make it easier for retail customers to compare and switch accounts
Tackling the deficit is next fiscal battle – Pg. 2 ‐ With a last‐minute deal to cut about $40bn from the 2011 federal budget Republicans and Democrats have solved the US’s least important fiscal problem ‐ They must increase the legal debt limit so that the federal government can keep borrowing to meet its obligations ‐ Dealing with the debt limit is likely to take at least another month ‐ Reducing the deficit over the next few years is a balancing act. Tightening too fast, before the private sector is ready to spend, and a lack of demand will cripple the recovery ‐ Tighten too slowly and the government will borrow funds that would have gone into private investment ‐ For the economy, that cancels out some of the hundreds of billions of dollars in 2011 tax cuts agreed by Congress and the Obama administration last December. $112bn in payroll tax cuts are due to expire at the end of 2011 and Mr Obama’s budget assumes that the former president George W. Bush’s income tax cuts expire for higher earners at the end of 2012 ‐ ….larger issue: the projected rise in Social Security and healthcare spending caused by an ageing population
Legal action looms after Icelanders vote No – Pg. 3 ‐ Britain and the Netherlands have vowed to take Iceland to court over $5.8bn lost in the failed Icesave bank after a deal to repay the money was rejected for a second tie by Icelandic voters in a referendum ‐ …60% voting against the deal in spite of warnings that a No vote could disrupt the country’s economic recovery and scupper its bid to join the European Union ‐ The dispute involves money deposited by British and Dutch customers in the Icesave unit of bankrupt Landsbanki. They were reimbursed by domestic deposit insurance schemes, leaving the UK and Dutch treasuries out of pocket ‐ Credit rating agencies warned before the referendum that a No vote would set back Iceland’s efforts to normalize its “international economic relations” after the banking crisis and was likely to lead to a downgrade of the country’s sovereign debt ‐ Dutch officials noted that fulfillment of the EU rules on bank deposit guarantees was a prerequisite of EU membership – signaling that Iceland’s application to join the bloc was likely to be held up until the dispute is resolved
China’s trade deficit – Pg. 14 ‐ On Sunday the customers bureau reported that imports ($400bn) had exceeded exports ($399bn) over the first three months. This tiny trade deficit – China’s first quarterly shortfall for seven years – is an encouraging development for the world economy ‐ But if the result is that China is consuming about as much as it is producing, good. Having fewer excess dollars swilling around the system means that China faces less pressure to print yuan to keep the exchange rate where it wants it ‐ …$2,850bn of FX reserves…. ‐ …China’s overall first‐quarter trade deficit comes after two successive years of import growth outpacing exports – the main requirement for rebalancing the economy
US watchdogs line up 100 cases against executives of failed banks – Pg. 15 ‐ …seek to hold people accountable for management failings and recover billions of dollars,… ‐ …FDIC says the failures have cost its insurance fund $59bn ‐ Insurers who write policies known as D&O, which are held by directors and officers to protect them in the event of a bank failure, are likely to be liable for much of the money the FDIC aims to recover ‐ In the Savings and Loan crisis, the FDIC recovered only $4.1bn in D&O claims, a tiny slice of the $103bn bank failures drained from its insurance fund, …
Bets drive Australian dollar to highs – Pg. 15 ‐ Short‐term speculators have built up record bets on further gains in the Australian dollar, pushing the currency to highs, as optimism over global growth and elevated commodity prices boost its appeal ‐ …Australian dollar hit 29‐year highs against the US dollar …. ‐ The Australian dollar has also benefited from a re‐emergence of the global carry trade, in which increasing confidence in global growth prompts investors to sell low‐yielding currencies such as the dollar and the yen to finance the purchase of riskier, higher‐yielding currencies
Junk bond funds back in demand – Pg. 16 ‐ Funds investing in junk bonds had record inflows last week as individual investor demand for higher‐yielding corporate debt roared back after a brief pause last month
NYSE rejects Nasdaq’s joint bid – Pg. 18 ‐ The board of NYSE Euronext unanimously voted on Sunday to reject Nasdaq OMX and the IntercontinentalExchange’s offer to break up its planned merger with Deutsche Borse ‐ Nasdaq and ICE are prepared to press forward with a hostile bid if they deem it appropriate, …. ‐ NYSE Euronext’s board has privately expressed concerns about how likely it is US regulators would approve the Nasdaq‐ICE deal, which would create a near‐monopoly in US listings and by far the largest US stock exchange
9 April 2011
Google in landmark antitrust settlement – Pg. 1 ‐ The agreement with the Department of Justice, announced on Friday, will allow Google to proceed with its $700m acquisition of ITA Software, giving it an influential position in travel search and online airline bookings ‐ It will also subject the company to ongoing monitoring by US antitrust regulators and open a new avenue for rivals to take allegations of unfair treatment by Google to Washington ‐ The acquisition of ITA, which makes travel‐search technology and software used by airlines to handle bookings, was fiercely opposed by online travel companies ‐ Under a consent decree with US regulators, Google will be required to license out ITA’s technology to other companies, and to set up “firewalls” to prevent data from other companies that use ITA’s systems from leaking into its own operations (Prof Note: wait…is this like Arthur Anderson had a firewall with Enron; how the rating agencies had firewalls; very curious)
US budget clash goes to wire – Pg. 3 ‐ A deal to end the standoff over the US budget and keep the federal government open was being held up by a dispute over funding for family planning and abortion, …. ‐ The Republicans insisted that the two sides were still divided over the extent of the cuts to the 2011 budget, which will fund the government until the end of September, and not over social issues ‐ The US government has been kept open by short‐term funding resolutions following the failure of the then Democrat‐controlled Congress last year to pass a budget for 2011. The latest resolution ran out on Friday ‐ On top of pushing for sharp reductions in spending, the Republicans also attached a proposal to the budget bill cutting federal funding for Planned Parenthood, a women’s health services body that has long been a target of conservatives ‐ US law has for 30 years banned the use of any federal funds for abortion services except in cases of rape, incest and when a woman’s life is in danger. The government does, however, fund family planning health clinics under a Nixon‐era programme, which in turn helps pay for clinics operated by Planned Parenthood ‐ The clinics provide cervical smears, contraception and other medical services, mostly to women on low incomes, and also abortion services, which are privately funded ‐ Nearly two‐thirds in the study of those Americans said abortion should be illegal in all or most cases (Prof Note: Is not the legalization of abortion not simply the regulators way of having “God” be the counterparty to an OTC derivative? Is Abortion not simply a put option with God taking the short position? When you think of it this way, one can understand why it is such a heated topic, God is being placed in the position to be obligated to take an infinite loss…the loss of a life would be infinite…)
Japan service sector in steep decline – Pg. 4 ‐ Sentiment among Japan’s service sector workers fell at the fastest rate on record last month as consumers cut spending following the earthquake and tsunami ‐ Such levels have not been seen since early 2009, when Japan was struggling with its worst recession since the second world war ‐ The decline in sentiment underscores the self‐restraint, or jishuku, ….
An inflated outlook – Pg. 5 ‐ The reverberations from China’s rising wages, alongside rapid economic growth there and in fellow emerging economies, were felt in far‐off Frankfurt this week ‐ …the ECB…looks at China and sees a more inflationary future ‐ ….the People’s Bank of China, the central bank, raised rates for the fourth time since October, as well as taking other action against price rises ‐ First, more pricey Chinese labour still represents only a fraction of the final price of goods sold in Europe and the US ‐ Second, Chinese productivity levels are not standing still. ‐ Third, as Chinese wages rise, some production will shift to lower‐wage economies, keeping the global price low ‐ The benefits to China of rising wage levels and productivity are clear. ‐ If China is no longer exporting deflation, domestic prices in Europe and the US will have to be kept on a rather tighter rein in future
German lenders set for stress test blow – Pg. 9 ‐ European banking regulators have set up a dispute with German authorities, pressing ahead with a tight definition of capital for planned stress tests and making it more likely Germany’s state‐owned Landesbanken will fail
Mickey Mouse sets out on Shanghai Disneyland venture – Pg. 10 ‐ Walt Disney is to be reborn in shanghai, with Chinese characteristics (Prof Note: Wait, did Barbie, “Pink”, not just die in Shanhai?) ‐ Already, Disney has taken a big step to soften the park’s cultural footprint by abandoning Main Street, the nostalgic recreation of founder Walt Disney’s Missouri home town
Gold and silver fever grips investors – Pg. 17 ‐ On Friday silver pushed above $40 a troy ounce for the first time since 1980. Gold pushes to an all‐time high in nominal terms of $1,474.19 an ounce ‐ The precious metals’ rallies have clear links to rising fears about inflation. But recent predictions for silver to hit $50 and gold to breach $1,500 are based on more than these concerns ‐ The interest has been triggered by a range of factors, not least geopolitical tensions. After a weak January, prices of the metals spiked higher in February when the unrest that toppled governments in Tunisia and then Egypt sent investors scrambling for havens ‐ Some gold bugs are even betting on a third round of quantitative easing, dubbed “QE3”, by the Federal Reserve, after its current asset‐buying programme ends in June ‐ An end to QE would tighten US monetary policy but it would be a small step compared with the inflationary impact of soaring oil and food prices, which have pushed real US interest rates – nominal rates minus inflation – to negative levels, analysts say
Life & Arts – Madoff spins his story (must read)
8 April 2011
Trichet defends ECB rate increase – Pg. 1 ‐ The European Central Bank has defended a rise in official interest rates as good for the whole eurozone even as preparations began for a bail‐out of Portugal, the latest victim of the region’s debt crisis ‐ …ECB’s decision to lift its main interest rate from 1% to 1.25%, which economists warned would hit the eurozone’s weakest economies hardest – including Portugal and Ireland ‐ The ECB told Portuguese banks to cut their exposure to government debt, …
Madoff spreads the blame for Ponzi scheme – Pg. 1 ‐ …admitted he had lied to investors and relatives for at least 16 years before he confessed to federal authorities in 2008 and was sentenced to 150 years in prison ‐ Mr Picard, who has said the fraud began as long as 25 years ago, has sued all four men or their estates, ….
Rebuilding budget rises to $47bn – Pg. 2 ‐ The Japanese government has said the size of the extra budget for the first phase of the public relief and rebuilding effort following the March 11 earthquake and tsunami could reach about $47bn – some previous suggestions
Shutdown looms as last‐minute talks begin – Pg. 3 ‐ The US was lurching towards a government shutdown as President Barack Obama and congressional leaders struggled to resolve the ever more dramatic budget impasse on Thursday ‐ Meanwhile, House Republicans approved a bill that would extend funding for the military until the end of the 2011 fiscal year on September 30, and the rest of the government until the end of next week, in order to give lawmakers more time to come to a resolution ‐ The last time the US government closed its doors was in 1995 and early 1996, … ‐ A shutdown would only be partial, with an estimated 800,000 out of 4.4m federal workers being temporarily laid off ‐ Nevertheless, a wide range of government services would be suspended or disrupted, from the processing of home loans, tax returns and visa applications to the staffing of national parks ‐ Military pay would be delayed until after the standoff ended, but lawmakers would continue to receive their salaries, despite efforts in both the House and the Senate to half their own pay
ECB leaves question of further rises open – Pg. 4 ‐ …putting it ahead of the US Federal Reserve and Bank of England in tightening monetary policy, but it deliberately left open when further rises in eurozone borrowing costs would follow ‐ Earlier on Thursday, the Bank of England held the UK official interest rate at 0.5% ‐ The Fed meanwhile, is still completing its “quantitative easing” programme to support the US economy ‐ Because it has acted early against rising inflation, the ECB believes it does not need to give financial markets guidance over a longer time scale – as the US Fed has in the past ‐ The ECB aims to keep eurozone inflation, which reached 2.6% in March, “below but close” to 2% ‐ Portugal’s decision to accept outside help could also see the ECB halting the government bond purchasing programme it launched last May, at the height of the eurozone debt crisis
Beware risks inherent in the global recovery – Pg. 5 ‐ The increase in eurozone interest rates is only one sign of a global economic recovery that appears to be self‐sustaining and gathering fresh momentum ‐ …outside Japan, the annualized growth rate of the Group of Seven economies would probably reach 3% in the first half of the year ‐ Germany is the star performer among advanced economies, with resurgent industrial production and unemployment falling to its lowest level since reunification in 1990 ‐ A concern for the immediate outlook is the effect of rising oil prices, which threatens to squeeze incomes in advanced economies and to exacerbate inflationary pressure in emerging economies ‐ In emerging economies, the risks of inflation rising because the authorities are too worried about tightening monetary policy or allowing greater currency appreciation are high
US bank results – Pg. 12 ‐ …average prices are still down by two‐thirds since before the crisis ‐ Investors also expect more so‐so numbers from investing banking
Too fixed income – Pg. 12 ‐ Conventional fixed income securities are a crime against nature – the nature of economic reality ‐ The standard product is supposedly secure because its terms are known in advance, but present payments do not correspond to a shifting economy, which is always growing or shrinking, inflating or deflating ‐ A fixed interest rate is unlikely ever to compensate correctly for inflation ‐ The spread over a supposed “risk‐free” rate (to compensate for the chance of default) is almost inevitably wrong
Banks fight for ‘block’ share deals – Pg. 20 ‐ Wall Street banks are vying to underwrite companies’ share sales in so‐called “block trades”, a sign of their willingness to take on greater risks and use more of their own capital ‐ The volume of block trades, which are also known as “bought deals”, rose sharply in the first three months of this year to a quarterly high, … ‐ Block trades occur when equity underwriters buy a secondary offering of shares from a company at a discount to the current market price, and then place those shares with investors in the market ‐ Those trades differ from other secondary share offerings that companies use to sell additional shares, because banks briefly own the block trade and hold it on their account until it is sold on ‐ The banks also take on more risk, because the shares could lose value while the bank is still holding them ‐ The block trades, in which the bank puts its own capital to work on behalf of the issuer, reflect the banks’ growing desire to take on risk
7 April 2011
Portugal in plea for EU bail‐out – Pg. 1 ‐ …Portugal’s outgoing prime minister, has asked the European Union for financial assistance, paving the way for the third bail‐out of a eurozone country after Greece and Ireland ‐ The move was welcomed by EU officials, who had been encouraging such a move ‐ The request for the aid would have to be made in terms that were “appropriate to the current political situation,”… ‐ Portugal’s borrowing costs have soared to what the government acknowledges are unsustainable levels after its parliamentary defeat,… ‐ It was not immediately clear what form a government request for EU support would take, but the outgoing government has previously said that it did not have the political authority to negotiate a rescue agreement with the European financial stability facility, the EU’s bail‐ out fund ‐ Indonesia in clampdown on Citigroup after claims that employee stole millions from clients – Pg. 1 ‐ Citigroup has been barred from selling wealth management services to new clients in Indonesia after allegations that a long‐time employee stole millions of dollars from customers of its premium retail bank ‐ …Citigold, the US bank’s flagship service for wealthy customers
German recovery gathers pace – Pg. 2 ‐ Germany’s rapid industry‐led economic rebound has gained fresh momentum, with Berlin reporting on Wednesday that industrial orders has surged a further 2.4% in February ‐ The stronger‐than‐expected increase followed a 3.1% month‐on‐month rise in January and added to evidence that Europe’s largest economy had started 2011 strongly ‐ The latest data also suggested Germany’s economy was rebalancing away from its dependence on exports of high‐quality engineering products to fast‐growing Asian economies
Rival parties fail to break deadlock – Pg. 3 ‐ The US began preparations to stand down nearly 1m workers and suspend services ranging from processing ax returns to national parks as a government shutdown loomed over stalled budget talks ‐ The two sides are also split over policies attached to the budget bill, which take aim at abortion by cutting funding for family planning, and at the Environmental Protection Agency ‐ ….800,000 federal workers would be temporarily laid off and services suspended as long as there was no budget to support them ‐ National parks would be closed, processing of paper tax returns suspended, government websites stopped and housing loans guaranteed by the federal government also suspended ‐ ….emergency services, defined as those covering “safety of life and protection of property”, which include policing and large parts of the military, would remain open
In a tight spot – Pg. 9 ‐ ….the European Central Bank is expected today to increase its main interest rate from 1% to 1.25% ‐ Other central banks, especially in Asia and south America but also in Europe, have already started tightening monetary policy ‐ With inflationary pressures today no more prevalent in the 17‐country eurozone than in the US or UK, and growth prospects no better, the rise marks the moment when differences in analysis, rather than divergent economic circumstances, begin to affect policy decisions ‐ The ECB’s decision to strike out while the US Federal Reserve is still easing policy and the Bank of England sits on the fence has implications for global economic prospects beyond Frankfurt, Washington and London ‐ Today, however, the ECB is focused on combating inflation risks, while the Fed continues to provide exceptional economic support through “quantitative easing” asset‐purchase programme and the US debate has only just turned back towards possible tightening ‐ The world’s main central banks rarely move in opposite directions,… ‐ …the Fed still thinks the rise in headline inflation caused by oil prices will be transitory, and plans to continue its $600bn QE2 programme until June as planned ‐ Beyond the US and eurozone there is less disagreement – although the International Monetary Fund and other global organizations fret that emerging market central banks have been too slow to tighten policy ‐ India, meanwhile, faces the highest inflation of any of the main Asian economies – resulting in its central bank becoming the most active in tightening monetary policy among the Group of 20 leading nations ‐ Chile, the world’s largest copper producer, has raised rates nine times since last June to 4%. Peru, the second –largest copper producer, has increased rates eight times to 3.75%, and has made enthusiastic use of measures such as high bank reserve requirements
European banks in further capital calls – Pg. 15
Covered bonds protected in review by Britain’s regulator – Pg. 22 ‐ UK banks’ covered bonds would be protected even if the bank that sold them went under,…. ‐ Covered bonds – securitizations backed by pools of mortgages – are considered the safest form of bank debt because the issuing bank undertakes to replace bad loans and because the pool is typically ring‐fenced for the bondholders in bankruptcy
End of QE2 sets tricky bath for emerging nations – Pg. 23 ‐ Fears, too, about inflation in China, India, Brazil and other emerging economies, which stalked the market three months ago, are at least as strong as they were
6 April 2011
US close to federal shutdown on budget – Pg. 1 ‐ The US moved closer to its first government shutdown since the mid‐1990s after a high‐ stakes White House summit ended without a deal to resolve differences between Democrats and Republicans over the budget (Prof Note: This is DISGUSTING! In the Mid‐ 90s all the government workers were laughing their collective a$$es off while the private sector suffered. The government workers knew they would receive back pay (which they did) and the private sector employees suffered! OUTRAGEOUS!!!) ‐ A shutdown – to occur on April 8 in the absence of a new budget law – would cement the view that the US political system is incapable of resolving its differences on fiscal policy, and potentially threaten recovery
IMF changes tack over capital controls – Pg. 1 ‐ The International Monetary Fund has proposed its first guidelines for controlling flows of speculative capital, thereby legitimizing a tool that it once opposed ‐ The framework represents a big shift by an institution that spent the mid‐1990s campaigning for free flows of capital, only to be embarrassed when the Asian financial crisis of 1997‐98 showed the dangers of a sudden withdrawal of foreign capital ‐ Inflows push up asset prices and some developing countries are worried about inflation, financial market bubbles or a panic if capital were suddenly to flow out ‐ Brazil levies a tax on foreign capital flowing into domestic equities or bonds ‐ The IMF framework does, however, recommend that countries first respond to capital inflows by letting their exchange rates appreciate – or adopting looser monetary and tighter fiscal policy. If that is not possible, it urges countries to use controls that do not discriminate between foreign and domestic investors, including limits on foreign currency borrowing by local banks
Fed opts against tapering off asset purchases – Pg. 4 ‐ The US Federal Reserve will not taper off its current $600bn round of asset purchases as they come to an end in June, based on the minutes of its last monetary policy meeting ‐ The FOMC also sent a signal that market expectations of a rise in interest rates next year are broadly in line with its current thinking. The Fed’s target for short‐term interest rates is currently between 0 and 0.25% ‐ The committee made little change to its assessment of the economy, noting that housing was still depressed, and judging that the rapid fall in the unemployment rate in recent months overstates the strength of the labour market
Beijing lifts interest rates in battle against inflation – Pg. 4 ‐ China raised interest rates for a fourth time in five months as Beijing struggles to reduce bank lending, rein in inflation and slow economic growth ‐ The central bank said the official one‐year lending and deposit rates would be increased by 25bps from Wednesday, raising the deposit rate to 3.25% and the lending rate to 6.31% (Prof Note: Hmmmmm…sounds like 3‐6‐3 to me!) ‐ Consumer price inflation in China rose 4.9% in February from a year earlier, the same as in January ‐ But politically sensitive food prices accelerated and producer prices increased 7.2%, their most since October 2008 ‐ The government predicts that headline inflation will continue to rise and peak around June or July ‐ An overabundance of bank credit resulting from the government’s post‐crisis economic stimulus package is the main cause of inflation, although officials also blamed “external factors” such as soaring oil prices ‐ The official interest rate in China is not a benchmark, as in other economies, but a regulation for banks that they cannot deviate significantly from, making the cost of capital one of the last prices still directly state controlled
Visibility needed – Pg. 9 ‐ Angela Merkel was firm with her audience of German bankers: taxpayers must never again be asked to fund a bail‐out ‐ As the financial crisis spread in 2008, Germany offered up to $710bn in liquidity guarantees and capital to its teetering institutions ‐ German banks also have an unusual reliance on hybrid capital: the oddly named “silent participations” which global regulators will no longer consider as up to scratch ‐ Altogether, 7,600bn (euro) of German banking assets are supported by less than 350bn (euro) of equity and reserves,
Treasuries face being caught in QE2’s wake – Pg. 22 ‐ The US bond market is feeling the heat from a war of words between Federal Reserve officials. The sparring, over the need for interest rate rise once quantitative easing ends in June, has unsettled dealers ‐ Against the backdrop of improving jobs numbers and rising inflation, bond yields are being buffeted by the contrasting views of Fed officials, divided into policy “doves” or “hawks” based on how aggressively they want the central bank to act ‐ Once QE2 is completed in June, the two‐year note could well rise sharply as bond investors look for normalization
Portuguese bail‐out expected after latest credit downgrade – Pg. 22 ‐ Portugal’s cost of borrowing soared to more than 10% for the first time since the launch of the euro, following a political crisis that has pushed the country to the brink of an international bail‐out ‐ The jump in yields – for the 12th day in a row – was sparked by Moody’s decision to cut the country’s sovereign rating by one notch from A to Baa1 ‐ Fitch downgraded Portugal by three notches on Friday. S&P also cut the country’s long‐ term rating by three levels in two separate moves over the last 10 days
5 April 2011
Obama launches re‐election campaign – Pg. 1 ‐ Barack Obama has launched his re‐election campaign 20 months ahead of the 2012 poll, seeking to gain a fundraising jump on Republican opponents in what is expected to be by far the most expensive race in US history ‐ With the fiscal battle at a turning point, the Treasury said the US would hit is congressionally mandated debt limit on May 16 ‐ …the US could default on its debt as early as July 8 ‐ On top of cuts, conservative Republicans are pressing to take funding away from healthcare, environmental regulation, and family planning – measures the Democrats strongly oppose ‐ Campaign officials say he is aiming to raise as much as $1bn for next year’s poll, a record for one candidate
Borrowing costs soar towards 10% ‐ Pg. 2 ‐ Portugal’s cost of borrowing has jumped to within a whisker of 10% as the belief grows that the country needs and international rescue to fend off a sovereign bond default ‐ The market estimate of the probability of default is now 40%, up from 30% a month ago, as measured by Credit Default Swaps
Caution holds back US hiring spree – Pg. 3 ‐ US manufacturing was severely affected by the recession, with more than 2m jobs lost. The sector’s growth has spearheaded the economic recovery. ‐ Manufacturers have found they are able to increase productivity by getting their employees to work harder or more efficiently ‐ Companies have made increasing use of temporary labour and overtime. These can be more expensive than to pay a salary – but they reflect a focus on staying nimble ‐ Another problem is a lack of technical skills in the US workforce, a longstanding complaint by executives of industrial companies ‐ In a sense, the jobs outlook is a Catch‐22‐style conundrum. Companies say they would feel more confident – and start to hire in earnest – if unemployment were to fall below 8%, yet unless they generate jobs, unemployment will not reach those levels
Democrats gain demographic edge – Pg. 9 ‐ The electorate has become less white and more Hispanic more rapidly than predicted, …. ‐ The economic recovery under way in the US, and a small but discernible increase in job creation, is likely to bolster Mr Obama ‐ Another boost may come from the lack of a Republican candidate who can appeal both to the party’s narrowing conservative base and a the broader electorate ‐ The non‐Hispanic white population dropped from 69.1% in 2000 to 63.7% in 2010 ‐ By contrast, the minority population, which includes African Americans and Asians, jumped from 30.9% to 36.3% over the same period
Left on the shelf – Pg. 11 ‐ The hunt for new consumers is shifting west, away from the mulitnationals’ relative comfort zone of the big coastal cities and into areas where distribution, logistics and consumer behaviour are all less than certain ‐ ….china is shaping up to be the world’s biggest grocery market within just three years ‐ Multinationals are losing their allure for employees, suggesting citizens, too, increasingly see their future with local companies ‐ This reflects narrowing pay differentials…
History will rue US and European debt woes – Pg. 13
It’s 1989, but we are the Russians – Pg. 13 ‐ (Prof Note: F’in A right on!!!)
Qatari Diar makes first move into US property – Pg. 21 ‐ …deal to build a $700m development in Washington DC’s city centre ‐ Qatari Diar will be the cornerstone investor in a fund set up to finance the development of a 10‐acre mixed‐use development overseen by Hines, the US developer, and Archstone the residential investor and operator ‐ The all‐equity financing was put in place by Barwa Bank, which is part‐owned by Qatari Diar, … ‐ Hines, a private company run by Gerald Hines, and Archstone have taken stakes in the scheme ‐ The first phase comprises six buildings containing 458 rental apartments and 216 condominiums, as well as 520,000 sf of office space and more than 185,000 sf of retail ‐ A second phase of the project is planned to include a 250‐room hotel and another 110,000 sf of retail
Prospect of Fed rate rise boosts CME interest rate futures trade – Pg. 25 ‐ Interest rate futures trading in the US surged last month, as markets appeared to price in the increasing likelihood that the Federal Reserve will raise rates in response to inflation sooner than previously thought
4 April 2011
Regulators divided on systemic risk list – Pg. 1 ‐ The Federal Deposit Insurance Corporation is arguing for a broad approach, pulling in large hedge funds, insurers and asset managers, while the Treasury and the Federal Reserve prefer to designate only a handful (Prof Note: Four Letters “L” “T” “C” “M”) ‐ The new system aims to identify future AIGs and – by placing Fed examiners inside companies and forcing them to maintain higher capital and liquidity standards – stop the sort of dangerous risks the insurer took before its $180bn government rescue in 2008 ‐ Bank holding companies with more than $50bn in assets are designated as systemically important automatically
Congress remains deadlocked over budget – Pg. 4 ‐ With Republicans in the House of Representatives preparing to unveil on Tuesday their fiscal blueprint for 2012 and beyond, the White House and Congress are still negotiating a budget for the current year, which ends in September ‐ Republicans want $61bn in spending reductions, while Democrats – who initially wanted a spending freeze, have now agreed to $33bn in cuts (Prof Note: Forgive me but is not the current deficit $1,480bn? What exactly is $61bn going to do???) ‐ Looming closer is the need to raise the congressionally‐mandated US debt ceiling, which stands at $14,300bn and will have to be increased in the coming months to avert a default
ECB criticized ahead of its expected rate rise – Pg. 6 ‐ The European Central Bank faces an international backlash this week, when it is expected to raise interest rates, in spite of the continuing eurozone debt crisis, and to consider ways of weaning the region’s weakest banks off its offers of unlimited liquidity (Prof Note: Explain to me how one can criticize the ECB with only one goal, “keep inflation at or near 2.00%”? You can criticize the goal but not the ECB’s actions given the goal!) ‐ The eurozone’s difficulties were highlighted last week when “stress tests” revealed Ireland’s stricken banks needed an additional $34bn in capital,… ‐ Still in consideration is the setting up of a special facility for eurozone banks in restructuring, which would help Irish banks ‐ ‐ Thursday’s expected interest rate increase from 1% to 1.25% would follow a surge in eurozone inflation to 2.6% in March
Greenspan is wrong: we can reform finance – Pg. 9 by Barney Frank ‐ Mr Greenspan is wrong on both counts. His rosy view overlooks a monumental crisis that threatened the foundations of the American economy, led to soaring unemployment, a continuing foreclosure crisis and weakened economies in the US and Europe ‐ Regulators also have new authority to regulate the almost $600,000bn derivatives market ‐ This, combined with the new Basel III capital standards and the ability of regulators to insist on even greater capital, will ensure more prudent and productive lending. And regulators will be aided by the new Consumer Financial Protection Bureau, which will act to prevent the predatory, reckless lending that was a precursor to the recent crisis
QE2 won. What next? – Pg. 14 ‐ Don’t look now, but QE2 has worked, at least so far. ‐ Last week’s US payroll data underline this. ‐ Low US rates boosted US competitiveness at the price of inflation in China and elsewhere. That has helped the US so far, but may yet have ugly consequences ‐ And QE2 has failed to breathe life into US housing, in spite of rising affordability. But, critically for central banks, the Fed has shown it can use monetary policy to manage the US economy, even when rates are already at zero ‐ The Fed still has to find an exit strategy, which will be difficult
Refinancing of property loans could hit industry – Pg. 16 ‐ Up to $967bn of loans made to commercial property borrowers by banks and other financial institutions will require refinancing within the next two years across Europe, which could spark a crisis in the industry, as lenders take a tougher line on extensions and renewals ‐ It also suggested that between 500bn – 600bn (pounds) of commercial property loans will mature in the next two years, many of which have already been extended once by banks not previously able to take writedowns from demanding money back from problem borrowers ‐ The number of loans scheduled for maturity is set to double in the next few years, which it said would come as the strength of the collateral from the property underlying those loans falls precipitously ‐ Lenders are also finding costly, drawn‐out enforcement and messy, nonconsensual restructurings are more than expected in the original loan underwriting, involving resources that would be better committed elsewhere for a better return ‐ Many loans were securitized in the form of commercial mortgage‐backed securities and also temporarily rolled over. Special servicers of such debt are expensive, and the increase in servicer headcount has not kept pace with the volume of loans each is working on at any given time
2 April 2011
US exchanges in $11bn NYSE bid – Pg. 1 ‐ Nasdaq OMX and IntercontinentalExchange have challenged a plan to create the world’s largest exchange, making an $11.3bn offer for NYSE Euronext weeks after it had agreed a merger with Deutsche Borse ‐ The battle for NYSE, which was launched on Friday, will also shape the fates of the world’s leading financial centres ‐ Nasdaq‐ICE’s cash‐and‐share offer would bolster New York’s position as a global listing centre, while strengthening London’s position in derivatives ‐ If successful, the deal would also give ICE a US futures business to compete with the CME Group in Chicago and Deutsche Borse in Europe ‐ Under the proposal, ICE would buy NYSE Euronext’s futures businesses, known as NYSE Liffe, while Nasdaq OMX takes over NYSE’s remaining operations including the Euronext group of stock exchanges in New York, Paris, Brussels, Amsterdam and Lisbon, as well as its US options business
Strong jobs growth offers evidence of recovery but scars of recession remain – Pg. 1 ‐ The US economy generated a stronger than expected 216,000 jobs in march, providing further evidence that a robust recovery in the labour market is finally underway ‐ The jobless rate fell from 8.9% to a two‐year low of 8.8% as 230,000 new private sector jobs offset a 14,000 decline in the number of government positions ‐ Services led the gains… ‐ There was also no growth in hours worked and average hourly earnings were flat at $22.87, suggesting wage rises are still a long way off
Risk appetite picks up as recovery fears fade – Pg. 14 ‐ …expectations that the European Central Bank would raise rates at its policy meeting next week were bolstered by unexpectedly robust eurozone inflation figures
QE2: what happens when it ends? – Pg. 15 ‐ The US Treasury is due to lose the biggest buyer of its debt within a few months ‐ Such economic improvements, increases in inflation and eventually a potential shift in expectations of when the Fed might raise official interest rates are a bigger driver for bond yields than Fed buying… ‐ Another impact of reduced liquidity could be felt in the levels of investor demand for new bonds. Both junk bonds and emerging market bond sales have reached record levels in the past two years,…
Bank bondholders ‐ Pg. 16 ‐ Senior bondholders rank equally with depositors in the hierarchy of creditors. Yet their relationship to the bank is different. A bondholder makes a purely financial judgment to become a creditor to a bank after evaluating the risks of non‐payment. A depositor’s relationship is based as much on personal and social considerations as products offered, and is entered into without much knowledge of the bank’s financial condition. Depositors are taxpayers, while bondholders may not be
1 April 2011
Irish banks need extra 24bn (euro) Pg. 1 ‐ …total cost of the government’s rescue to about 70bn (euro) ‐ This will be Ireland’s fifth attempt to draw a line under banking crisis, which has so far cost the state 46bn (euro) and is likely to bring the country’s entire banking sector under government control ‐ …Thursday night, the European Central Bank threw Ireland another lifeline by suspending the minimum credit rating needed on Irish government‐backed assets used as collateral to obtain liquidity
Grain price surges on lower than expected US stocks – Pg. 1 ‐ Prices of farm commodities soared on Thursday after the US government revealed that inventories of corn and soyabeans were lower than had been believed, adding to inflationary pressures around the world ‐ The surge in grain prices had become a headache for policymakers, particularly in developing countries, forcing central bankers to tighten monetary policy ‐ ..US, the world’s largest exporter of agricultural commodities, to plan big increases in plantings ‐ ….demand has surged for fattening livestock in developing countries, such as China, and for corn‐based ethanol in the US
EU eyes China anti‐subsidy duty – Pg. 2 ‐ Europe is poised to open a new front in its trade battle with China after member states gave their asset to a proposal to put anti‐subsidy duties on imports of high‐end paper ‐ The move suggests the EU is willing to take more aggressive measures to confront what it believes are unfair trade practices by the world’s largest exporter ‐ Anti‐dumping cases are far more popular among European manufacturers because they are easier to prove than subsidy cases. The EU’s history of subsidizing its own industries has also made it inconvenient to point the finger at other nations,…
Gloom hits ‘Governor Moonbeam’ – Pg. 3 ‐ …California’s record $26bn deficit ‐ …New York and Illinois, two other states that have crippling budget deficits,… ‐ …California’s constitution, which requires a two‐thirds majority in the state government to pass tax increases
Fed data reveal how it helped European banks – Pg. 3 ‐ Two European banks used almost half of the Federal Reserve’s emergency lending as the financial crisis peaked at the end of October 2008 ‐ The discount window is the last refuge for banks that are unable to borrow elsewhere ‐ Central banks use it to lend at a penalty rate to banks with liquidity problems, taking some of their good assets as collateral ‐ Use of the Fed’s discount window peaked at $110bn at the end of October 2008 as the financial crisis reached its worst point after Lehman Brothers collapsed in September ‐ Almost 74% of that lending went to the New York branches of foreign banks ‐ When Lehman went bankrupt it could only secure funds through central banks such as the Fed
Youth fears housing shortage – Pg. 7 ‐ Young Arabs are increasingly concerned about access to affordable housing,… ‐ 40% estimated unemployment rate among young Arabs
A shadowy presence – Pg. 9 ‐ One main spur to the shadow financing world has been the strict rules in place on the price of money ‐ The shadow system has developed because interest rates in the formal financial sector are tightly controlled – and kept within a narrow band. So banks prefer to lend to large state enterprises that can be relied on to repay ‐ The trust companies are often at the heart of these new kinds of money flows, operating in a murky domain where the official banking system meets the shadow banking system. The trust companies cater largely to two groups of clients: private companies that need capital and cash‐rich families in search of higher returns ‐ Since developers cannot borrow money from banks until they own the land, many need to raise funds elsewhere ‐ …local governments rely on land sales to fund their own operations ‐ One thing the government has attempted to do is to encourage the establishment of credit guarantee companies that backstop loans to private groups and pay off the loans in the event of default
German groups agree gender quotas – Pg. 19 ‐ Germany’s largest listed companies said that they would set voluntary quotas for women at top management level at the end of this year, after caving in to government pressure (Prof Note: Does any organization (besides academic) have an academic quota, e.g. every board member must have an advanced degree? Every professional staff person must have a degree from an accredited university? Every controller MUST have a CPA? Perhaps this should be the focus to start!)
New warning raises heat on Portugal – Pg. 22 ‐ The eurozone’s peripheral economies face further downgrades because of growing risks of defaults and rising funding costs, … ‐ It highlights increasing dangers for the peripheral economies of Portugal, Greece and Ireland after last week’s EU agreement intensified fears one or more of these countries will default
31 March 2011
US groups rediscover appetite for M&A – Pg. 1 ‐ Us companies have returned to large strategic dealmaking, helping to boost global mergers and acquisitions activity by 26% in the first quarter ‐ The US now accounts for almost half of global activity, up from about a third last year ‐ Nine of the 10 biggest deals this year have been struck in the US, suggesting confidence among American chief executives and boards has bounced back faster than elsewhere ‐ Deals involving companies from Brazil, Russia, India and China accounted for 12.6% of global activity, their highest contribution since …2001 ‐ Europe had a quieter quarter in M&A, with activity up about 27% to $162bn
Dimon warns of bank ‘nail in coffin’ – Pg. 1 ‐ Regulators are negotiating international capital standards for the biggest banks but Mr Dimon said setting the new requirements too high, or allowing overseas banks to calculate their asset base differently, could disadvantage US banks and was already stifling economic growth ‐ Attacking another aspect of Dodd‐Frank, Mr Dimon said rules requiring companies to put up collateral as they trade derivatives would “damage America” (Prof Note: Does he mean more than America has already been damaged or a continuance???)
Obama urges US groups to raise production – Pg. 3 ‐ He called on the US to cut foreign oil imports by one‐third over the next decade
Stark defends ECB on rates – Pg. 3 ‐ The European Central Bank’s determination to press ahead with interest rate rises has been defended by its top policymaker, even after the escalation of the eurozone debt crisis in Ireland and Portugal, two of the region’s weakest members ‐ Mr Stark’s intervention comes as Ireland’s bank crisis enters a new phase with the publication of bank “stress test” results today ‐ One option would be a special ECB facility for eurozone banks in restructuring or to relax rules on the collateral banks have to provide when borrowing from the ECB ‐ A rate rise could hit countries such as Ireland, but also Spain, harder because of its impact on mortgage markets
Payrolls point to jobs growth – Pg. 4 ‐ The US economic recovery will reach a crucial turning point on Friday if official payrolls data confirm what a mass of other evidence suggests – that the struggling labour market has finally turned the corner ‐ There were encouraging signs on Wednesday when the ADP employment report, which mirrors the official survey but uses data from the processing of private paychecks, said payrolls increased by 201,000 in March ‐ Payrolls are the single most watched piece of data on the US economy and have puzzled economists because of their volatility and because average growth of about 150,000 seems too weak compared to a steady bounce in other labour market data ‐ Momentum in the labour market is also vital to the Federal Reserve as it nears a decision on what to do after completing its $600bn “QE2” programme of asset purchases last June ‐ Small businesses – those with fewer than 50 employees – hired the most workers,… ‐ State and local government employers, however, have been cutting staff as they wrestle with budget deficits
Treasury expects $24bn crisis profit – Pg. 4 ‐ The US Treasury is forecasting a profit of almost $24bn for the government programmes used to fight the financial crisis, a positive outcome for despised bail‐outs that were once estimated to cost hundreds of billions of dollars ‐ The estimate includes a $110bn profit from the Fed’s programmes, including its scheme to buy more than $1,000bn of mortgage‐backed securities, offsetting a $73bn loss on payments to Fannie Mae and Freddie Mac, the mortgage guarantors ‐ ….”most significant legacy may be the exacerbation of the problems posed by ‘too big to fail’, particularly in which the Treasury executive the bailout”
Greenspan on finance – Pg. 14 ‐ Alan Greenspan does not like the Dodd‐Frank financial regulation act. ‐ …financial share of US GDP rose from 2.4% to 7.4% between 1947 and 2008 ‐ This reflects a two‐way casuality. More sophisticated economies need more finance because they have more trade, capital accumulation, savings and innovative ideas in need of investment. Conversely, more sophisticated financial systems accelerate growth by mitigating the risks of trade and investment and spurring on new enterprises
Yen back in favour for carry trades – Pg. 22 ‐ International efforts to drive down the Japanese yen have been boosted by the return of a yen‐funded “carry trade”, a strategy used by investors to buy into high‐yielding currencies such as the Australian dollar ‐ Before the financial crisis, the yen was a popular funding currency for carry trades, in which low‐yielding currencies are sold to finance the purchase of riskier, higher‐yielding currencies such as the Australian dollar
Campaign to reform US rules on private stock gathers pace – Pg. 22 ‐ An intense lobbying campaign is under way to change a US rule requiring companies with 500 investors or more to report to the SEC, potentially making it easier for companies such as Facebook and Groupon to stay private longer ‐ The letter asked the SEC to look at creating exemptions for the 1934 Securities Exchange Act rule that a company must begin filing financial reports when the number of investors reaches 500. ‐ The SEC has said that only the most sophisticated investors should by shares in companies that are lightly regulated and have limited disclosure of their finances, to protect retail investors from fraud
30 March 2011
Opec set for export revenue of $1,000bn – Pg. 1 ‐ The cartel has been one of the main beneficiaries of high oil prices, which have soared in recent weeks amid the civil uprisings in the Middle east and north aftrica ‐ Brent crude was trading at $115 a barrel on Tuesday
Greenspan warns Dodd‐Frank reforms risk ‘market distortion’ – Pg. 1 ‐ …attacked the Dodd‐Frank financial reforms warning they could create the “largest regulatory induced market distortion” in the US since the imposition of wage and price controls in 1971 (Prof Note: Greenspan….did you not cause this mess singlehandedly???) ‐ …writing that regulators are ill‐equipped for more intrusive supervision because they “can never get more than a glimpse at the internal workings of the simplest of modern financial systems” and that “with notably rare exceptions (2008, for example), the global ‘invisible hand’ has created relatively stable exchange rates, interest rates, prices, and wage rates” ‐ Mr Volcker famously said that the most useful financial innovation of the past 30 years was the automated teller machine
Walmart hits back at women’s claim – Pg. 6 ‐ …retailer is accused of paying women in the US less than men for the same work and of passing them over for promotion (Prof Note: My last calculation had women making 40% more than men! Hmmmmmm) ‐ The case has the potential to transform the course of legal disputes between big business and workers in the US by establishing legal precedents t hat would have wide‐ranging implications
US house price fall continues – Pg. 6 ‐ Prices were 3.1% lower than January 2010, in line with economists’ forecasts ‐ It was the biggest yearly decline since December 2009, and left the index 31.8% below its summer 2006 peak ‐ The market has been dragged down by the glut of houses entering at fire‐sale prices because of foreclosures crisis, as well as by the high unemployment rate
Portugal hit by further downgrade – Pg. 20 ‐ Standard & Poor’s has cut Portugal’s credit rating to one level above junk status on concern that commercial investors would suffer under the terms of a Europe‐led financial rescue ‐ Tuesday’s downgrade, the second in a week, comes after the fall of the Socialist government plunged the country into a political crisis. It sent Portugal’s borrowing costs soaring ‐ Another downgrade to junk would have big implications for Lisbon as many investors can only buy investment grade bonds (Prof Note: Think portfolio rebalancing. Investors would have to sell Portuguese debt, not because they believed it was a poor investment but because the plan documents required it) ‐ Spanish bond yields were untroubled due to a belief that Madrid can turn around its economy without external help ‐ EU policymakers agreed to create a more orderly process for sovereign defaults by introducing collective action clauses into all eurozone bonds that make clear private creditors will share the burden of default from July 2013 (Prof Note: “bailin)
BATS takes on NYSE with new primary listing platform – Pg. 20 ‐ BATS Global Markets, operator of the third‐largest US stock exchange, has confirmed it will launch a market for primary listings in the fourth quarter, opening a major new front in its challenge to the dominance of the New York Stock Exchange and Nasdaq ‐ The move comes as the future of incumbent US exchanges has been thrust into the spotlight by a recent rash of mergers ‐ Since its creation six years ago, Kansas‐based BATS has grabbed market share in the US from Nasdaq and the NYSE by offering lower fees and faster trading. It has about 10% of trading in the US stocks
IMF raises concerns over US reforms to derivatives trading – Pg. 20 ‐ New regulations aiming to reform the vast derivatives markets may fail to remove systemic risks or prevent the need for another taxpayer bail‐out of the financial system, … ‐ The reforms which shift derivatives to clearing houses in an effort to dilute the impact of a default of a large dealer, could result in more risks for the financial system and alternative policies such as a tax on banks’ derivatives liabilities should be considered,…. ‐ …how to reform the $583,000bn over‐the‐counter derivatives markets, dominated by swaps trades ‐ Clearing houses, which guarantee swaps trades and share the costs of a counterparty default among their members, should in theory make it easier for a bank to go under without triggering a financial crisis
Americans feather their nest eggs with silver Eagles – Pg. 21 ‐ ….silver has become the favoured investment of disaffected Americans ‐ …the price of silver has more than doubled since the Fed first raised the prospect of a second round of quantitative easing – effectively, printing money to prop up the economy – in late August (Prof Note: Wait…I do not understand. Did Ben Bernanke himself not state that we were not printing money?!) ‐ All the world’s top mints are selling silver coins at record pace.. ‐ Silver has even outshone gold, which shares its perceived quality as a hedge against the debasement of paper currencies
29 March 2011
ICBC chairman plays down loan risk – Pg. 1 ‐ China’s largest bank lent $98bn to local governments in the post‐crisis credit boom, but insists these loans do not pose a danger to the country’s banking system ‐ …Industrial and Commercial Bank of China, the world’s biggest bank by market capitalization ‐ The development companies now account for 10% of ICBC’s loan book
Congress wrestles with budget – Pg. 2 ‐ Lawmakers must agree to a deal by April 8 to fund the government until the end of September to avoid a shutdown
US to unveil stricter rules on home loans – Pg. 2 ‐ …today they propose which mortgages should be considered sufficiently risky to require lenders to retain a financial interest in the loans ‐ …propose that loans in which a borrower makes a 20% downpayment should be exempt from the new risk retention rules, … ‐ For other mortgages, lenders would have to keep a 5% financial interest ‐ In the run‐up to the financial crisis, lenders caused a surge in “subprime” and “no‐doc” laons in which borrowers with low incomes and little to no downpayments were given big sums loans that they could not afford ‐ The subprime lenders packaged and securitized the loans, transferring the risk to other investors who incurred big losses when the bubble burst ‐ Wells Fargo has argue for even higher downpayment standards of at least 30% ‐ The rule, which is expected to run to more than 300 pages because of the complexity of the definitions, … ‐ CoreLogic, a real estate tracking firm, estimates nearly half of US homeowners would not quality for a mortgage if 20% became the norm (Prof Note: that is interesting given Freddie/Fannie’s statements about the average LTV on a home being 50%)
Food and fuel boost consumer spending – Pg. 2 ‐ Higher prices at petrol stations and grocery stores pushed up US consumer spending in February as households faced growing pressure on their budgets ‐ Consumer spending, which accounts for about 70% of the US economy, rose 0.7% in February…
The lights go out – Pg. 9 ‐ …Angela Merkel, German chancellor and Europe’s most powerful politician ‐ …Ms Merkel’s mighty Christian Democratic Union suffered a humiliating defeat in the southern state of Baden‐Wurttemberg ‐ The result – victory for the centre‐left and environmentalists – could see a sorely weakened coalition in Berlin limping to the end of its term in office in 2013, … ‐ When in doubt – as she was when Germany abstained in the UN Security Council vote to impose a no‐fly zone in Libya – the chancellor’s instinct is to play safe and not alarm her electorate
Bond defaults – Pg. 14 ‐ If the future is like the past, then yields on debt issued by banks are too high. But the market is pricing a new normal, a worse one, for big banks ‐ Investors do not trust the ratings of investment‐grade senior credit of European financial institutions. Current prices make sense only if the losses on this paper are the same as those historically experienced by junk bonds rated four whole notches lower. To be precise, they correspond to a default rate of 11% with a subsequent loss of 60%, or a default rate of 30% with 20% haircuts ‐ Bank credit has expanded (it now accounts for almost half of all global corporate credit), and banks are more leveraged than they used to be (in spite of the most recent deleveraging).
S&P cuts ratings of Portugal’s top five banks – Pg. 16 ‐ …warned that it could cut the country’s sovereign debt rating for a second time within a week… ‐ The bank downgrades follow S&P’s decision to cut Portugal’s long‐term sovereign debt credit rating by two notches to triple B on Friday, after the collapse of the Socialist government plunged the country into a period of political and financial uncertainty ‐ The rating agency warned on Monday that a further cut in Portugal’s sovereign rating “could take place as early as this week”. That would lower the rating to triple B minus, one level above junk status
US muni bond demand slides into deep freeze – Pg. 23 ‐ A feared meltdown has yet to materialize. Instead, the US municipal bond market, blighted by concern that struggling states and cities could default on their obligations, has gone into a deep freeze ‐ Sales of new bonds have plunged as retail investors, traditionally the biggest buyers of municipal debt, have fled ‐ Demand for muni bonds has dried up. Local individuals lured by tax breaks represent about 70% of the market. Many have cashed out in recent months as fears about bond defaults, after the worst recession in decades hit local government revenues, unsettled investors ‐ The behavior of these investors is important because of a shift in the make‐up of demand for munis that has made the market more dependent on individual buyers ‐ One of these tools was bond insurance. Before the financial crisis, the so‐called monolines like MBIA and Ambac, insured more than half new muni sales ‐ The bond insurance industry collapsed because these companies lost their triple A ratings on the risky mortgage debt they also insured, leaving retail investors more cautious on munis ‐ Another source of support that no longer exists for munis are structured investment vehicles that use leverage called tender option bond programmes (TOBs) ‐ TOBs created higher yields that drew investors like hedge funds and generated large‐scale funding for municipal governments over the past decade. At their height, they were estimated to be a market of between $250bn to $500bn. These arrangements blew up in the financial crisis ‐ Finally, variable rate debt arrangements, including the $300bn auction‐rate securities market that used derivatives, have dried up as a muni funding source ‐ They are out of favour after backfiring during the financial crisis, resulting in soaring borrowing costs for some local governments, hospitals and schools ‐ The end of TOBs and variable rate deals left a void in the muni market, particularly in long‐ term demand
28 March 2011
UK regulators’ stance on bank capital requirements criticized – Pg. 1 ‐ UK bank regulators are coming under attack from their international peers and investors over their aggressive stance on bank capital ‐ Concerns have mounted as a paper by a Bank of England adviser, calling for the doubling of new internationally agreed capital ratios, appears to have gained ground ‐ …big systemically important financial institutions (SIFIs) must hold additional capital beyond the international minimum in equity ‐ Basel III rules, due to be phased in by 2019, have set the core tier one capital ratio – the key measure of financial strength – at 7% of risk‐weighted assets ‐ The recent Bank of England paper called for an overall ratio of 15‐20%
Ireland seeks ECB deal to secure banks – Pg. 3 ‐ Ireland is scrambling to secure a deal with the European Central Bank that can prevent the country’s banking crisis spinning out of control after the publication this week of results of crucial “stress tests” of its financial system ‐ The new Irish government wants the ECB to provide about $85bn in medium‐term funding to replace emergency temporary help from Ireland’s central bank ‐ A tough line taken by the ECB last November and threats to cut off emergency liquidity resulted in Ireland accepting an 85bn (euro) bail‐out agreed with the European Union and International Monetary Fund ‐ Dublin has delayed recapitalization measures, creating alarm in Frankfurt ‐ The ECB is currently providing about 100bn (euro) in short‐term loans to Irish banks, with the Irish central bank providing a further 70bn (euro) ‐ Creating a new facility for Ireland would forestall the need for immediate sales of assets, which Irish officials say in current markets would result in the banks incurring large losses, leading to additional capital injections that the state, in the absence of private sector investors, cannot afford
Hard to credit – Pg. 7 ‐ ….Moody’s, the US credit rating agency, for a decision to downgrade Greece to the same level as that of rivals Standard & Poor’s: B1 or B plus, a rating meaning “highly speculative” and well below investment grade ‐ Europe’s sovereign debt crisis hit a new peak last week as Portugal slipped ever closer to becoming the next country after Greece and Ireland to need an international bail‐out ‐ …trickle of downgrades – Japan, Portugal, Spain and Greece are among countries to have suffered one this year – but also through stiffer regulation of the sector ‐ Governments are the biggest borrowers in the capital market, issuing more than $8,000bn of debt – 62% of the total – in 2009 ‐ One thing all sides agree on is the need to reduce the reliance on ratings, which is often embedded in financial regulation around the world ‐ Bank capital and insurance rules as well as debt indices are frequently based on credit ratings ‐ Among the most controversial suggestions is that agencies should have to inform governments (but not companies) three days before any change in rating
US bill raises fears for covered bonds – Pg. 15 ‐ US proposals for a covered bond market risk wrecking the products’ centuries‐old reputation for boring stability, … ‐ European banks are selling record amounts of the bonds, which have their roots in 18th‐ centry Prussia and are backed by pools of loans that remain on a bank’s books, unlike the toxic subprime securitizations the financial crisis made infamous ‐ The securities are considered ultra‐safe because banks must replace dud loans and the pool is ring‐fenced for the bondholders in bankruptcy ‐ But the proposals allow for the US bonds to be backed by a far wider range of assets than is common in Europe, where up to four‐fifths are based on high‐quality mortgages ‐ European banks managed to raise funds via covered bonds throughout the crisis even as other markets froze. The bonds remain a lifeline for banks in eurozone countries whose economic woes have made investors wary of unsecured debt ‐ No covered bond has reportedly defaulted, though 19th‐century data are sketchy
Unilever tests out ‘dim sum’ market – Pg. 15 ‐ Dim sum bonds are slowly gaining traction with multinationals, …
26 March 2011
Japan accelerates evacuation around nuclear plant amid fresh leak fears – Pg. 1 ‐ Japan’s prime minster has warned there is no end in sight tot the world’s worst nuclear crisis in 25 years,… ‐ The government warned that the vessel housing the No 3 reactor might have suffered a breach, possibly exposing the reactor’s fuel rods to the air (Prof Note: The yen is getting stronger…has anyone thought of the borrowing cost for the US if there is a sell‐off by Japan to fund this crisis?) ‐ Maintaining food and water supplies is increasingly difficult ‐ Radiation doses exceeding legal limits have been detected in food and water outside the evacuation zone ‐ Chinese authorities said two Japanese travelers arrived with radiation levels “seriously” over the limit,…
EU agrees ‘grand bargain’ package – Pg. 4 ‐ European Union leaders wrapped up a two‐day summit by approving a “grand bargain” of measures they argued would make them better able to tackle the eurozone debt crisis – and just in the nick of time ‐ EU leaders did agree to give the eurozone’s $619bn bailout fund more firepower, promising to increase its lending capacity to its full 400bn (euro). ‐ Portugal looks as if it is in for a rocky three months. Standard & Poor’s on Friday downgraded its debt, a move that could make it even harder for Lisgon to refinance the 10bn (euro) debt due in April and June ‐ If the other rating agencies were to downgrade Portugal to ratings in the B category, Portuguese banks could face difficulties in raising liquidity from the European Central Bank ‐ It remains unclear whether, with a nuclear crisis in Japan and a war in Libya, investors have focused on the just‐completed “grand bargain”
US presidential hopefuls record sparks debate – Pg. 4 ‐ Tim Pawlenty, former Republican governor of Minnesota, launched his campaign to win the Republican nomination and defeat President Barack Obama (Prof Note: BA Political Science and JD)
Consumers see cloudy forecast – Pg. 4 ‐ The US economy was in a stronger position than previously thought at the end of last year, but American consumers are showing signs of renewed pessimism, clouding the outlook for the US recovery ‐ US gross domestic product great at an annualized rate of 3.1% in the fourth quarter of 2010, a more rapid clip than the earlier estimate of 2.8% growth,… ‐ Meanwhile, rising inflationary pressures are being felt increasingly by consumers. Expectations of inflation one year from now are up to 4.6%, from 3.4% last month
Stakes are high in setting Libor – Pg. 10 ‐ Libor is an estimate of how much it costs banks to borrow from each other, and is used as a reference for about $350,000bn in financial products. That means very small changes can have a big knock‐on effect on products such as interest rate derivatives and loans that are pegged to the rate ‐ The British Bankers’ Association, which sponsors the rate and hires Thomson Reuters to do the daily calculations, …. ‐ For dollar Libor, 20 banks submit their borrowing costs every day. The top five and bottom five rates are dropped and the rate is calculated from the remaining 10 rates (Prof Note: Interquartile range)
Buffet hits at ‘negligent’ US executive pay – Pg. 10
25 March 2011
Barclays at centre of Libor inquiry – Pg. 1 ‐ Barclays is emerging as a key focus of the US and UK regulatory probe into alleged rigging of benchmark interbank lending rates that are the reference point for $350,000bn in financial products,.. ‐ Regulators require banks to put controls in place to prevent various arms of their business from profiting improperly from the flow of confidential information that other parts receive ‐ The British Bank [Barclays] is one of four banks to have received subpoenas about the setting of Libor between 2006 and 2008. The others are Citigroup, Bank of America and UBS
Fed to hold press conferences in bid to explain monetary policy – Pg. 1 ‐ The Federal Reserve will for the first time hold regular press conference to better explain monetary policy to the US public and financial markets ‐ ….meeting at the conclusion of four of the eight annual meetings,… ‐ Alan Greenspan and Paul Volcker, his predecessors, each held one news briefing, in 1992 and 1970, respectively ‐ The first one will be on April 27, … ‐ Other central banks routinely hold briefings ‐ The move comes as the Fed has faced unpopularity in the US after the financial crisis, with the bank bail‐outs stoking a high degree of public distaste
Wealthy move more capital offshore – Pg. 4 ‐ The wave of political strife enveloping the Arab world has rattled Gulf merchant families, businessmen and royals, leading many to move more of their personal wealth into offshore havens and assets ‐ Individual Gulf investors have up to $1,200bn of liquid assets, …
Homes barometer swings to danger – Pg. 6 ‐ A large overhang of foreclosed homes along with a credit squeeze is pushing the US housing market to new lows, just as government assistance is waning ‐ …sales of new homes fell to a seasonally adjusted annual rate of 250,000 in February,… ‐ Home prices have already dropped more since their peak in 2006 than during the Great Depression of the 1930s. Almost four out of 10 homes today are sold by someone who either cannot pay their mortgage or will not because he or she owes more than the home is worth ‐ Housing accounts for only 2.3% of the gross domestic product – down from 6% in the bubble years of the past decade – but it remains an important barometer for Americans, whose wealth is tied to their homes, and for investors around the world, who bought securities by these mortgages ‐ Analysts say the industry is facing two main problems, an overhang of about 4m foreclosed homes that is weighing on prices and sharply depressing sales of new properties, and a credit squeeze that is making it more difficult for borrowers to get mortgages ‐ Since each state handles foreclosures differently, the rate at which this backlog will clear varies widely across the country ‐ Also weighing on the housing market is tighter lending standards
State and local workers – Pg. 14 ‐ …estimated state and local pension deficits of $3,500bn ‐ Layoffs are approaching 3% since the financial crisis started ‐ In the early 1980s, the peak‐to‐trough decline in local non‐educational payrolls was 6.5%, …
Portugal troubles place Spain in the line of fire – Pg. 23 ‐ A Portuguese bail‐out has been considered a racing certainty by many investors since the end of last year
24 March 2011
Fed rejects BofA plan to increase dividend – Pg. 1 ‐ …dealing the lender and its shareholders an unexpected blow just as rivals prepare to increase quarterly pay‐outs (Prof Note: Is this an investment opportunity???) ‐ BofA’s proposal was part of a battery of stress tests the Fed conducted on 19 large US financial institutions. ‐ …BofA’s shares fell 2.5% ‐ The Fed all but ruled out dividends amounting to more than 30% of earnings, as well as any proposal that would have pushed the bank’s tier one common capital below 5% under a stress scenario
Utah raises standard in anti‐Fed campaign – Pg. 3 ‐ Shops in Salt Lake City will soon be able to accept gold Buffalo and Eagle coins (no foreign minted Napoleons or Krugerrands allowed), after a bill to make gold and silver legal tender passed Utah’s House and Senate (Prof Note: Whao….this is BIG!) ‐ The state does not trust the US Federal Reserve ‐ The bill, which is under review by the governor, ends state taxes on the transfer of gold – they currently treat it as an asset and not as money – but until the federal government does the same, its green paper will have the edge ‐ …reminder that easy monetary policy since 2007 has won the central bank many more enemies than friends ‐ The Fed is unpopular with the US public, and several other states have recently been considering – with varying degrees of seriousness – similar legislation to Utah’s ‐ From 2003 to 2009 the percentage of people saying the Fed does a “good” or “excellent” job fell from 53 to 30%,… ‐ ….duty is to the bank’s dual mandate on employment and inflation
Housing blow – Pg. 3 ‐ Sales of new homes in the US dropped for a third consecutive month in February to the lowest rate on record ‐ Sales fell across all regions. The north‐east was hardest hit, with sales plunging 57.1% from January ‐ The time it would take to sell the homes currently on the market rose to 8.9 months. Economists say inventory would be cleared in about six months in a healthy housing market
Estimate for reconstruction bill put at Y25,000bn – Pg. 6 ‐ Japan’s government has raised its estimate of the cost of reconstruction after the earthquake and tsunami to $309bn as it tries to assimilate the full economic impact of the devastation
Merkel seeks to renegotiate EU rescue deal – Pg. 7 ‐ Ms Merkel will seek to stretch out the country’s $31bn capital contributions to the new 500bn (euro) eurozone rescue fund over five years rather than four, …she will not argue the size of the contribution ‐ Finland’s opposition to boosting the lending capacity of the European financial stability, the eurozone’s temporary bailout facility, means that agreement will not be reached this week
A reticent America – Pg. 9 ‐ The Middle Eastern upheavals have revealed US foreign policy to be more timid than the world has become accustomed to, and a remarkable subject has emerged as the toast of neo‐conservative Washington – France ‐ Faced with an overstretched military, massive government debt and popular disenchantment with foreign wars, Washington is looking for its partners to do more, even if that means the US playing a mere supporting role ‐ The difference with the Bush‐era formulation – “You are with us or against us” – could not be starker ‐ For the US, foreign policy has long been torn between the country’s instincts, to back democracy, and its interests, especially to keep oil flowing out of Middle East autocracies ‐ Added to that is the paradox of democracy. In the long run it can stabilize a country but getting there is inherently destabilizing
US home sales – Pg. 14 ‐ New home sales fell by 28% from the same month of 2010 to 250,000. The accompanying statistics that this is the lowest since 1963 fails to capture just how lousy a quarter of a million homes is ‐ …investors at a 40‐year low of 186,000 ‐ Estimates of the “shadow inventory are around 1.7m homes, up by a quarter in 2010. Another 250,000 are repossessed monthly ‐ Between 2002 and 2007 there were an average of 1.3m households formed annually ‐ More recently that number fell to 400,000, the lowest since 1947, due to young adults staying at home and fewer immigrants
Housing subsidies – Pg. 14 ‐ Governments should not be encouraging the purchase of a home with a big mortgage as a way to build wealth ‐ In Germany, house prices have hardly moved for decades ‐ In the US, residential investment bubbled up to 6% of gross domestic product and has now crashed down to 2.3%, wreaking financial havoc along the way
Egyptian bourse suffers sharp fall on first trading day since uprising – Pg. 15 ‐ The Egyptian stock exchange fell 8.95% on its first day of trading after almost two months of closure caused by the turmoil which swept Hosni Mubarak,…
Russia’s state banks tighten their grip – Pg. 18
Call to simplify convertible bonds – Pg. 22 ‐ Contingent convertibles bonds – dubbed cocos – should be based on simple market triggers rather than complex regulatory ratios, ….
Treasury begins its mortgage retreat – Pg. 22 ‐ The body’s planned sales marks the first stage of the US government ending its huge support of the mortgage market during the financial crisis ‐ …the Fed has acquired $1,250bn stake in mortgages
Yen action sets scene for return of the carry trade – Pg. 23 ‐ The carry trade, in which the purchase of riskier, higher‐yielding assets is funded by selling low‐yielding currencies, is a popular investment employed by investors to take advantage of rising asset markets ‐ Before the financial crisis, the low‐yielding yen was widely used to fund investments in a wide range of risky assets such as equities, commodities, property and higher‐yielding currencies such as the Australian dollar ‐ Traders cit a range of factors that led to last week’s spike. These include expectations that Japanese institutins would repatriate funds to pay for post‐earthquake reconstruction costs and speculative momentum as traders taking advantage of the move upwards forced buying by investors squaring bets against the yen
Fresh sovereign default fears see Ireland’s bond yields leap – Pg. 23 ‐ Ireland saw a leap in its cost of borrowing on Wednesday as peripheral eurozone economies came under pressure because of worries over the risk of sovereign bond defaults
23 March 2011
Stimulus delivers record Fed boost – Pg. 5 ‐ The Federal Reserve made a record contribution of $79.3bn to the US Treasury in 2010 from investments such as its large portfolio of mortgage bonds purchased to breathe life into the economy ‐ In audited financial statements for 2010, the Fed said its reserve banks held $2,423bn in assets, up from $2,235bn a year earlier, allowing it to pay a bigger contribution to the Treasury than last year’s $47.4bn ‐ The record balance sheet was swollen by the start of the Fed’s $600bn programme to buy US Treasury bonds, its latest attempt to stimulate growth, and follows assets purchases that have left it with a large volume of mortgage‐backed securities
UK inflation rate adds to coalition’s Budget challenge – Pg. 6 ‐ Inflation in the UK is continuing to creep uncomfortably higher, underlining the challenge facing the British government as it prepares to unveil further details of its radical spending cuts ‐ The annual inflation rate hit 4.4% in February, up from 4% in January and more than double the Bank of England’s 2% target ‐ Unexpectedly rapid rises in prices add to the risks that the UK’s coalition …must deal with as it seeks to implement the sharpest package of cuts in public spending since demobilization after the second world war ‐ High inflation in the UK – which compares with a rate of 2.8% in the eurozone and 2.1% in the US …. ‐ Other data out on Monday revealed public borrowing in February was higher than economists had expected…
The US dollar – Pg. 14 ‐ The US dollar index has been weaker since May last year, and is back to late 2009 levels ‐ Not even recent risk aversion has been able to halt its decline ‐ There are plenty of textbook negatives. The US is running twin deficits that few think will reverse soon. Monetary policy seems to be on hold forever. Goldman Sachs sees near‐zero interest rates until 2013
European rescue fund puts default at top of agenda – Pg. 25 ‐ It was hardly a surprise – yet the official EU Agreement to establish a permanent eurozone rescue fund sent the peripheral bond markets reeling ‐ …the plans for the ESM, which will make investors share the burden of sovereign defaults, have been known since last October, it concentrated minds in the market that one of the peripheral economies will default ‐ First, Portugal’s government could fall on Wednesday, which may force the country to follow Greece and Ireland and seek a bailout ‐ Second, uncertainty surrounds Ireland and whether Dublin will be able to agree to a deal with Germany over reducing the cost of its bail‐out loans ‐ Third, investors are puzzling over what the new collective action clauses, which will be added to bonds issued after the summer of 2013, will mean ‐ Finally, there is disappointment that policymakers have stopped short of giving the ESM and the EFSF powers to intervene in the secondary markets, taking these responsibilities from the European Central Bank
22 March 2011
US Treasury eyes $20bn profit on sale of financial crisis securities – Pg. 1 ‐ The US Treasury will sell $142bn portfolio of mortgage‐backed securities acquired during the financial crisis, in the latest withdrawal from government market intervention ‐ The assets were acquired in 2008 and 2009 under authority granted by Congress to fight market turmoil ‐ …analysts noted that a faster sale of the MBS might be one of several stop‐gap measures the Obama administration deploys to avoid a US debt default, if a sufficient number of congressional Republicans ignore please to increase the debt limit from $14,300bn ‐ The Treasury’s investments are dwarfed by the holdings of the Federal Reserve, which bought $1,250bn of MBS in the crisis
Finland holds sway on eurozone debt deal – Pg. 5 ‐ …while leaders have agreed to raise the fund’s bail‐out capacity from the current 250bn (euro) to the full 440bn (euro), they have not decided how to get there ‐ But, during an emergency meeting of eurozone leaders on March 11 and in further negotiations last week, Finland blocked the increase
Dip in home sales exceeds forecasts – Pg. 5 ‐ Sales of homes in the US fell more sharply than expected in February, following three consecutive months of gains, and prices dropped sharply as the combination of tight credit and growing inventory weighed on the market ‐ Prices were down 5.2% from a year ago to a median price of $156,100, the lowest level since April 2002 (Prof Note: Lets do the math. 80% of $156,100 = $124,880. Divide by three for median income and we get $41,626.67. The median household income is above this value. Hmmmmm…this is good news) ‐ The number of homes on the market continued to rise, gaining 3.5% to 3.49m available homes
Citigroup – Pg. 12 ‐ Citigroup is at a crucial juncture. The bank lost an aggregate $140bn during the financial crisis and was bailed out by the US government. ‐ …the board has just signed off a one‐for‐10 reverse stock split of common shares. Value added? Zero.
Gupta steps down at Indian business school – Pg. 19 ‐ (Prof Note: That caught my attention!)
Fund manager warns on lack of transparency in covered bonds – Pg. 23 ‐ Banks have been issuing record amounts of covered bond to satisfy investors demand for the safest forms of bank debt. The bonds are backed by giant pools of loans such as mortgages but, unlike regular securitizations, they remain on a bank’s books. They are considered top quality because of the issuing bank’s commitment to replace dud loans and because even if the bank collapses, the existing pool is ring‐fenced for the covered bondholders ‐ The industry prices itself on a history going back more than two centuries and that apparently does not include a single default ‐ Many of the bonds are issued under strong legal framework,…
21 March 2011
AT&T to buy T‐mobile USA for $39bn – Pg. 1 ‐ (Prof Note: iPhone HERE I COME!!!) ‐ AT&T has moved to reshape the US telecoms industry with an agreement to buy T‐Mobile USA from Deutsche Telekom for about $39bn in cash and stock ‐ …unite the nation’s second and fourth‐largest wireless carriers, … ‐ Bringing the two together would cut the number of wireless carriers in the US from four to three and easily create the largest provider with more than 120m subscribers
Egypt’s reforms backed by 77% of voters – Pg. 4 ‐ Official results from Egypt’s referendum on constitutional change showed a large majority of voters supported the reforms sponsored by the country’s military rulers and billed as a first step towards democracy ‐ Turnout was 41%, much higher than any recent election in Egypt
Cost to insurers forecast to rival hurricane Katrina – Pg. 8 ‐ Insurance costs of the Japanese earthquake could rival the super catastrophe levels of hurricane Katrina or the September 11 terrorist attacks that destroyed New York’s World Trade Centre, .. ‐ …expected total economic losses to be between $200bn and $300bn, or 4 to 5% of Japanese gross domestic product
In search of shoots – Pg. 9 ‐ …from the middle of the 19th century, Britain’s economic growth rate has averaged close to 2% ‐ deviating significantly from that figure only at times of national crisis, such as the 1920s recession, world wars and the recent financial crisis ‐ …while the average annual UK growth between 1997 and 2003 was 2.7%, it slowed to only 0.4% from 2003 to 2010 ‐ Below we identify areas in which there might be scope to boost the rate of productivity growth, or the rate of growth itself, and assess the government’s chances of success o Laying off austerity measures o Easing land use and planning laws . (Prof Note: My anti‐green vote!) o Increasing labour supply o Simplifying taxation o Encouraging entrepreneurship o Relaxing regulation o Boosting education and skills o Improving management o Expanding innovation
Unproductive America – Pg. 16 ‐ Americans returning from visits to western Europe or Japan cannot help but notice they are coming back to a land with less worker protection, more expensive healthcare, spottier transport and a weaker educational system ‐ The government, and bond investors, should be concerned. The slower growth rate, two‐ thirds of what White House economists assume in their budget projections, will make it harder to handle rising interest and entitlement payments
US banks face fresh scrutiny on lending – Pg. 17 ‐ US banks could be forced to disclose when they give clients below‐market rates on loans as part of their efforts to secure further business,… ‐ The proposed change could lay bare cases in which larger lenders use their balance sheet to secure lucrative investment banking business ‐ The rule change would prohibit banks from tying the availability or terms of credit to the purchase of other products and services ‐ The proposed rules, on what is known as initial measurement, would require banks to make clear where the transaction price of a loan differs from its fair‐market value. In some cases, the difference could hit the bank’s earnings ‐ The international accounting body must also address this issue after defining fair value as an exit or sale price under new rules ‐ Currently, fair value is usually taken to be an entry price for recording loans on a bank’s books
Iran bolstered gold reserves to cut exposure to dollar – Pg. 17
EU plans fresh transparency rules – Pg. 18 ‐ Europe is set to impose mandatory transparency measures for mining and forestry companies, requiring them to detail their financial relationships with foreign governments,… ‐ The US has already included similar requirements in its Dodd‐Frank reform legislation
19 March 2011
G7 in co‐ordinated $25bn action to stop speculators driving up yen – Pg. 1 ‐ The world’s most powerful central banks joined forced to sell billions of dollars of yen, battling speculators – described as “sneaky thieves” by one Japanese official – who have driven the currency to record highs ‐ The intervention by banks including the Federal Reserve, European Central Bank, Bank of Japan and Bank of England began in the early hours of Friday morning, … ‐ The rise in the yen was the result of dealers betting that Japanese insurers and other big companies would have to repatriate funds to meet claims and pay for reconstruction
Brics steer clear of intervention with abstentions – Pg. 2 ‐ If the western powers go to war with Muammer Gaddafi, it will be without the support of one of the key emerging components of the new global architecture – the Brics ‐ Russia and China are permanent members of an institution that reflects the global power structure since the second world war. Brazil and India, presently serving two‐year temporary terms, are seeking permanent seats on a reformed council that would more closely reflect the realities of the 21st century
US reticence marks new direction – Pg. 3 ‐ After a decade in which the US was often reviled for its unilateral military impulses, Barack Obama’s refusal to be pushed into a rapid decision to intervene in Libya marks a new era in US foreign policy (Prof Note: yes…the recognition that the U.S. is broke!)
Beijing tightens bank lending reins – Pg. 6 ‐ China’s central bank stepped up its efforts to rein in inflation by ordering domestic banks to increase the level of deposits they hold in reserve, the third time it has done so this year ‐ …force most large institutions in China to hold a record 20% of their deposits in reserve at the central bank ‐ The increase is designed to reduce liquidity in the system and curb inflation, which has remained stubbornly high in recent months ‐ Beijing has put the fight against inflation at the top of its agenda this year, … ‐ The central bank has now raised the reserve requirements for banks nine times since the start of last year and has lifted benchmark deposit and lending interest rates three times since October ‐ Small and medium‐sized Chinese banks will have to keep as much as 18% of their deposits on reserve
Obama plays catch‐up as he courts Brazil – Pg. 6 ‐ While the administration has been looking the other way, China has been filling the vacuum. It displaced the US as Brazil’s biggest trading partner in 2009 and is proposing building a rail rival to the Panama Canal across Columbia ‐ For Brazil, the most important issue will be whether Mr Obama supports the country’s bid for a permanent seat on the US Security Council, as he did for New Delhi during a trip to India last year
Judge blocks state’s union rights law – Pg. 6 ‐ A Wisconsin judge has blocked a controversial law to curb collective bargaining rights for public employees, saying it may have violated the legal due process of the state’s legislature ‐ Desperate to prevent the law from taking effect on March 26, two local county officials launched legal challenges, alleging that the manner in which the bill was passed violated the state’s “open meeting” law
US banks move fast following Fed ruling – Pg. 11 ‐ JPMorgan Chase and Wells Fargo led a parade of US banks that unveiled dividend increases and stock buy‐backs hours after securing the Federal Reserve’s approval to return more cash to investors for the first time since 2009
18 March 2011
FDIC files $900m WaMu lawsuit – Pg. 1 ‐ …damages from three former executives of Washington Mutual, the largest bank to fail in US history, and their wives, … ‐ The damages would be the largest sought by the FDIC from individuals related to a bank’s collapse during the financial crisis, … ‐ The wives of Mr Killinger and Mr Rotella were also named in the lawsuit for allegedly helping their husbands transfer homes and other assets totally millions of dollars in a way that concealed them from present and future creditors ‐ The lawsuit says that the defendants received a collective $95m in compensation from January 2005 to September 2008. Meanwhile, according to the lawsuit, they left WaMu with a high‐risk residential loan portfolio that exceeded $100bn
GE works to limit impact as investors fear financial losses – Pg. 3 ‐ General Electric, the largest US industrial group, has set up an emergency response centre at the headquarters of its nuclear business in Wilmington, NC… ‐ The unfolding disaster could swing public opinion against nuclear power in general, and against GE, which supplied reactors for the plant and still has a substantial nuclear business, (Prof Note: Hello….rather that pi$$ on nuclear, what about pi$$ing on building reactors on fault lines? Hello, Ring of Fire???) ‐ Japanese law makes clear that in the case of “extreme” events, liability lies with the government, and a magnitude 9.0 earthquake would surely qualify, … ‐ (Prof Note: out of curiosity…is this benefiting Brazil given its new found oil reserves?)
Tokyo’s plight raises prospect of G7 action – Pg. 4 ‐ World finance ministers held a conference call late on Thursday evening US time to discuss Japan, raising the possibility of large‐scale co‐ordinated currency intervention for the first time in a decade (Prof Note: Again with the G7….Where is Russia, where is Brazil, where is China with the world’s largest currency reserves, oh, and right next door to Japan?!)
Obama’s priority remains close to home – Pg. 6 ‐ With Japan facing a nuclear meltdown, the Middle East in turmoil and budget talks in Congress stalled, an unruffled Barack Obama is steadfastly sticking to his own homegrown political and travel schedules (Prof Note: Lets not forget that he did take time out of the tragedies and his busy schedule to provide a prediction for College Basketball’s March Madness! At least his priorities are in order!!!)
Wall Street bail‐out left ‘toxic’ legacy – Pg. 8 ‐ The US Treasury helped created a “toxic cocktail” of “subsidies” and “market distortions” with the Wall Street bail‐out, … ‐ ….better than expected financial outcome disguised the “moral hazard and legacy of ‘too big to fail’ that Tarp has left” and “the very real harm to government credibility though mismanagement of this programme” ‐ With the financial cost of Tarp proving much less than feared, the criticism of the programme focused on two areas: “moral hazard” exacerbated by saving private businesses with public funds, and the lackluster results of a mortgage modification programme
US data show fall in jobless claims – Pg. 8 ‐ Fewer Americans filed for unemployment insurance last week and the number of people claiming jobless benefits fell, …
Inflation in India – Pg. 14
Deadline set for EU governments to detail action on ‘failing’ banks – Pg. 15 ‐ European governments must put in place emergency bank recapitalization mechanisms within the next three months, …
17 March 2011
Subpoenas served on banks in Libor rate inquiry – Pg. 1 ‐ UBS, Bank of America, Citigroup and Barclays have received subpoenas from US regulators probing the setting of the London interbank offered rate, or Libor, for US dollars between 2006 and 2008 ‐ Libor, which measures the rate banks charge each other, is used as a reference for about $350,000bn in financial products ‐ Investing agencies include the US Securities and Exchange Commission, the Commodity Futures Trading Commission, the US Department of Justice, and UK Financial Services Authority and the Japanese Financial Supervisory Agency
Hit to economy will be ‘limited’, says Yosano – Pg. 3 ‐ Japan’s growth will barely be affected by the earthquake and tsunami, and the economy may even expand faster than expected, … ‐ Spending on reconstruction was likely to add 1‐2% points to GDP…. ‐ The economy grew 3.9% in 2010, its best performance for two decades, although GDP shrank 0.3% in the last quarter compared with the previous three months ‐ The clean‐up and rebuilding bill would easily surpass the Y3,300bn spent by the government in the aftermath of the Kobe earthquake in 1995 ‐ Japan’s gross public debt is about twice GDP. Tokyo plans to borrow $547bn of this year’s Y92,000bn budget
Renewed vigour for tough talk on deficit – Pg. 6 ‐ So many Republicans voted against a resolution on Tuesday sponsored by their leadership in the House of Representatives to fund the federal government for another three weeks, that it only passed with Democratic support ‐ Both parties are divided over how to cut the deficit, forecast to hit a record $1,650bn this year, …
New‐housing starts fall 23% ‐ Pg. 6 ‐ New home construction in the US slumped in February, recording the biggest drop since 1984 in a sign that weakness continues to plague the real estate market ‐ Housing starts fell 22.5% in February to a seasonally adjusted annual rate of 479,000 ‐ The figure a sharp reversal of January’s 14.6% jump ‐ Building permits fell 8.2% in February from January to an adjusted annual rate of 517,000 and completions rose 13.9% to 581,000
Geithner open to corporate tax cut – Pg. 7 ‐ …”reasonable chance” of the US finding a consensus on corporate tax reform,… ‐ If authority to borrow more money is not granted to the Treasury, the US could potentially default, which might lead to turmoil in international capital markets
Fed opposes single surcharge for banks – Pg. 8 ‐ The US will not support a single capital surcharge for the world’s biggest financial groups, … ‐ …Fed advocating a “gradated” approach with a “nominal” surcharge for a bank of $50bn in assets and a greater one for those at the top with more than $1,000bn
US banks’ plea on swap rules – Pg. 15 ‐ US banks are urging regulators writing new rules for the derivatives markets under 2010’s Dodd‐Frank Act to keep their hands off the banks’ swaps businesses in London and other overseas financial centres ‐ US regulators are finalizing new rules for the previously privately traded swaps markets. The rules will mandate clearing for many swaps, as well as set capital, collateral, trading and reporting requirements, all aimed at reducing risks and improving transparency ‐ The swaps markets are traded around the world. IN 2010 they were nearly $600,000bn of private, or over‐the‐counter, derivatives contracts outstanding, … ‐ US reforms are expected to reduce profits derivatives dealers make from trading swaps, used to hedge or take positions in interest rates, credit currency and commodity markets ‐ New European derivatives regulations will not be ready until at least 2012,…
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16 March 2011
Japan disaster spooks market – Pg. 1 ‐ Equity markets across the world fell sharply on Tuesday as investors took fright at the threat of a nuclear meltdown in Japan and the biggest two‐day sell‐off in the country’s Nikkei index for 24 years ‐ Japanese equities fell 10.6%, their third‐worst drop in history, while German shares fell more than 5% at one stage
Pressure mounts on central bank for fresh boost – Pg. 4 ‐ The Bank of Japan is often accused of doing too little too late, but that was not the case on Monday when most analysts applauded its decision to make Y21,800bn available to financial institutions to ensure there is plenty of cash in the system as the country recovers from its worst natural disaster ‐ The yen is already trading around its 15‐year highs at Y80.80 against the US dollar and breaking Y80 would bring it close to its all‐time high (Prof Note: It was 100 when I was in Tokyo in 08’)
Russia in dilemma on Arab unrest – Pg. 6 ‐ For Moscow, the unrest in the Arab world is oddly double‐edged. The resulting spike in oil prices has boosted Russia’s economy ‐ International investors have been piling back into Russia’s stock market for the first time since mid‐2008, taking it to near three‐year highs ‐ The oil windfall could restore Russia’s precrisis complacency, tempting it to backtrack on much needed reforms such as tackling corruption and reducing the state’s role in the economy
Boehner to seek deep spending cuts for raised US debt limit – Pg. 6 ‐ Between April 15 and May 31 the US will hit its congressionally mandated borrowing limit, which stands at $14,300bn
Bahrain declares state of emergency – Pg. 8
Fed sees recovery starting to gather strength – Pg. 8 ‐ The Federal Open Market Committee met on Tuesday amid heightened concerns that turmoil in the middle east and the earthquake in Japan could threaten the reviving American economy ‐ …the Fed kept its main interest rate at its current range of 0‐0.25% and said it would continue a $600bn programme of government bond purchases through to the end of June as scheduled ‐ The Fed said inflation expectations remained “stable” and core inflation – excluding food and energy costs – was “subdued”, … ‐ The recent increase in the price of oil has raised the odds that consumer spending and confidence could be hit…
US homebuilder confidence rises – Pg. 8
Platform for growth – Pg. 9 ‐ [Brazil]…the fields contain the world’s largest known offshore oil deposits ‐ In one step, Brazil could jump up the world rankings of national oil reserves and production, from 15th to fifth ‐ Latin America’s biggest economy grew 7.5% last year and is expected to grow by nearly 5% in 2011 ‐ The danger for Brazil, if it fails to manage this windfall wisely, is of falling victim to “Dutch Disease”. The economic malaise is named after the Netherlands in the 1970s, where the manufacuturing sector withered after its currency strengthened on the back of a large gas field discovery combined with rising energy prices ‐ The oil industry could grow from about 10% of GDP to up to 25% in the coming decades,… ‐ The country is the world’s second biggest exporter of iron ore. It is the largest exporter of beef. It is also the biggest producer of sugar, coffee and orange juice, and the second‐ largest producer of soyabeans ‐ The government is also seeking to extract social benefits from the discoveries by setting up a sovereign wealth fund that will invest in education and other long‐term initiatives
The Nikkei slump – Pg. 14 ‐ Tuesday’s sell‐off in Japan was a study of panic
Big banks probed over Libor – Pg. 15 ‐ Regulators in the US, Japan and UK are investigating whether big banks conspired to “manipulate” the benchmark interest rate used to calculate the cost of billions of dollars of debt ‐ …the investigation was looking at how Libor was set for US dollars during 2006‐08, immediately before and during the crisis (Prof Note: If you remember…this is when their were articles published about Libor really being the risk‐free rate) ‐ …Libor – used as a reference rate for about $350,000bn in financial products – have long claimed it is antiquated and lacking in transparency ‐ Commentators complained bitterly during the financial crisis that the rates were distorted because they believed weaker banks were unwilling to admit higher borrowing costs
15 March 2011
Tokyo pumps Y21,800bn into banks – Pg. 4 ‐ …doubled its asset‐buying programme to Y10,000bn in a bid to stabilize markets following the earthquake disaster ‐ The Tokyo stock market plunged 6.2% on Monday while Japanese government bonds jumped on fears the economy could be damaged by the effects of the quake and planned electricity cuts ‐ The BoJ’s injection helped pull yields on the country’s sovereign debt sharply lower. ‐ After the 1995 earthquake that devastated Kobe, the government injected Y9,900bn in new stimulus funds through three supplemental budgets
Huge losses to test strained budgets – Pg. 4 ‐ Early estimates for losses still cover a very wide range of about $10bn to more than $60bn, although they have been steadily ticking upward since the quake struck ‐ Very, very large losses can cause insurance companies to fail, leading to financial losses beyond the industry itself and even disrupting the provision of cover ‐ Japan has the third‐largest insurance industry after the US and Germany and domestic insurers retain large amounts of local risk. Earthquake cover is low, being present in just 14‐ 17% of policies ,… ‐ The 2001 terror attacks in the US resulted in losses of less than $20bn, …. ‐ Hurricanes Katrina, Rita and Wilma in 2005 caused $60bn of insurance losses, …
Ahead in the clouds – Pg. 7 ‐ …the model of paying extraordinarily high sums remains largely intack ‐ …since the crisis, the gap has widened dramatically,.. ‐ Pay per employee at Goldman Sachs, UBS, Credit Suise, Deutsche Bank and Morgan Stanely – five of the world’s biggest investment banks – averaged $403,000 in 2010,… ‐ That is about 10 times the average US and UK income of $40,000…. ‐ In Europe, for example, regulators have limited the cash component of senior bankers’ bonuses to as little as 20%, with the rest paid out mostly in share‐based awards over several years ‐ The loss of staff to shadow banking, where leading professionals can earn billions a year rather than millions, is already picking up steam
Household spending – Pg. 12 ‐ Unemployment remains elevated, fuel prices are up and house prices are falling again ‐ What fell by some $55bn was savings
US housebuilders more optimistic as homebuyers’ interest revives – Pg. 19 ‐ In the first nine weeks of the year – traditionally a period of insipid demand for new homes – all six of the nationally spread homebuilders have seen a rebound in both the number of visitors to showhomes and downpayments on properties ‐ The unexpected spate of demand has caught many in the industry by surprise
Europe debt deal spurs relief rally – Pg. 22 ‐ The euro and eurozone peripheral bond markets rallied on Monday in response to moves by European policymakers to tackle the region’s 18‐month debt crisis ‐ Greece was the biggest beneficiary among the peripheral economies as its stock market rose 5.15% ‐ …. ‐ The chance of a Greek default over the next five years also remains above 50% as measured by credit default swaps
14 March 2011
Leaders cut surprise deal on key reforms – Pg. 3 ‐ The 17 eurozone heads of government surprised many, however, including some within their own ranks, by cutting a deal on almost all the important elements in the early hours of Saturday morning during an emergency summit in Brussels ‐ Leaders committed to increasing the lending capacity of the current rescue fund – the European financial stability facility – form about 250bn (euro) to its full, headline level of 440bn (euro) ($610bn), making it able to bail out several more eurozone countries should the debt crisis continue to spread ‐ A permanent, post‐2013 fund – the European Stability Mechanism – will be able to lend up to 500bn (euro), likely to be achieved through stepped‐up guarantees from triple‐A states and paid‐in capital from those with weaker balance sheets ‐ The funds will be able to buy bonds, but only directly from a struggling government – not on the open market – and only after the government agrees to austerity measures similar to those imposed on bail‐out nations ‐ The two countries [Greece and Ireland] currently in bail‐outs were offered an easing in their rescue terms in exchange for further austerity measures ‐ Greece took the deal….Ireland rejected the deal…
Fed begins to prepare for life after QE2 – Pg. 4 ‐ The timing of tighter policy will depend on the strength of recovery in the labour market and inflation projections ‐ After completion of QE2, however, the Fed will hold more US Treasuries than it wants in the long term. It will be able to speed the “automatic” decline of its balance sheet by choosing to let those Treasuries mature as well as by not reinvesting early repayments from its portfolio of mortgage‐backed securities ‐ The main tightening of policy will probably come through a rise in short‐term interest rates
China noses back ahead as top goods producer to halt 110‐year US run – Pg. 4 ‐ China has become the world’s top manufacturing country by output, returning the country to the position it occupied in the early 19th century ‐ …China last year accounted for 19.8% of the world manufacturing output , fractionally ahead of the US with 19.4% ‐ The last time China was the world’s biggest goods producer was in about 1850 when the country was close to the end of a long period of population growth and technological ascendancy ‐ Buoyed by the industrial revolution, the UK then became the top maker of factory goods and held this position for almost 50 years, following which the US began a long run as the world’s premier manufacturing nation ‐ Economic historians believe China’s share of world manufacturing output in 1830 was nearly 30%, after which it fell to about 6% in 1900 and half this figure in 1990
History shows rebuilding can spur economy – Pg. 6 ‐ First the country [Japan] was stuck in deflation. Since the mid‐late 1990s it had failed to shake off the debilitating drip of gently falling prices ‐ The second point was psychological. Japan had lost its confidence…
Home loan chaos is hitting America’s recovery – Pg. 11
Wisconsin – Pg. 14 ‐ Another victim might be investors in America’s $3,000bn municipal bond market ‐ With unfunded state and local pensions deficits estimated at as much as $3,500bn, curbing the entitlements removes a mortal threat to local government solvency ‐ General obligation bond investors rightly claim that they have first priority on tax revenue but, when push comes to shove, might makes rights
Risky loans stage comeback – Pg. 15 ‐ Controversial lending practices that proliferated ahead of the financial crisis have made a comeback this year as investors flock to corporate debt that offers either higher yields or the promise of being pegged to potentially rising central bank interest rates ‐ So‐called covenant‐lite loans that strip out safeguards for investors, dividend deals in private equity‐controlled companies, and a third class of instruments, payment‐in‐kind toggle notes, were widely criticized as part of the easy lending that led to the credit crunch ‐ Since the start of the year, “cov‐lite” loans have totaled almost $30bn in the US, compared with 2007’s full‐year tally of $100bn and 2006’s $24bn, the second‐biggest year (Prof Note: What am I missing? ‘Cov‐lite’ loans, have lenders learned nothing???!!!) ‐ Such loans typically exclude a provision that triggers a default if the company’s finances deteriorate. Lenders worry that a postponed default could lower the value of recoveries if the company goes bankrupt (Prof Note: This is bull$hit! Percent recovery is what matters NOT default! Stop thinking default and start thinking Percent Recovery. Further, what the “H” “E” “double hockey stick” happened to ‘material adverse change’ clauses???!!!) ‐ Pik toggle notes give the company the option, in a squeeze, to pay lenders with more debt, rather than cash
Investors hope for Fed test windfalls – Pg. 16 ‐ The Fed will also rule by next Monday on whether the banks have stockpiled enough capital to begin returning some of it to shareholders in the form of dividend increases and buy‐ backs, or – for those that have yet to withdraw from the US Treasury’s troubled asset relief programme – to repay the bail‐out funds they received…
Beijing sets up fund for outbound investment – Pg. 17 ‐ Beijing’s municipal government has agreed to set up China’s first local currency fund for outbound investments with A Capital Asia, a European‐owned private equity firm, … ‐ Under the agreement to be announced today, the fund aims to raise $456m…
12 March 2011
Rapid rise in oil price holds global economy hostage – Pg. 3 ‐ With economies in many parts of the world still fragile, the fear now is that rising oil prices – on top of cuts to government spending, a rumbling sovereign debt crisis in Europe, continued instability in the Middle East and now an earthquake in Japan – could do enough damage to cripple the global recovery ‐ Governments in the developed world already have huge deficits; central banks have cut rates to zero and bought billions in assets. There is no ammunition left to deal with another shock ‐ Oil Producers o Oil producers get rich when prices rise: the same number of barrels exported suddenly turns into a lot more US dollars. The economic problem is what to do with all the cash o If a country such as Saudi Arabia tries to spend all the money at home, then the certain result is inflation… o …revenues are usually invested overseas in the short term, often in safe assets such as US Treasury bonds. That helps to finance the US government but not private consumption or investment around the world ‐ The US o ….a sustained $10 rise in the oil price will lower US growth by just 0.2% in each of the following two years o Growth forecasts for 2011, which had been heading upwards towards 4%, are starting to drift back down again ‐ Developing world o …overall incomes are lower and oil makes up a far larger share of total consumption o For example, oil consumption was 9.5% of 2009 gross domestic product in Egypt, 9.2% in Thailand and 6.4% in India, compared with 3.3% in the US and 2.2% in Japan ‐ UK and Europe o …European economies are among the world’s most efficient users of oil, so in theory they are well placed to withstand the shock o First, many European nations such as the UK and Ireland are tightening fiscal policy and can ill‐afford another hit to demand from rising oil prices o Second, Europe has higher inflation than the US – the most recent year‐on‐year rates were 2.4% for the eurozone and 4% for the UK – and its central banks are more concerned
Nokia chief in $6m ‘golden hello’ – Pg. 11 ‐ Stephen Elop received a $6m “golden hello” when he left Microsoft to become chief executive of Nokia last year,…
Reinsurers rocked by disaster – Pg. 16 ‐ European reinsurers were hit sharply as investors expected higher claims on the sector following the Japanese earthquake and resulting tsunami
11 March 2011
Dalai Lama relinquishes political role and urges move to Tibetan elections – Pg. 1 ‐ The Dalai Lama will step down as political leader of the Tibetan government in‐exile, potentially confounding the Chinese government’s efforts to control the succession process after his death ‐ The Chinese government, which has ruled Tibet since 1959, dismissed the Dalai Lama’s announcement as the posturing of a “political separatist” ‐ While the Dalai Lama will remain Tibetans’ spiritual leader, the decision to relinquish political power before his death will make it harder for the Chinese government to try and argue that his temporal authority has passed to a reincarnated successor of Beijing’s choosing ‐ The election is scheduled for March 20
Spanish downgrade revives fears over weaker eurozone economies – Pg. 1 ‐ The euro fell against the dollar and stock markets slid on Thursday after Moody’s downgraded Spain’s sovereign credit rating and revived investor fears about weaker eurozone economies ‐ Spain, which held triple A ratings from all the main rating agencies before the global financial crisis, had its Moody’s rating cut by one notch to Aa2 – two notches below the top level and the same as that from Standard & Poor’s ‐ The euro tumbled….$1.3802 (Prof Note: Still too high for European vacations!) ‐ Moody’s blamed the credit downgrade on its newly pessimistic assessment of the capital needs of the Spanish banking system and on the lack of fiscal discipline among Spain’s autonomous regions
Portugal urged to tap crisis fund soon – Pg. 2 ‐ …Austria’s finance minster warned…. ‐ Austria is among a bloc of northern eurozone countries that have given priority to fiscal discipline to solve Europe’s sovereign debt crisis and demanded tough conditions for aid to stricken members
US warns Russia over investor risk – Pg. 2 ‐ The US vice‐president has warned Russia it risks scaring away investors unless it moves to strengthen the rule of law and introduce political reforms (Prof Note: …here I thought LTCM would be enough of a warning!)
Oil price jumps on report of Saudi violence – Pg. 4 ‐ Saudi police have fired rubber bullets and percussion grenades to disperse a protest in the kingdom’s mainly shia east a day ahead of a planned “day of rage”,… ‐ A “day of rage” has been called for across Saudi Arabia today
Republicans boosted by Wisconsin vote – Pg. 6 ‐ The late‐night passage of contentious anti‐union measure in the Wisconsin state legislature has buoyed the Republican party, setting the stage for further initiatives across the country against organized labour ‐ The Wisconsin Senate passed a bill restricting collective bargaining rights for many public sector workers late on Wednesday, …. ‐ …the Republicans stripped out the financial sections of the bill late on Wednesday, allowing them to push through the remainder of the measure containing the controversial provisions. Only the budget bill required the quorum.
Fears over funding threat to US influence – Pg. 6 ‐ The US risks a sharp loss of influence at institutions such as the World Bank if Congress will not pay promised contributions,… ‐ Under the Republicans’ plans, the US would not fund $106.6m in new capital for the Asian Development Bank this year, and would make none of its promised contributions to a range of UN and World Bank funds for the environment and food security (Prof Note: Why does the world need the US when it has China???!!!) ‐ If the US did not take up its new shares at the ADB, Washington would fall from joint‐biggest to seventh‐largest shareholder ‐ At present the US has, in effect, veto power at the ADB if it votes with Japan. If Washington did not pay this year then the bank would probably leave the new shares un‐issued for a time. However, if Washington did not take up its shares it would eventually lose veto power permanently
Seoul raises base rate to 3% ‐ Pg. 6 ‐ South Korea’s central bank has raised interest rates for the second time in three months as it tries to control inflation
US bank assets – Pg. 14 ‐ …total loans were $5,200bn at the end of last year, 4% down on 2009 ‐ Banks kissed goodbye to $157bn of loans in 2010, down 17% on the year before ‐ There were also fewer non‐performing loans – at 3% of total loans – and early warning bells were rung less often ‐ Last year’s ratio of charge‐offs to loans at 2.5% for all banks covered by the Federal Deposit Insurance Corporation has only been higher twice: in 1933 and 1934 during the Depression
AOL cuts workforce by 20% ‐ Pg. 15
BofA under fire over staff home‐loss subsidies – Pg. 17 ‐ The Securities and Exchange Commission has ordered Bank of America to include a proposal in its proxy statement that calls for eliminating a form of compensation that protects executives from falling house prices when they relocate
IASB chief urges US to adopt global accounting rules – Pg. 19 ‐ The US Securities and Exchange Commission is due to decide this year whether to jettison US accounting rules in favour of adopting the IASB’s international financial reporting standards (IFRS), which are followed in the European Union and a number of other countries ‐ If the US decided not to adopt the standards, or let the decision slide into 2012 or beyond, it could be kicked out of IASB oversight bodies,…
Rate risk boosts convertible bonds – Pg. 22 ‐ Big investors looking for protection against rises in interest rates have stoked demand for convertible bonds, ….
Structured loan deals pick up as investors widen search for yield – Pg. 23 ‐ The market for collateralized loan obligations, one of the engines behind the buyout boom of the past decade, is picking up as investors widen their search for yield ‐ CLOs, pools of loans financed by bonds that are repaid by the underlying loans, were very popular in the years before the credit crisis because they offered banks a way of offloading loans and offering investors higher returns ‐ …this year has already been $1.2bn of issuance… ‐ CLOs consist mostly of leveraged loans, floating‐rate corporate loans with ratings below investment grade. They often fund leveraged buy‐outs.
10 March 2011
Pimco fund cuts its T‐bond holdings to zero – Pg. 1 ‐ The world’s biggest bond fund has cut its holdings of US government‐related debt to zero for the first time since early 2008 in the latest sign of increasing investor expectations of rising interest rates ‐ By the end of June, the Fed is expected to have purchased about $800bn of Treasuries, pushing its total holdings to $1600bn (Prof Note: About the size of China and Japan combined) ‐ After slashing its government‐related holdings to zero, Pimco Total Return’s assets are primarily in US mortgages, corporate bonds, high yield and emerging market debt ‐ The fund holds 23% of its assets in net cash equivalents, defined as any instrument that has a low sensitivity to movements in interest rates
Budget battle rages over taxes – Pg. 2 ‐ The fight over the US budget intensified, as Republicans attacked a Democratic proposal to expand negotiations from discretionary spending to include tax increases and some curbs on large government healthcare and agriculture programmes
Texans learn harsh reality of cutbacks – Pg. 2 ‐ Teachers in Texas are among the country’s worst paid, and many of their students require lunch subsidies and specialist help with the English language ‐ Texas is one of 39 states that have projected budget gaps for the 2012 fiscal year,…. ‐ Others areas will be cut, but education is particularly vulnerable. It accounts for 55% of Texas state spending, versus healthcare at 25% and public safety at 10% ‐ Up to 100,000 jobs are expected to be cut from public education in the state
Brics’ billionaires outnumber Europe’s – Pg. 2 ‐ The US still has the world’s most billionaries with 413 individuals with a total net worth of $1,500bn. At the beginning of this year, the Brics countries….had 301 billionaires, 108 more than in the previous year, one more than Europe ‐ As the world economy recovered, the number of billionaires rose to a record 1,210 in 2011, boasting a total net worth of $4,500bn ‐ In Asia, the number of billionaires has nearly tripled in the past two years to 332, with 115 in mainland China alone ‐ Europe’s fortunes are also starting to slow, with its number of billionaires overtaken by Asia for the first time in more than a decade
Borrowing costs soar on eurozone periphery – Pg. 13 ‐ The cost of borrowing for Portugal, Ireland and Greece has hit euro‐era highs, amid concern in the markets that European leaders will fail to take concerted action to dispel fears of sovereign defaults ‐ The long‐term market interest rate for Spain came close to setting a record and Italy’s borrowing cost rose above 5% for the first time since November 2008 ‐ …Portugal was forced to pay a sharply higher premium in a debt auction on Wednesday,…. ‐ Greece and Ireland, both of which are in multiyear EU‐IMF rescue programmes, have seen rises of almost 4%
Rule to cut debit card fees set for halt – Pg. 16 ‐ A controversial rule to cut debit card swipe fees would be delayed and kicked back to regulators for more study under new legislation set for a US Senate vote next week,…
Europe’s banks face 5% stress test ratio – Pg. 18 ‐ European banks are likely to need a core tier one capital ratio of 5% to pass stress tests next month, …..as regulators rebutted claims that the exercise would be too soft on the financial sector ‐ The ratio would be more difficult for banks to achieve than the measure applied in a widely criticized stress test exercise last year that failed to quell market fears about the health of Europe’s banks ‐ Core tier one capital is considered the best form of bank capital to absorb potential losses and its ratio to a bank’s risk‐weighted assets is one of the most important measures of an institution’s financial strength ‐ It compares with a 7% standard for core tier one capital that will be phased in by 2019 under a “Basel III” rule book for global banks
Banks dip into tool box for Basel III – Pg. 23 ‐ Basel basics o The Basel III rules endorsed by the Group of 20 leading economies are designed to make the banking system more resilient to crises o They impose new rules on the capital banks hold. o Minimum equity capital ratio (pure stock): . 2013 – 3.5% of risk‐weighted assets . 2019 – 4.5% Minimum Tier 1 capital (equity + other instruments, including some hybrid bonds): 2013 – 4.5% 2019 – 6% . Minimum total capital plus new “capital conservation buffer”: 2013 – 8% 2019 – 10.5%
9 March 2011
Libyan central bank chief lies low – Pg. 1 ‐ The governor of Libya’s central bank, the man who holds the key to the Gaddafi regime’s finances, appears to have gone to ground, confounding officials, diplomats and bankers desperate to find him ‐ The 45‐year‐old Mr Bengdara, who holds a master’s degree in economics from Sheffield University in the UK, ….
US personal bankruptcies expected to fall in 2011 – Pg. 3 ‐ Personal bankruptcy filings are expected to fall this year for the first time since 2006, another sign of a strengthening economy,… ‐ …roughly 1.5m Americans will file for personal bankruptcy protection in 2011, a slight decrease over 2010, when filings totaled 1.53m ‐ The number of filings has increased every year since 2006, when a new law that made it more difficult to wipe debts took effect ‐ Two big drivers of bankruptcy filings are the jobless rate and the level of consumer debt, both of which have declined from recessionary highs ‐ …consumer debt, after falling for 21 consecutive months, started to climb in October. Consumer borrowings grew 2.5% in January,…mainly driven by higher student loans and car loans ‐ At the same time, the savings rate has begun to fall. As of January, Americans were saving 5.8% of their income, down from a peak of 7.2% in 2009 – and still well below the 9% of the 1980s and 1990s
US Treasury market – Pg. 14 ‐ The financial markets’ current $3,500bn question can be stated as a thought experiment: what happens to US Treasury yields when the biggest buyer, the Federal Reserve, bows out?
Demand grows for ‘synthetic’ junk bonds – Pg. 15 ‐ Demand is growing for “synthetic” financial instruments that enable investors to take positions in the US junk bond market without owning the underlying securities ‐ The instruments, created by using credit derivatives on junk bond on high‐yield indices, resemble transactions linked to US mortgages, which proliferated before the financial crisis ‐ The CDOs pooled derivatives linked to debts and then sliced them into tranches of varying risk and return ‐ Now, hedge funds are buying the riskiest parts of instruments linked to bonds. This demand reflects more bullish views on the US economy, which investors believe will translate into lower corporate defaults ‐ Synthetic junk bonds have been in the market before. Similar investments, called collateralized bond obligations (CBOs), blew up after corporate defaults unexpectedly soared when the telecoms bubble burst in the early 2000s ‐ The derivatives are sold as “tranches” that represent different slices of default risk in an index of high‐yield bonds compiled by Markit called CDX ‐ The riskiest tranche – known as the “equity” – covers the first 15% of defaults ‐ The Depository Trust & Clearing Corp, which compiles credit derivative data, says net notional exposure in all credit default swap tranches….
Hedge funds attack EU swaps curbs – Pg. 22 ‐ Hedge fund managers have strongly criticized new proposals approved by European Union lawmakers to ban the use of “uncovered” sovereign debt, warning that the move could do significant damage to Europe’s troubled government bond markets ‐ So‐called “naked” sovereign CDS positions, where traders take positions without owning the underlying debt, were rarely taken to speculate on sovereign credit risk….
Greek yields leap as downgrade adds to fears over bond default – Pg. 22 ‐ Greece’s cost of borrowing hit the highest levels since the international community intervened to rescue the eurozone bond markets from imploding in May last year ‐ Greek yields leapt higher amid growing fears that the country will be forced to default on its bonds after a multi‐notch downgrade by Moody’s this week
8 March 2011
Members of Opec join Saudis in oil boost – Pg. 1 ‐ The behind‐the‐scenes move by Kuwait, the United Arab Emirates and Nigeria reflects growing unease among Opec members over the threat to the global economic recovery from crude’s runaway rise amid the worsening crisis in Libya ‐ US oil prices….$160.95 a barrel….Gold jumped to a record $1,444 a troy ounce ‐ Opec, which controls 40% of global oil supplies, is divided about the need to increase output
Foreclosure settlement plan divides opinion – Pg. 1 ‐ Officials are divided over a $20bn “mega settlement” of the US foreclosure crisis, with some fighting a plan to force banks to cut outstanding debt on struggling homeowners’ mortgages,… ‐ Instead of the fine being paid into federal and state coffers officials are working on a plan that would use the pot of money to cover writedowns of mortgage principal ‐ (Prof Note: Yet again…’moral hazard’ issue!)
Barbie fails to charm China fans as Shanghai’s pink store closes – Pg. 1 ‐ Barbie, the slender symbol of American consumerism, has shut up shop in Shanghai just two years after opening her biggest flagship store there ‐ The withdrawal comes on the heels of store closures in China by US retailers Home Depot and Best Buy, which both struggled to crack the local market ‐ Retail sales also continue to grow strongly, at more than 18% in 2010 from a year earlier
Levy risks reigniting protests by the prudent – Pg. 2 ‐ But now the Obama administration is involved in talks that would go much further than the mortgage modification efforts of 2009, going so far as to write down the principal – the debt outstanding – on thousands of mortgages (Prof Note: OUTRAGEOUS! Capitalism is truly “D” “E” “D”…DEAD!)
Hardship on rise for middle class – Pg. 3 ‐ Outside of the social security office in a rundown area of Washington, …smoking a cigarette….pick up the benefits that keep them afloat (Prof Note: Outrageous! Like potato chips being purchased with food stamps!) ‐ …44.1m Americans are now being fed in some part by Snap, the highest number in the 50‐ year history of the programme ‐ …the number of US citizens using the programme has ballooned over the past three years by almost 17m, an increase of 61%... ‐ The average Snap allowance is $130 to cover a month of food,…. ‐ (Prof Note: Somehow my handout always comes in the form of a boot in my a$$!)
A democracy is built – Pg. 9 ‐ In many ways, property is the focus of the story of modern China ‐ The move for tens of millions from government housing to new, privately owned apartments has proved an exercise in mass social mobility. It has offered them the chance to join the urban middle class and escape the social controls and scrutiny that come with state‐owned flats ‐ In January, Beijing introduced rules designed to reduce the pace of forced demolitions. Local authorities must provide reasonable compensation and alternative accommodations, and ensure safety during the exercise ‐ The race to repossess land usually has one of two motivations – to make way for new factors or to clear space for high‐rise housing developments for sale to the urban middle class.
Sovereign ratings – Pg. 14 ‐ Some economists argue that ratings are actually lagging behind indicators
Manpower survey shows widening job‐creation gap – Pg. 17 ‐ Strong hiring plans in the developing world contrasted with a subdued outlook in industrialized nations… ‐ Companies in developed economies remain wary of boosting employment in the second quarter of the year,… ‐ ….marked difference between the optimism in India, China, Taiwan, Brazil, Turkey and Singapore, and the more subdued outlook for countries such as Canada, the US, Norway, and France
Junk bonds resilient as US recovery trumps oil – Pg. 22
7 March 2011
Russia in $10bn bid to tempt investors – Pg. 1 ‐ The Russian government is establishing a $10bn fund to coinvest with leading international private equity firms in an effort to attract foreign capital to the country and has asked Goldman Sachs informally to guide the project, …. ‐ The Russians have also reached out to the Middle East sovereign wealth funds ‐ So far, most private equity firms have regarded Russia with extreme caution (Prof Note: Lets not forget LTCM!) ‐ The Russian effort comes as skepticism about the rule of law and corruption remains widespread among western investors
Brazil to ban unwelcome sovereign investors from buying farmland – Pg. 1 ‐ Brazil is preparing rules to block foreign governments, state‐owned companies and speculators from buying agricultural land while allowing in private sector investors ‐ The country, one of the world’s most important agricultural powers, last year severely restricted all new farmland investment from abroad amid fears that foreign governments, led by China, were snapping up acreage in emerging markets to boost their food supply security ‐ Brazil is one of the few countries with the capacity to ramp up food production to feed an increasingly hungry world but its agricultural sector will need enormous investment to realize its full potential ‐ The country is already the world’s largest exporter of coffee and sugar, the second largest grower of soyabeans, and the third‐largest exporter of maize
Confusion clouds Libya’s investment fund – Pg. 3 ‐ With much of its [Libya] assets frozen, no one is sure if the authority is still functioning,… ‐ Today, the LIA’s assets in the US and some European counties have been frozen – though not its Italian holdings, …
Japan foreign minister quits – Pg. 5 ‐ …revelations that he received political donations from a foreign resident, deepening the political turmoil that has beset the administration of Naoto Kan
Nervous Beijing raises security spending – Pg. 5 ‐ China’s spending on internal public security overtook national defence for the first time last year, underlining Beijing’s growing concern about public unrest ‐ …public security….$84bn
US assesses risk of domestic Islamism – Pg. 5 ‐ The US Congress is opening controversial hearings on homegrown Islamic radicalism focusing on claims that a Muslim community once considered integrated into society is becoming a potential recruiting ground for terrorist
A question of scale – Pg. 7 ‐ …one in five government dollars goes on defence…. ‐ …new world order, in which US power is enfeebled at home by deficits and checked abroad by rising rivals ‐ The Pentagon is seeking $540bn in the still‐unresolved for the still‐unresolved budget for the current fiscal year, in addition to $159bn on the two wars… ‐ To keep the government running, the US has to borrow 40 cents in every dollar it spends
Traders ‘short’ dollar as currency loses attraction – Pg. 15 ‐ Hedge funds and forex dealers are betting record amounts against the dollar, reflecting a growing belief that the US currency has lost its haven appeal and that eurozone interst rates will soon rise ‐ In contrast, speculators have added to their euro holdings amid expectations that the European Central Bank will soon raise interest rates to head off rising inflation
European regulators to include ‘near‐fail’ in banks’ stress tests – Pg. 15 ‐ European banking regulators are preparing to introduce a “near‐fail” category into the continent’s new stress test process, as part of a mechanism to force recapitalizations on weaker banks
Women at top lift shares, says study – Pg. 16 ‐ Neither board remuneration nor the splitting of the chief executive and chairman are connected to company price performance, but a smaller board size and a high proportion of female directors are ‐ The findings showed that high female representation was the third strongest link to good share price performance, after board size and substantial shareholders
Brussels pushes US on accounting – Pg. 17 ‐ The European Commission has tried to bolster the US’s uncertain commitments to global accounting standards by suggesting that it could lose international influence if it did not sign up ‐ The US is due to decide this year whether to jettison its US GAAP accounting system in favour of the IFRS norms followed in the European Union and some other countries ‐ It is also thought to harbor doubts over whether the US would still have a legitmate role to play within the IASB itself without a firm commitment to IFRS ‐ Some of the “converged” accounting rules are controversial, including proposed lease accounting changes that could cause some companies to breach loan covenants
5 March 2011
Strong US employment figures raise hopes for sustainable job creation – Pg. 1 ‐ One of the strongest US payroll reports in months has raised hopes that the economic recovery is finally leading to steady growth in jobs ‐ Non‐farm payrolls rose by 192,000 in February – in line with market expectations – but hiring was spread across a broad range of industries, figures for previous months were revised up, and the unemployment rate fell again from 9 to 8.9% ‐ Sings of sustainable job creation make it highly unlikely that the Federal Reserve will expand its “QE2” programme beyond the $600bn due for completion by the end of June ‐ But the job numbers are also unlikely to push the Fed towards early interest rate rises because wage growth – which feeds through to inflation – was slow ‐ Average hourly earnings rose by just one cent to $22.87 and the average work week was flat at 34.2 hours ‐ Manufacturing added 33,000 jobs as did construction; business services put on 47,000 jobs; healthcare created 40,000 new positions and the hospitality sector took on 22,000 employees ‐ State and local governments were a drag as they shed 30,000 jobs in February Republicans reject $6.5bn budget cuts – Pg. 2 ‐ Republicans forcefully rejected an Obama administration proposal to cut an additional $6.5bn in spending, as tensions flared up again in the political battle over the US budget Protests build across Saudi Arabia – Pg. 3 ‐ Demonstrators staged a rare rally after Friday prayers in Riyadh, marking the first such protest in the Saudi capital, as the kingdom braced itself for an Egypt‐inspired “Friday of Rage” next week ‐ In Saudi Arabia protests and public displays of dissent are outlawed Business influence rises in China – Pg. 4 Financials shaken by Citi and Goldman downgrades – Pg. 14 ‐ The financial sector lost ground after the investment ratings on Citigroup and Goldman Sachs were unexpectedly downgraded by one of their rivals. ‐ Bank of America Merrill Lynch downgraded its recommendation on the two banks to “neutral” from “buy”, citing expected weakness in their first‐quarter results ‐ Among the stocks in focus was Fifth Third Bancorp, which was down 5.6% to $13.84 over the week after announcing that it was under investigation by Securities and Exchange Commission. Investors grapple with new crude shock – Pg. 15 ‐ Brent crude, the European benchmark, was trading at about $116 a barrel on Friday, below the level of nearly $120 touched last week ‐ Scenario 1: Gaddafi falls quickly ‐ Scenario 2: Protracted disruption in Libya ‐ Scenario 3: Contagion Billions pulled from emerging market equity funds – Pg. 15 ‐ The switch out of emerging market equities into shares in developed markets is continuing, …. ‐ …while investors are pulling out of emerging market equities sending major stock indices lower, there has been no major sell‐off in EM bonds ‐ EM equities have seen considerable volatility since the start of the year, with a heavy price drop in the weeks to mid‐February…
4 March 2011
ECB hint on rate rise jolts markets – Pg. 1 ‐ The European Central Bank has jolted financial markets by signaling that interest rates will almost certainly rise in April, taking a marketedly more aggressive stance on inflation than the Bank of England and US Federal Reserve (Prof Note: Pathetic! The market is jolted by the ECB saying it is going to follow its single mandate of keeping inflation at or near 2.00%. What does this say? Markets believe people do not follow mandates?) ‐ Economists warned that the ECB’s action risked backfiring, pointing out that its last interest rate increase in July 2008 came just months before the collapse of Lehman Brothers (Prof Note: I have no confidence economists understand the capital markets! This is why I generally say I am more of a capital markets person than economists. Elliott…you are an economist on steroids!) ‐ The ECB wanted to act preemptively with an interest rate “flu shot” and would see how the economy performed,… ‐ In spite of its hawkish stance on inflation the ECB shelved further steps to unwind the exceptional support for eurozone banks it has provided since September 2008 ‐ In the UK, the Bank of England is also moving closer to interest rate increases to combat inflation. But the US Federal Reserve has seen less of an inflationary threat in rising commodity prices
Libya lurches towards civil war – Pg. 2
Military sacks Egyptian PM – Pg. 2
S&P warns on regional instability – Pg. 3 ‐ No country in the Middle East and north Africa is immune to contagion from the political unrest that has hit countries such as Libya, Tunisia and Egypt, …. ‐ …S&P has cut its ratings on Tunisia, Egypt, Jordan, Bahrain and Libya this year because of heightened political risks. All are under review for further downgrades ‐ The region has seen a lower rate of sovereign upgrades in recent years than other emerging markets because of the slow rate of its structural reforms,… ‐ The US rating agency also underlined other risks in the region. “The main geopolitical risk that we continue to see in the region stems from Iran’s development of its nuclear fuel programme.”
China security chief exerts growing influence – Pg. 3 ‐ The police have started to put heavy pressure on foreign journalists in Beijing and Shanghai ‐ “Ever since the Tibet uprisings in early 2008” (Prof Note: I was in Beijing during this time….ironic!) ‐ …police and other departments have invested heavily in data mining tools, which promise to predict trends in public opinion and warn of potential protests
ECB on risky route, experts warn – Pg. 4 ‐ When in May 2009 the European Central Bank cut its main interest rate to 1% ‐ a record low – continental Europe was in its worst recession since the second world war. Monetary policymakers feared deflation that would wreak still more economic damage ‐ Germany has resumed its postwar role as Europe’s economic powerhouse: its unemployment rate is at a 20‐year low ‐ Eurozone inflation, meanwhile, has soared on higher oil and commodity prices – and risks of deflation have all but vanished ‐ Mr Trichet dealt with one objection squarely – that an interest rate increase was the last thing needed in countries such as Greece and Ireland, hardest hit by the debt crisis. The ECB had to act for the eurozone as a whole, declared its president
Focus of US Fed remains on core inflation – Pg. 4 ‐ So far, however, most members of the Fed’s rate‐setting Federal Open Market Committee have remained steadfast in their preference for looking at core inflation. Core consumer prices, excluding food and energy, were up by 1% on a year ago in January, while the headline index rose by 1.6% ‐ The Fed’s position is that it does not ignore oil and food price movements, but that it must consider inflation two years in the future, and today’s headline inflation is a poor guide ‐ Mr Kohn said three factors influenced the decision not to respond to commodity inflation in 2008: futures markets suggested oil prices would not stay high, the amount of slack in the US economy was already rising, and market expectations of future inflation were under control (Prof Note: The Fed looks at the Futures market!) ‐ The main market measure of inflation expectations – the rate of price rises implied by inflation‐protected Treasury bonds – has been edging up, …
Currency loss forces Swiss bank into limelight – Pg. 4 ‐ …SNB, which unusually for a central bank is independent and privately owned, …. ‐ Unlike most international counterparts, Switzerland’s central bank is a quoted company
Brazil claims it is fifth largest economy in the world – Pg. 5 ‐ Brazil has overtaken Britain and France to become the fifth largest economy in the world after reporting 7.5% economic growth in 2010 – the fastest rate since 1986 (Prof Note: Holy Cow! The second and fifth are the bookends for the BRICs! China is Brazil’s largest trading partner. This is not good for the US!) ‐ …gross domestic product to $2,215bn last year… ‐ …brazil is struggling to sustain rapid growth owing to its creaking infrastructure, convoluted tax system and labour constraints, leading to concerns of rising inflation (Prof Note: Midterm examination question: “List in order the two seven largest economies in 2010.”) ‐ The central bank on Wednesday night tightened its benchmark Selic interest rate by another 50bps to 11.75%, the second increase this year
10‐k filing season – Pg. 12 ‐ Sixty days after the end of every fiscal year, companies listed in the US have to file a Form 10‐K with the Securities and Exchange Commission. The 10‐K is one of the best sources of information investors can get ‐ How to navigate the document? o First, go to item 7, where a company has to give its most thorough assessment of current conditions and future prospects. It is here that shareholders might discover that a corporation holds most of its liquid assets overseas, or that a large proportion of its financing is off‐balance sheet. Consider management’s views alongside risk factors outlined earlier in item 1A o Look at the explanation for the difference in generally accepted accounting principles and non‐GAAP measures, in particular whether the exceptional events that flattered the non‐GAAP numbers really are one‐offs o …do NOT forget the footnotes. For example, the 10‐K shows gross positions for derivative assets and liabilities rather than netting them off. …If goodwill has been impaired, try to find out why. Do the reasons reconcile with management’s expectations for earnings power in item 7? After interrogating its 10‐K, investors shouldn’t have to read a company’s annual report again (Prof Note: A question on this article in some form will be on the midterm)
IMF warns food prices to stay high – Pg. 20 ‐ The world faces a prolonged period of high food prices, (Prof Note: Americans, in general (I include myself in this statement), can afford to lose some weight!) ‐ The economists said that a large part of the surge in food prices was related to temporary factors, such as the weather ‐ Farmers in the US – the top exporter of corn, wheat and soyabeans – are due to start planting summer crops in a few weeks’ time
US inflation expectations rise to highest level since summer 2008 – Pg. 21 ‐ Investors are betting that US inflation will start to rise as a result of sharply higher oil prices, evidence that the financial markets are pricing in a wider economic impact from the crisis in Libya ‐ Inflation expectations in the US have risen to their highest level since the summer of 2008, as the surge in crude boosts inflation‐protected bonds ‐ Since the deflation scare of last summer, when 10‐year inflation expectations plumbed a low of 1.5%, the ensuing upward momentum has been driven in part by the Federal Reserve’s resumption in November of bond purchases, known as quantitative easing, and higher commodity pricing
3 March 2011
US crude oil output highest in a decade – Pg. 1 ‐ US oil production rose last year to its highest level in almost a decade, thanks to an increase in the extraction of “unconventional” reserves ‐ As a result…the US was the largest contributor to the increase in the global oil supplies last year over 2009 – and is on track to increase domestic production by 25% by the second half of the decade ‐ …imported oil, which accounted for roughly half of US demand in 2010 ‐ US oil imports have fallen steadily since 2006
Rules exemption on forex swaps near – Pg. 2 ‐ The US Treasury is close to exempting foreign exchange derivatives from tough new regulations in a big win for dealers,… ‐ …Dodd‐Frank…forces more derivatives to be traded through clearing houses and on exchanges in a bid to reduce risk and improve transparency (Prof Note: While ignoring the systemic risk that will be focused on clearing houses!) ‐ Options can be structured in many ways and are a bespoke product that does not translate well to an electronic platform or futures type trading environment
Ohio tensions rise over right to strike – Pg. 2 ‐ Protests in Ohio have intensified against Republican attempts to curb union rights, as the state’s legislation was set to consider a proposal to impose legal curbs on collective bargaining for public employees and end their right to strike ‐ The heart of the battle is Wisconsin, where governor Scott Walker has put forward a plan to end collective bargaining for most state workers ‐ In Ohio, however, unlike Wisconsin and Indiana, the collective bargaining proposal only needs a simple majority to pass the legislature, meaning Democrats are unable to emulate the “runaway” strategy
Obama calls for talks with Congress on budget – Pg. 2 ‐ The Senate on Wednesday approved a budget extension that averts a government shutdown at the end of this week by an overwhelming margin of 91‐9 (Prof Note: another “extend and pretend” strategy)
US struggling to hold role as global leader, Clinton says – Pg. 3 ‐ The US is at risk of falling behind in a global battle for influence with China, Hillary Clinton, secretary of state, has warned, in a bleak account of how Washington’s straightened financial circumstances affect its world role ‐ ….”unbelievable” competition with China for influence over islands in the Pacific, with development of Papua new Guinea’s “huge” energy reserves one of the key issues at stake ‐ She [Hillary] added that Beijing had “wined and dined” all the leaders of “these small Pacific nations” (Prof Note: Imagine if a government with fiscal surplus was to overtake the U.S….imagine that!!!)
US mortgage rules – Pg. 12 ‐ US financial regulators are closer to writing rules requiring banks to have “skin in the game” for mortgage underwriting ‐ Tentatively, banks would have to retain 5% of any “non‐qualifying” mortgage with a downpayment of less than 20% ‐ High‐quality loans they cannot purchase already cost 65bps more today, which implies $40,000 higher total costs for a typical US homebuyer who pays 20% down ‐ Retention rules are a slideshow to the main event, GSE reform ‐ Eliminating the moral hazard that Fannie and Freddie create and allowing the private sector to set prices would have much the same effect as forcing banks to retain risk but with less balance‐sheet bloat. With or without banks having more skin in the game, the mortgage playing field should be far smaller and the price of entry for homeowners appreciably dearer
Gender realignment – Pg. 12 ‐ The European Court of Justice has ruled that European Union insurers must become gender blind by the end of 2012 ‐ To be fair to the ECJ, the philosophical weakness is not theirs but enshrined in the EU treaty, which requires members “to promote equality between men and women” with no explanation of what this equality means ‐ Life assurers can also scarcely fail to notice that women live longer
US airlines in fuel hedging rethink – Pg. 13 ‐ US airlines are being forced to rethink their fuel hedging policies because of a rare divergence between the cost of jet fuel and the oil benchmark they traditionally use to insure against high energy costs ‐ The unusual disconnect has seen a number of US airlines raise fares even though in theory they were well‐hedged, … ‐ The discrepancy between WTI and jet fuel prices means that US airlines are not insulated from rising fuel costs, prompting some to increase fares
US interest rate hike concern spurs demand for loan funds – Pg. 22 ‐ The first exchange‐traded fund for corporate bank loans begins to trade on Thursday amid demand from investors to hedge against interest rate rises ‐ With official interest rates near zero and the US economy picking up, these loans have been in demand recently because they pay a floating rate based on the London interbank offered rate (Libor) ‐ In the US, banks arrange such loans for companies with ratings below investment grade and syndicate a large tranche to investors ‐ Several fund companies have lined up to launch new loan products
Global Property Insight
Investors take notice of commercial recovery – Pg. 1 ‐ Labelled two years ago as the “next shoe to drop”, the US commercial property market has been staging a recovery in recent months (Prof Note: NOOOO….it is a bear bump….do not be confused!) ‐ The multi‐family housing sector has experienced the strongest recovery so far, as volatility in the residential real estate market has created a shift away from home ownership in favour of rental ‐ Rental demand could continue to rise this year, after the Obama administration announced in February a retreat from the housing market, with a proposal to unwind Fannie Mae and Freddie Mac – the government‐sponsored mortgage finance companies created to facilitate home ownership after the Great Depression – which have received billions of dollars of taxpayer money ‐ Meanwhile, the retail sector is expected to reach its low this year
2 March 2011
Top 10 hedge funds eclipse banks with profits of $28bn for clients – Pg. 1 ‐ The top 10 hedge funds made $28bn for clients in the second half of last year, $2bn more than the net profits of Goldman Sachs, JPMorgan, Citigroup, Morgan Stanley, Barclays and HSBC combined,…. ‐ Even the biggest of the hedge funds have only a few hundred employees, while the six banks employ 1m between them
Fed ready to fight oil price threat – Pg. 4 ‐ The US Federal Reserve is “prepared to respond as necessary” if rising commodity prices threaten to trigger inflation or choke off the economic recovery,… ‐ Expectations of inflation could become self‐fulfilling if workers demand higher wages to compensate for higher expected prices ‐ …higher commodity prices were being offset by stagnant wages, …. ‐ Mr Bernanke gave a strong hint that the Fed would not buy more bonds after it completed its current $600bn round of quantitative easing, nicknames QE2, at the end of June
Inflation pushes ECB closer to rate rise decision – Pg. 4 ‐ An interest rate increase in the eurozone will almost certainly loom closer on Thursday, with the euro’s monetary guardian poised to take a distinctly hard line against rising inflation, …. ‐ Eurozone inflation hit 2.4% in February, the highest since October 2008, …. ‐ At least some council members would favour a rise before summer – well before a likely increase by the US Federal Reserve ‐ ….
Gender ruling will raise women’s insurance costs – Pg. 5 ‐ Young women will pay more for car insurance and old men receive less pension income as a result of a European court ruling on gender equality in insurance pricing,… ‐ Gender should not be taken into account as a risk factor in insurance contracts, the European Court of Justice ruled on Tuesday. It found that to charge women lower premiums than men breached EU sex discrimination rules ‐ …raise car insurance for young women in the UK by between 25 and 50%.... ‐ From next year’s end insurers will no longer be able to use statistics related to gender to help calculate risks and to set premium rates for products ‐ …biggest impact is likely to be felt in car insurance and retirement products where gender is the most important differentiator
Democrats hit out at housing finance plans – Pg. 6 ‐ All those options would increase the role of the private sector ‐ One includes reinsurance roe lint he event of a catastrophic downturn. Another would leave the entire market to private finance apart from a pool of loans for low‐income workers that would continue to be guaranteed by the Federal Housing Administration ‐ The plan also says good, affordable rental accommodations should play a bigger role for those on lower and moderate incomes – …
Saudi stocks tumble as fears spread over unrest – Pg. 13 ‐ Saudi Arabia’s stock market, the largest and most liquid in the Arab world, suffered its worst decline since November 2008, amid concerns that unrest in the region could spread to the world’s largest oil exporter ‐ …gold to a fresh record high of $1,432.10….Brent crude oil prices rose 3.2% to $115.56/barrel
US figures underestimate China’s Treasury holdings, say strategists – Pg. 21 ‐ ….China’s holdings to $1,160bn at the end of December from a prior estimate of $892bn made just two weeks ago ‐ The true figure, however, is closer to $1,300bn….
1 March 2011
New bank rules hit HSBC outlook – Pg. 1 ‐ HSBC has warned investors that its future profitability will be affected by new global regulations designed to make the financial sector safer, but it softened the blow with the promise of dividend increases ‐ HSBC cut its targeted return on equity by one‐fifth, following similar profit target downgrades by the likes of Credit Suisse and Barclays ‐ The bank said its core tier one capital ratio, a measure of financial strength, had risen from 9.4% to 10.5% ‐ Under new disclosure rules, the bank also published more information about the amount it pays its staff, including the revelation that top bankers in Asia were given 40% higher bonuses than those based in London
Congress nears deal to avert shutdown – Pg. 2 ‐ The temporary agreement would buy both parties more time and would avoid a Friday deadline that – were it to be missed – would shut down the government ‐ Even with the probable temporary reprieve, the threat of a shutdown has not been taken off the table, given the tricky internal politics each party faces
Obama offers healthcare opt‐out – Pg. 2 ‐ The Obama administration opened the door on Monday for states to abandon one of the most controversial provisions of the sweeping 2010 healthcare law ‐ A new policy that allows states to replace provisions of the law with their own policies in 2014 could, White House officials said, allow states to abandon the individual mandate that forces people to buy insurance if they can afford it ‐ Under the original heathcare law, states could opt to replace some provisions of the law with their own policies under certain conditions in 2017
Higher oil price brings threat of global downturn – Pg. 5 ‐ The global economy faces another bumpy ride if oil prices persist at current levels, … ‐ With oil prices still high on Monday – Brent crude ended trading broadly flat at $111.80 a barrel – the global recovery is in danger of being undermined ‐ Economists agree that the immediate effect of higher oil prices is a redistribution of income from oil users to oil producers. Households and companies cannot in the short term easily reduce the amount of oil they consume, so as the price rises huge sums are transferred from net oil‐consuming places, such as Europe, China, Japan and the US, to the large produces such as Russia, Saudi Arabia and other Gulf states ‐ …because oil‐producing countries trend to spend less of their incomes than oil‐consuming nations, the price rise is almost certain to lead to a drop in global demand. In 1974, 1979 and 2008 sharp oil price rises have come shortly before recessions in leading advanced economies ‐ Central banks are also tempted to fight the higher inflation with oil prices with rises in interest rates
CME cuts costs of futures trading to undermine rival’s new launch – Pg. 15 ‐ CME Group, operator of the largest US futures exchange, has launched a pre‐emptive strike against rival exchange operator NYSE Euronext by slashing the cost of trading its two flagship futures products in an attempt to undermine similar plans by its New York rivals ‐ NYSE Euronext’s futures arm, NYSE Liffe, is only weeks away from launching a challenge to the CME’s near monopoly of trading in interest rate futures, known as Eurodollars and one of the most widely traded derivatives contracts in the world ‐ It has teamed up with the Depository Trust & Clearing Corporation, the New York‐based post‐trade services group, to offer “cross‐margining” – where trading positions across products on the exchange are taken into account when assessing how much margin, or upfront cash, is needed to guarantee against default
Investors start to fret over renewed threat of stagflation – Pg. 24 ‐ Stagflation, the pernicious combination of weak or negative growth with inflation, was last flavor of the day in the 1970s and 1980s ‐ Few investors are willing to say the toxic combination of inflation and weak growth has arrived yet,…
Dollar’s haven status at risk from rising oil – Pg. 25 ‐ A flight to the dollar usually accompanies increased risk aversion ‐ This time, though, while the traditional havens of the Swiss Franc and the yen have benefited, the US currency has suffered ‐ The main reason for the dollar’s underperformance….is concern about the effect of rising oil prices ‐ The fears is that higher oil prices will lead to a transfer of funds from oil‐importing countries to the sovereign wealth funds of oil‐exporting nations ‐ Other factors are denting the dollar’s appeal. Though still considered unlikely prospect, ….action in the Middle East as weighing on the US currency
28 February 2011
3M chief labels Obama ‘anti‐business’ – Pg. 1 ‐ Manufacturers could shift production out of the US to Canada or Mexico as a result,… ‐ The 3M chief also criticized US immigration policy, saying the difficulty of obtaining visas was forcing companies to move research and development overseas
Egyptian military proposes reforms – Pg. 2 ‐ A panel of legal experts appointed by Egypt’s military rules has proposed radical changes to the constitution that would open presidential elections to independent candidates and impose a two‐term limit on future presidents (Prof Note: To all current students, FOLLOW THIS! You are too young to have seen the development of the EU and probably did not pay attention to Iraq, but pay attention NOW! You have an opportunity to see the birth, or rather re‐birth, of a nation. Do not miss out!) ‐ Under the proposals, an independent candidate would need the endorsement of 30 members of parliament or the backing of 30,000 people from 15 of the country’s 29 provinces ‐ Other proposed changes include reducing president terms from six to four years. The electoral process would also be placed under full judicial supervision ‐ The amendments will be put t a referendum this year before presidential and parliamentary elections
US nears short‐term deal on budget – Pg. 4 ‐ Congress has just days to reach agreement on funding before parts of the federal government close ‐ After initially focusing their cutting pledges on the less‐controversial areas of the federal budget, Republicans are starting to discuss cuts to the benefits programmes that many Americans value
EU backs new bonds – Pg. 5 ‐ …plan to use EU funds to back private‐sector bonds for large infrastructure projects, in the hope of kick‐starting more funding for transport and energy programmes that they fear are being crippled by austerity measures ‐ …the document for the first time outlines how EU officials believe EU funds could be used to support new infrastructure projects ‐ …the EU and the European Investment Bank would provide either guarantees that private debt issued for a new project would be repaid, using EU funds if necessary, or a direct loan at a subordinated level, making It more likely that more senior private debt would be repaid ‐ The plan, which the paper calls “Europe 2020 Project Bond Initiative”, is expected to be unveiled today …
A balancing act – Pg. 7 ‐ A commitment to repay debt, even in the face of severe financial problems, is the bedrock of the modern US municipal bond market, a $3,000bn part of the credit markets where states, cities and other public bodies borrow for roads, bridges, schools, hospitals and utilities that their regular tax revenues cannot fund ‐ As lawmakers struggle to plug the latest deficits – most states are constitutionally required to balance budgets annually – investors have started to worry ‐ The $800bn US economic stimulus introduced to stem a slide into another Depression included multifaceted aid for states and local governments both directly and through programmes such as subsidies for cheap debt. This federal support largely runs out this year ‐ Second, many Americans have some of their wealth tied up in muni debt. About two‐thirds of the muni bond market is in the hands of individual investors ‐ Third, any bail‐out could further strain the finances of the federal government, which is already raising eyebrows at home and around the world for its ballooning debt (Prof Note: Enough bail‐outs….how about some bail‐ins!!!) ‐ Compared with cash‐strapped Greece or Ireland, US states’ debt tends to be much lower relative to the size of their economies ‐ ….median state has debt of just 7.3% of gross state product, the equivalent of GDP (Prof Note: For the record, not good enough under the Maastrict Treaty for a state to be part of the EU!) ‐ Unfunded pension liabilities, which are estimated to total between $700bn and $3,000bn, are a looming problem (Prof Note: No kidding!) ‐ Munis are not held to the same stringent disclosure requirements as, say, corporate bonds ‐ Investors used to rely on bond insurance to protect themselves – but that industry collapsed after many insurers also guaranteed risky mortgage debt ‐ …bond payments rank high in the priority of bills that state and local governments pay, much like the payments did 35 years ago in New York city
26 February 2011
London Stock Exchange trading halted by third glitch in four months – Pg. 1 ‐ The London Stock Exchange faces a battle to restore investor confidence after a third technical glitch in four months halted trading on Friday morning ‐ Friday’s problem, which prevented orderly dissemination of market prices,… ‐ The LSE restored trading after midday in the UK ‐ Investors were able to trade on alternative venues, such as Chi‐X Europe and BATS Europe, which have emerged as competitors to the LSE in recent years ‐ But even alternative trading activity was limited because the LSE’s crucial daily auction, which sets a “reference price” used as a basis for later trades, was also disrupted
West weighs military measures – Pg. 2 ‐ Western officials have begun discussing military options to deal with the bloodshed in Libya, amid fears that the popular uprising against Col Muammer Gaddafi could devolve into a protracted civil war ‐ At issue are the establishment of no‐fly zones and other possible steps, such as securing ports, airports and safe areas, as part of a humanitarian effort should the fighting spin further out of control
Saudis lift output to make up for lost oil – Pg. 3 ‐ …raised its output by Friday to at least 9m barrels a day,…compared with 8.6m b/d in January ‐ …loss of supply from Libya, which is believed to total about 1.2m b/d (Prof Note: About the size of the Alaskan pipeline) ‐ As a matter of policy, the kingdom maintains between 1.5m b/d and 2m b/d of idle output capacity at all times, which can be put into production at short notice,… ‐ …adding a single barrel of production capacity still carries a price tag of about $5,000
Wisconsin governor evokes hero Reagan in ‘assault’ on unions – Pg. 3 ‐ He then recalled the moment in 1981 when Mr Reagan fired 11,000 air traffic control operators who the president accused of conducting an illegal strike ‐ “This is out moment”….”Our time to change history” ‐ In this battle, not every union is created equal ‐ …private sector unions as well as police and firefighter unions, who are in the public sector but backed the governor’s candidacy, will be immune from changes ‐ The union membership for public sector workers is 36.2%, compared with just 6.9% of private sector workers who are unionized ‐ …all union membership, which now stands at 11.9% of the total workforce, compared with 20% in 1983, unions are still a powerful force in Washington because they are the single largest donor group for Democrats and have powerful organizing network that Democrats use to get voters to the polls
Oil price spikes set grim precedents – Pg. 15 ‐ The past five global recessions have all followed sharp jumps in the oil price ‐ So far the jump in oil prices is nowhere near as large as seen during previous oil supply shocks. During the first gulf war in 1990‐1991, oil prices jumped 150% in three months. In the 1970s, when oil supply was struck by a series of events, such as the Arab‐Israeli war and the Iranian revolution, prices rose more than 200% in a matter of months ‐ The S&P 500 was down just 2% on the week,…
25 February 2011
Saudis seek to calm oil panic – Pg. 1 ‐ ….fears of an oil‐supply crisis after panic buying sent crude prices to a 2 1/2‐year peak of almost $120 a barrel ‐ The shortfall caused by Libya means the market is seeing its biggest supply disruption since hurricane Katrina destroyed most US production in 2005 ‐ Energy used per dollar of real US gross domestic product has halved since the 1970s, but energy intensity is much higher in emerging economies ‐ Saudi Arabia is considering two options, …the first would be to boost output and send more crude via the east‐west pipeline, linking the country’s largest oilfields in Eastern province with the Red Sea port of Yanbu, for shipment to Europe. Another would be a swap agreement, where West African oil intended for Asian buyers is redirected to Europe, with Saudi Arabia stepping in to supply Asia
Oil price surge puts fragile US recovery at risk – Pg. 3 ‐ This is not the 1970s: a jump in the price of oil is now far less likely to cause economic stagnation and high inflation in advanced economies ‐ The biggest change since the 1970s is that the US can now produce a lot more per barrel of crude and so output is less sensitive to the oil price ‐ That reflects both greater energy efficiency and changes in the make‐up of the economy: it takes less energy to make lattes and financial services than it did to make steel and cars ‐ The other big headache that higher oil prices will cause is in managing inflation. Higher oil prices are likely to cause further sharp rises in overall headline price rises but, if they damp consumer spending, then “core” price rises for other goods and services may weaken at the same time
White House rejects shutdown fear – Pg. 6 ‐ …government shutdown as early as March 4,… ‐ Between April and May , the US will hit its congressionally mandated debt limit of $14,300bn and failure to increase that ceiling could ultimately lead to a US default ‐ Moody’s Investors Service warned that the US may have to take “extreme, perhaps draconian steps” to conserve cash and give priority to debt service payments in the event that a deal fails to materialize
China reveals plan for 45 more airports – Pg. 6 ‐ …increase the number of airports in the country to 220 ‐ This is in spite of the fact that most of the country’s existing airports are losing money ‐ …forecasts that passenger demand will rise 15% this year, as the growing middle class in China becomes more able to travel ‐ One potential boon for the new airports could come from smaller aircraft, after the government announced in November that civilian aircraft could fly in airspace below 4,000m ‐ The decision could prompt a big increase in the use of helicopters and light aircraft ‐ …estimates that purchases of helicopters during the next decade in China will reach 3,300
US warns extreme food prices will stay – Pg. 15 ‐ The world faces a protracted bout of extremely high food prices, the US government has warned, overwhelming farmers’ ability to cool commodity markets by planting millions of additional hectares with crops ‐ …food inflation would surge in the second half of this year as wholesale prices filtered through the supply chain, affecting consumers ‐ …heavily subsidized US ethanol industry’s demand for corn would continue to grow in spite of higher input costs, consuming about 36% of the domestic crop ‐ …the US exports half of the world’s corn and a third of the world’s soyabeans, changes in US acreage and, hence, the potential supply has a global impact, affecting international buyers such as China
US banks brace for interest rate rises – Pg. 17 ‐ The largest US banks are being warned by regulators to prepare for increasing interest rates, which some officials see as a threat to the financial industry’s recovery ‐ Modest inflation and the subdued economic recovery have kept interest rates at close to 0% and few economists expect monetary policy to tighten before the end of the year ‐ But when rates do increase, or if an economic shock pushes interest spreads wider, as in past cycles, banks who borrow on too much of a short‐term basis and lend too long will be caught out ‐ Deposits have climbed 10% since 2008, while loans have declined by 13%, …. ‐ …the securities banks hold as a percentage of total assets peaked at 28% in November
Investors count the cost of opacity in muni bond sector – Pg. 22 ‐ US investors and local governments lose as much as $30bn a year because of poor transparency and liquidity in the $3,000bn US municipal bond market ‐ Muni bonds are mainly bought by private investors because of their tax advantages but they trade over the counter, not on an exchange, and they do not need to be registered with the Securities and Exchange Commission ‐ …market is fragmented into more than 50,000 issuers that issue multiple series of bonds ‐ The result is that the bonds are hard to trade and this lack of liquidity means they yield as much as 1.1% more than they otherwise would, … ‐ …costs twice as much to trade New York municipal debt today as in the 1920s, despite vast improvements in trading technology ‐ Most munis are bought, however, by investors who hold them to maturity, which is a contributing factor to their illiquidity ‐ To get around the problem that Congress cannot force independent local governments to move their bonds to an exchange, the authors propose a new not‐for‐profit utility, called “Common‐Muni”, to advise municipalities. They say that start‐up costs would be $25m
Financial wizardry finds new role in post‐crisis world – Pg. 23 ‐ Sovereigns frequently use derivatives to manage their finances to protect against swings in currencies or interest rates ‐ CDOs were used to enhance the credit worthiness of the underlying loans and raise cheap funding. But, when the mortgage crisis hit, the value of many of these CDOs plummeted ‐ The EFSF is not technically a CDO, some finance specialists stress, but a special purpose vehicle that essentially pools guarantees and loans from stronger euro members to give it a top Triple A credit rating ‐ ..tranching – a feature used in many securitizations to sell bonds of varying risk and therefore increase the amount of debt that can be raised
Fears over CFTC derivatives rule – Pg. 23 ‐ Leading US exchanges are gravely concerned about proposed rules that could hamper the launch of new derivatives products – a key strategy in the current round of exchange mergers ‐ The issue revolves around a rule proposed by the Commodity Futures Trading Commission that 85% of annual trading in a futures contract or swap must occur on an exchange, or what is called a Designated Contract Market ‐ Under the rule, if a contract does not meet the 85% threshold on a DCM, it must migrate to another market venue ‐ This can include SEFs, the new trading platforms for trading over‐the‐counter derivatives under the Dodd‐Frank Act ‐ NYSE Liffe US is set to launch interest‐rate futures in the next month ‐ Some analysts believe that Deutsche Borse will register as a clearing house in the US but that might change if the rules are adopted
24 February 2011
$36bn Saudi bid to beat unrest – Pg. 1 ‐ The measures include a 15% salary rise for public employees to offset inflation, reprieve for imprisoned debtors and financial aid for students and the unemployed ‐ The cash‐rich Saudi government has pledged to spend $400bn by the end of 2014 to improve education, infrastructure and healthcare ‐ …unemployment has remained above 10%.... ‐ Hundreds of people has signed up to a Facebook campaign calling for a “day of rage” across Saudi Arabia on March 11,…
Gaddafi loses grip on Libya’s third city – Pg. 2
Goldman sees danger in US budget cuts – Pg. 4 ‐ The Republican plan to slash government spending by $61bn in 2011 could reduce US economic growth by 1.5‐2.0 percentage points in the second and third quarters of the year,… ‐ Goldman, which is forecasting US gross domestic product growth of 4% in the second and third quarters of 2011, pegged the cost of a government shutdown to the US economy at $8bn in reduced spending per week, based on the experience of the federal closures of 1995 and 1996 ‐ A government shutdown in the world’s largest economy will occur if Congress and the White House do not agree on a budget measure by the end of next week
Brazil warned on consumer credit explosion – Pg. 4 ‐ Brazil’s economy has been riding a consumer credit boom as millions of new middle‐class consumers borrow money at high interest rates to pay for everything from liposuction to cars ‐ The major banks have reported credit growth of more than 20% last year ‐ Although the ratio of loans to gross domestic product is still relatively low in Brazil at 46%, the debt service burden on consumers has reached 24% of disposable income, … ‐ The US consumer “blew up” at 14%....
US distortions – Pg. 12 ‐ One reason monetary policy is staying loose, say, is because banks report scant demand from companies for credit
Overdraft fees boost for banks – Pg. 13 ‐ Federal Reserve regulations that came into effect last July require banks to obtain customer permission before charging overdraft fees on ATM withdrawals and debit card purchases ‐ Banks say high “opt in” rates show customers are willing to pay for services they value. But consumers’ groups argue that aggressive bank marketing practices are the real reason so many account holders continue to pay overdraft fees when they can opt out ‐ A 2008 Federal Deposit Insurance Corporation study found that a $20 fee for a two‐week overdraft would be equivalent to an annualized interest rate of 3,520%
Banks face sharp fall in mortgage revenues – Pg. 14 ‐ US banks are facing a multibillion‐dollar decline in mortgage underwriting revenue, as higher interest rates put a damper on last year’s refinancing boom, …. ‐ Refinancing activity has since fallen off sharply, as mortgage rates, which tend to trade in tandem with the yield on the 10‐year Treasury note, have edged higher ‐ The cost of a 30‐year fixed‐rate mortgage climbed above the important 5% level earlier this month, making refinancing uneconomical for many borrowers
23 February 2011
Apple vote to test waters on investors’ rights to elect directors – Pg. 1 ‐ Shareholders pushing for changes to the way US company directors are elected look set to gain significant support at a test case vote on the issue at Apple’s annual meeting today ‐ …CALPERs has put a proposal to the meeting seeking to introduce majority voting on the election of directors ‐ With almost 60% of the votes cast so far, 74% have voted in favour of changing the company’s voting system,…
Battle of Madison tests US stomach for longer struggle – Pg. 4 ‐ The unions have opted for Egypt as their chosen analogy ‐ The protesters have drawn comparisons between themselves and the pro‐democracy demonstrators who forced Hosni Mubarak from power, equating Wisconsin’s State Capitol square with Cairo’s Tahrir Square (Prof Note: Clearly the unions have never been to Cairo!) ‐ Their mainly Republican opponents have preferred Greece ‐ Should Mr Walker get his way, governors in other states such as Indiana, Ohio and Iowa seem likely to move to curb union bargaining power ‐ ….the issue could come to a head on Friday. If the state has not restructured its debt by then, it will face $165m of additional expenses, which Republicans say will force Wisconsin to sack 1,500 state workers
Geithner backs UK on cutting deficit – Pg. 6 ‐ …voiced support for the UK’s deficit reduction strategy, saying he was “very impressed” with plans to cut spending rapidly and raise taxes (Prof Note: How about some criticism for the US and its deficit increase?!)
US residential property – Pg. 12 ‐ Last quarter, the US residential vacancy rate declined to 9.4%, an almost 1% drop compared with the third quarter and the steepest quarterly fall since 1966 ‐ This new‐found demand means rents could grow at more than 2% this year,… ‐ Rental yields – at about 5% ‐ are about the same as mortgage rates. That means a tenant’s rent covers the interest bill and the owner pockets any capital appreciation ‐ But although yields have risen strongly, they have merely returned to their 50‐year average after being decimated during the housing bubble ‐ For yields to push higher, either house prices need to fall or demand for rental properties needs to rise
Japan’s debt pile gives investors growing concern – Pg. 23 ‐ Moody’s on Tuesday warned that it might follow suit [S&P downgrade], both agencies citing long‐term fiscal unsustainability of its growing debt pile ‐ Domestic investors, which make up 95% of the Japanese government bond market, are watching developments closely ‐ …Japan’s gross debt is set to grow to more than twice the size of the economy this year ‐ …new bond issuance is set to exceed tax revenues for the third year running in the fiscal year 2011 ‐ The most important investors last year were commercial banks, as corporate savings have made up for a slowdown in household savings rates
22 February 2011
Shutdown fears raise hopes for US budget – Pg. 2 ‐ The tense budget standoff in Washington could open the door to a compromise between Republicans in the Senate and the White House that would allow both parties to avert a potentially disastrous shutdown of the government ‐ The Congress has until March 4 to pass what is known as a continuing resolution, or legislation to fund the government.
China challenges US on investment – Pg. 2 ‐ Beijing has charged Washington with blocking Chinese investment in US companies ….
Workers call the tune in China – Pg. 3 ‐ Labour shortages in manufacturing have been dominating headlines in China, but some employers are proving more able to hire staff than others ‐ While smaller factories struggle with a tightening in the labour market, larger companies offering better wages and benefits – those that are more likely to have HR managers – are able to recruit all the staff they need ‐ Across the country, local governments have been raising the minimum wage
Bahrain’s credit rating is hit after protests – Pg. 4 ‐ Standard & Poor’s has downgraded the credit rating of Bahrain, the tiny Gulf kingdom and warned that the demonstrations of the past month were likely to continue ‐ Bahrain is one of the poorer countries in the oil‐rich Gulf…
Eurozone price rises sound alarms at ECB – Pg. 10 ‐ Eurozone output price inflation has seen the biggest jump in almost a decade as record manufacturing growth and soaring business confidence in Germany power an economic rebound across the region,… ‐ The pick‐up showed businesses taking increasing advantage of robust economic growth to pass higher fuel and raw material costs on to customers ‐ The eurozone last year took economists aback with the pace at which it recovered from 2000’s global economic downturn – in spite of the debt crisis which hit eurozone “peripheral” countries such as Greece, Ireland and Portfugal ‐ Eurozone GDP could expand 0.7 in the first three months of 2011, ….
Transparently opaque – Pg. 12 ‐ Healthcare spending has been gorwing faster than the economy as a whole for decades. On recent trends, it will rise from one‐sixth of GDP in 2009 to nearly one‐third by 2035 and almost half by 2080, … ‐ In spite of this, the US is in general no healthier than other countries. The 17.3% of GDP that it spends on healthcare compares with 10.4% in Canada and 8.7% in the UK, but average life expectancy at birth is lower than in either of those countries ‐ Given the size of public spending on healthcare for the elderly and poor – almost half the total outlay ‐ … ‐ To tackle inefficiencies in private insurance, which covers healthcare for most citizens – about 150m – the act establishes state health insurance exchanges.
Wisconsin walkout – Pg. 18 ‐ …Republicans to point to Labour Department statistics that show benefits for unionized state and city public sector employees have increased 20% more than for private sector workers since 2001
Covered bonds make running in poor securitization market – Pg. 28 ‐ Covered bonds may be attracting investor interest at the expense of their crisis‐tarnished securitization cousins,…. ‐ The markets for securitization – bonds backed by pools of loans such as mortgages – have still to recover from the financial crisis where they became synonymous with the “toxic” subprime loans that first triggered market turmoil in 2007 ‐ Covered bonds – an ultrasafe form of securitization that remains on a bank’s books – have however roared back, with banks selling record amounts of them so far this year ‐ Securitization was an important source of bank funding before the crisis, where it accounted for nearly three‐tenths of all European bank bond issuance. A further 23% consisted of covered bonds, … ‐ Last year, securitization was worth only 8%, against 32% for covered bonds ‐ Since the crisis began, the majority of securitizations have been placed directly with central banks as collateral for loans rather than sold in the market ‐ Basel rules on bank capital, which demand that higher capital be held against securitizations. Liquidity rules too, favour covered bonds over securitizations
21 February 2011
Brussels considers ‘English‐only’ exams to boost British officials – Pg. 1 ‐ Monoglot Britons may be allowed to take a special “English‐only”entrance exam to work in Brussels in an effort to boost the dwindling number of British officials at European Union institutions ‐ Normally, candidates have to take the exam in a foreign tongue and also demonstrate working knowledge of a third European language ‐ This requirement has proved too much for Britons, who comprise less than 1.5% of graduate applications for EU jobs last year. While Britain accounts for more than 12% of the Union’s population, only 5% of Eurocrats hold British passports
Inflation threatens global lifestyle hopes – Pg. 4 ‐ Europeans and Americans believe inflation will have a big influence on their lifestyles in the next six months, … ‐ Inflation threats have created a dilemma for policymakers who are anxious not to damp growth unnecessarily ‐ Eurozone inflation reached 2.4% in January and is likely to have risen again this month. UK inflation has reached 4%, heightening speculation that the Bank of England might increase rates sooner than previously expected
Second Iceland referendum over Icesave repayment deal – Pg. 4 ‐ Iceland’s president has again blocked a deal for the country to repay Britain and the Netherlands $5.4bn lost in the failed Icesave bank, triggering another referendum a year after a previous agreement was overwhelmingly rejected by Icelandic voters ‐ The decision added another twist to a saga that has cast a shadow over Iceland’s economic recovery efforts and thrown its bid to join the European Union into doubt ‐ The deal involves money lost by British and Dutch depositors who held accounts with Icesave, the online arm of Landsbanki, which collapsed along with the rest of the Icelandic financial sector in 2008. Those customers have already been reimbursed from their domestic deposit insurance schemes, leaving the UK and Dutch treasuries out of pocket ‐ London and The Hague have threatened to hold up Reykjavik’s EU application until the money is repaid ‐ Efforts by the Icelandic government to settle the debt have been repeatedly thwarted by public anger over taxpayers being asked to pay for the mistakes of bankers and regulators
Parties seek to end the deadlock on funding – Pg. 5 ‐ Senators from both leading parties expressed hope on Sunday that a budget deal could be reached by early March, but any details were lacking and fears remained that the US could face a 1990s‐style shutdown of the federal government (Prof Note: Ok…this 90s style shut down was government workers laughing their collective a$$es off enjoying additional vacations days and eventually getting paid) Obama accused of stoking ‘Greece‐like’ protests – Pg. 5 ‐ The issue has made Wisconsin a lightening rod for progressives and conservatives, transforming the state’s normally sleepy capital into a national ideological battleground ‐ Wisconsin is far from the first state to attempt to limit collective‐bargaining rights, but the national attention has turned Mr Walker’s plan into a test case with far‐reaching implications ‐ Mr Walker’s bill would severely curtail collective‐bargaining rights and cut benefits for most public employees, in an attempt to tackle a $137m budget shortfall and a state deficit that is protected to hit $3.6bn within two years ‐ The bill passed the state legislature’s budget committee last Wednesday. But Democratic legislators fled the state to prevent it going to the fllor of the state Senate by denying the chamber a quorum. Republicans hold a 19‐14 majority in the legislature, but they need at least one Democrate present before taking a vote on the bill (Prof Note: This is Bull*$&T! Is this not called “job abandonment”?! In the F’in private sector they would all be FIRED!!! Way to show our children responsibility…run from your problems…real mature Wisconsin Dems!) ‐ Wisconsin’s constitution allows absent members to be compelled to appear
The debt net – Pg. 7 ‐ To date, bondholders have been largely shielded from the fallout of the eurozone crisis. Bonds – a form of debt – rank higher than equity, meaning that when business turns sour bondholders have a stronger claim to getting their money back than shareholders ‐ That is a state of affaris policymakers in Europe and the US are keep to change. In future, bond investors would lose part of their investment to, in regulatory parlance, “bail in” an ailing institution before taxpayers are called upon to bail it out (Prof Note: Will the bondholders not simply price this risk into their investment? Will bank borrowing costs not simply go up? Will the cost still be born by taxpayers? Am I missing something???) ‐ The US has already put in place bail‐in‐like powers as part of the Dodd‐Frank financial reform act passed last year ‐ Furthermore, senior bank bonds are typically held not by hedge funds but by pension funds, insurers and other asset managers – the plodding pedestrians of the investment universe – attracted by the apparent safety and reliability of bank bonds. If that safety goes, there is a knock‐on risk that the ultimate cost will be borne by those behind the insurers and pension funds; the general public (Prof Note: Duhhhhhh…see above) ‐ Banks in particular need a special regime because they crumble so quickly ‐ As such, a bail‐in is akin to an outpatient facility or an emergency room in a hospital – the patient is rushed in, patched up and sent out of the door again, albeit with life‐altering injuries. Insolvency regimes, by contrast, have more in common with a long period of rehabilitation for a serious illness
Moody’s forecasts ‘distress’ for US municipal bond markets – Pg. 15 ‐ Moody’s expectes defaults and distress in the $3,000bn US municipal bond markets but does not anticipate a broad “crisis of confidence”, ….
Bloomberg extends Islamic service with new platform – Pg. 17 ‐ Bloombert will today launch an Islamic finance platform, sharpening the expansionist financial information company’s emerging markets strategy and providing a vote of confidence for a sharia‐compliant market that has seen growth slow ‐ Citing figures from the 2010 Global Islamic Finance Report and a forecast from the Malaysian central bank, he said the market was expected to expand from $1,300bn in 2009 to $2,000bn in three to five years
19 February 2011
Big G20 nations split over ways to tackle global economic imbalances – Pg. 1 ‐ China, however, signaled its opposition to the monitoring plan ‐ The decision to adopt guidelines to help global rebalancing was adopted at the G20 summit in Seoul in November, and is intended to form a central part of this year’s meetings ‐ In Seoul, the US failed to secrete precise targets for current account surpluses, with a proposed limit of 4% of gross domestic product ‐ While Germany supports using the suggested economic indicators for monitoring purposes, like China it opposes any numerical targets
US in deadlock over budget – Pg. 3 ‐ The risk of the US government shutdown is rising (Prof Note: What a *$&($& joke! I remember the last one, all the government workers laughing their collective a$$es off knowing full well the “vacation” would be paid. Disgusting!!! How much is this going to cost the taxpayers?!) ‐ The latest resolution expires on March 4, giving a political system already bitterly divided over the issue of public spending little time to forget a fresh deal to keep non‐essential government services open ‐ Family planning programmes such as Planned Parenthood, an abortion provider, would be cut by $318m (Prof Note: hmmmmmmm….will this add to the welfare roles?) ‐ The Special Inspector General for Tarp, the financial bail‐out programme, would also receive a $13m increase,…) ‐ The most likely outcome is another temporary resolution funding the government for as little as a few weeks or a month but this is by no means certain
Office rents in Rio are America’s dearest – Pg. 3 ‐ Prime office space in Rio de Janeiro has overtaken New York for the first time as the most expensive in the Americas on the back of Brazil’s growing economy and its strong currency,… ‐ Rio ranked fourth in the world for prime office rentals after Hong Kong with $241/sf, Londo’s West End with $233/sf and Tokyo with $166/sf ‐ The rising demand for offices in Rio compared with New York stems from the sharp differences in economic growth between Brazil and the US (Prof Note: Never been to Brazil due to the Visa requirement) ‐ Rio’s importance is increasing as an oil hub following the discovery in recent years by Petraobras,…
A squeezed muddle – Pg. 8 ‐ The days when British workers could expect apy rises averaging 1.5 to 2% above inflation ended with the recession of 2008‐09, as they did at least a decade ago in economies such as the US and Germany under the onslaught of competition from emerging markets. They may never return ‐ Today, UK inflation as measured by the consumer prices index is running at 4% on a year ago, compared with an average pay rise in the last year of 2.3% ‐ …Bank of England fears that today’s inflation problem for household incomes will not disappear in the medium term ‐ The Bank’s failure to forecast these trends has undermined the credibility of its utterances – and it accepted this week that this will lead to somewhat higher inflation expectations in the medium term ‐ Trade union militancy has almost disappeared from the private sector, where unions now represent just 15.1% of workers, compared with 56.6% in the public sector
Spain sets new bank capital rules – Pg. 9 ‐ Spain has approved a law obliging its banks to reinforce their capital by September or face partial nationalization but has granted unlisted cajas or savings banks until March next year to organize stock market flotations ‐ Bank Strength – Average core tier one capital ratio, 2011 o Switzerland – 15.7% o Nordics – 12.0% o UK – 10.9% o France – 9.6% o Benelux – 8.5% o Italy – 8.4% o Spain – 8.1% o Germany – 8.1% o Austria – 4.1%
On a roll: the bulls have taken over – Pg. 15 ‐ On March 14 1935 the S&P 500 bottomed out at 8.06. Just under 350 trading days later the US share index had doubled ‐ It took just over 500 trading days to rebound from its intraday March 2009 low ‐ The best‐case scenario, following the path of the 1990 bull market, would see the S&P 500 more than double from its current 1,340 to 2,800. His “worst case”, mirroring the rally of 1974, would end at 1,750, with a small correction due over the next few months
18 February 2011
Madoff fraud clean‐up set to amass fees of more than $1.3bn – Pg. 1 ‐ Baker Hostetler has been paid $128m since being appointed in December 2008 and will receive an estimated $603m for its work between 2011 and 2014,… ‐ The trustee has received $3.2m and stands to make further $12.5m in the next three years,… ‐ Mr Picard has recovered about $7.6bn for Mr Madoff’s victims after filing more than 1,000 lawsuits against defendants ranging from JPMorgan Chase to the owners of the New York Mets baseball team
Fed plan to cap card fees contested – Pg. 4 ‐ A proposed rule from the Fed would limit the fees charged to retailers to 12 cents a transaction, a move cheered by the likes of Walmart but fiercely opposed by banks and card companies
Inflation rate signals likely QE2 freeze – Pg. 4 ‐ Core consumer price inflation in the US seems to have broken the downward trend that led the Federal Reserve to launch a new $600bn round of asset purchases last November, with a 1% year‐on‐year rise in January ‐ Princes for airline fares and rents climbed but prices for cars and medical care declined
A market to capture – Pg. 7 ‐ At 37% of the total, the combined group’s biggest source of revenue will be trading in derivatives and clearing ‐ Second to clearing and derivatives trading come equities trading and listings, at 29% of the new group’s source of revenue ‐ Regulations such as the European Commission’s Markets in Financial Instruments Directive (Mifid), enacted in 2007, prompted the emergence of upstart competitors to Europe’s former national exchanges ‐ Exchanges are also lobbying regulators to scrutinize off‐exchange trading. ‐ Yet the exchanges believe the most effective weapon in their fightback is a combination of consolidation and a drive into derivatives and clearing ‐ The control of both the trading of derivatives and the clearing of them – a combination known as a “vertical silo” – gives exchange operators the power to lock out competitors and keep lucrative contracts and revenue in‐house. This is how the CME Group, the worl’d largest futures exchange, has built its 98% market share by trading volume in the US interest rate futures contracts ‐ Another powerful tool is ownership of a stock market index ‐ Ownership of clearing houses puts a combined Deutsche Borse‐NYSE Euronext in pole position to capitalize on any OTC clearing opportunities, although industry participants remain unclear exactly how big the benefits will prove ‐ Others jostling for the business are the CME Group which owns not only the Chicago Mercantile Excahnge but also a vast clearing house; LCH.Clearnet, a UK‐based clearing house; and IntercontinentalExchange, a US exchange and OTC trading and clearing business that, like its rival CME, has a clearing house in London too ‐ America’s Dodd‐Frank requires clearing houses to accept for clearing OTC derivatives from any platform
17 February 2011
Cost of 2012 election on course for $2bn – Pg. 1 ‐ Barack Obama and his Republican opponent, John McCain, together spent just over $1bn while campaigning in 2008, but that record is expected to be easily surpassed next year ‐ Spending has been pushed up by a 2010 Supreme Court decision relaxing restrictions on corporate funding of political broadcasts and by a rise in money raised by groups outside the main parties
US homeowners’ racial gap widens – Pg. 4 ‐ US home ownership fell from a peak rate of more than 69% in 2004 to 66.5% in the last quarter of 2010, its lowest level for 12 years (Prof Immature Note: I told you so ! mean reversion!!!) ‐ For all Americans, the idea that the government would drive the rate of home ownership has evaporated with the White House plan for housing finance, which winds down the government‐sponsored mortgage guarantors and emphasizes the role of renting. It is a stark change ‐ After a devastating housing crash, the administration has signaled a retreat, pledging to do more to support access to rented housing but reduce the government’s role in the mortgage market ‐ …the millions of Americans that are in negative equity or have lost their homes have helped to change the orthodoxy of home ownership ‐ Advocates of using government policy to improve access to housing are now focused on rental
Fed lifts economic growth forecast for 2011 – Pg. 4 ‐ …some suggesting that signs of a strengthening economy could mean the central bank should scale back its programme to buy $600bn in Treasury securities ‐ …Fed upgraded its growth forecast to 3.4‐3.9% from its previous range of 3‐3.6%, pointing to stronger consumer spending, business investment and exports ‐ The central bank said that measures of underlying inflation remained “subdued” and that longer‐run inflation expectations were “stable” in spite of rising commodity prices ‐ …an important measure of US inflation recorded its fastest rise in more than two years in January,…
In pharaoh’s economy – Pg. 12 ‐ Egypt has a population of 83m, and its nominal gross domestic product was about $220bn in 2010,… ‐ Ireland has a population of 4.5m, yet its 2010 GDP – even in recession – was bout $210bn; Egypt’s per capital GDP is lower (slightly) than Iraq’s ‐ The Egyptian economy has in fact been growing quite fast – at about 7.5% a year between 2006 and 2008,…. ‐ A democratic replacement should set three guiding principles: to promote private enterprise (Cairo’s stock market value is only $14.5bn,) to invest in physical infrastructure (Prof Note: Street lights in Cairo), and clamp down on corruption and tax evasion ‐ Egypt has advantages. Inflation is falling (it is 11%) and its debt/GDP ratio is only 15%
Borders files for bankruptcy protection – Pg. 14 ‐ Borders, the US bookstore chain, has proposed closing almost a third of its 640 stores after being forced to seek court protection from its creditors after years of declining sales
Banks in plea over card fees cap – Pg. 17 ‐ The US financial sector will today urge Congress to delay the implementation of new ruels that cap debit card fees which could cost banks and card processors billions of dollars
Investors in rush to hedge against inflation threat – Pg. 25 ‐ This week, consumer prices jumped to 4% in the UK, double the targeted inflation rate. ‐ Since August, investors have been switching into inflation‐linked debt in the US, UK and France, where the bonds are most established ‐ In the US, the world’s biggest market for these securities, overall issuance this year will rise to more than $100bn, a record. ‐ The shift in inflation expectations can be seen in the yield differential, known as the break‐ even rates, between linkers and similar maturing conventional debt.
Downgrades loom for US states after Fitch rethinks pension bills – Pg. 25 ‐ Cash‐strapped US states and cities face the prospect of downgrades after Fitch Ratings changed the way it analyzes their burgeoning pension bills ‐ In Miami, Florida, a quarter of the city’s operating budget pays for pensions. Among states, Illinois stands out for setting aside 12% of its budget for its chronically under‐funded pension
16 February 2011
D Borse and NYSE set out deal terms – Pg. 1 ‐ …signaling ambitions to reach into fast‐growing Asia ‐ The combined group would have revenues of $5.4bn and pro forma 2010 earnings before interest, depreciation and amortization of $2.7bn. It would have four times the revenues of the London Stock Exchange ‐ The group would be 60% owned by Deutshe Borse shareholders and 40% by NYSE Euronext investors
China’s rising wage bill poses risk of relocation – Pg. 3 ‐ Shanghai is not alone in moving early to head off unrest this year. Beijing’s municipal government raised minimum wages by 21% in January, and the southern providnce of Guangdong is also considered a rise ‐ At about $400/month, Chinese workers are now three times more expensive than their Indonesian counterparts, and five times as costly as in Vietnam, although they remain considerably cheaper than in Taiwan and Malaysia ‐ …minimum wage rise of 30% would cut margins by just 1‐5% for companies with large Chinese manufacturing base ‐ There is little talk, however, of shifting more complex manufacturing such as silicon chips and flat panel screens, for which labour makes up as little as 2‐3% of total cost
Protestors turn on the charm to lure tourists – Pg. 4 ‐ 5m Egyptians indirectly dependent on tourism ‐ 1.8m Jobs provided directly by tourism ‐ 1.2m Number of tourists who fled during the protests ‐ $3.7bn Tourism revenues in the third quarter of 2010 ‐ 40% of the population lives in poverty and unemployment is rampant, …
Fed’s forecasts for growth and inflation look set to creep up – Pg. 5 ‐ The US Federal Reserve is set to nudge its economic forecasts higher when it releases an update on Wednesday… ‐ The Fed refused a Freedom of Information Act request for its detailed guidelines on making economic projections ‐ …the forecasts do not give a clear signal of how the FOMC expects to change policy in the future
Elusive information – Pg. 7 ‐ $582,655bn Notional value of outstanding over‐the‐counter derivatives contracts ‐ …building blocks of so‐called “reference data” are not standard
JPMorgan apology on military foreclosure – Pg. 17 ‐ Under US rules, banks cannot foreclose on homes of soldiers who took out a loan before going on active duty and cannot charge more than 6% for home loans for up to a year after they have left active service
China and Russia sell US Treasuries – Pg. 20 ‐ The selling of US Treasuries by China and Russia during December was countered by strong buying out of the UK,… ‐ China remained the largest foreign holder of Treasuries at $892bn in December, down from $896bn the prior month
15 February 2011
Obama demands tax reform – Pg. 1 ‐ …overhaul on the US corporate tax code but failed to put forth his own plan for reform, as he laid out a $3,730bn budget request designed to bolster the global standing of the US economy ‐ The budget proposal said the US should aim to eliminate special tax breaks and loopholes and use the savings to lower the corporate tax rate from its current level of 35% (Prof Note: 35% is low (if not the lowest) for the industrialized nations…already) ‐ There was no hint of the US moving towards a system of territorial taxation that exempts international earnings – a priority for many large business groups ‐ It proposes cutting deficits by $1,100bn over the next decade, achieving a temporarily sustainable debt‐to‐gross domestic product ratio of 3.2% by 2015 ‐ Eventually, however, America’s fiscal outlook would start deteriorating again because of the costs of Social Security, Medicare and Medicaid, which were not tackled in any significant way in the budget
SEC sees munis as a growing risk for investors – Pg. 1 ‐ The $3,000bn municipal bond market where states and local governments raise money… ‐ In recent months, investors have withdrawn $25bn from mutual funds that buy “munis”, …. ‐ Two‐thirds of investors in the market are individuals who benefit from tax breaks on muni debt
Tough times for Obama strategy – Pg. 4 ‐ The deficit would peak at 10.9% of output in 2011 and then drop to 7% in 2012 and 4.6% in 2013. By 2014 the budget would be broadly back to primary balance with debt stable at about 75% of gross domestic product ‐ The long‐term issues that will cause the deficit to rise again in 2020, such as the rising cost of healthcare and social security, are not addressed in detail at all ‐ About $321bn of deficit reduction over the next decade is supposed to come from a 30% cut to the deductions that higher earners are allowed to make from their income tax bills. That includes popular tax breaks such as deductions for mortgage interest payments
SEC seeks to shine light on shadowy local bonds market – Pg. 4 ‐ Disclosure has been lacking even as the market in which states, cities and public bodies raise money has grown to a respectable $3,000bn over the years ‐ Regulation of munis is complex and unique. Municipalities are not required to register their securities with the SEC and therefore are not subject to the same disclosure requirements as corporate bonds ‐ The SEC can file charges against municipalities if they are alleged to have committed fraud, but otherwise is limited by law in its oversight to the brokers, advisers and other registered financial actors party to the transaction ‐ Prior to the US financial regulation law, independent advisers to municipal issuers were not regulated at all ‐ Last year the SEC amended its rules to require that notification within 10 days versus the previous “timely” standard ‐ The muni bond market is made up of more than 50,000 issuers, including small towns, hospitals and school districts who sell bonds only infrequently
Japan welcomes China’s rise to become second biggest economy – Pg. 5 ‐ Japan has basked in the status of world economic number two, after the US, for more than four decades ‐ …Japan’s economy expanded 3.9% in 2010 – its fastest pace in two decades but far behind the 10.3% growth recorded by China ‐ Officials said Japan’s nominal gross domestic product was worth $5,474bn in 2010 compared with China’s $5,870bn ‐ In purchasing power parity terms – often a more telling measure of economic weight – China has been the world’s second largest economy for years ‐ Faltering demand from the US hurt Japanese exports, a vital driver of growth, which were down 0.7% in the fourth quarter after the yen rose to 15‐year nominal highs against the dollar
Ignorant economists – Pg. 12 ‐ There is less faith in financial markets and more attention to monetary factors ‐ The greatest challenge for all economists is to understand the dynamics of the financial‐ economic nexus ‐ Macroeconomists predict growth and unemployment rates with models that do not include financial variables. Prevailing financial models underestimated the chance of extreme events (Prof Note: This is exactly why when I am referenced as an economist I always qualify that I consider myself more of a capital markets person! (Prof Note: No offense Elliott…I consider you more of a capital markets guy than economist despite what your Ph.D. may say!)
Valentines 2011
China in talks over Panama Canal rival – Pg. 1 ‐ China is in talks to build an alternative to the Panama Canal that would link Columbia’s Atlantic and Pacific coasts by rail – a move that Bogota hopes will spur Washington to push for congressional approval of a US‐Colombia free‐trade pact ‐ The mooted rail link is the latest example of China’s increasingly aggressive lending to the developing world, as evidenced by Chinese banks having lent more to developing countries over the past two years than the World Bank ‐ The country [Columbia] is the US’s closest ally in South America, but Bogota is frustrated by Washington’s stalling over a free‐trade agreement signed by both governments four years ago but yet to be ratified by Congress ‐ Columbia is the world’s fifth‐largest coal producer, but most is exported via Atlantic ports even as demand surges across the Pacific.
Parliament dissolved as Egypt’s army promises polls in 6 months – Pg. 1
Middle East buffeted by shockwaves – Pg. 2 ‐ …emboldening opposition movements in Algeria, Iran and Yemen and prompting Palestinian leaders to commit to long‐delayed elections
Focus turns to land deal fortunes – Pg. 3 ‐ Billions of dollars in Egyptian land deals over the past 20 years are coming under scrutiny by Egypt’s revolutionaries, amid a worldwide hunt for assets stashed away by Hosni Mubarak, former president ‐ A real estate boom that built satellite cities around Cairo and developed the Red Sea coast created vast fortunes for politically connected businessmen, many of whom allegedly received very generous terms for land that was allocated without competitive tenders ‐ Now many of these deals are likely to be re‐examined by whatever political leadership takes Mr Mubarak’s place ‐ Switzerland’s government has ordered its banks to freeze assets of the Mubarak family, while the UK’s Serious Fraud Office is looking into allegations that profits of corruption may have been stashed in London banks ‐ Many of the biggest land deals in the country were made as direct allocations by the government without competitive tenders, and for low prices
Obama to propose $1,100bn cuts plan – Pg. 4 ‐ …two‐thirds of the deficit reduction would come from lower levels of government spending, including a five‐year freeze on discretionary programmes unrelated to national security and defence that would save $400bn through to 2021 ‐ The rest of the savings would come from tax increases, including a proposal already floated by Mr Obama to limit the ability of wealthy Americans to deduct items such as mortgage interest and charitable donations from their taxes ‐ A framework for corporate tax reform that would lower rates for US businesses while eliminating some of their tax break is also expected to be part of today’s proposals
Evolution of an uprising – Pg. 6 ‐ In 18 days of protest, the Arab world’s most populous nation has overturned perceptions of a passive region mired in autocracy
China’s US mortgages – Pg. 14 ‐ …half a trillion dollars of capital they have at risk in mortgage‐backed securities is not to help those spending it “build wealth and achieve the American dream”… ‐ The alarming recommendation last week of a prominent Chinese economist for China to dump its agency paper before Congress removes implicit guarantees shows the level of misunderstanding ‐ Today’s model of offering tax‐deductible, fixed‐rate loans that can be refinanced at will and subsidizing them with a federal guarantee is simply too generous,… ‐ Agency guarantees slash about 65bps off typical mortgages and quantitative easing at least another 30. A typical US home would cost $41,000 more with a 20% down payment otherwise. Eliminating tax‐deductible mortgage interest would add another $60,000 ‐ Brining private sector discipline to mortgage finance is the only way to cap the US government’s housing liabilities and ensure that existing guarantees are honoured. Though it may be a painful transition, such a transformation is not only in America’s best interest but also China’s
Call for NYSE to be lead name – Pg. 15 ‐ …any other option could create obstacles for the deal ‐ Deutsche Borse shareholders are set to own up to 60% of a new Netherlands‐based holding company, under which various Borse and NYSE Euronext businesses, including the New York exchange, would sit ‐ …the London‐based derivatives exchange known as Liffe is to remain largely intact in the UK’s financial centre as part of the planned merger,… ‐ Frankfurt, already the home of the Borse’s Eurex derivatives arm, is set to be the leading location in Europe for the combined group‐s derivatives. That will involve bringing together the euribor short‐term interest rate futures contracts that are Liffe’s flagship product with the longer‐term German government bond futures on Eurex
Inflation fears lead investors to bet on rate rises – Pg. 15 ‐ Financial markets are betting that the UK will be the first to raise rates in June, followed by the European Central Bank in September and finally the US Federal Reserve in December ‐ Rising food and commodity prices have prompted markets to bring forward expectations of rate rises, sparking the jump in volumes as inflation has become one of the biggest concerns for businesses, consumers and investors ‐ ...most strategists say the markets are more accurate today than they were in the past, as the contracts – known as overnight index swaps in the UK and eurozone and Fed funds futures in the US – used to make the predictions are more widely traded with hundreds of banks and investment funds making bets
12 February 2011
US government let go of home loans market – Pg. 4 ‐ TheObama administration announced a government retreat from the housing market, potentially pushing up the cost of mortgages and ending the decades‐old push for even greater home ownership ‐ Proposals in a white paper released on Friday would wind down Fannie Mae and Freddie Mac, the “government‐sponsored enterprises” that have received billions of dollars of taxpayer money to prevent their failure. With other government programs they now support more than 90% of the mortgage market ‐ In the first option, the government’s role would be limited to the Federal Housing Administration, which provides access to mortgage credit for poorer borrowers (Prof Note: Perhaps rent subsidies rather than home ownership for poorer borrowers?! We need to get back to home ownership being an accomplishment rather than an entitlement!) ‐ In the second, the government would also maintain a guarantee over mortgages, but prices to the banks at a higher level so it would only be competitive in the absence of a functioning market ‐ In the third, the government would be a last‐ditch insurer of the market, paying out to holders of mortgage securities only in “catastrophic” downturn in which private insurers were wiped out ‐ …this year the GSEs should start to pull back from the mortgage market by reducing the limit on the size of loans that they back and increasing further the guarantee fee that they charge mortgage providers ‐ The much‐vaunted 30‐year fixed mortgage, unusual compared with other countries, is also under threat from the proposal (Prof Note: GOOD! Let us get back to 50% LtV and 15‐year notes!)
D Borse and NYSE Euronext near tie‐up – Pg. 10 ‐ …could conclude talks as soon as Tuesday to create the largest exchange group by revenues.. ‐ The combined group could be known at DNNYSE Group, … ‐ The company, in which Deutsche Borse investors will hold a stake of about 60%, is the biggest consolidation proposal to have hit the global exchanges sector this week… ‐ The mergers raise questions over which financial centres stand to gain and lose as the new groups decide where to base, and invest in, trading platforms and clearing houses, …
Equities touch highs despite inflation fears – Pg. 14 ‐ Inflation, interest rates and geopolitics provided the key market drivers this week as investors navigated a further tightening move by China and the resignation of Egypt’s president, as well as a re‐emergence of eurozone debt fears ‐ US Treasury bond yields spiked to their highest levels since April, helping to lift the dollar ‐ …. ‐ Underpinning the shift away from EM assets has been the fear that mounting inflation pressures in many economies, particularly from food prices, will force central banks to raise interest rates – putting growth at risk ‐ China this week increased its benchmark rates by 25bps, the third such move since October ‐ The expected improvement in US growth helped prompt a steepening of the Treasury yield curve, although analysts also noted increasing inflation and issuance concerns ‐ Meanwhile, eurozone debt concerns returned to the agenda as the yields on Portugal’s 10‐ year government bond touched a euro‐era high, prompting the European Central Bank to intervene in the markets ‐ …Bank of England, as expected, left UK interest rates on hold
De Beers – Pg. 16 ‐ Buyers in China, Hong Kong and India last year accounted for about a fifth of the world demand, half that of their US counterparts. Asian markets, together with the Gulf region, will overtake the US by 2015
11 February 2011
Bernanke ally Warsh steps down as Federal Reserve governor – Pg. 1 ‐ Mr Warsh’s departure may change the balance of the FOMC in favour of keeping monetary policy looser for longer but it will also deprive Mr Bernanke of a trusted adviser ‐ There will not be two empty seats on the Fed’s board in Washington
US jobless claims hit two‐year low – Pg. 2 ‐ New claims for jobless benefits in the US fell to the lowest level in more than two years last week in a sign that the stricken labour market is strengthening
Obama faces budget balancing act – Pg. 6 ‐ …budget deficit, which is expected to hit a record of $1,480bn in the current fiscal year,…. ‐ Economically, there are mounting fears that the US could face a damaging debt crisis if it does not move to curb its deficit, but also concerns that it should not move too quickly towards fiscal restraint which could damp the global recovery
Report likely to fuel debate on Fannie and Freddie’s future – Pg. 6 ‐ Late on Wednesday, Freddie Mac said its chief financial officer would resign immediately for “personal reasons” ‐ Ever since home ownership bottomed at 40% during the Great Depression, public policy has rallied around the idea of making it more affordable to buy homes ‐ …since the 1930s, single‐family housing has received more government help than any other sector of the economy ‐ By the height of the housing bubble, nearly 70% of Americans owned a home. The figure is now about 66% ‐ While allowing the mortgage market to reduce its dependence on government, all of the above moves would raise borrowing costs and thereby face opposition from real estate associations and consumer groups
Auditors to face rule changes in wake of crisis – Pg. 15 ‐ Auditors operating in Europe are likely to face new rules this year which propose to clarify their role in the wake of the financial crisis, … ‐ ….role of auditors, and the extent to which this role should extend beyond a narrow duty to the company being audited and its investors, to a broader audience of clients, employees and regulators ‐ Another focus would be the independence of the profession ‐ …restrictions on the extent to which firms were allowed to combine audit and non‐audit roles; a regular rotation of audit firms handing any one company; regular competitive tendering for audit work; and a greater role for companies’ audit committees in selecting audit firms
Regulators to miss deadline for US financial reform rules – Pg. 20 ‐ US regulators will miss a July deadline set by Dodd‐Frank legislation for some of the rules on newly policed swap markets, …. ‐ These end‐users, unlike large Wall Street derivatives dealers, are exempt from mandatory clearing and trading rules.
10 February 2011
D Borse and NYSE in talks – Pg. 1 ‐ The world’s bourses are being swept up in an accelerating wave of consolidation after Deutsche Borse revealed that it was in advanced talks with NYSE Euronext to create the world’s largest exchange operator by revenues and profits ‐ …create the world’s largest stock exchange by market value after Honk Kong Exchanges and Clearing. Deutsche Borse has a market value of $15.3bn while NYSE Euronext has a market value of $8.7bn ‐ A deal between Deutsche Borse – Europe’s largest exchange group – and the owner of the New York Stock Exchange throws down the gauntlet to their arch rival CME Group, because it promises to create a dominant player in the European derivatives as a counterweight to the CME’s dominance in the US ‐ But the German‐US deal could face antitrust issues in Europe
US delays sale of $20bn AIG stock until May – Pg. 1 ‐ The news came as AIG announced a surprise $4.1bn increase in reserves against future property and casualty losses that is likely to push its 2010 results – to be revealed on February 24 – into the red ‐ AIG said its actuaries had found that reserves were inadequate to cover higher‐than‐ expected claims in areas such as decades‐old asbestos cases and workers’ compensation payouts. ‐ ….government, which spent more than $180bn to bail out AIG during the financial crisis (Prof Note: That is $1,000/tax paying citizen! Show me MY money!!!) ‐ AIG and the US Treasury, which obtained its stake when it converted preferred shares into common stock last month,…
Bernanke strikes more upbeat note on jobs market – Pg. 3 ‐ …more optimistic assessment of the state of the US jobs market, suggesting the central bank believes at least some of the drop in the unemployment rate in recent months reflects an improvement in the economy ‐ …Mr Bernanke said that it would take many years to get back to full employment. He said that economic growth of 4.5% in the coming years would be “ambitious” ‐ …most unemployment is still caused by a lack of demand – in which case monetary policy may be effective in bringing it down ‐ On whether the Fed will buy more long‐term Treasury bonds after its current $600bn programme of quantitative easing is completed in June, Mr Bernanke said that it would depend on whether “the recovery is on a sustainable track” and wither “inflation is low and stable at around 2% or a bit less” ‐ Mr Bernanke repeated his argument that the Fed is not responsible for inflation in emerging markets (Prof Note: Perhaps I do not understand economics! I thought QE2 was designed to increase the money supply, lower long‐term rates, and weaken the dollar to benefit our next exports. So, if I understand this correctly, given the commodities are priced in dollars and with Ben weakening our currency, how exactly is Ben not responsible for emerging market inflation? Hmmmmmm…scratching my head!)
Watchdog says IMF missed crisis risks – Pg. 3 ‐ Naïve admiration of light‐touch US and UK financial regulation and a “group‐think” mentality led the International Monetary Fund badly to miss the risks that led to the global financial crisis,… ‐ The fund’s analysis and economic modeling focused largely on traditional macroeconomic approaches and failed to spot the huge risks building up in financial systems in countries such as the US and UK ‐ The report underlined the IMF’s difficulty in expanding its analysis to include financial stability because of an outdated intellectual approach, a shortage of suitable expertise and recalcitrance from some member governments. In the years running up to the crisis, the US consistently refused IMF requests to permit an assessment of the stability of its financial system (Prof Note: WHAT??? What blatant arrogance! Clearly we knew what we were doing???!!!) ‐ Under pressure from the US, the IMF adopted a tougher line on assessing currency misalignment, provoking a sever backlash from China and other emerging economies
Portugal’s cost of borrowing increases to euro‐era record – Pg. 22 ‐ Portugal’s cost of borrowing rose to a euro‐era high on Wednesday amid renewed concern that Lisbon may yet have to turn to bail‐out funds to revive its stagnating economy ‐ Hedge funds were selling Portuguese debt after purchasing bonds at a syndication of five‐ year bonds just a day earlier,… ‐ Some European policymakers would like to see Portugal opt for bail‐out loans, which offer rates of about 6% and are considered the best way to deal with the country’s banking and economic problems. There are also hopes among some strategists that the rates offered on bail‐out loans might be reduced to encourage Lisbon to accept financial help
Equities falter as Bernanke sticks to script – Pg. 24 ‐ The run‐up in global stocks seen for most of the this month finally ran out of steam as interest rates remained the focus of global investors ‐ …Thursday’s decision on UK interest rates will attract plenty of attention as it comes against a backdrop of sharp divisions within the Bank of England and among economists ‐ On the currency markets, the talk briefly undermined the euro as traders scaled back expectations of near‐term increases in eurozone interest rates ‐ ….Brent oil up 99 cents back at $102 (Prof Note: When oil first broke $100/barrel all hell broke loose in the financial news. Now, nothing, nada, zip, ….hmmmmmmm)
9 February 2011
LSE in merger talks with Canada’s TMX – Pg. 1 ‐ The London Stock Exchange is in advanced merger talks with TMX Group, Canada’s largest exchange company, in the first big strategic move…. ‐ The combined group, with a market capitalization of $6.9bn, would be the world’s seventh biggest exchange and the largest platform for mining company listings at a time of surging commodities prices ‐ The combined group will have a dual stock market listing in London and Toronto, … ‐ The deal will require approval from the Canadian authorities, as there is a restriction in Canada on any one entity owning more than 10% of an exchange
Obama builds case for investment – Pg. 4 ‐ …proposals for greater infrastructure spending, … ‐ Since the 1990s Congress has passed transportation legislation every six years on a bipartisan basis. The bulk of infrastructure costs are paid for by a consumer tax on petrol, which has not changed since 1993 and which the chamber has lobbied hard to increase. ‐ The last transportation spending bill expired in 2009 and Congress has been unable to agree on new legislation since then ‐ …bill could have a $600bn price tag, some of which could be paid from stimulus funds
Report warns White House over mortgage shake‐up – Pg. 4 ‐ A White House plan to scale back the government’s role in financing home purchases could be a big win for the large investment banks and may drive up the cost of mortgages,… ‐ …Freddie/Fannie…which have since required $150bn in taxpayer aid to stay afloat ‐ …Freddie/Fannie…which are currently guaranteeing 95% of all home loans being underwritten today ‐ The administration could force Fannie and Freddie to raise the fees they charge banks for guaranteeing loans against default, thereby making non‐government backed securities a less expensive and more viable option ‐ …making it harder for borrowers to get a government‐backed loan, by allowing a rule that temporarily raised the cap on these loans to expire on September 30. The cut‐off stands at $729,750 for the most expensive areas, but is set to fall to $625,000 ‐ Lastly the administration may give tacit approval to exempting loans in which borrowers put 20% down from new risk retention rules, which means banks would wind up selling fewer loans to Fannie and Freddie ‐ The downside is that such moves would likely increase the cost of home loans, which could drag home prices down further
Strength in reserve – Pg. 7 ‐ In truth, the benefits to the US, in terms of support for its currency and its financial assets, are uncertain ‐ On the face of it, a modern version of the Triffin critique explains recent persistent American current account deficits; they have been funded largely by foreign governments buying dollar bonds. But the causation is not straightforward. Under a floating exchange rate system, as long as countries accumulate only moderate amounts of currency reserves allowing them to intervene in any future crisis, the demand for dollar‐denominated assets should be limited ‐ The search for a rapid replacement for the dollar, particularly one not controlled by national governments, yields few plausible immediate candidates, in any case ‐ A superficially attractive option is the special drawing right, a form of reserve asset created in 1969 during another round of discussions about the dominant dollar ‐ …the SDR is closer to an accounting unit than a currency. It comprises a weighted basket of currencies – the dollar, sterling, yen and the euro – whose values fluctuate according to the movements in their exchange rates ‐ SDR assets make up less than 5% of global foreign exchange reserves ‐ …in 1981 the basket was shrunk from 16 currencies to five (later four) with currencies, such as the Saudi riyal and the South African rand, in which trade was thin or restricted, thrown out
Hedge funds search for way to short munis – Pg. 21 ‐ …$3,000bn bond market… ‐ The mounting concern over “munis” has brought with it hedge funds and financial institutions who want to bet on the bonds’ creditworthiness, or make money on the back of volatile “spreads” – the premiums at which munis trade relative to benchmark debt ‐ There are two common ways of shorting. First investors can sell the underlying bonds. But to do that, they have to be able to get hold of the actual security to cover the short position taken ‐ The problem for investors wanting to do this is that more than 70% of munis are owned by local “buy‐and‐hold” investors, individually or through mutual funds ‐ The second option is to use credit derivatives
8 February 2011
US seeks Brazil’s support on renminbi – Pg. 1 ‐ The US is attempting to enlist Brazil in a united front against China’s allegedly undervalued currency, as Latin America’s largest economy struggles with a flood of cheap Chinese goods and a surging Brazilian real ‐ Any alignment with the US on the issue of China’s currency would mark a fundamental shift for Brazil. ‐ Brazil’s currency has appreciated nearly 40% against the US dollar over the past two years, making Chinese imports cheaper than domestically manufactured goods. The Chinese government has permitted only a gradual rise of its currency, the renminbi, against the dollar ‐ In a Treasury report released last week, the Obama administration stopped short of labeling China a “currency manipulator” amid concern it could lead to trade action and hurt the already sluggish US recovery. The US is instead seeking multilateral support on the issue
SEC sets sights on loan disclosures – Pg. 1 ‐ US securities regulators investing the role of banks in the mortgage crisis are homing in the mortgage crisis are homing in on the question of whether investors were misled about the home loans used to back securities ‐ The Securities and Exchange Commission and other regulators have been investigating a wide range of banking activities in connection with mortgages that were packaged into securities and sold to investors ‐ There also have been questions raised about whether loans were transferred properly into securitized trusts, and whether banks violated servicing agreements by having employees rubber‐stamp the foreclosure documents ‐ Estimates of the cost to banks vary widely. But some analysts predict that banks could wind up paying in excess of $100bn to settle these claims
US plans curbs on bank bonuses – Pg. 2 ‐ US regulators are set to follow their European counterparts in imposing tougher rules on bankers’ bonuses, staggering half of pay‐outs for top executives and star traders over three years ‐ The degree to which short‐term cash bonuses contributed to the crisis is disputed but most large financial institutions in the US and Europe have moved to defer more compensation and pay more bonuses in stock ‐ European banking regulators agreed last year that 40‐60% of executives’ bonuses should be deferred for three to five years. The US move, which introduces similar restrictions, signals a new willingness to introduce specific measures on pay after years of preferring to leave the issue largely to the industry ‐ A new “clawback” provision would require banks to evaluate the losses incurred by executives over the deferral period and amend their remuneration accordingly ‐ Banks with more than $50bn in assets would also be required to pinpoint employees, primarily traders, who could pose a risk to the institution’s stability ‐ The FDIC proposals are a response both to the Dodd‐Frank financial reform legislation of 2010 – which directed regulators to curb pay plans that encourage excessive risk‐taking – and principles agreed in 2009 by the world’s Group of 20 leading economies
Bank accounting – Pg. 14 ‐ Many bank chiefs say that overly stringent accounting standards made the financial crisis worse: write‐offs were too large and did not reflect the substance of their business. ‐ The rules are symbiotic. On one side, there has been a retreat from pure “mark‐to‐market” valuation, which forced banks mid‐crisis to report big writedowns on financial assets as prices fell in volatile and often illiquid markets. ‐ Now, long‐term assets will be valued at their historic cost. On the other side, loans losses will be recognized sooner. ‐ Banks will be required to estimate probably impairments on loans for at least a year in the future and hold a buffer against them
7 February 2011
Goldman cash pile stagnates as asset prices rise – Pg. 1 ‐ Goldman Sachs’ attempt to spend some of its $170bn excess capital on loans, real estate and other distressed assets is being hampered by a prolonged rebound in risk appetite that has lifted prices on many would‐be bargains ‐ Goldman’s “excess liquidity”, or cash deposits and securities the bank could sell or pledge, has helped lift capital ratios since the financial crisis while weighing down its returns ‐ The strategy stands in contrast to those pursued by many of Goldman’s rivals, which are awaiting US regulators’ approval to return their excess capital to shareholders ‐ If asset prices remain at current levels, Goldman has said it could change gear and begin to sell portfolios ‐ Goldman has long been one of Wall Street’s most active investors in distressed assets – from bankrupt golf courses in Japan to empty office buildings in China – using its vast network of contracts to help identify troubled assets and snap them up at attractive prices ‐ But the rapid return of risk appetite and the availability of relatively cheap credit has left a number of distressed assets funds bereft of opportunities
Police cuts deepen Camden’s blues – Pg. 4 ‐ (Prof Note: Sounds like we need to liberalize gun laws!) ‐ Already ranked by one measure as the second most dangerous city in the US, Camden sacked 45% of its police officers and one third of the fire department in January to make up for a dramatic shortfall in its budget (Prof Note: I wonder if the public school systems still is offering athletics?! I remember going to a public high school two years ago in Maryland wanting to make a $1,000 donation with the only stipulation being it could not go towards athletics. The Asst. Principal had the nerve to ask me to submit a few proposals. I said, “No.” Then she said (I could not make this up if I tried), “You come in here with the money and expect us to make proposals to YOU?!” I swear…I am NOT lying! Stage Capital donates elsewhere!) ‐ …Washington…this is expected to fall short by $1,480bn this year, the largest deficit on record ‐ US towns usually try to protect police and emergency services from cuts during downturns, because demand for them tends to rise in times of economic stress. But the severity of the recession forced 79% of cities surveyed by the league to lay off staff and one quarter to reduce public safety personnel ‐ There have also been big cuts in spending on libraries, welfare, parks, infrastructure, and education (Prof Note: Cut ALL high school sports before anything else!) ‐ The real test of the police cuts will come in Spring, when the streets are transformed into warmer and more comfortable arena for gangs and drug dealers to operate in (Prof Note: Liberalize gun laws…Jersey is one of the worst states for restrictions. At least allow the tax‐ paying public to defend themselves!)
Squatters add to muddles and delays in property foreclosures – Pg. 4 ‐ Foreclosures have been drawn out by state probes into the foreclosure practices of US banks, which have been accused of “robosigning”, or processing foreclosure affidavits without verifying their accuracy ‐ …bank seizures have helped plunge the US homeownership rate to a 10‐year low at the end of last year… ‐ The process of removing squatters is complicated by a law known as “adverse possession”. This varies by state, but gives ownership rights to a person who possesses a property for an extended period of time
Trouble to avoid – Pg. 7 ‐ Such large‐scale public protests against corporate tax avoidance – which many businesses prefer to call effective tax planning – are, for the moment, unique to Britain ‐ President Barack Obama last month called for the first US corporate rate cut in 25 years, to be funded by reforms of a code under which those who can work the system “can end up paying no taxes at all” ‐ Tax‐based tension between governments is mirrored in attitudes towards Ireland. Hostility to its policy of low corporate tax – seen as a cornerstone of “brand Ireland” – was laid bare during negotiations over a European Union bail‐out last November ‐ A UK proposal to impose taxes worldwide on passive income – royalties, interest and dividends – was dropped in 2008 after it precipitated the departure of a clutch of big multinationals such as WPP, the advertising group
Wall St seeks muni‐debt boost – Pg. 15 ‐ Wall Street is seeking to expand the market for derivatives that allow banks and investors to profit from – or hedge against – bond defaults by struggling US states and local governments ‐ …CDS contracts on US municipal debt – the derivatives that increase in value when the chance of a municipal bond default increases ‐ Municipal bonds are mostly owned by local US investors, lured by tax breaks. That makes them typically unattractive for large international fund managers to won and nearly impossible to sell short, in hope of profiting from falling prices
5 February 2011
Funds in $7bn emerging market exit – Pg. 1 ‐ Investors have pulled out more than $7bn from emerging market equity funds in the past week, the biggest withdrawal in more than three years after turmoil in Middle East and rising food inflation raised fears of economic instability ‐ But the fund outflows also reflected deeper unease about economic overheating in China, India, Brazil and other big emerging economies. Emerging markets attracted record investor inflows of $95bn last year as they became a defining investment theme ‐ Emerging market share prices have fallen nearly 3% this years and in the worst performing big market, India, equities are down 11%. Before the latest outflows, emerging market equity funds contained nearly $720bn ‐ Many investors ploughed their money straight back into the US, Europe and Japan as developed market equity funds took in $6.6bn, a fifth consecutive week of inflows ‐ Indonesia on Friday became the latest country this year to raise interest rates in an effort to control inflation, joining India, Brazil and South Korea
Struggle t judge economy’s health as jobs report paints confusing picture – Pg. 1 ‐ The Bureau of Labour Statistics estimates the US economy created 36,000 jobs last month – far below expectations of 146,000 – but the unemployment rate plunged from 9.4 to 9.0% ‐ A number of economists said the fall in unemployment showed the true state of the labour market, but the complex data led to different interpretations (Prof Note: for the record, I predicted a rise…I need to dissect and understand this data over the next week or so) ‐ Many economist argued that the drop in the unemployment rate was real but it could easily rise if discouraged workers search for jobs again
Cold snap allows much leeway for statistical slip‐ups – Pg. 3 ‐ First, they could focus on the survey f employers which pointed in a different direction to the survey of households used to derive the unemployment rate. Second, they could choose which of a range of seasonal and statistical effects they wanted to adjust for ‐ The fall appeared to reflect a large drop in the labour force, but in January the Bureau of Labor Statistics updated its figures for the size of the population ‐ “the labour force, at 153.2m, was unchanged after adjustment for updated population controls” ‐ Those data include a general decline in new claims for unemployment insurance, low levels of new job losses, and optimistic results from employer surveys ‐ …drop of 32,000 in construction and 38,000 in transport
American football season under threat – Pg. 3 ‐ NFL team owners and players are mired in a labour dispute, with the current agreement expiring on March 3. If the two sides do not reach a new deal by the time training begins this summer, the next lucrative NFL season is in jeopardy (Prof Note: Oh pulllleezzzzzzz…in this economy I hope fans leave the sport! While people are going hungry is not the time for a labour dispute in an entertainment industry!) ‐ Players are demanding higher salaries as compensation for playing in an increasingly brutal sport (Prof Note: The American public is demanding salaries!) ‐ The NFL and team owners, meanwhile, want to extend the current 16‐game season by two games to generate more revenue (Prof Note: Not another two weeks of football! Enough already…lets focus on what is important…the economy!) ‐ NFL players’ union estimates that a lockout would cost each of the 32 cities that are home to an NFL team $160m in local spending and 3,000 jobs… ‐ Last year’s Super Bowl was the most watched programme in TV history (Prof Note: I say with pride…I did not watch the superbowl! What a great time to go shopping and run errands!!!) ‐ The NFL’s image has been tarnished in recent years as a growing body of medical evidence has suggested that professional play can lead to long‐term health problems for many players (Prof Note: Forgive me but we are all subjected to an incurable and terminal disease…it is called…LIFE!)
At hand, an Arab awakening – Pg. 8 ‐ In Egypt, as in Tunisia, the young people who initiated the street campaigns were educated, internet‐savvy activists with no political affiliation ‐ The question of “who’s next” has been troubling Arab rulers and their western supports since Mr Ben Ali fled to Saudi Arabia three weeks ago ‐ Across the region, leaders are finding out that economic liberalization in political systems that lack accountability cannot protect against popular upheaval (Prof Note: This article makes me think long and hard about the dinner I had with Walid’s 31 year old brother. He is University educated and we had a very telling discussion of the Egyptian system, his current job and the lack of real opportunities. When I think back to that dinner early in January, it was not Muhammed speaking to me but an entire country’s generation. The two nights I spent with Walid’s family will be a permanent fixture in my memory. Walid, my prayers are with your family and all of Egypt!)
Whigs, Marxists and the Egyptian effect – Pg. 15 ‐ Oil prices rose above $100 a barrel this week amid fears the Suez Canal could close. Yet the bigger threat to markets lies in the risk of the protests spreading to other oil producers in the Middle East and north Africa, …. ‐ A Whig investment philosophy inspires many of the greatest enthusiasts about emerging markets. For the past two decades, it has been the right way to bet in most of Asia and Latin America ‐ A second approach can be called Marxist: not the inevitable triumph of Communism but the reading of history that stands behind all of Karl Marx’s thinking ‐ In other words, everything is primarily economic. Hence high food prices, high unemployment and a big gap between poor and rich are the real causes of Islamic radicalism and political discontent ‐ Then there are believers in trend‐free history. According to this view, each historical story is distinct: The Egyptians are not destined to do anything in particular and the Saudi Arabian government might last for generations or fall tomorrow ‐ It all depends on how those involved deal with the political and economic challenges they face ‐ Among western political observers, the Whig analysis of Egypt and the region has been the most common: chaos is a risk, but the calls for freedom ring so true that they cannot be resisted. In that account, a Saudi Arabian conversion to liberal democracy is just a matter of time ‐ Market types tend more towards the Marxist view. In these countries, autocratic governments, rampant corruption and a middle class that is small and largely lacks entrepreneurial spirit make regress more likely than progress ‐ Egypt and the region will work out well for investors if, and only if, the governments (whether new or old) can find a way to overcome the many obstacles which have slowed down development
Hungry investors return to covenant‐lite’ deals – Pg. 15 ‐ Risky companies are obtaining billions of dollars in loans with few or no conditions attached, a practice known as “covenant‐lite” that was common at the peak of the credit boom ‐ In the US, banks arrange loans with ratings below investment grade, but they typically syndicate a tranche to investors. These are commonly known as institutional loans or leveraged loans ‐ Covenant‐lite was a hallmark of the boom years of the last decade along with other financing practices, such as pay‐in‐kind debt, loans or bonds that pay interest with more debt rather than cash ‐ Covenant‐lite loans were used liberally to fund LBOs of the last decade and fuelled fears of mass defaults later ‐ In 2007, nearly $100bn covenant‐lite deals were sold to investors, many of them collateralized loan obligations, which allowed banks to repackage pools of money lent to risky companies into securities, driving the surge in leveraged buyouts. Leveraged loans were hard hit in the financial crisis and the create of new CLOs dried up
Love you and leave you – Insert 1 ‐ China’s poor are heading to the cities to find work and wealth – and leaving behind 58 million children (Prof Note: Sounds to me like “It was the Best of times, it was the worst of times…”)
4 February 2011
Bernanke toughens his call for action on deficit – Pg. 1 ‐ “The long‐term fiscal challenges confronting the nation are especially daunting because they are mostly the product of powerful underlying trends, not short‐term or temporary factors”,… ‐ …gap that is now running at 9‐10% of gross domestic product ‐ Mr Bernanke also appeared to endorse priorities set out by Barack Obama in his State of the Union address, calling for tax reform, but also incentives for investment in skills, research and development and the provision of “necessary public infrastructure”
JPMorgan was given early warning about Madoff, says court filing – Pg. 1 ‐ The lawsuit seeks to recover $1bn in fees and profits that JPMorgan reaped as the primary banker to Mr Madoff’s business and by structuring Madoff‐related derivatives, plus $5.4bn in damages ‐ Mr Picard alleges JPMorgan ignored billions of dollars in suspicious transfers in Mr Madoff’s bank business account and failed to follow up on concerns of employees involved in Madoff‐ structured products ‐ JPMorgan was Mr Madoff’s primary UU bank for more than 20 years. It also sold structured products related to the hedge funds that sent money to the scheme ‐ Mr Picard’s complain quotes an email in which the risk officer allegedly wrote in 2007 that he had been told by another JPMorgan employee “there is a well‐known could over the head of Madoff and his returns are speculated to be part of a [P]onzi scheme”
Bail‐out fund set for wider powers – Pg. 3 ‐ European leaders are preparing to commit themselves to an overhaul of the eurozone’s 440bn (euro) bail‐out fund that would increase its lending power and give it more tools to tackle the debt crisis, …
Regulators press for trader pay ‘clawbacks’ – Pg. 4 ‐ Regulators are pressing banks to introduce more “clawbacks” for traders’ pay as part of an overhaul of compensation at financial institutions, …. ‐ …new rules, which will force top executives to be paid a certain amount of compensation over several years, rather than in large annual cash bonuses ‐ Morgan Stanley, which lost $9bn on a single trade in 2007, was the first bank to publicly announce the introduction of clawbacks in 2008 ‐ If it occurs as planned, this will be the first time that US regulators have followed their European counterparts in specifying how much compensation should be deferred. The US rule is expected to closely follow a European standard that forces 40‐60% of executives’ bonuses to be deferred for three to five years
Euro falls as ECB stays low key on inflation – Pg. 4 ‐ The ECB sent the euro sharply lower on Thursday after resisting the temptation to ramp up further its anti‐inflation rhetoric, despite signs that price pressures were building in eurozone industry ‐ Among the steps being urged by the ECB is to give the European Union’s bailout fund powers to buy government bonds, which would relieve the bank of such responsibilities ‐ Eurozone inflation rose to 2.4% in January, driven largely by food and energy prices
Divide over increase of US debt ceiling widens as deadline looms – Pg. 4 ‐ The split between the White House and congressional Republicans over an increase of the $14,300bn US debt ceiling has widened in recent days…. ‐ The move by Republicans is intended to force the administration into negotiations over a deal that would tie any increase in the debt ceiling to aggressive spending cut targets that were the centerpiece of the party platform in the November midterm elections
Argentina threatens inflation analysts with fine – Pg. 6 ‐ The government this week sent a detailed questionnaire to private consultancies giving them 48 hours to spell out how they calculate their inflation estimates or face fines of up to $125,000 ‐ …inflation last year at around 25% and reckon on 30% for this year, way above the official 10.9% rate for 2010 ‐ Last year unions secured pay increases of as much as 42.5% ‐ Argentines, who suffered from hyperinflation in the 1980s, are oddly tolerant of soaring prices and continue to spend, fuelling a consumer boom ‐ Many are being compensated with rising salaries which largely preserve their purchasing power
Rating agencies buoyant on year ahead – Pg. 13 ‐ Moody’s Investors Service and Standard & Poor’s have forecast another strong year of revenue growth, underlining the continued profitability of the credit rating agencies in spite of sharp criticism over their role in the financial crisis ‐ Regulators are continuing to flesh out legislation aimed at curbing the conflicts of interest which result from the business model used by Moody’s and S&P, where sellers of debt pay for the credit ratings included on that debt when it is sold
US urged to follow ultra‐low bond trend – Pg. 21 ‐ When the US reintroduced a 30‐year bond five years ago, demand was so great that traders likened the reaction to “being on steroids” ‐ …estimated that demand for US long‐term bonds could reach $2,400bn during the next five years as a sweeping programme of financial and pensions regulation is implemented ‐ It comes as institutional investors try to make their assets match the long‐term liabilities of pensions and annuities they are committed to paying out decades into the future ‐ The market in ultra‐long bonds is growing ‐ The scale of interest depends less on the certainty of getting the original investment back in 100 years than on “duration”, a concept that measures the time until cash flows from interest payments cover the nominal price of the bond ‐ For pension and annuity providers, the longer the duration, the better ‐ Governments in countries such as the US, whose bonds form globally accepted benchmarks, do not really have the freedom to randomly issue one‐off bonds ‐ The benchmark status of those countries lowers their borrowing costs, but requires them to maintain an active yield curve, that is, bonds regularly issued at different maturities to provide reference prices for other borrowing rates, from corporate debt to individual mortgages ‐ In practice, this means that, before they commit to issuing, they have to be sure demand will be consistent and will not cannibalize the market for their existing debt ‐ The yield curve gives over borrowers more comfort in pricing their own debt off the benchmark rates, especially for longer‐dated bonds, where predictions of growth, inflation and other factors are harder to make with confidence
3 February 2011
US urged to launch 100‐year bonds – Pg. 1 ‐ The US Treasury has been urged to sell “ultra‐long” bonds with maturities of up to 100 years to help lower the government’s borrowing costs ‐ The longest bond issued by the US has a maturity of 30 years but, in recent years, the UK, France and China have sold 50‐year debt ‐ Extending the average maturity of its outstanding debt beyond its current 59 months would enable the US to take advantage of the prevailing low yields on bonds ‐ …”ultra‐long” bond issuance, defined as securities issued with a tenure of 40, 50 or 100 years ‐ Investors would welcome the sale of such ultra‐long debt as it would satisfy the long‐term investment needs of banks, pension funds, insurers and retail investors
Indian IT groups shift their focus from ‘protectionist’ US market – Pg. 1 ‐ Indian information technology companies intend to reduce their dependency on a US market they regard as “protectionist”, citing a decision to increase visa fees for skilled workers that will raise their personnel costs by up to $250m a year (Prof Note: this is nothing more than a trade barrier!) ‐ …wanted to boost revenues in Europe and emerging markets ‐ In his State of the Union speech last week, the president cited the IT industry as a key driver of job creation ‐ The US passed a law last year that increased the fee for H1B and L‐1 visas – commonly used by India’s IT outsourcing companies to bring talent into the US – to $2,000, up from $320
S&P warns of unsure future for Irish debt – Pg. 6 ‐ Senior bondholders at Irish banks face increased uncertainty over whether they will be repaid if fine Gael and Labour form the next Irish government, a credit rating agency has warned ‐ Both parties are committed to renegotiating Ireland’s $117bn bailout by the European Union and the International Monetary Fund, including a cut in the interest rate it pays and a relaxation to allow the government to impose losses on bondholders who lent to Irish banks ‐ Analysts believe the government would have the legislative powers to force losses on lenders, under wide‐ranging legislation passed in December, which includes powers to change bank management, force subordinated debt for equity swaps, and transfer out assets and liabilities
One‐off factors make job data hard to predict – Pg. 8 ‐ …Friday when the Bureau of Labour Statistics announced the number of jobs created in January ‐ New claims for unemployment benefits are following a meandering path downwards. Job losses have all but halted and the number of openings is up ‐ The official number for January is expected to come in at 142,000, a modest acceleration, but there is a wide range of estimates because the numbers will be affected by a host of one‐off factors ‐ One is weather ‐ …January is the month when the BLS announces how many people were employed a year ago using unemployment insurance tax records that it collects from the states ‐ If signs of recovery prompted more people to look for jobs in January, then the unemployment rate could rise again. The consensus of economist is for 9.5%
US health law faces court dissection – Pg. 8 ‐ Republicans in the US Senate sought on Wednesday to repeal the healthcare law as part of a strategy… ‐ Most analysts agree that the fate of the law, the signature achievement of Barack Obama’s first two years in presidential office, will be determined not in Congress but in the Supreme Court ‐ Its deliberations will focus on one question: whether the federal government can force individuals to buy health insurance ‐ The administration has argued that the so‐called “individual mandate” is a crucial element of the law, because it drastically expands insurance enrollment and enables insurance companies to pay for a popular consumer protection in the legislation: the ban on discrimination against individuals with pre‐existing medical conditions ‐ The Obama administration argues that Congress has the right under the constitution to tax citizens, and that, under the healthcare law, the penalty it exacts against individuals who can afford to buy insurance but fail to purchase it is, in effect, a legal tax
Shadow boxes – Pg. 9 ‐ …”shadow banking”, the mysterious world of fast‐growing entities that are muscling in on some bank businesses but have so far escaped the same level of regulation ‐ The new US Federal Stability Oversight Council is also drawing up a list of “systematic” non‐ banks that would be subject to special scrutiny and tighter rules ‐ ….$2,000bn hedge fund industry is not even the largest part of a shadow sector that the Federal Reserve Bank of New York estimates at $16,000bn. ‐ It also includes money market funds, clearing houses and special‐purpose vehicles that hold complex securities. Though it is smaller than its $20,000bn peak marked in 2008, shadow banking is still larger than the $13,000bn assets in banking proper ‐ As a result, regulators believe that non‐banks have become essential sources of credit, fueling bubbles in good times and exacerbating busts when things go bad ‐ Some non‐banks also engage in what is known as “maturity transformation” – they pull together shorter‐term money and use it for longer‐term investments, such as 30‐year mortgages (Prof Note: I thought this was called an SIV???) ‐ Non‐banks also pose a risk when they become so large and connected with ordinary banks that their failure would destabilize the broader system (Prof Note: Four letter response…LTCM!) ‐ The more that non‐banks act like banks – or borrow heavily from banks – the riskier they become for the broader economy (Prof Note: I thought bank’s underwrote their deals and counterparties? If done correctly, this risk should be quantifiable or at least known…this assumes “done correctly”. Also, banks do NOT have to lend to everyone that wants a loan!) ‐ Wall Street leaders are particularly uneasy about the competitive threat posed by inter‐ dealer brokers – linchpins in the trading of over‐the‐counter derivatives – and commodity funds. ‐ Large defaults are also a concern for clearing houses, also known as central counterparties (CCPs). Their business which involves pooling funds from market participants to use if one or more of the clearer’s members defaults, has a good record, with only a handful of failure sin more than a century. But the stakes are about to rise as new rules in Europe and the US begin to insist that swaths of over‐the‐counter derivatives are processed through clearers (Prof Note: No kidding! Dodd‐Frank is pushing $615,000bn onto clearing houses (no typo)) ‐ There is on global regulatory regime for CCPs – and a European Commission survey of the 13 EU clearers found they held wildly different amounts of capital, from millions of euros in one case to just 29,000 (euro) in another ‐ Underpinning many of the shadow banks is the $2,800bn US money market fund industry, which provides much of the underlying cash by buying up commercial paper and other short‐term debt ‐ Non‐banks o Hedge funds: Investment pools for wealthy and institutional investors. o Commodities funds: Investment pools that place large bets on movement of commodities prices. Use of derivatives and leverage mean they could sustain huge losses compared with real assets o Private equity groups: Raise long‐term funds from institutional investors for direct investment. Regulators are concerned that the largest in the US are acting more like banks, entering fields such as debt trading and hedge funds o Money market funds: Take short‐term money from investors and buy commercial paper and other securities. o Securitization: Pooling of assets such as mortgages into securities that are sliced up and sold to different types of investors. Lenders pass on loans quickly, giving them few incentives to ensure they are repaid. Limited information on underlying assets makes them illiquid and hard to value
Learning to love inflation – Pg. 14 ‐ …unexpected inflation detoxifies over‐leveraged financial systems by eroding the value of fixed debts – without going through disruptive defaults ‐ There are precedents: inflationary debt erosion did almost half the work in cutting the ratio of US government debt to gross domestic product from 122% to 25% between 1945 and 1973,…. ‐ There is a case for allowing higher inflation in the developed world, and an admission of this would help the debate. The problem lies in the developing world, where rising commodity prices have created the wrong kind of inflation. The effects of letting developed world inflation float higher (too much cash for oil exporters and too much hot money distorting currency markets) make this disjunction all the more dangerous
Banks warn over proposed reforms to derivatives trade – Pg. 24 ‐ Banks in Europe have hit out at a proposal by the European Commission that would empower regulators to ban certain over‐the‐counter derivatives, cautioning that any bank could “exacerbate systemic risks” ‐ …proposes reform of OTC derivatives trading that – like Dodd‐Frank – would require standardized contracts to be traded on exchanges and “organized trading facilities”. OTFs would be similar to platforms called “swap execution facilities” emerging in the US ‐ It also suggests derivatives contracts could be banned where regulators decide they should be cleared but not clearing house offers to do so
2 February 2011
Banks weigh risk of capital flight – Pg. 3 ‐ Egypt faces the risk of renewed capital flight out of the country once the banking sector reopens in what would present further strains to its financial system,… ‐ The closure of domestic stock market and banking sector last week has temporarily halted the outflow of capital, but not before the bourse plunged 20% and an estimated $1.5bn of foreign money placed in Treasury bills left the country ‐ This caused the exchange rate to the dollar to drop by almost 1% over the past week to a fresh six‐year low of E5.85 (Egyptian pound) ‐ The central bank should be able to comfortably manage any foreign capital outflows from its reserves, and will probably try to allow a controlled depreciation of the currency ‐ The local banking sector has a healthy buffer of deposits to loans, yet significantly deposit withdrawals will make it trickier to finance the government budget deficit and meet the estimated $46bn of mostly local currency debts maturing this year ‐ Moreover, an increased “dollarization” of the economy could further drain the central bank’s reserves, and increase pressure on the exchange rate
Probe into $400m SEC office leasing contracts – Pg. 4 ‐ The US Securities and Exchange Commission signed leases for $400m of office space without circulating the contract for competitive bidding, as would be normally required ‐ …requirements for 900,000sf of space…. ‐ …the SEC is now trying to dispose of two‐thirds of the empty 900,000sf on its hands ‐ Government agencies are supposed to advertise contracts before awarding them but can move faster in some circumstances if they meet certain requirements. The SEC said it needed room for 2,335 extra workers based on the expected budget increase ‐ Last May, it originally sought 270,000 – 315,000sf of new space. The SEC expanded its request by 600,000sf just after Dodd‐Frank was signed into law, …. ‐ In 2009, the agency is reported to have paid $83m a year in rent – or 9% of its budget – for all of its properties
Loan loss accounting – Pg. 14 ‐ The new rules will force banks to forecast losses on all their loans for the “foreseeable future” – probably between one and three years – and hold a buffer to cushion the impact when it comes ‐ …current system, whereby losses are only recorded when the borrower’s default is finalized – a loophole that, at the beginning of the financial crisis, allowed banks to keep some loans on their balance sheet as assets, even though it was likely many would be written off once the lengthy default process worked its way through the system
Fed eases past China as leading holder of US Treasury securities – Pg. 15 ‐ The Federal Reserve has surpassed China as the leading holder of US Treasury securities even though it has yet to reach the halfway mark in its latest round of quantitative easing,… ‐ …SOMA, total $1,108bn, made up of bills, notes, bonds and Treasury Inflation Protected Securities, or Tips ‐ …China holds $896bn while Japan owns $877bn ‐ The Fed is buying Treasury debt under two programmes. The largest is QE2, which began in November and is scheduled to involve $600bn of purchases by June ‐ It is also buying $30bn of Treasuries a month as it reinvests principal payments from its large holdings of mortgage debt and debt issued by government housing agencies – a programme dubbed QE lite ‐ The Fed has devoted 67% of its QE2 purchases to Treasuries with a maturity of four and a half to 10 years. That has helped pull back yields in that part of the yield curve from their highs of December ‐ By contrast, just 5% of the Fed’s buying has been for Treasury debt longer than 17 years.
1 February 2011
Oil surges on Egypt fears – Pg. 1 ‐ Oil prices broke through the $100 a barrel level for the first time in more than two years, amid market fears that Egypt’s turmoil will hit oil flow
ECB halts emergency bond purchases – Pg. 1 ‐ The European Central Bank suspended its emergency purchases of eurozone government bonds last week as the debt crisis eased, allowing it to focus on combating rising inflation ‐ ….annualized eurozone inflation reached 2.4% in January, the highest for more than two years and beyond the ECB’s target of “below but close” to 2% ‐ The ECB is expected to hold its interest rate unchanged at 1% on Thursday ‐ Eurozone inflation was 2.2% in December ‐ Economists do not see eurozone interest rates rising before late this year
Irish growth forecast cut by half – Pg. 2 ‐ Ireland’s central bank has more than halved its growth forecast for 2011 following the austerity budget in December, with employment continuing to fall, exports slowing and consumption declining after the introduction of higher taxes ‐ Gross national product, which excludes the profits of foreign‐owned multinationals and is often seen as a better measure of the economy’s performance, will contract by a further 0.3% in 2011, before returning to growth of 1.5% in 2012 ‐ Domestic demand looks set to remain subdued, with consumer spending likely to fall again in 2011 in line with higher personal taxes and lower employment
Warning on EU short selling rules – Pg. 3 ‐ European equity markets would lose liquidity and investors, and be at risk of more manipulation, if Brussels pushed ahead with plans to increase public disclosure of “short selling” activity,… ‐ Brussels drew up proposed rules after the 2008 financial crisis and subsequent sovereign bond turmoil led member states to introduce a patchwork of restrictions on short selling ‐ Brussels acknowledged short selling could help make markets efficient and increase liquidity but said it presented risks. So it proposed more disclosure – investors would have to tell regulators about their significant net short positions once these amounted to 0.2% of a company’s issued share capital, and notify the market generally once this hit 0.5% ‐ plus curbs on “naked” short selling and a regime vis‐à‐vis net short positions in EU sovereign bonds
US airlines – Pg. 14 ‐ …82% of seats on North America’s aircraft carried paying passengers
Egyptian unrest hits emerging markets – Pg. 23 ‐ The Egyptian crisis prompted a wave of selling in other North African and Middle Eastern markets over the weekend, with Dubai equities falling the most, by 4.3% on Sunday ‐ Signs of a stronger‐than‐expected recovery in the US have helped support confidence in global markets overall – but developed markets have seen most of the benefit, with some fund managers switching out of emerging markets
31 January 2011
Brazil and China face increase in trade tensions – Pg. 1 ‐ Trade tensions between Brazil and China are expected to increase after the Asian country emerged last year as the biggest foreign direct investor in Latin America’s largest economy ‐ …tensions have surfaced after China last year also emerged as one of the biggest sources of cheap imports into Brazil, helped by a surge in the value of the real, which is undermining the competitiveness of domestic industry
Overhaul of 440bn (euro) rescue fund on table – Pg. 4 ‐ …deal could include a revamp of both the Irish and Greek bailouts either to extend the payment periods or cut the interest rates they are paying on their bail‐out loans ‐ Among the more controversial elements is the call by some officials, including representatives of the International Monetary Fund, for a Portuguese bail‐out to be included in the deal; a smaller group of officials have also advocated a flexible line of credit for Spain ‐ Those measures are opposed by the European Commission, EU’s executive, and some within the German government, who believe Portugal’s stable banking sector and near‐EU average debt levels may not necessitate a bail‐out ‐ An overhaul of the fund is likely to be the centerpiece of the grand bargain. There is widespread consensus that its lending power will be increased so it can use its full 440bn (euro) in funds; currently, due to restrictions imposed to ensure a triple A rating, it can only lend about 250bn (euro) ‐ To do so, Germany and other triple A rated eurozone countries would have to increase their guarantees for the fund; in exchange, a proposal has been made that countries with weaker ratings put in capital to help shoulder the burden
US panel’s report reflects partisan rift – Pg. 4 ‐ …culprits include regulators, politicians, Wall Street banks and credit rating agencies – has given rise to a fresh partisan rift over its procedures and findings ‐ In a dissent, three of the four Republican commissioners condemned it as too US‐centric, diminishing the importance of the global credit bubble that brought down financial institutions in the UK, Iceland and Ireland as well as in the US ‐ The division means the FCIC has failed to publish a consensus version
Pointers from the past – Pg. 7 ‐ In spite of recent bail‐outs, markets are pricing in high risk of a restructuring for countries such as Greece and Ireland, in what would be the first default of an advanced nation since postwar Germany in 1948 ‐ As the more than 50 sovereign restructuring of the modern era all come from the developing world, policymakers are likely to turn to emerging markets for guidance on what to do ‐ The EU and IMF, which have provided bail‐out funds to Greece, do not think the country needs a restructuring as it is sticking to fiscal reform targets ‐ Buenos Aires still owes western creditors $7bn, though Argentine officials are confident of reaching a deal within weeks to reschedule payments to the Paris Club. The loss to lenders has been painful, at about 75% of their initial investments as a result of a restructuring in 2005. Originally only 75% accepted, but that proportion has since risen through a second offer to 90% ‐ Proposed in 2001, this “sovereign debt restructuring mechanism” was aimed at making it easier for countries to restructure debts – which by that time were largely held by an increasingly numerous, anonymous and difficult to co‐ordinate group of bondholders ‐ Under the mechanism, a country could reach a restructuring agreement with a qualified majority of creditors that would then be made binding on the others – deterring litigation. But against a backdrop of improving emerging markets, the SDRM failed to win enough support. ‐ Unlike a debt buy‐back, restructurings seek to amend the terms of bonds, often where a country offers investors the opportunity to swap from their old bonds into new ones. In essences creditors agree to exchange an existing bond for a longer dated bond, potentially with lower interest costs. This gives the debtor country longer to repay and a smaller interest burden. The incentive for creditors to take up the offer is that if they hold out and the situation deteriorates, they could end up worse off ‐ Pakistan in 1999 became the first of the modern era to restructure sovereign bonds, followed by Ukraine, Uruguay and the Dominican Republic. The process has proved successful, with in many cases over 90% of bondholders participating. But even a small percentage of holdouts, when the debts are large, can pose problem ‐ New government bonds would, moreover, include clauses that bound a dissenting minority of bondholders legally to a restructuring supported by a majority of creditors
US economy – Pg. 12 ‐ In the aftermath of the Great Depression, it took the US 10 years to restore total compensation for employees to its pre‐downturn level ‐ …the annualized $8,100bn paid to US employees in the past quarter broke the pre‐crisis record, from the first quarter of 2008, by a whisker. In aggregate, US workers have never been paid so much. ‐ It seems that Americans who have a job feel they can keep it. All this optimism helped to fuel a 3.2% jump in US gross domestic product in the final quarter of 2010
Property funds set sights on Germany – Pg. 14 ‐ Germany has emerged as the preferred location for investment by non‐listed real estate funds, knowing the UK down the rankings after a period of dominance among investors ‐ Investors also said they were looking for greater involvement and control, with 90% of investors preferring to be active investors, compared with almost 80% last year
Investors snap up ‘Yankee’ bonds – Pg. 15 ‐ Non‐US companies and banks have sold a record among of dollar bonds in January, making I the busiest month to date for the so‐called “Yankee bond” market ‐ The lure of the US capital markets reflects the huge pool of investors looking to buy dollar bonds, and now appear to have more appetite for credit risk than their eurozone counterparties
Harmonized accounting rules to hit US banks – Pg. 15 ‐ US banks could see their balance sheets balloon under new proposals from the accountancy rule‐makers that would dramatically reduce their ability to net their derivatives exposure ‐ Current US rules allow banks greater scope to offset money owned to and from a counterparty, rather than presenting two gross figures – something the standard‐setters say is the single largest quantitative difference between the presentation of balance sheets in the US and elsewhere ‐ Under proposals that would bring US rules into line with International Financial Reporting Standards, the two groups argue that figures should be offset only when a bank has the right to settle with its counterparty in all circumstances, including the company’s default or bankruptcy ‐ The US, however, has yet to decide whether it will back IFRS over its own system, known as US GAAP
Nasdaq OMX lures trades to platform ‐ Pg. 15 ‐ Nasdaq OMX has captured up to 1% of total US share trading on a new type of platform that aims to lure large blocks of trades back onto exchanges ‐ Off‐exchange trading has grown as large traders have shied away from exchanges and other “lit” venues – so‐called because prices are displayed before trades are matched. Off‐ exchange venues post prices only after trades are done, reducing the risk of investors revealing their hand to the wider market in advance ‐ So‐called “dark pools” executive a record 12% of market trading volume in December,...
29 January 2011
Protestors defy Egypt crackdown – Pg. 1 ‐ Enraged protesters across Egypt defied a night‐time curfew and the deployment of troops and armoured vehicles to demand an end to the 30‐year rule of President Hosni Mubarak ‐ The regime severed almost all internet and mobile phone access ahead of the protests that followed Friday prayers ‐ The Extraordinary four‐day outburst of youth anger, partly inspired by the Tunisian revolt, is the worst turmoil Egypt has seen in decades ‐ The military establishment, the backbone of the regime, has been fiercely loyal to Mr Mubarak but it is unclear how far the army will go in repressing the protests ‐ Washington provides Cairo with $1.3bn military aid a year and $250m in civilian assistance ‐ (Prof Note: I am being asked daily now for a better recollection of my experiences of Egypt two weeks ago. So I will elaborate on what I have not stated. Other than Walid’s family, I felt very uneasy around the people of Egypt. Please remember that Walid’s family were the only “true” Egyptians I met, everyone else I met in context of a service they were trying to provide me, i.e. get my money. This was the first country where I had an omnipresent feeling on insecurity. I eluded to Mohammed (my driver) being my security contingent but in reality there is more truth to that than fiction. At every site I hired a tourist police to stay with me to “show” me photos, in truth, I wanted a man with a gun by my side. Everything was for sale and I quickly learned that “no” was really the start of the haggle. Everywhere people were trying to provide me a service and receive payment of some kind. Mohammed learned very early I wanted a 5 metre perimeter and he kept it to about 2 metres. When I had dinner with Walid’s family I was given very dangerous information, i.e. the truth on salaries, rents, and standard of living. This made me aggressive when haggling and interacting with people. Never before have I ever said in a restaurant when I was given what I perceived to be the ignorant westerner’s bill, “I am not F*($n paying this. Recalculate!” (they recalculated the bill) Further there was an overwhelming desire for American dollars. More so than in other African nations or other areas of the world. The demand was so great that I stopped paying in American dollars, hoarding what I had (I tend to travel with a lot of cash so I was not worried about running out) just in case. When I went to the Cairo museum there were at least 500 policeman outside closing streets. Apparently the President was coming and Mohammed made his opinion clear of the President…negative. Now that current events have boiled over I see Cairo and all of Egypt was really a country at its breaking point, literally boiling over. The aggression toward my wallet was not greed but actual need! While I made many travel errors what I did best that I believe kept me safe is Mohammed knew I was worth more to him if kept safe than if harmed. Further, kudos to the J.W. Marriott! For the second time in my life, I have fled to a Marriott for safety and received a welcome and assured of my safety. You may not appreciate being safe as we take it for granted but every time I saw the Marriott sign, passed the barocaded car entrance with guns and dogs, pulled up at the front, passed through the metal detector and was patted down, I felt safe. In all my travels I have come to the conclusion that people are generally good everywhere. I knew there was something wrong in Egypt, I just did not feel safe. It was an experience that I am happy to have lived through but would not like to live through it again.)
US consumption grows at its fastest rate in five years, latest figures show – Pg. 1 ‐ The US economic recovery is speeding up, with consumption growing at its fastest rate in five years during the last quarter of 2010 ‐ The overall economy grew at a seasonally adjusted, annualized rate of 3.2% in the fourth quarter,… ‐ …robust increase in consumption, exports and investment raised hopes that the private sector would be able to lead a sustained expansion in 2011 ‐ The figures contrasted with news this week of a shock contraction of UK gross domestic product in the final quarter of 2010 ‐ Consumption picked up even before a temporary cut to payroll taxes kicked in at the start of 2011,… ‐ Some economists noted that part of the increase in the US growth was fuelled by a fall in the savings rate from 5.9% to 5.4%
Stop bashing the bankers, ministers told – Pg. 3 ‐ Governments around the world must stop banker‐bashing and create the right environment for lenders to support economic growth, some of the world’s most powerful bankers will tell finance ministers today ‐ …degree of confidence that the worst of a full‐blown euro crisis has been averted, there remains the danger of repeated minicrisis across the eurozone for years to come unless authorities act more decisively, …. ‐ Banks suffer from low long‐term rates because they squeeze their margins
Gloomy fiscal outlook sets US on long road to tackle its debt – Pg. 4 ‐ The grim report this week from congressional analysts that the US budget deficit would hit a record this year …. ‐ …short‐term surge in the deficit was the product of the $858bn tax‐cut deal … ‐ The Republicans, who have controlled the House of Representatives since November, are united over the need for a large reduction in spending,… ‐ At home, Tea party‐backed groups are calling for most aggressive cuts, including the elimination of entire government agencies such as the departments of commerce and housing ‐ Potentially even more sensitive are the largest entitlement programmes of social security and Medicare, which form the bulk of the budget and where both parties are facing tough political choices
Bernanke’s QE2 efforts receiving mixed signals – Pg. 15 ‐ The five‐year bond, at the centre of the bonds being targeted by QE2, has seen its yield almost double to 2%, while the benchmark 10‐year yield is up by a third to 3.4% ‐ …the Fed’s aim was not to lower bond yields, as such; it wanted to boost the economy and create (some) inflation, to avoid a deflationary spiral ‐ Another test is the real yield: the amount that can be earned on Treasury bonds after inflation. This yield matters, because Treasury inflation‐protected securities are the safest alternative for anyone considering other investments. If the real yield is low, other investments look more attractive ‐ What of the complaints? First, foreigners. China clearly no longer believes Zhou’s maxim: the Chinese took no time to condemn US policy, and warn of its effect on emerging markets ‐ Beijing, along with many other emerging markets, has tied its monetary policy to the US by tying its currency to the dollar
28 January 2011
S&P cuts Japan’s credit rating amid concerns over debt burden – Pg. 1 ‐ Standard & Poor’s has cut Japan’s sovereign rating for the first time since 2002, saying the government lacks a “coherent strategy” for dealing with its soaring debt (Prof Note: And just what is the US’s “coherent strategy”? Further, while Japan’s debt is higher as a percentage of GDP than the USs, it is larger owed to the Japanese people, not the world. I would think one is more likely to default when one is defaulting on non citizens making the US a larger risk, especially with the world moving away from the dollar as a reserve currency..but hey…that is just me) ‐ The one‐notch cut to AA‐ puts S&P’s domestic and foreign ratings for Japan on par with China’s as concerns grow about the long‐term fiscal prospects of the world’s third‐largest economy ‐ There are no signs that Japan faces an immediate debt crisis and government bond yields remain very low by international standards, but the state’s debt burden is expected to soar above 200% of gross domestic product this year ‐ The cost of insuring Japan’s sovereign debt against default widened 4bps to 85bp ‐ S&P said that it expected Japan’s fiscal deficit to decline “only modestly” to an estimated 8% of GDP in the year starting April 2013 from 9.1% this fiscal year
Hoarding drives up food prices – Pg. 1 ‐ Governments across the developing world are stockpiling food staples in an attempt to contain panic buying, inflation and social unrest ‐ High food prices have been contributing factor to the recent wave of social unrest across North Africa and the Middle East
S&P strengthens Kan’s hand – Pg. 2 ‐ About 95% of Japanese government bonds are held by domestic investors – compared with about 50% in the case of the US (Prof Note: See rant above!) ‐ And most debt is held by Japanese financial institutions such as banks and pension funds that have few other places to park funds ‐ ….$1,000bn gold and foreign exchange reserves are second only to China’s
German price surge threatens eurozone inflation target – Pg. 2 ‐ Eurozone inflation is likely to have surged above the European Central Bank’s target this month, after Germany reported prices were rising at the fastest rate since October 2008 ‐ The ECB, which earlier this month signaled its willingness to raise interest rates if necessary to combat inflation, aims to keep the annual rate “below but close” to 2% over the medium term. Eurozone inflation figures are – released on Monday ‐ With its economy growing robustly and unemployment falling steeply, Germany is likely to be the eurozone country where “second round” effects would emerge first – for instance through higher wage demands
Trade swell rejuvenates Californian ports – Pg. 3 ‐ …trade at the two San Pedro ports, which combined are the largest in the western hemisphere, came roaring back in 2010, suggesting that consumer demand in the US is strengthening
Two Chinese cities face property tax – Pg. 3 ‐ Beijing is to introduce a property tax in two Chinese cities, the latest measure aimed at preventing a housing market bubble ‐ The State Council said on Thursday that the long‐awaited tax would be introduced as a trail in Shanghai, the country’s business capital, and in Chongquing, a large city in the centre‐ west of the country ‐ Faced with rising political pressure from those shut out of the market, the government has been battling to control house prices since April, when it introduced limits on speculative purchases of apartments. The measures have restricted price increases but have not produced the drop in prices that some officials had hoped for ‐ …the tax will be introduced gradually, with each city allowed to set its own rate
Egypt – Pg. 16 ‐ …tiny and very rich elite, a small middle class and ill‐educated masses (almost 30% of the population is illiterate) ‐ A dictatorial government uses repression and subsidies to keep the peace ‐ One result: a fiscal deficit and total government debt that are 8% and 72% of GDP respectively (Prof Note: I remain amazed that is all of Cairo there is not a single traffic light) ‐ Several emerging market strategists include Egypt, with its 80m people and developing business culture, on their lists of next‐generation growth tigers (Prof Note: Not a chance. Egypt needs to decide what it wants to be first. In Cairo there literally will be a donkey and cart next to an S‐class Mercedes)
Who’s to blame – Pg. 16 ‐ …fault were banks, regulators, rating agencies, corporate governance, the government, over‐the‐counter derivatives and so on (Prof Note: this is BS! The fault was simple…American Culture!)
Hedge funds rebuke Goldman – Pg. 18 ‐ Leading hedge fund managers have hit back at calls for tougher regulation of their industry made by Gary Cohn, Goldman Sachs president, in Davos ‐ New US regulations have forced Goldman to wind down its internal trading operations, leading to a number of traders departing to set up their own funds ‐ In the US, the Securities and Exchange Commission and the Commodity Futures Trading Commission on Tuesday this week passed new rules that will require all US hedge funds managers more than $1bn to file “detailed” quarterly information on their portfolios, investments and strategies
Crisis inquiry points to widespread failures – Pg. 18 ‐ ….accusing the Federal Reserve of having “neglected its mission by not piercing the housing bubble, while finding that Goldman Sachs had understated its benefit from the government bail‐out of AIG ‐ (Prof Note: this issue is so large it MUST be cultural! Has the public school system curriculum been adjusted for the next generation to teach fiscal prudency? Of course not, the school system cannot even figure out the importance to teach constant payment mortgage calculations. Oh, but let us not forget that students learn how to play the recorder and those lucky enough to have home economics learn to bake a cake (instead of balance the family checkbook!))
Bank researchers call for doubling equity safety net – Pg. 18 ‐ The new Basel III rules requiring banks to hold more capital are too weak and should be doubled to provide optimal protection against future economic shocks (Prof Note: How about banks should just be banks?! Quit trading and just be banks. The same song continues to play, the same dance continues to occur, just watch Jimmy Stewart (went to my Prep school by the way) in Miracle on 34th Street…the songs have been song…lets finally listen!) ‐ The paper concludes that global regulators should require banks to hold equity capital equal to 16‐20% of their assets, adjusted for risk ‐ The new Basel III minimum, approved last year, is 7% and phases gradually over eight years
Google abandons property search – Pg. 19 ‐ (Prof Rant: Dammit Google…like Obey One for Princess Leia, you are all we had!) ‐ The US property portal market is more fragmented, with no single site commanding more than 6% of the share of the clicks nationally… ‐ Even so, there are leading websites such as realtor.com, real‐estate.yahoo.com, zillow.com, and trulia.com, which have gradually been pushing out the smaller brokers and agents (Prof Note: LETS TAKE BACK THE STREETS AND PUSH THE REALTORS TO THE CURB…PREFERABLY KICK THEM TO THE CURB!!!)
Concerns over inflation spur move into variable‐rate notes – Pg. 26 ‐ Demand for bonds and loans paying variable rates of interest has surged this year as investors look for a hedge against inflation ‐ Prices of fixed‐rate bonds fall when interest rates or inflation expectations rise ‐ Demand for leveraged loans, which pay interest at floating rates and which are issued by companies with ratings below investment grade, has driven prices for this debt to their highest since July 2007
27 January 2011
Goldman president warns on bank rules – Pg. 1 ‐ …impose more regulation on banks could cause the next crisis by pushing risky activities towards hedge funds and other lightly supervised entities (Prof Note: Is that not LTCM of 1998? How quickly we forget history!) ‐ …Goldman executives were concerned about the build‐up of risk not just among hedge funds but also entities such as the clearing houses set to take over some of the derivatives’ business from banks
CBO predicts record US budget deficit in wake of Obama tax deal – Pg. 1 ‐ The US budget deficit will jump to its widest level on record this year, …. ‐ The CBO said the annual budget shortfall in the 2011 fiscal year would reach $1,480bn – the largest on record – up from $1,290bn last year and $1,410bn in 2009. As a share of the US economy, this year’s projected fiscal gap of 9.8% of gdp would be the second highest since the second world war, up from 8.9% in 2010 and close to the 10% postwar peak of 2009 ‐ The debt‐to‐GDP ratio, which stood at 62.1% in 2010, is expected to rise to 69.4% this year – a level the CBO previously predicted it would not reach until 2020. The CBO is now estimating a 76.2% debt‐to‐GDP ratio in 2020 and cautioned its forecast may be conservative ‐ If the tax deal approved in December is extended, and payments to physicians under Medicare are held constant, as Congress generally does, the ratio would hit 97%, the highest since 1947, by 2021
Fed issues cautious growth upgrade – Pg. 3 ‐ The Federal Reserve made a cautious upgrade to its growth outlook and kept its asset purchase programme at $600bn after its first unanimous vote since 2009 ‐ “Although commodity prices have risen, longer‐term inflation expectations have remained stable and measures of underlying inflation have been trending downward” ‐ The core price index for personal consumption expenditures, the Fed’s preferred measure of inflation, rose by 0.8% on the previous year in November compared with the Fed’s objective of 2% or a bit below ‐ In spite of government support, sales during 2010 fell by 14.2% to 321,000, the lowest level on record
US fightback hinges on innovation – Pg. 4 ‐ …inspiring teachers, more engineers, cleaner energy, smarter scientists and faster trains ‐ …grim picture of the country’s problems, in education, infrastructure and politics, leavened with an uplifting appeal to American traditions of innovation, risk‐taking and public service ‐ …relatively little time was devoted to foreign policy, much was made of the rising economies of the rest of the world: in China, India and elsewhere ‐ “over the next 10 years, nearly half of all new jobs will require a high school degree. And yet, as many as a quarter of our students aren’t even finishing high school” (Prof Note: We are teaching the WRONG things in High School!!! Where in the curriculum is the Constant Payment Mortgage taught….where I ask…WHERE???) ‐ …promised a five‐year freeze in discretionary budget spending but this will make little dent in the deficit, as it skirts the big ticket items of health and social security
Financial industry warned on reform funding – Pg. 4 ‐ The financial industry will have to pay for the implementation of reforms through new fees if Congress fails to provide the funds,… ‐ The CFTC and Securities and Exchange Commission were promised big budget increases by Democrats to fulfill their new duties under the Dodd‐Frank financial reforms ‐ ..the failure to agree a budget has frozen SEC funding at its 2010 level of $1bn
Overarching problems – Pg. 9 ‐ In the American savings and loan crisis of the 1980s, the dealings were even more dubious and the property borrowings far greater; the cost to the US taxpayer ran to more than $100bn (Prof Note: Fannie/Freddie is well over that now…have the bonuses of the executives been clawed back…I am just curious???) ‐ …what started as a seizure in the subprime market in 2007 is increasingly focused on commercial property ‐ …$1,400bn of loan to the sector worldwide mature between now and 2014, of which nearly half exceed the value of the underlying assets ‐ An estimated 30% of mortgages exceed the value of the underlying homes, giving rise to a $700bn shortfall ‐ …only recently that property has rivaled industrial innovation as a focus of the investor euphoria ‐ Property‐based financial crises ensued in the mid‐1970s in the US and UK; in the mid‐1980s in America; in the early 1990s in Japan, the Nordic countries and the UK again; then once again in the English‐speaking countries along with Spain from 2007 ‐ Property, that is, has acted as a sink for excess liquidity when industry’s demand for funds has been weak ‐ …lending capacity of banks has greatly increased since the 1970s. In effect, the safety net governments have placed under financial systems after successive crises has permitted banks to borrow and lend more on a shrinking capital base in pursuit of a high‐risk, high‐ return strategy ‐ …property constitutes the biggest chunk of assets on bank balance sheets. Before 2007 the US appeared to be an exception, but only because property exposure had been moved off balance sheet ‐ …property is the epicenter of pro‐cyclicality in banking. When prices go up, the value of a bank’s capital increases because of the rise in the value of its own properties and of the collateral that supports its lending ‐ Risk in property is then perceived to be declining so the supply of credit to the sector increases, which further pushes up prices in a self‐reinforcing process that ultimately turns into a self‐reinforcing decline. ‐ …explain this pro‐cyclical behavior in the property sector o …in‐built market bias towards optimism (Prof Note: Ever met a developer that thought returns were less than 30%?) o …”disaster myopia”…underestimate the problem of low‐frequency shocks o …interaction of competition myopia o …conventional accounting, which provides incurred losses but not against the probability of loss o …bank bonuses are based on conventional accounting ‐ …fashionable remedy for these problems is macroprudential regulation – using tools such as counter‐cyclical capital buffers and loan‐to‐value limits to prevent excessive credit creation ‐ …it could be that the greatest systemic threat from property now lies not in the developed world but in emerging markets that are importing loose US monetary policy through exchange rate pegs to the dollar
Commercial market outlook – Pg. 9 ‐ Outstanding debt to global commercial real estate is estimated to stand at $6,800bn…. ‐ Of this debt, more than one‐third ‐ $2,400bn – is due to mature in the next two years ‐ Many of these loans were originated or refinanced at the peak of the market in 2006‐07 then extended again under some duress during the crash, which means they are often higher than the underlying assets
State of the Union – Pg. 14 ‐ Mr Obama ignored the fairly carefully crafted suggestions of his bipartisan Fiscal Commission and offered only $400bn of spending cuts over a decade: $40bn annually, just 3% of this year’s expected deficit ‐ The dollar’s reserve currency status still enables it to finance its deficit more cheaply than others ‐ A relatively high birthrate means the old will be a lesser burden on the government than in Japan or Europe
Fair value accounting – Pg. 14 ‐ Leslie Seidman….new chairman of the Financial Accounting Standards Board on Tuesday announced a reversal of the board’s most controversial piece of regulation: mark‐to‐market accounting ‐ Instead of forcing companies, particularly banks, to value their financial assets at market values, the new rules will allow them to value certain ones at historic values, even when the market for those assets falls ‐ …world leaders will be relieved as the compromise brings US standards more into line with the rest of the world, aiding the process of converging the FASB’s rules with those of the International Accounting Standards Board
US lenders in pay‐out plea – Pg. 15 ‐ Fannie Mae and Freddie Mac have been quietly lobbying the US Treasury to cut the dividend the housing finance groups pay on preferred stock issued as part of their government bail‐ out… ‐ As part of the 2008 government takeover of Fannie and Freddie, the Treasury infused both firms with capital in return for senior preferred stock that pays a 10% quarterly dividend. That dividend is double the amount charged to banks that received assistance under the troubled asset relief programme, and more than other rescued companies such as AIG, paid on funds they received from the government
Freddie plots a course out of limbo – Pg. 16 ‐ Freddie and its larger sibling Frannie Mae have borrowed $150bn from US taxpayers to cover losses on boom‐era home loans that have gone bad at a record pace ‐ Formed after the Great Depression to facilitate home ownership, neither Freddie nor Fannie originates loans. They buy mortgages from banks, enabling them to lend more ‐ Fannie and Freddie keep some of those loans, but package most of them into securities that are sold to investors
States ranked on pension gaps – Pg. 24 ‐ Connecticut, Illinois and Hawaii are among the states with the highest combined debt and pension liabilities,… ‐ Republican lawmakers are studying ways for states to go bankrupt, a move that could enable them to renegotiate their pension promises, but one that is likely to be met with fierce opposition in Congress and the financial markets ‐ Studies have valued the unfunded public pension gap upwards of $1,000bn ‐ For 31 states, these obligations amount to more than 100% of annual tax revenues. For 10 states, it is more than 200% ‐ Connecticut has the highest funding needs relative to its economy, taxing power, revenues and number of citizens. Debt and pension gaps amount to $9,366 per citizen ‐ (Prof Note: Remember, If the liability and burden to citizens is to great, people can move!)
26 January 2011
British economy shrinks – Pg. 1 ‐ The British economy shrunk in the final quarter of 2010, in a shock contraction that casts doubt on the strength of grown in the industrialized world and the wisdom of early fiscal tightening ‐ …output fell by 0.5% in the fourth quarter… ‐ The contraction was caused by broad‐brush weakness in services and consumption ‐ Economists believe US growth rose to an annualized rate of about 3.5%, fuelled by a recovery in consumer spending ‐ The UK, which has the world’s sixth‐largest economy, suffered heavy snows and abnormally low temperatures through much of late November and December ‐ Weak growth also shows the risks of the UK’s aggressive programme to cut its fiscal deficit ‐ …sterling fell 1.2% against the dollar and the yield on UK government bonds fell as investors put back expectations of an earlier hike in interest rates
Successful debut for bail‐out bond is vote of confidence in Europe – Pg. 1 ‐ The eurozone bail‐out fund saw heavy demand for its debut bond issue on Tuesday, a vote of confidence in Europe as it battles to contain its debt crisis ‐ Investors like the EFSF bonds as they have a triple A ratings, yet offer a big premium over German Bunds
IMF raises world growth outlook as UK stalls – Pg. 3 ‐ The US fiscal stimulus package agreed late last year and the Federal Reserve’s autumn decision to restart quantitative easing have significantly improved the growth outlook, according to the fund ‐ Increasing its forecast for US 2011 growth by 0.7% to 3%, the fund credited the tax‐cutting deal between Barack Obama, US president, and the outgoing Congress, which also extended unemployment insurance ‐ The IMF also forecast faster growth in German and Japan and thought it was most likely that the eurozone will not succumb to a new crisis ‐ The new stimulus sows the seed of a longer‐term crisis in the US public finances, the fund warned on the day the president will address the issue in his second State of the Union address to Congress ‐ It projected that gross US government debt would hit 110% of national income by 2016, and the deficit this year will be more than twice the eurozone ‐ In the immediate future, the greatest risk to the global economy came from Europe,… ‐ The fund again criticized emerging economies, including China for continuing to run trade surpluses at the same time as many are damping exchange rate appreciation ‐ The fund recommended allowing currencies to appreciate to “combat over‐heating pressures and facilitate a healthy rebalancing to domestic demand”
Obama to endorse spending freeze – Pg. 6 ‐ The five‐year non‐security spending freeze – which does not include large entitlements such as social security and government healthcare programmes such as Medicare and Medicaid – is more aggressive compared with last year’s White House budget, which proposed no increases in discretionary spending for three years
House price fall raises double dip fears – Pg. 6 ‐ US home prices fell for the first consecutive month in November, dropping to the lowest level since June 2009 and raising fears that a double dip in the housing market could deal a blow to the economic recovery ‐ House prices in the 20 biggest US cities fell by 0.5% on a seasonally adjusted basis,… ‐ Home prices have been plagued by a vicious cycle of high unemployment and foreclosures, which are causing houses to be deeply discounted ‐ Since the housing boom faded in 2006, home prices have fallen 30.3% nationally and cities that had experienced the sharpest price inflation are now suffering the most
London set for Russian listings rush – Pg. 24 ‐ Four industrial and mining companies from Russia are set to list in London within the next few weeks, … ‐ The companies are taking advantage of a narrow window before the state steps in with its own capital raisings
US muni bond sales dray up amid concerns over defaults – Pg. 24 ‐ Fundraising by US states, cities, hospitals and other public bodies has plunged as fears of defaults and bankruptcies have intensified this month ‐ January is typically a month of low new issuance for the $3,000bn municipal bond market, but growing concern about the health of state and local economies in the US and record selling of muni bonds by retail investors have pushed borrowing costs higher
25 January 2011
IMF sees stimulus fuelling US growth – at a cost – Pg. 1 ‐ Revising its forecast for US growth in 2011 higher by 0.7% to 3%, the IMF cited the tax‐ cutting deal between President Barack Obama and the outgoing Congress ‐ But the new stimulus has sown the seeds of a longer‐term crisis in the US public finances, the IMF warned on the day the president will address the issue in his second State of the Union address to Congress ‐ The fund saw a more rapid recovery in Germany, Japan, eastern Europe and Latin America and suggested that the eurozone would most likely not succumb to a new crisis ‐ It projected that gross US government debt would hit 110% of national income by 2016
Sarkozy urges G20 capital code – Pg. 2 ‐ …code of conduct to regulate international capital flows on Monday amid warnings that the money pouring into emerging economies would grow again in 2011, exacerbating tensions seen last year in the international financial system ‐ Tensions rose last year as private capital flooded from advanced economies into emerging ones, boosting their currencies. Growth economies, led by Brazil and China, said the US was launching a “currency war” when the Federal Reserve added to global liquidity in a second round of quantitative easing
Europe’s stability fund – Pg. 14 ‐ Tarp started out as a vehicle for buying toxic assets from US banks. It became something else entirely: a mechanism for recapitalizing those banks ‐ The European financial stability facility needs an equally drastic makeover to make it a more effective force in ending the eurozone sovereign debt crisis ‐ The EFSF launches its first bond issue today – up to 5bn (euro) for Ireland’s rescue package ‐ Though its headline size is 440bn (euro), its lending capacity is only 255bn because of creditworthiness constraints ‐ …the EFSF is too modest to achieve its overarching purpose: to deter a much larger liquidity crunch in the eurozone than has been seen so far ‐ The European Union faces twin financial problems: some member states face liquidity and perhaps solvency difficulties, and many of its banks are woefully undercapitalized ‐ Tarp was a (relative) success because it became a flexible crisis‐fighting instrument
UK watchdog seeks ‘radical rethink’ on regulation of financial products – Pg. 15 ‐ ….”radical rethink” of consumer protection in the UK, including the possible imposition of fee caps and bans on some retail financial products ‐ The FSA is not the only regulator moving to tighten rules. The US has established a consumer bureau to oversee mortgages and credit cards, while the Securities and Exchange Commission recommended last week that brokers be required “to act in the best interest” of their customers rather than simply recommend “suitable” investments
Spanish banks ordered to boost capital – Pg. 16 ‐ Spain will force its weaker savings banks to raise more capital or face nationalization in an effort to restore confidence in the Spanish economy ‐ …financial institutions would be obliged to have a minimum of 8% of risk‐weighted assets ‐ The requirement would be even higher for institutions that are unquoted or have no private investors and depend on wholesale finance markets to fund more than 20% of their assets ‐ Spain’s 8% capital target, to be implemented by the autumn, goes beyond that required by 2019 under the Basel III capital adequacy rules ‐ Basel III aims for an effective core capital minimum of 7% of risk‐weighted assets
24 January 2011
Obama to focus on centrist agenda – Pg. 1 ‐ President Barack Obama will seek to cast himself as a transformed leader in his State of the Union address on Tuesday… ‐ Mr Obama is expected to set out a centrist agenda embracing two ideas: the government should target investment in areas such as clean energy technology, infrastructure and education, and Washington must come to grips with the deficit “in a responsible way”
Consumer cuts in buoyant economies hit global recovery hopes – Pg. 3 ‐ Consumers in the most buoyant economies are cutting back on weekly shopping bill more than their peers in the economically depressed US and Europe, …. ‐ …appear to undermine hopes that Asian shoppers will fuel multinationals’ profit growth and help rebalance the global economy ‐ …70% of Asians cut their spending to save on household expenses in the fourth quarter of last year. That compares with 62% of European and 65% of North Americans ‐ …84% of North Americans and 69% of Europeans believe their country to be in recession, must 41% of Asians think so ‐ …Asian thrift is historical. The absence of a welfare safety net in China and much of Asia has long fostered a mentality of saving, and the region has some of the highest savings rates in the world ‐ European household spending patterns have remained stable over the year, while North American thriftiness dipped in the fourth quarter
US business cool on cutting deficit – Pg. 3 ‐ A debt crisis in the US would have damaging consequences for corporate America, with higher interest rates crippling demand from consumers and raising borrowing costs for new investments, both domestically and internationally ‐ …aggressive spending cuts at the federal agencies, from the Pentagon to the education and energy departments, could damage the revenue stream and profitability of large government contractors, which are concentrated in the technology and defense industries ‐ The other concern is that any attempt at tax reform aimed at deficit reduction – including an overhaul of corporate taxation – could involve the loss of critical tax breaks and incentives that benefit specific companies and sectors, even if it were accompanied by a lower corporate tax rate
Oversight of banks costs US far more than EU – Pg. 4 ‐ The US spends more than six times as much to supervise banks and other credit institutions as the European Union, … ‐ The various federal and state agencies that supervise banks in the US spent $4.4bn on 18,000 frontline employees in 2009‐10, while the 27 EU nations spent $2.2bn on 10,000 employees.... ‐ It found that the US spends $1m per $1bn of banking revenue, compared with $150,000 in the EU. The ratio is similar for total risk‐weighted assets: the research took into account the banks’ total size adjusted for risk. The US spends $150,000 per $1bn of assets; the EU spends $25,000 ‐ The costs cover day‐today supervision of the system for safety and soundness as well as consumer protection and conduct issues ‐ There are several reasons for the differences. The US has many more very small banks and spends correspondingly more on them. It also has about 10,500 institutions to safeguard, while the EU has 6,500. The two spend roughly the same per bank, at $150,000 ‐ The US also has more overlap between its state and federal agencies ‐ The bank data include small community lending institutions such as US credit unions, UK building societies and Spanish cajas ‐ The US also invests more in areas that the EU has historically neglected, such as consumer protection and winding up failing banks ‐ Last year the US spent $1bn on consumer protection and conduct issues, versus $500m in the EU. The Federal Deposit Insurance Corporation has a programme for resolving failed banks that costs $300m a year. EU countries, with the exception of a new programme in the UK, spend almost nothing except in emergency situations
Oil outlook veers from record high to market crash – Pg. 4 ‐ For countries that have experienced a devaluation of their currencies against the dollar since 2008, effective oil prices are even higher. ‐ For oil importers, they squeeze incomes, reducing demand ‐ Stagflation – the combination of stagnation and inflation – is the usual result. The reverse is true in oil‐producing and exporting countries ‐ Pressure builds in sovereign wealth funds in oil‐producing countries to recycle their petrodollars into peripheral European debts and increasingly complex wrappers are invented to persuade Germany it is not standing surety for other eurozone sovereign debt, while convincing international investors that it is
Obama urged to take moral lead on gun control debate – Pg. 7 ‐ The White House has so far refused to endorse legislation proposed by one gun control advocate,….that would outlaw large magazine clips that have been used in numerous mass shootings
An uncertain outlook – Pg. 8 ‐ The problem of redefaults is only one of several headwinds facing the US housing market – and is among the factors that has made a recovery in house prices elusive ‐ Home prices are expected to decline yet again this year – for the fifth year in a row – and the number of houses entering foreclosure is rising ‐ Housing concerns are centered on three issues. First, housing accounts for one‐quarter of US households’ assets. ‐ Second, bond investors and banks remain exposed to further mortgage losses. ‐ Third, the decline in house prices makes it even more difficult for Washington to extract itself from financing mortgages. Currently more than 90% of new US mortgages are guaranteed by government‐backed agencies… ‐ Already some 5.6m homes are in some stage of delinquency or foreclosure, meaning that the borrower is at least three months behind on payments – a record number of soured loans. As many as 1.5m additional borrowers are expected to default this year,… ‐ The foreclosure process is becoming increasingly bogged down by litigation
Battle with investors over who bears subprime losses – Pg. 8 ‐ Investors in America, Europe and elsewhere who gobbled up $1,400bn worth of securities backed by US mortgages in the run‐up to the financial crisis have seen the value of their assets plunge ‐ Last week, BofA estimated that its potential exposure could be “$7bn to $10bn”
Property loans – Pg. 16 ‐ Yields on this debt are now about 200bps above US Treasuries, almost one‐fifth lower than the beginning of the year and less than half the level they traded at a year ago ‐ US commercial property investors who bought into lower‐grade high‐yield properties backed by swaths of debt before the crisis remain the most exposed. Vacancy in sub‐triple A properties are still double their pre‐crisis levels in many areas, and interest rates can only move one way
22 January 2011
Obama gives GE chief key jobs role – Pg. 1 ‐ …appointment of Jeff Immelt, the General Electric chief executive, to advise him on the economy and jobs ‐ …single biggest problem facing the administration – unemployment – remains persistently high, at 9.4% ‐ The council replaces an advisory board headed by Paul Volcker, former Federal Reserve chairman, that was established after the financial crisis
German growth sustains eurozone – Pg. 2 ‐ German, French and Belgian business sentiment picked up by an unexpectedly high degree at the start of the year, suggesting that Germany’s broadening economic recovery is sustaining manufacturing in other parts of the eurozone ‐ Economists see Europe’s largest economy growing about 2.5% this year, against forecast French growth of only 1.5% and a Belgian rate of 1.8% as public spending cuts and oil price rises bite
Leading investors raise alarm on inflation – Pg. 2 ‐ Some leading global investors have turned bearish on government bonds from developed countries as they warn of the growing danger of inflation ‐ In Europe, inflation has risen above the European Central Bank’s target for the first time in more than two years, leading investors to be on eurozone and UK interest rate rises this year ‐ Markets have been pricing in higher inflation since the summer. Break‐even rates – which measure investors’ expectations for inflation – have risen steadily since August in the US and UK and Germany to 2.2%, 3.1%, and 2% respectively but are still reasonably subdued ‐ Inflation has been strongest in emerging markets such as China, where inflation was 4.6% in December, …. ‐ Bankers said there was increasing demand for floating‐rate debt where interest payments increase as rates do
Move to allow state bankruptcy – Pg. 4 ‐ Republicans in the House of Representatives are studying the viability of legislation to allow states to seek bankruptcy protection as a solution to their fiscal woes ‐ By law, they cannot go bankrupt, and some are advocating this as an option to prevent future federal bail‐outs and allow states to re‐emerge from insolvency in a sounder financial state ‐ The chances of such legislation advancing appear limited because of constitutional issues amid fears that the possibility of state bankruptcies could exacerbate turmoil in the municipal bond markets, raising borrowing costs, and could reduce incentives for state governments to tackle their budget gaps ‐ Public sector unions might well fight any move to allow state bankruptcies, since their influence could be severely curtailed in any bankruptcy proceedings ‐ Last month Mr Nunes, Mr Ryan and Darrell Issa, another House Republican, introduced legislation that would ban a federal bail‐out of state pension funds. The bill would also require greater disclosure by states of the risks to the financial health of their pension funds, preventing their issuing of tax‐exempt bonds if they failed to do so. Statutory bankruptcy for states would be a far bigger step
Japan to consider abolition of death penalty – Pg. 6
On the back foot – Pg. 10 ‐ British inflation is real, it is back and it is hurting. Annual rises in the consumer price index have exceeded the Bank of England’s 2% target for four‐and‐a‐half of the past five‐and‐a‐ half years. At 3.7% in December and set to rise to above 4%... ‐ The problem is exacerbated by rises in value added tax this year and last, and by the sharp fall in the pound driving up import prices ‐ Under Anthony Barber, during the boom of 1973‐74, inflation exceeded 25%... ‐ Following the boom under Nigel Lawson, it peaked in 1990 above 10% ‐ One persistent fear for investors is that the Bank is deliberately stroking inflation to whittle away public debt, approaching 80% of national income. As inflation rises, the ratio of the national debt to the cash value of the UK economy falls, making the burden look more manageable. If wages rise with inflation, the proportion of incomes people need to spend on servicing debt falls too ‐ Sterling’s fall of more than 20% since the start of 2008 has also caused a one‐off rise in import prices ‐ A second strand of reasoning from the Bank is that inflation can be seen in prices but not in many other parts of the economy
21 January 2011
Hopes of rebound in commercial real estate market – 1 ‐ The prices of bonds backed by loans for office towers, shopping malls and hotels are soaring, signaling growing confidence among investors that the commercial real estate sector is on the road to recovery ‐ …investors see signs that the market will stabilize in the next six to 12 months (Prof Note: Not this investor!!!) ‐ Occupancy rates for offices, traditionally one of the last commercial‐property sectors to rebound, are stabilizing, … ‐ So far this year, spreads on CMBS, which measure the risk premium relative to government bonds, have hit their lowest levels since July 2008.
Turkey cuts rates to deter capital inflows – Pg. 3 ‐ Turkey’s central bank has pressed ahead with its unorthodox policy of cutting interest rates to deter speculative capital inflows, in a surprise move that will heighten fears of overheating in one of the Europe’s fastest‐growing economies ‐ …historic low of 6.25% … ‐ Inflation, which was within the central bank’s target band at 6.4% in December, is likely to moderate in the next couple of months, giving the central bank more leeway to pursue its experimental policy approach ‐ The lira, which has lost more than 10% of its value against the dollar since November, weakened after the decision
Fears over pace of China’s growth – Pg. 4 ‐ The national economy expanded at an annual rate of 9.8% in the final quarter of 2010, and grew 10.3% for the entire year. Consumer price inflation slowed to 4.6% in December, after reaching a more than two‐year high of 5.1% the previous month ‐ For the whole year, consumer prices rose 3.3%, above Beijing’s target of 3% ‐ This month the Beijing municipal government increased minimum wages by 21% ‐ Faced with accelerating inflation, Beijing has raised the amount banks must hold on reserve seven times over the past year, and increased interest rates twice in the fourth quarter ‐ To get around tighter government lending quotas, Chinese banks moved trillions of renminbi in loans from balance sheets last year, repackaging them as wealth management products
Jobs and home markets in US show signs of improvement – Pg. 4 ‐ …new claims for jobless benefits fallings sharply and the overall number of Americans collecting unemployment insurance dropping to the lowest level in more than two years
Housing policies helped trigger crisis, says OECD – Pg. 4 ‐ Badly designed housing policies helped trigger the financial crisis that began in 2007, … ‐ ….removing tax benefits for home ownership and lifting restrictions on rents ‐ ….financial innovation in mortgages had been a big factor in driving up housing prices ‐ …consider treating home ownership like any other investment. ‐ This would mean taxing what is known as “imputed rent”, defined as the rental value of the property, less depreciation and interest expense on mortgage debt ‐ That would enable residents to make a clearer comparison between the cost of owning or renting a home and make the latter closer in cost to the former
Signals of a shift – Pg. 7 ‐ Beijing prides itself on foreign policy of non‐interference, a pledge to do business with whatever government is in power in a country without being drawn into domestic political issues
Lacklustre demand for Tips auction – Pg. 20 ‐ A record sale of inflation protected US Treasury bonds on Thursday met lackluster demand as investors were overwhelmed by the scale of the issue ‐ The Treasury sold $13bn of 10‐year inflation‐protected securities, or Tips,… ‐ The core rate of inflation, which strips out food and energy prices and which is watched by policy makers, remained steady at an annual rate of 0.8%
Wall Street’s ‘Bernanke’ rally runs into headwinds – Pg. 20 ‐ US equities have been on a bull run since late August and early signs from the earnings season suggest the rally may last a while yet ‐ …easy money and recent tax cuts have certainly boosted stocks. Excluding financials, the US market is back near highs of 2007, with midsized companies – the S&P 400 index – hitting a record peak ‐ For many, the missing ingredient in the recovery, amid signs of stronger earnings, is a lack of robust job creation
Battle rages in Hong Kong’s renminbi trade – Pg. 21 ‐ Unlike the mainland, where the People’s Bank of China sets the exchange rate, in Hong Kong the renminbi’s value is able to fluctuate without limits ‐ At one level, there is a simple explanation for the convergence between the offshore renminbi‐dollar exchange rate (known as CNH) and its onshore equivalent (CNY): the amount of renminbi flowing out of the mainland through cross‐border trade deals is more or less equal to the amount of demand for the currency from offshore investors ‐ …renminbi trade settlement scheme….the scheme, at the heart of Beijing’s drive to reduce its reliance on the US dollar, allows Chinese companies to settle their imports and exports in renimbi. It has created lucrative opportunities – through both legal and illegal routes – for companies to exploit pricing differentials between the mainland and offshore markets
Japanese broker offers country’s small investors renminbi bonds – Pg. 21 ‐ …Monex, the country’s largest online brokerage, becomes its first distributor of such debt ‐ The bonds are a portion of Beijing’s Rmb8bn debt issuance in Hong Kong last December, of which there was a Rmb2bn portion of three‐year bonds ‐ Risk‐taking Japanese retail investors have long been keen buyers of assets denominated in high‐yielding currencies as deflation at home has kept rates close to zero for years, forcing them to seek returns overseas
20 January 2011
Obama toughens China line – Pg. 1 ‐ …Asia’s and China’s continuing prosperity has been based on free trade and the stability provided by the presence of the US military in the region ‐ …Mr Obama urged Beijing to end discrimination against US companies and respect human rights, including Tibet
Ministers issues stark warning on Japan’s ballooning national debt – Pg. 1 ‐ Japan has hit a “critical point” where it risks losing investor confidence if politicians fail to reach agreement on how to rein in the escalating national debt,…. ‐ Japan has no difficulties financing its deficit and there is no sign that it could face a sovereign debt crisis in the near future ‐ Japan’s gross national state debt will soon rise above 200% of gross domestic product
Fed prepares its next move after QE2 – Pg. 4 ‐ Fed officials are fairly satisfied with the effects of QE2 despite the sharp rise in 10‐year bond yields since November. They point to other indicators, such as tightening in credit spreads and a recovery in inflation expectations since last August, as evidence that it eased financial conditions ‐ If the economy were to lose momentum again, or inflation were to continue to fall, then the Fed could yet be persuaded to increase its asset purchases. In the other direction, any sharp rise in inflation expectations would rapidly push the Fed towards tightening policy
Banks braced for further changes as reform sinks in – Pg. 4 ‐ What the Volcker rule means in practice o Banks are banned from trading for their own account and prop trading desks must be shut down or sold o Market making and hedging will be allowed but disguising prop trading under these allowed categories will be made difficult by forcing banks to report quantifiable metrics o Trading that generates revenue from price movements rather than spreads, incorporates a high degree of risk, involves assets that are held in inventory for a long time and is initiated by traders rather than customers will be flagged as possible violations o Chief executives forced to attest publicly to the effectiveness of their compliance regime o Unspecified punishment for violators o Banks are banned from trading against the positions of their customers o Possible new information barriers within banks
Mongolia makes tracks to escape neighbor – Pg. 7 ‐ The country is at one of the sweet spots of the global economy. It sets atop huge deposits of the commodities that China needs to fuel its growth ‐ Landlocked and long ignored, Mongolia is using an instrument of 19th‐century geopolitics – railway‐building – as a means of navigating 21st‐century globalization ‐ Mongolians fear they will be smothered by China ‐ …China is already taking 70% of Mongolia’s exports ‐ While Soviet policies caused huge devastation to Mongolian society, Mongolians also remember centuries of conflict with China. The instinct to play the two giants off against each other is deeply ingrained ‐ …country….3m people
Goldman/Wells Fargo – Pg. 14 ‐ Goldman makes almost half its revenues from fixed income, currencies and commodity trading ‐ Well’s biggest division is quaintly named “community banking”.
Japan’s banks urged to help SMEs – Pg. 17 ‐ Japan’s financial regulator has asked banks to examine the losses incurred by small and medium‐sized companies through foreign exchange derivatives and to consider ways to support businesses ‐ Many Japanese companies which export their products buy derivatives to hedge their foreign exchange exposure, particularly to the dollar‐yen exchange rate ‐ The yen’s advance to 15‐year highs against the dollar prompted the government to intervene in the markets last September for the first time in six years
Portuguese credit downgrade is looking, warns Moody’s – Pg. 23 ‐ Portugal is likely to suffer a credit downgrade from Moody’s….because of its high public debt levels, worries over economic growth and funding difficulties for the country’s banks ‐ …debt affordability was one of the main concerns in a credit rating review, which would probably result in a downgrade of Portugal’s sovereign debt rating within three months ‐ Portugal’s central bank is forecasting a recession in 2011, with a sharp contraction in domestic demand ‐ Fitch downgraded Portugal’s sovereign debt rating twice in 2010. Moody’s and Standard & Poor’s both warned in December that they could also downgrade Portuguese debt
19 January 2011
SEC officials say budget squeeze is hampering enforcement drive – Pg. 1 ‐ SEC officials said that without investment in technology, the agency could not deal better with market issues such as last May’s “flash crash” or improve the enforcement division that missed the Madoff multibillion dollar fraud ‐ Congress last month failed to agree a 2011 budget and is funding the government through short‐term “continuing resolutions”, which have frozen SEC funding at its 2010 level of $1bn ‐ The Dodd‐Frank financial reform act authorized Congress to double the SEC’s budget by 2015 ‐ Due to the funding shortfall, SEC officials cannot replace most employees who leave. Offers to hire staff have been frozen unless approved by Ms Schapiro’s office….
Cost of Portuguese debt rises – Pg. 2 ‐ Portugal’s cost of borrowing brushed close to euro‐era highs on Tuesday as Germany resisted calls to bolster the eurozone’s bailout fund for heavily indebted economies on the continent’s periphery ‐ Belgium, which is also under market scrutiny because of high debt levels and political uncertainty, raised only 3bn (euro) in 10‐year bonds compared with 4bn (euro) or 5bn (euro) in the past
Fuel rises spur UK inflation – Pg. 2 ‐ Markets are expecting interest rates to start rising in the UK during the summer after soaring energy and food prices helped push up inflation much more than expected in December ‐ Inflation jumped from 3.3% to 3.7% last month, … ‐ The unexpectedly sharp rise in prices leaves the Bank with a dilemma because inflation looks set to rise above 4% in the next few months – more than double its 2% target – while the nascent economic recovery looks fragile ‐ Most of the rise in inflation last month came from higher petrol prices, …. ‐ A lift in the value added tax to 20% in January is likely to provide another push to inflation next month, as retailers are expected to pass on more of the tax increase than they did for a similar increase at the start of 2010
California’s potholed city presents view of the future – Pg. 4 ‐ A strained property tax base, dwindling industrial activity and the aftermath of decades of generous pay and pension deals for city workers are taking their toll on many cities across the state ‐ …a 1999 state law that boosted benefits, allowing some workers to retire in their 50s on 90% of their salaries (pensions) ‐ Escaping these commitments will be hard – even in bankruptcy. Unlike private pension arrangements, those for public workers cannot be undone.
Beijing builds to hold US power at bay – Pg. 6 ‐ …China tested a new stealth fighter aircraft,… ‐ The US defense community is considering how to counter China’s strategy of denying access to the waters off its coast ‐ The Chinese emphasis on submarines has also put pressure on the US navy to lift its underwater capability and quicken the modernization of its own fleet ‐ One of the most sensitive questions in both countries is whether China will develop overseas bases to support and expand its reach, and whether the US should extend its existing system
US banks – Pg. 14 ‐ What banks fail to admit publicly this time is that there is nothing remotely normal about the US economy right now ‐ …US policy interest rates have been near zero for an astounding 25 months, with seemingly no end in sight ‐ Borrowing costs have been at rock bottom for so long that this fact is almost forgotten
China and Russia main sellers of US Treasuries after QE2 – Pg. 22 ‐ China and Russia were major sellers of US Treasuries in November as bond yields surged sharply higher that month, … ‐ China remained the largest foreign holder of US Treasuries, but its portfolio shrank $11.2bn to $895.6bn in November ‐ Russia reduced its Treasury holdings from $131.6bn to $122.5bn, its lowest level since last April
18 January 2011
China’s lending hits new heights – Pg. 1 ‐ China has lent more money to other developing countries over the past two years than the World Bank, … ‐ The volume of overseas loans by the two banks indicates how Beijing is forging new patterns of China‐led globalization, as part of a broader push to scale back its economic dependency on western export markets ‐ The agreements include large loan‐for‐oil deals with Russia, Venezuela and Brazil, as well as loans for an Indian company to buy power equipment and for infrastructure projects in Ghana and railways in Argentina ‐ The World Bank figures are for the International Bank of Reconstruction and Development, the bank’s main lending arm, and the International Finance Corporation, which lends to the private sector
Goldman pulls Facebook offer from US clients amid legal fears – Pg. 1 ‐ Goldman Sachs has scrapped an offer to its wealthy US clients to participate in a $1.5bn Facebook investment, dealing a blow to its efforts to pull off one of the highest‐profile private financing for a US company in years ‐ The offer will still be open to investors elsewhere, but the bank said the high level of publicity surrounding the plan threatened to breach US securities laws, which are designed to limit the promotion of private share sales ‐ Demand for shares in the social networking company – which has penciled in a full initial public offering early next year – has soared in private markets this year, making Goldman’s ability to offer the stock to its most favoured clients a coup for the bank
Canada tightens mortgage rules – Pg. 3 ‐ Canada imposed new curbs on mortgage lending on Monday amid concern about spiraling consumer debt fuelled by high property prices and low interest rates ‐ Canada has a more conservative home‐finance system than the US. ‐ Canada’s property market has remained resilient throughout the US subprime crisis. ‐ However, the high prices coupled with low interest rates have spurred a sharp rise in consumer debt ‐ Statistics Canada estimates that the ratio of debt‐to‐household income reached a record 148% in December, higher than US levels for the first time in more than a decade ‐ Under the new rules, the maximum amortization period for government‐insured mortgages with loan‐to‐value ratios of more than 80% will drop from 35 to 30 years ‐ The limit was earlier lowered from 40 years ‐ The maximum amount of home‐equity loans will fall from 90% to 85% of the value of the property ‐ In addition, the government will stop insuring home‐equity loans, which are almost all variable‐rate products, and thus especially vulnerable to an upturn in interest rates
A strategy to straddle the planet – Pg. 6 ‐ As the financial crisis recedes, one of the big fears is that the process of increasingly closer links among big economies worldwide will go into reverse as governments and countries look inward ‐ In recent years, a range of important countries have found that China rather than the US is their principal trading partner, from neighbouring Japan and South Korea to commodity rich Australia and Brazil
An embarrassment of riches, albeit ‘unreal’ – Pg. 7 ‐ …China’s $2,850bn in foreign exchange reserves, … ‐ …Beijing could leverage its position as the single largest foreign owner of US Treasury securities ‐ China struggles to find reliable, liquid investment opportunities for its embarrassment of riches ‐ But with only about a quarter of China’s foreign exchange reserves invested in euro‐ denominated assets – and given Beijing’s desire to reduce its reliance on dollar assets – European officials say privately that China is not in a position to cajole the EU
States warned of $2,500bn public pensions shortfall – Pg. 13 ‐ US public pensions face a short‐fall of $2,500bn that will force state and local governments to sell assets and make deep cuts to services, …. ‐ The severe US economic recession has cast a spotlight on years of fiscal mismanagement, including chronic underfunding of retirement promises ‐ …estimated a funding gap for pension, healthcare and other non‐pension benefits, such as life assurance, of at least $1,000bn as of the end of fiscal 2008 ‐ The gap has risen from an estimate of more than $2,00bn at the end of 2009 ‐ Pension liabilities are not included in state and local government debt figures
Investors snap up US company debt – Pg. 22 ‐ Banks and companies have borrowed record amounts in the US bond markets in the first two weeks of the year, with investor appetite for debt showing no signs of waning ‐ January is historically a busy month in the bond markets as borrowers try to get ahead of their funding needs and investors cast round for buying opportunities
Half European securitizations face downgrading by agency – Pg. 22 ‐ Nearly half of all European securitizations could be downgraded following changes in the criteria Standard & Poor’s uses to measure the creditworthiness of deals ‐ The agency has estimated that up to three‐quarters of European commercial mortgage‐ backed securities could be affected, and up to 90% of the far larger residential mortgage‐ backed securities market. ‐ Under the new rules, if a counterparty for a derivative such as a swap drops to A minus, it will be required to post collateral within 10 business days. If a counterparty drops to triple B plus (the lowest investment grade rating) they have 60 days to replace themselves with another eligible counterparty
17 January 2011
‘Bric’ creator adds Mexico, Korea, Indonesia and Turkey to the list – Pg. 1 ‐ ….”growth markets” ‐ The new approach will involve looking at fresh ways to measure exposure to equity markets beyond market capitalization – for example, looking at gross domestic product, corporate revenue growth and the volatility of asset returns ‐ Mexico and South Korea account for 1.6% each of global GDP in nominal terms. Turkey and Indonesia are worth 1.2 and 1.1%, respectively ‐ China is the world’s second‐largest economy, at 9.3% of global GDP (the US is worth 23.6%), while Brazil, India and Russia combined provide a further 8%
Bail‐out fund’s powers face overhaul – Pg. 2 ‐ European leaders are coalescing around a plan to give the eurozone’s 440bn (euro) bail‐out fund new powers to buy bonds of besieged economies, a move that officials say will be debated by finance ministers in Brussels on Monday ‐ European officials say that Berlin is demanding that governments commit themselves to greater austerity measures – particularly the EU’s southern members – in exchange for making changes to the EFSF ‐ Another proposal to be discussed at the finance ministers’ meeting on Monday will be increasing the EFSF’s lending capacity. Under current rules, the EFSF can raise the full 440bn (euro) from investors, but can lend only about 250bn (euro) of that amount, since it must keep billions in reserve in order to maintain a triple A rating from credit agencies ‐ In order to increase the fund’s lending capacity and retain the triple A rating, Germany and other countries with sterling credit worthiness would have to step up their commitments to the fund
Derivatives trading platform bypasses intermediary banks – Pg. 19 ‐ A new type of derivatives trading platform has emerged that would allow pension funds and industrial companies to transact off‐exchange derivatives between themselves, cutting out banks that have long acted as intermediaries in such deals ‐ The move breaks new ground in the post financial crisis push to regulate the vast over‐the‐ counter derivatives markets ‐ Reforms stemming from the Dodd‐Frank act in the US and similar proposals by the European Commission call for many OTC derivatives to be traded on exchanges and other types of platform, and that they be processed through clearing houses to protect the financial system against the fallout from another big default, such as that of Lehman Brothers in 2008 ‐ The aim is also to reduce the role of big Wall Street and European banks that have controlled dealing in, and pricing of, OTC derivatives, and bring transparency to the system
15 January 2011
Inquiry finds SEC missed chances to uncover suspected Ponzi scheme – Pg. 1 ‐ Securities and Exchange Commission examiners missed several red flags and failed to uncover an alleged $550m Ponzi scheme run by Westridge Capital Management that lasted more than a decade,… ‐ …report details several missteps by the examiners, including failing to follow up on their own suspicions about the firm’s highly leveraged investment strategy
Fed misread dangers of housing crash, minutes show – Pg. 2 ‐ The Federal Reserve spotted most of the issues that would cause the 2007‐08 crisis in a discussion on the housing market in mid‐2005, … ‐ The Fed publishes full transcripts of FOMC meetings with a five‐year lag. In June 2005 committee members requested a full‐day discussion of the rapid risein house prices that was then underway ‐ During the meeting Fed staff told the FOMC that housing seemed to be over‐valued by about 20%, based on price‐to‐rent ratios, but they played down the role of aggressive mortgages such as interest‐only loans, and said that monetary policy could respond effectively to a house price slump ‐ Members of the FOMC saw how banks that sold on mortgages no longer had incentives to make good loans
Brazil acts to curb strong rise in real – Pg. 2 ‐ Brazil has reached further into its arsenal of measures to intervene in the exchange rate to help curb the appreciation of its currency, the real, before an expected increase in interest rates next week ‐ The central bank sold nearly $1bn in reverse currency swaps on Friday in a move designed to counter upwards pressure on the exchange rate in the futures market. It was the first time it has held such an auction since May 2009 and follows separate measures last week designed to curb short selling of the dollar
CBRE leads race for ING property arm – Pg. 10 ‐ CB Richard Ellis, the US‐listed property services firm, has emerged as favourite to acquire ING’s real estate group to create the world’s largest property funds business with more than $100bn under management ‐ CBRE, the world’s largest property consultancy with 29,000 staff and more than 300 offices worldwide, is the frontrunner to buy the global real estate investment management platform in a deal valued at about $1,3bn… ‐ The deal would be transformational for the US group, catapulting it to become the world’s largest investment manager as well as the largest adviser. The stable fee income from the property fund management platform is expected to complement its advisory business, which traditionally generates fees through instructions on investment sales and leasing that is strongly linked to the volatile property cycle
14 January 2011
Offshore renminbi rules eased by Beijing – Pg. 1 ‐ China took a further step towards increasing its currency’s global role, allowing domestic companies to move renminbi offshore for investment purposes ‐ The shift came as the People’s Bank of China allowed the currency’s daily trading reference point to strengthen through the Rmb6.6 per dollar level for the first time on Thursday, a day after Time Geithner, US Treasury secretary, reiterated concerns about China’s currency policy ‐ Companies have been allowed to use the renminbi to settle international trade transactions since July 2009, under an initiative to reduce Beijing’s reliance on the US dollar ‐ Foreign companies have few ways to use renminbi besides buying goods from China, depositing it in low‐yielding accounts and bonds, or swapping it into other currencies. Chian maintains strict controls on investment from abroad ‐ According to bankers, the government is encouraging large state‐owned enterprises to make acquisitions in renminbi rather than other currencies ‐ China is trying to turn the renimbi into a global currency for trade without abandoning extensive controls on the movements of capital – a balancing act that economis say will prove increasingly difficult as the renminbi accumulates offshore
Tough requirements on bonds that banks count towards capital – Pg. 1 ‐ Global regulators have imposed tough requirements on the bonds that banks can count towards their regulatory capital in a bid to kill off a funding technique that has been blamed as a key contributor to banks’ need for taxpayer bail‐outs ‐ The changes affect so‐called hybrid securities which sit between equity and debt and were intended as a buffer to soak up unexpected losses. However, during the crisis they failed to take losses, leading those investors unaffected even as banks accepted hundreds of billions in rescue funds from governments ‐ The Basel Committee on Banking Supervision said on Thursday that banks would have to make sure that hybrids include a mechanism for taking losses, known as “bail‐in”, that allows them to be converted into equity or written‐off ‐ The committee said any hybrid capital issued after 2013 would either have to be issued in a country that automatically imposes bail‐ins or the bond must include a formal trigger ‐ A bail‐in would be initiated by an injection of taxpayer money or a decision by the bank’s main regulator that “a write‐off, with0ut which the firm would become non‐viable, is necessary”
ECB takes harder line on inflation – Pg. 4 ‐ The European Central Bank has struck a noticeably tougher stance on inflation, raising the chances of an interest rate increase even as the eurozone debt crisis maintains intensify ‐ …ECB had even raised interest rates in July 2008 – when the eurozone was in recession and just a few months before the collapse of Lehman Brothers investment bank
Paydown problems – Pg. 7 ‐ As it stands today, the US borrows about 40 cents of every dollar it spends ‐ The big fear is that if no action is taken, investors might eventually punish the US for its fiscal laxity. That would raise borrowing costs for businesses and consumers, force severe austerity measures and risk social unrest ‐ In December, the president announced a two‐year freeze on pay for civilian government workers, a nod to the need for budget cutting to begin at some point ‐ …start tackling social security reform and set a framework for tax reform, these measures will be incorporated into the White House’s proposed annual budget, to be presented mid‐ February ‐ Anytime between March 31 and May 16, the Treasury estimates, US debt will hit its congressionally mandated limit of nearly $14,300bn (Prof Note: Aye Caramba…that is 100% of GDP!) ‐ America’s budgete deficit in the year to last September amounted to about $1,300bn – the second highest on record ‐ The commission proposed raising the state pension age, curbing government healthcare and limiting popular tax breaks such as the ability to deduct interest paid on mortgages (Prof Note: YES!!! I am 100% for the loss of interest deductibility on houses! Take leverage away from the average American that only has a high school diploma and does not understand leverage!!!) ‐ Some potential options to cut the deficit – such as a consumption or value added tax, or a tax on carbon ‐ ….
13 January 2011
Forecasts deepen fears of food crisis – Pg. 1 ‐ Agricultural commodities prices leapt after the US government surprised traders by cutting stock forecasts for key crops, putting the world a step closer to a new food crisis ‐ While officials are drawing comfort from stable rice prices, crucial for feeding Asia, they warn that a sustained period of high costs, especially in grains, would hit poorer countries. ‐ The US Department of Agriculture said the ratio of global stocks‐to‐demand would fall this year to levels “unseen since the mid‐1970s, reflecting an accelerated pace of vegetable oil” consumption for food and fuel ‐ The US is the world’s largest corn supplier, meeting more than half of global import needs. Corn is an important ingredient in animal feed, and the tightening of the market partly reflects stronger appetites for meat in emerging markets. Record ethanol production in the US will also swallow up nearly 40% of US crop
Geithner turns up economic heat on China – Pg. 1 ‐ China needs to reduce unfair subsidies and stop the theft of intellectual property as well as letting its currency appreciate,… ‐ …Mr Geithner widened the range of US concerns about Chinese economic policy well beyond the currency that has been a focus of Capitol Hill’s anger with Beijing ‐ …US needed to invest more in research and development, reform education and improve public infrastructure
Germany backs plans to give new powers to eurozone rescue fund – Pg. 1 ‐ Germany is backing proposals to give new powers and lending capacity to the $577bn eurozone rescue fund, even If that means increasing its financial guarantees, … ‐ Berlin has balked at any new EU powers to combat market panic. But Germany’s willingness to strengthen the EFSF suggests the bloc is uniting behind a revised strategy
Portugal move eases European debt crisis – Pg. 2 ‐ By containing Lisbon’s borrowing costs, the ECB – which holds its first interest‐rate setting meeting of 2011 today – has been able to prevent some of the gloomiest market fears about the eurozone from becoming self‐fulfilling
Domestic demand spurs growth in Germany – Pg. 3 ‐ Germany last year experienced its most dramatic economic turnaround since the country’s reunification in 1990, with tentative signs of a rebalancing away from export‐led growth ‐ Gross domestic product expanded 3.6% compared with the previous year – at least partly reversing a 4.7% contraction in 2009, … ‐ But despite Berlin’s proclaimed fiscal prudence, the full effects of tightening measures implemented by Berlin have yet to be felt. Government spending rose 2.2% last year, while the public sector deficit rose to 3.5% of GDP. It was the first time Germany had breached the 3% deficit limit set for the eurozone in five years, although less egregiously than other countries
Tax increase of up to 67% in US state angers business – Pg. 4 ‐ Illinois legislature approved tax increases of up to 67% on Wednesday – a move that has angered companies in the cash‐strapped state – just hours ahead of a new legislature being sworn in ‐ The increases – a jump in income tax from 3% to 5% and a rise in business taxes from 7.3% to 9.5% ‐ are lower than originally proposed, but have angered business groups,…
In a sea of troubles – Pg. 7 ‐ Bermuda is a leading insurance centre, while the British Virgin Islands is the global capital for incorporation of offshore companies
Housing weighs down the recovery – Pg. 9 ‐ A fall in the unemployment rate from 9.8 to 9.4% was largely due to the sharp decline in the labour force participation rate as discouraged workers soared to a new record. ‐ But we face another threat to the recovery: the growing likelihood of a double‐dip downturn in the housing market ‐ Millions of homes stand empty. Home‐buying intentions have slip back and mortgage applications are down dramatically from the already‐depressed levels of a year ago ‐ Estimates of homes wither with loans in delinquency or at some stage of foreclosure are as high as 8m. Equally worrisome is negative equity, where the mortgage exceeds the value of the home ‐ An estimated 5.5m US households are tied to mortgages that are at least 20% higher than the current home value. These are borrowers most likely to default ‐ The raw material for foreclosures – delinquencies – remains on the rise, foretelling a significant increase in the roughly 25% of home mortgages already under water ‐ The MBA estimates 8m homes are 30 days or more behind on payments or in foreclosure ‐ More than 3m homes have been repossessed by the banks since January 2007 ‐ The estimates are that prices will fall a further 10 to 20%, which would bring the total decline from the peak valuations of the first quarter of 2006 to about 40% ‐ An estimated 5.5m US households are tied to mortgages that are at least 20% higher than the home value ‐ Since mortgages average approximately 50% of total home values, the 30 plus per cent decline in home prices to date has already reduced homeowners’ equity by over 60% ‐ Standard & Poor’s believes 70% of loans already modified will re‐default, putting another huge bill on to the back of taxpayers ‐ All previous postwar recoveries have been able to depend on a growing US housing market. That is not the case this time. Indeed, the continuing decline in the housing market is a dagger pointed at the heart of an incipient economic recovery
12 January 2011
Report to highlight alleged conflicts of interest in Goldman’s dealings – Pg. 1 ‐ Goldman Sachs will come in for harsh criticism from an influential US Senate report that will highlight alleged conflicts of interests in the bank’s dealings with clients,… ‐ As part of the reforms, Goldman revealed it had lost more than $15bn on investments with its own capital in 2008…
Japan pledges to buy 20% of pioneering eurozone bond issue – Pg. 1 ‐ …raising expectations that other international investors will support the pioneering fund‐ raising move and help ease the region’s debt crisis ‐ Bankers close to the deal are confident of attracting support from sovereign wealth funds in China, Norway and the Middle East ‐ Some investors said this showed that Berlin could pay a price for the success of the EFSF bond, which is similarly triple A rated, but expected to offer higher yields
Focus sharpens on bail‐out fund – Pg. 2 ‐ Currently, the EU has only two options when a eurozone country finds itself under siege in the bond market: the European Central Bank can use its own balance sheet to buy up the country’s debt in an effort to lower borrowing costs, or the EU must resort to a full‐blown bail‐out ‐ …advocates believe overhauling the EFSF would provide the EU with significantly more tools ‐ Among the ideas under consideration, officials say, is using the fund to purchase bonds of besieged countries, an ability that would come in hand during the current run on Portuguese debt
Taking on gun lobby proved step too far for president – Pg. 4 ‐ (Prof Note: Some of the most polite places I have ever been are shooting ranges. It is very interesting, everyone there knows everyone is packing and I have heard the highest concentration of “excuse me” and “pardon me” and “sorry” at gun ranges. Dare I say it, I DARE, perhaps arming everyone is the solution. Take the advantage away from the criminal and put a gun in everyone’s hand! )
Risk of bust after boom haunts resource‐rich Latin America – Pg. 5 ‐ Brazil, one of the world’s largest exporters of commodities, recently imposed controls to curb the capital inflows that have pushed up its currency, pummeling manufacturers and putting jobs at risk. Chile, the world’s largest copper producer, has also weighed in to currency markets to help its exporters ‐ Underlying the region’s concerns about the strength of its commodities‐fuelled currencies lies a dramatic shift in the continent’s terms of trade. After nearly a century of decline, the relative price of raw materials has risen steadily over the past decade against that of manufactured goods ‐ Commodities account for 53% of regional exports, versus 40% a decade ago. Manufacturing has shrunk by almost a tenth to 15% of output. If sustained, this economic transformation could lead to the so‐called Dutch Disease, a term coined after the Netherlands’ export‐ oriented manufacturing sector plunged in the 1970s after its currency oared following the discovery of a large natural gas field and a rise in energy prices ‐ The first is to increase government savings. This reduces the flood of capital inflows and can be used to build a spare cushion for when the windfall ends ‐ The second is to invest the windfall in ways that boost long‐term productivity, such as education
Basel III – Pg. 12 ‐ Credit where it is due. The Basel III banking reforms include a laudable new technique to help banks deal with credit bubbles. It was announced last month, but is only now getting the attention it deserves ‐ The goals are to help regulators identify financial bubbles and help banks deal with their aftermath ‐ Only aficionados of the Hodrick‐Prescott statistical filter will understand it completely, but the basic idea is to compare the recent pace of credit growth with the historical trend (Prof Note: To damn complicated, if the average college graduate cannot understand it, it is to complicated. The H‐P is a statistical measure to look at tending long‐term rather than short‐ term, hence the filter. Hello…can you say moving average over a long‐period of time? Basically the H‐P decomposes a time series (lay terms). H‐P is also best when there are no permanent shifts in the data (like what happened recently). Simple…we need metrics that average business majors with no graduate degrees can understand. I had to dust off my own grey matter to remember the H‐P) ‐ The technique has two big pluses. First, it is semi‐automatic. There is discretion to tweak the test and interpret the results, but it will be harder to make excuses for credit bubbles (Prof Note: see above). Second, it is cross‐border. All regulators have promised to rein in their own banks’ operations in lands judged to be bubbling by the domestic authorities
Tough test looms for indebted US states – Pg. 21 ‐ …the $3,000bn US municipal bond market could be on the verge of a crisis to rival that in the eurozone, as cash‐strapped states and cities facing big budget and pension deficits struggle to pay their own debts ‐ …states will now have to confront their fiscal deficits without the federal support that has helped them withstand the effects of the downturn ‐ Municipal borrowers have also lost the benefit of the Build America bonds programme, a crisis‐era, federal subsidy for taxable infrastructure bonds that expired at the end of 2010 ‐ The scheme fuelled record muni bond issuance last year and a drop in borrowing costs as it directed more than a quarter of financing needs to deep‐pocketed institutional investors ‐ Individual investors, who represent two‐thirds of the market, withdrew more than $13bn from muni bond mutual and exchange traded funds in the last two months of 2010, an outflow that exceeded the sums they cashed out at the height of the financial crisis in 2008,… ‐ The risk premium – or spread – to triple‐A rated muni bonds on the debt of Illinois, among the most troubled states, has consistently set new records since late 2008
11 January 2011
M&A rush for deals as recovery gains pace – Pg. 1 ‐ A flurry of dealmaking by companies on both sides of the Atlantic has given the year the busiest start for mergers and acquisitions activity for a decade, firming up expectations of a bounceback in volumes as re the economy recovers ‐ With deals worth $34bn announced globally on Sunday and Monday, deal volumes so far this year have topped $83bn, up from $67bn last year. That puts 2011 ahead of the boom years, … ‐ Bankers argue that companies across a broad range of sectors are turning to M&A as they look for growth opportunities globally and consider spending the cash piles accumulated since the financial crisis ‐ US companies are estimated to have more than $1,000bn in cash on their balance sheets and are expected to come under increasing pressure to put those funds to work or return money to shareholders
Goldman revamps reporting structure – Pg. 1 ‐ Goldman Sachs has moved to address criticisms that it puts its interest ahead of its clients’ , introducing a new financial‐reporting structure and dozens of other changes to tehway it deals with customers, counterparties and investors, … ‐ Goldman drew fire from regulators for its actions during the financial crisis, culminating with the Securities & Exchange Commission’s decision in April to file civil fraud charges alleging that the bank had misled investors in a structured product. The bank settled those charges in July, agreeing to a record $550m fine
Bank regulators agree on global sweep to tackle credit bubbles – Pg. 1 ‐ Banking regulators have quietly taken a major step towards harmonized global regulation by agreeing to raise worldwide capital requirements whenever an individual country declares a credit bubble ‐ Part of a larger “Basel III” banking reform package, the “countercyclical capital buffer” heralds a step change in the way national banking regulators interact and is the first concrete example of “macroprudential” regulation that seeks to moderate the economic cycle ‐ The agreement, struck last month, says that if a country decides its economy is overheated – based on the ratio of credit to gross domestic product – it can require banks within its borders to hold extra capital against potential losses ‐ Regulators in every other country would have to follow suit and impose a proportional surcharge on their own banks, based on the size of those institutions’ exposure to the bubble country
Fed turns in record profit with boost from QE – Pg. 2 ‐ The financial crisis turned the US Federal Reserve into the most profitable bank on record last year as income poured in from its quantitative easing programme ‐ The Fed made a net profit of $80.9bn in 2010 on income of $88.1bn. The bank paid only $2.7bn in interest costs and incurred $4.3bn in operating expenses. It sent $78.4bn to the US Treasury ‐ The Fed’s interest costs are minimal because almost all of its liabilities, such as bank reserves, are paid at the overnight rate of 0‐0.25% but many of its longer term assets yield 4‐5% ‐ Most of the Fed’s income – a total of $76.2bn – came from interest on the approximately $2,000bn of securities that it has acquired as part of its efforts to simulate the US economy under the quantitative easing programme ‐ It is possible that the Fed’s profits could turn to losses in future years if rising inflation forced it to tighten monetary policy rapidly. It would then have to pay much more interest on its liabilities and might suffer capital losses if it had to sell securities rather than let them mature
Eurozone debt crisis deepens – Pg. 4 ‐ The European Central Bank intervened to prop up the eurozone bond markets on Monday as political leaders and bankers warned the debt crisis was deepening amid fears Portugal was edging closer to an international bail‐out ‐ Although the European Union officials denied they were taking about a bailout for Portugal, the ECB had to buy the country’s government bonds to stop the market selling off steeply before important debt auctions in Lisbon on Wednesday ‐ Investor attention is also turning towards Belgium, which has the third highest public debt‐ to‐GDP ratio in the eurozone ‐ Portugal’s cost of borrowing jumped to 7.18% for 10‐year debt, close to a euro‐era highs at one point before the intervention by the ECB saw yields fall back to close to 7.01%
A high price to pay – Pg. 7 ‐ Although 2008 is remembered as the year of the financial crisis, it was also the year of an inflation scare that peaked in the summer as average consumer price rises in advanced economies approached 4.5% ‐ and the rate in the emerging world was double that. Oil hit $147 a barrel; food riots broke out ‐ Inflation is back ‐ At the end of last year, Brazil faced its highest inflation rate for six years, at 7.6% ‐ In advanced economies, inflation has been more muted because household spending is not so much about food – but indicators have also been rising ‐ Eurozone inflation rose above the ECB’s 2% target in December to 2.2% and price rises are running at 3.3% in the UK ‐ With some fearing that inflation might be on the 1970s‐style persistent march higher, and others that current price rises are making a 1990s‐style Japanese deflation and debt trap where prices fall and debts rise compared with income, central banks have their work cut out. ‐ In contrast, the greater fear in the US remains that of deflation, which could plunge the world’s biggest economy into a Japan‐style economic morass ‐ America’s high unemployment rate – at 9.4% compared with less than 8% in the UK – creates what economists call an “output gap” between the level of production and the amount a country could produce at full employment ‐ In theory, idle factories and unemployed workers should push prices down, as they compete for such demand as there is in the economy
Hong Kong price differentials create renminbi openings – Pg. 20 ‐ If Beijing had its way, some suspect China would transform the renminbi into an international medium of exchange without granting any concessions to speculators desperate to get their hands on the currency ‐ Companies can issue bonds at much lower rates in Hong Kong than on the mainland. Chinese government bonds, the best reference, yield as much as 2% less in the offshore market ‐ As Hong Kong’s renminbi markets expand and more companies adopt the renminbi for trade, Beijing is likely to find the distinction between “genuine” trade flows and the more speculative equivalent ever harder to dinstinguish
10 January 2011
Trade war looming, warns Brazil – Pg. 1 ‐ Brazil has warned that the world is on course for a fullblown “trade war” as it stepped up its rhetoric against exchange rate manipulation as a form of veiled export subsidy ‐ The US and China were among the worst offenders,… ‐ The actions have renewed interest in how to manage destabilizing flows of speculative money, with IMF suggesting last week that the world needed rules to govern the use of capital controls ‐ …Brazil’s trade with the US had slipped from an annual surplus of about $15bn in Brazil’s favour to a deficit of $6bn since quantitative easing in the US. He said China’s overvalued currency was also distorting world trade
US banks face fresh stress tests before paying higher dividends – Pg. 1 ‐ Large US financial groups are bracing for a new battery of stress tests that will determine which institutions are now healthy enough to raise dividends and buy back shares ‐ The exercise, mirroring the tests of May 2009 when the sector was reeling from the crisis, comes as investors have been pressing banks to return part of their surging profits ‐ The Fed has sought to draw a distinction between the new tests and their 2009 counterparts, telling institutions to consider the latest demand for data as part of a new world of regular testing that does not contain a “pass or fail” (Prof Note: What is this, ‘No bank left behind?!’)
Tensions rise in currency wars – Pg. 4 ‐ Chile, one of the most free market of emerging economies, has also unveiled a campaign of intervention against its currency ‐ With a sense that the battles against destabilizing capital inflows are here to stay has come a determination to set new rules of engagement on controlling them. ‐ Last week the International Monetary Fund revealed a bid to put itself at the centre of the debate, releasing a study arguing for global rules to constrain governments’ use of capital controls ‐ The case for global rules is that one country’s actions can spill over to others. Last year’s rash of direct currency market intervention to slow speculative capital inflows, for example, proved self‐perpetuating as country after country rushed to stop its own exchange rate being the only one to rise ‐ Aside from direct currency intervention, measures range from inflow controls, such as a requirement that Chile once had for investors to post interest‐free deposits at central bank, to banking regulations such as Brazil’s decision last week to raise reserve requirements on foreign exchange positions, to emergency blocks on investors taking money out of the country in a crisis
QE helps push prices and job creation, says Fed vice‐chair – Pg. 4 ‐ Inflation is a percentage point higher and there will be 3m more jobs in 2012 because of the US Federal Reserve’s programme of asset purchases (Prof Note: If that isn’t Fed rhetoric, what is?!) ‐ The estimates suggest that, if the Fed has simply cut interest rates to zero in 2009 and not started to buy trillions of dollars in assets, then the US economy would now be close to deflation and the unemployment rate in 2012 would be 1.5% higher (Prof Note: Is this not the Fed writing its own evaluation?) ‐ By buying long‐term assets such as Treasury securities, the Fed aims to push down long‐ term interest rates and stimulate the economy when short‐term rates are already at zero
Star‐crossed levers – Pg. 7 ‐ January 1 brought the birth of four pan‐European regulators for the financial sector, in which Brussels has pushed to strengthen the single market. The European Banking Authority will be based in London, the European securities and Markets Authority in Paris and the European Insurance and Occupational Pensions Authority in Frankfurt. A new Frankfurt‐based agency, the European Systemic Risk Board, will monitor the entire financial sector looking out for any early warnings signs of potential crisis
Inflation fears put investors on the defensive – Pg. 15 ‐ Inflationary pressures are building around the world, posing a dilemma for investors and prompting an increase in demand for bonds that offer protection against rising prices ‐ Markets are also pricing in further rises over the next few years with some warning that inflation could be the world’s next economic pressure point ‐ Emerging markets face the biggest threat from inflation, … ‐ Inflation has risen sharply in the past year in the big emerging markets of China, Brazil, India and Indonesia … ‐ In Europe, inflation has almost certainly jumped because of the rise in food energy prices, which were exacerbated by the fall in the euro at the end of last year ‐ In the US, the decision to launch a second round of quantitative easing has helped boost inflation
Commercial property loans sour outlook for US lenders – Pg. 16 ‐ The US regional bank sector looks set for consolidation in 2011, prompted by billions of dollars in soured commercial real estate loans clogging balance sheets ‐ So far, banks have avoided writing down these loans by extending their maturity dates. But with $1,500bn of commercial real estate loans coming due over the next four years – half with mortgages in excess of current property values – such evergreening may be reaching a tipping point,… ‐ The 100 largest banks by assets have an average of one‐quarter of their loan portfolios tied up in commercial real estate,… ‐ Although commercial real estate only accounts for about 5% of US gross domestic product, mounting problems with these loans could stall a broader economic recovery, …. ‐ (See table in FT for list of bank total assets and % (CRE/Total Loans)
8 January 2011
US new jobs data hit recovery hopes – Pg. 1 ‐ The US economy added fewer jobs than expected last month, tempering recent enthusiasm about an acceleration in the recovery and cementing expectations that the Federal Reserve will not scale back its $600bn stimulus programme ‐ …103,000 jobs were created in December… ‐ …unemployment rate fell to 9.4%, its lowest level since May 2009 ‐ Mr Bernanke also challenged Congress to come up with a credible programme to reduce future budget deficits, warning that “we cannot grow out of our fiscal imbalances” ‐ The decline in the unemployment rate – the sharpest in 18 months – was due in part to a falling US labour force
Pentagon faces big budget cuts – Pg. 2 ‐ The cuts of $78bn over five years detailed by Robert Gates, the US defense secretary, are the first big reductions in US military spending since the 9/11 attacks lifted outlays on antiterrorism measures ‐ The cuts represent about 3% of projected spending over the period ‐ The incoming Congress has placed deficit reduction at the centre of its political programme, which should help ensure that the cuts go through ‐ To reach those goals, the defense department plans to cut up to 47,000 US troops, but only from 2015 – one year after soldiers are set to begin pulling back from Afghanistan ‐ In the longer term, Mr Thompson said the Pentagon’s 20% + share of federal spending meant defense would be cut even further as part of overall deficit reduction
US jobs report an ‘utter mess’ – Pg. 3 ‐ The problem is that the monthly payrolls report contains two different measures – a survey of households and a survey of employers – and in December they pointed in Different directions ‐ Jobs growth is picking up a bit to more than 100,000 a month but still shows no sign of a dramatic acceleration ‐ Most analysts attribute the fall in labour force participation and therefore the fall in the unemployment rate, to the expiry of longer‐term unemployment benefits in December ‐ Congress has since renewed long‐term unemployment benefits. A likely consequence is that the size of the labour force will bounce back in January, reversing the fall in the unemployment rate ‐ …the average duration of a spell of unemployment, which rose from 21.7 to 22.4 weeks, suggesting that those people who are finding jobs have not been out of work for long
Portugal bail‐out fears grow as debt costs soar – Pg. 3 ‐ Portuguese equities and bonds tumbled on Friday, forcing the European Central Bank to intervene to steady the markets as investor fears rose about the ability of Lisbon to fund its public debt ‐ Portugal’s cost of borrowing, or bond yields, jumped to euro‐era highs while some of the country’s banking stocks slumped to 17 year lows amid hardening views in the markets that Lisbon will have to follow Greece and Ireland into using bail‐out loans ‐ In the equity markets, European financial stocks fell for the first time in 2011 after the Commission report reignited investor concerns about the eurozone sovereign debt crisis
US foreclosure ruling to reverberate – Pg. 3 ‐ The Massachusetts Supreme Judicial Court upheld a lower court ruling that the banks did not have the right to claim the homes because they could not prove they owned the mortgages at the time of foreclosure ‐ The Massachusetts case involved two home loans assigned to multiple owners over several years. In each case, documents were either incomplete or missing, raising questions about which entity owned the mortgage
US banks gain China securities foothold – Pg. 10 ‐ …greater access for US companies to China’s booming financial sector has been a perennial issue in the bilateral discussions between Washington and Beijing
7 January 2011
Brazil in push to curb rising currency – Pg. 1 ‐ Brazil has launched a fresh attempt to limit the appreciation of its currency, as fast‐growing economies renew their efforts to restrict damaging inflows of “hot money” ‐ …the central bank announced that domestic banks would have to hold higher reserve requirements against foreign exchange positions ‐ The decision follows Chile’s decision this week to intervene in currency markets to hold down the peso ‐ Investors warned that actions by Brazil, which was the first country last year to warn of the dangers of a “currency war”, were likely to be followed by other emerging markets ‐ The actions have reawakened interest in how to manage destabilizing flows of speculative money,…
US examines multi‐tiered fight against bank proprietary trading – Pg. 1 ‐ US regulators to use techniques pioneered in the fight against money laundering to crack down on “proprietary trading” by banks as part of new financial reforms, …. ‐ The question of how to define trading done with banks’ own funds is one of the thorniest for the US authorities in the post‐crisis regulatory overhaul because it is difficult to differentiate such activities from market‐making on behalf of clients ‐ The first tier would involve automated “tripwires” that alert banks’ compliance departments. … ‐ The second tier would see internal compliance and risk management departments quiz the trader on the nature of the position ‐ Finally, regulators, who keep inspectors on banks’ premises, will be able to see the “trip wires” and monitor traders and compliance departments
Brussels to target bondholders – Pg. 2 ‐ Banks’ senior bondholders should share the burden of future losses in order to spare taxpayers from having to foot the bill for expensive bail‐outs, …. ‐ …make bondholders act as a last line of defense, writing down the value of their investments to “bail in” a bank before taxpayers had to fund a bail‐out ‐ ….any bail‐ins would not be applied to bonds issued before 2013 ‐ …reserved on the idea of contingent capital bonds, dubbed cocos, which unlike bail‐in, have a pre‐set trigger at which they convert into equity. Cocos’ clear trigger has been put forward by some as a benefit over bail‐in, where skeptics have warned regulators might act could exacerbate market turmoil
Debt limit request sets up Congress showdown – Pg. 5 ‐ The Obama administration has requested approval from Congress for an increase in the national debt limit of the US – setting up a showdown with newly empowered Republican lawmakers – warning of “catastrophic economic consequences for decades” if a deal is not reached ‐ …Tim Geithner, US Treasury secretary, urged them to move quickly to raise the debt ceiling from its current level of $14,290bn (Prof Note: Wait….was not 2009 GDP $14,300bn? Is the proposal to allow our debt to exceed 100% of GDP? Hmmmmmmm….) ‐ The Treasury estimates that the national debt will hit its upper limit between March 31 and May 16, potentially triggering a government shutdown and a default, on the country’s debt obligations (Prof Note: I remember the last government shutdown. What a F’in joke! Every friggin government worker was laughing their a$$e$ off calling it a vacation knowing they would be made whole with back pay…and they WERE!)
Riveting prospects – Pg. 7 ‐ President Barack Obama has bought into the idea, setting a target of doubling US exports in the next five years that will require a vigorous revival in manufacturing ‐ The International Monetary fund believes that the US current account deficit widened last year, which Japan and Germany, which are both running surpluses, moved deeper into the black ‐ The traditional culprit in any story about US export failure is the overvalued dollar, which has been an international hot topic again recently as tensions flared over China’s intervention to hold down the renminbi ‐ ….American businesses are simply unused to selling internationally ‐ Second, the US has been less active than other countries in signing agreements to facilitate international trade ‐ American exports are particularly severely affected by tariff barriers; in the World Economic Forum’s ranking of exporting countries by “tariffs faced”, the US ranks eight highest out of 121 ‐ A third problem for US manufacturers is an insufficiently skilled and educated workforce ‐ Fourth, as emerging economies acquire modern facilities and skills, they are increasingly capable of replacing production in US and other developed countries ‐ The most fundamental issue, however, is that large US companies generally want to manufacture in the markets where they sell. The US is the world’s largest outward investor and American companies earn much more from their foreign operations than from exports. The revenues of US‐owned foreign affiliates were about $5,000bn in 2008 ‐ …almost three times the value of US exports of goods and services ‐ When American manufacturers look at emerging economies, they often decide it would be better to build plants close to the market. That is not solely, or even primarily, for reasons of cost but also to help them understand local needs, improve logistics, protect against currency volatility, meet local regulations and improve relations with govenrmetns that are often their largest customers
US retailers deliver best holidays since 2006 – Pg. 13 ‐ Sales at leading US chain retailers failed to meet Wall Street’s heightened expectations in December, but the sector still delivered its strongest performance since 2006 during the two months of the holiday shopping season
Eurozone default risk on the increase – Pg. 20 ‐ Another sign of the dwindling fortunes of the eurozone emerged this week. The economies of western Europe overtook their neighbours in central and eastern Europe as greater default risks ‐ An index that measurses the risk of default of 15 western European economies, including Germany, France and the peripherial eurozone countries, has surged higher than a comparable one comprised of countries such as Hungary and Ukraine. These indices, which measure the cost to insure the two geographical groups against default, suggest any hoeps that the festive lull could give the eurozone breathing space appear to be facing, only one week into the new year ‐ Bond yields are offering similar warning signs for the eurozone
6 January 2011
Jobs data increase confidence in recovery – Pg. 1 ‐ Surveys showing faster‐than‐expected jobs growth and a boost for the services sector bolstered confidence that the US economic recovery has shifted into a higher gear ‐ The ADP survey, in particular, signaled that businesses have started to hire new workers aggressively ‐ The evidence of a more rapid expansion caused 10‐year Treasury yields to rise from 3.36% to 3.46% (Prof Note: This also indicates more inflation) ‐ The private sector added 297,000 jobs in December, up from a revised 92,000 in November and the 11th straight month of expansion ‐ The gain was higher than the 100,000 new jobs that economists had predicted, and bodes well for the monthly jobs report from the US government, set to be released on Friday ‐ The improving health of services businesses, which account for the bulk of US economic activity, was highlighted by the ISM’s non‐manufacturing index, which rose to 57.1 in December from 55 in November, surpassing estimates of 55.6%
‘Food price shock’ threat as commodities soar – Pg. 1 ‐ …farm commodities prices shot up to a nominal record last month, surpassing the levels of the 2007‐08 food crisis ‐ The FAO said that its food price index – a basket tracking the wholesale cost of commodities such as wheat, corn, rice, vegetable oils, dairy products, sugar and meats – jumped to 214.7 points, above the peak of 213.5 set in June 2008 ‐ …food aid agencies are drawing comfort from relatively stable prices for rice, one of the two most important agricultural commodities for global food security ‐ Rice, the staple for more than 3bn people in Asia and Africa, hit an all‐time high of more than $1,000 per tonne in 2008, but is trading now at $535 a tonne
Call for China defence budget rise will irk US – Pg. 3 ‐ A prominent Chinese military economist has called for a steep rise in the country’s defence spending, an appeal likely to reinforce US concerns about the pace of China’s military expansion just ahead of a visit by Robert Gates, US defence secretary, to Beijing ‐ …china needed to increase its military spending form the current level of 1.4% of its gross domestic product to up to 2.8%, in order to close the gap with military technology in developed countries (Prof Note: US spends approximately 4.5%)
Replicators no more – Pg. 7 ‐ Pulpy is Coca‐Cola’s first international product to be developed in the emerging world and make a significant – though undisclosed – contribution to group‐wide sales ‐ These innovations do not yet involve transformational technological shifts – such inventions remain the preserve of the developed world with its long‐established universities and commercial laboratories. But the emerging world is spawning product improvements with commercial implications that are game‐changing. They do not win Nobel prices but they do make money. (Prof Note: I remember stating to ULI, “Why do I get paid the same for a complex webinar on real estate derivatives as someone offering a basic excel webinar?” The response was profound, “Roger, you fill 26 seats, basic excel fills 90+” OUCH!!! I get it!!!) ‐ With china last year overtaking Japan as the world’s second largest economy, its companies are leading the charge ‐ Only Russia has significant numbers of science Nobel prize winners. But China beats the world in turning out engineers and scientists – 2m a year, five times the US total (Prof Note: We need to change this!) ‐ …about 30% of US science and engineering PhD graduates born in China ‐ China produces more peer‐reviewed scientific papers than any country bar the US ‐ In dollar terms, Chinese research and development spending has already exceeded Japan’s and is set to beat that of the European Union and match the US in the next 20 years
Irrational Exuberance – Pg. 12 ‐ The S&P 500 index is at about 1,270, well below the 1,500‐plus levels of 2007 and 2000 ‐ Mr Shiller assumes reversion to the long‐term mean
Portugal pays high yield in debt issue – Pg. 21 ‐ Portugal has insisted that it can access debt markets without European Union or International Monetary Fund help in spite of being forced to pay a high premium in its first test this year of investor sentiment ‐ …demand for the issue had been 2.6 times the amount on offer, compared with about 2.4 times from previous sale ‐ Many bankers think Portugal will eventually follow Greece and Ireland and seek financial aid ‐ Portuguese benchmark 10‐year bond yields have risen three quarters of a percentage point to 6.65% since the start of December ‐ …worries increased over Ireland after the markets focused on moves by Swiss central bank, which has excluded securities issued by Allied Irish Banks, Anglo Irish Bank and Bank of Ireland from the list of assets it accepts as collateral for its repurchase operations, ….
Dinner last night was a Lebanese restaurant in the Marriott; $40 fed me like a King. The exchange rate is about 5.77:1 and today I am headed to Alexandria. An 11 hour private car and driver, total cost $213 plus tip. I am finding prices on everything to be reasonable, however, I have only gone from airport to Marriott so I really have no real comparison, that will be for today.
The world is westernizing. It is best for those younger to travel today rather than wait, else, the global portfolioization (my world) of culture will negate the ability to experience the vast differences that even I have noticed in my life. My room here is IDENTICAL to what I would have in New York, Boston, San Francisco or DC, only, I admit, it is a bit larger.
5 January 2011
Oil prices ‘enters danger zone’ – Pg. 1 ‐ High oil prices threaten to derail the fragile economic recovery among developed nations this year,… ‐ Over the past year the oil import costs for the 34 mostly rich countries that make up Organization for Economic Co‐operation and Development have soared by $200bn to $790bn at the end of 2010,… ‐ The increase, due to high crude prices, is equal to a loss of income of about 0.5% of OECD gross domestic product, … ‐ Oil prices have edged closer to $100 a barrel in recent weeks and Brent crude hit $95 a barrel for the first time in 27 months on Monday… ‐ Oil consuming nations, meanwhile, need to accelerate their efforts to reduce their reliance on oil,… ‐ On top of the high crude prices, Europe is still to feel the full impact of higher gas prices as 75% of its gas contracts are linked to oil prices. The weak euro against the US dollar will also amplify the cost ‐ The ratio of countries’ oil import bills to GDP, a key measure of the cost of oil prices on economies, is close to levels last seen during the financial crisis in 2008,…
Brighter outlook not enough to alter QE2, Fed reveals – Pg. 1 ‐ Federal Reserve officials indicated last month that it was too early to consider scaling back their plan to buy $600bn in long‐dated treasury bonds by the end of June, … ‐ …also pointed to the $858bn fiscal package signed into law by president Barack Obama last month – which extended Bush‐era tax rates, cut the payroll tax and extended unemployment insurance – as supporting the recovery
Price rises in eurozone miss target – Pg. 2 ‐ Eurozone inflation has surged above the European Central Bank’s target for the first time in more than two years, threatening fresh difficulties for the euro’s guardian as it combats the regional debt crisis ‐ Prices rose at an annual rate of 2.2% in December,… ‐ The ECB’s main interest rate has been kept at the record low of 1% since May 2009. The central bank has also flooded the 17‐country eurozone with liquidity by matching in full banks’ demands for funds, a policy that has acted as a further stimulus to the economy ‐ Despite the inflation increase, economists predict that a rise in ECB interest rates remains some way off ‐ In 2009, the annual rate even turned negative. Inflation was last above 2% in November 2008
Authority aims to give early warnings to avert crises – Pg. 2 ‐ European economic policies will come under more scrutiny from this month when the European Central Bank takes the lead in a new financial police authority with whistle‐ blowing powers to prevent future crises
Traders fear threat of political agendas – Pg. 2 ‐ Radical changes to Europe’s system of supervising its banks, insurers and securities markets, taking effect this week, are central to plans by the European Union to bolster financial regulation and oversight in the 27‐country bloc ‐ The creation of four new pan‐European agencies is aimed at helping to prevent a repeat of the region’s financial crisis ‐ The four new agencies comprise three European supervisory authorities (ESAs) to oversee the banking, insurance and securities markets sectors, together with a broader European Systemic Risk Board (ESRB), which will warn about dangers building in the financial system ‐ The European Banking Authority (EBA) will be based in London; the European Securities and Markets Authority (ESMA) in Paris; and the European Insurance and Occupational Pensions Authority (EIOPA) in Frankfurt
White House frustrated as several roles remain vacant – Pg. 3 ‐ When Sheila Bair steps down as head of the Federal Deposit Insurance Corporation this summer two things will happen in the Obama administration ‐ First, some officials will breath a sigh of relief. Then, they will begin looking ot fill the latest in the long line of senior financial and economic positions
Stroll to a new status – Pg. 7 ‐ This year could be the one when talk of Asia’s export‐led development begins to give way to a realization that much of the region’s future growth will be self‐generated ‐ Not only in China but in countries including India, the world’s second most populous; Indonesia, a fast‐growing nation of 240m,… ‐ The emergence of a middle class in Asia beyond the prosperity that already exists in Japan, South Korea, Taiwan, Singapore, and Hong Kong will have far‐reaching consequences ‐ Asia’s three biggest developing economies are all now witnessing something new: the emergence of a consuming class outside the biggest conurbanization
Bond wave strikes on both sides of Atlantic – Pg. 13 ‐ Companies have embarked on an early‐year rush to issue debt in a bid to beat rivals and secure financing before any rise in borrowing costs ‐ The surge in bond issuance on both sides of the Atlantic on Tuesday came as equity markets rallied on better growth prospects for the US economy and corporate earnings
Ford surges to bump Toyota to third place in US car market – Pg. 13
EU bond launch set to aid Ireland – Pg. 23 ‐ The European Union will today launch a multibillion‐euro bond to raise money for effort to rescue Ireland’s finances in an important test of investor appetite for Europe’s government debt markets ‐ Bankers said there was strong demand for the bonds from European, Asian and Middle Eastern investors, even before the official opening of order books expected today ‐ The triple‐A rated bonds are expected to price at yields of about 2.5%, about 70bps over German Bunds and well below those of Italian and Spanish debt ‐ The euro bond, which will be issued by the European Financial Stabilization Mechanism on behalf of the EU, will be underwritten by Barclays Capital, BNP Paribas, Deutsche Bank and HSBC ‐ The EFSF bond is seen as a landmark for Europe’s markets as it will be the first issued by the eurozone as one entity. Some investors say it could be the first step towards a common eurozone bond
Cairo Comments:
Rather than send additional emails, I thought I would add thoughts/experiences of Cairo at the bottom. Several have asked me to send these out and they give me more purpose to the travels.
In truth I have not left the airport. The flight was long from JFK but uneventful. The Cairo airport is efficient and the process for a Visa is to pay $15 and they hand you the Visa. It could not have been easier. Passport control was efficient and much quicker than the US (Go Egypt!).
I am at the Marriott and there is more security here than others I have stayed including Doha and Dubai. It was a maze to drive into the hotel, there was a metal detector and my bag was scanned. Looking at my room from behind my laptop, it is just as I like, 100% USA! Tour by day and return to the US oasis at night.
There is an enormous amount of construction in Cairo. In 08' I saw more tower cranes in Dubai but in 11' I have seen more earth moved in Cairo. If you are in development/construction this is not a bad place for you.
4 January 2011
BofA to pay $2.6bn over home loan claims – Pg. 1 ‐ Bank of America has taken a big step toward resolving claims that its Countrywide Financial unit, a lender at the heart of the financial crisis, sold loans based on faulty information by agreeing to pay $2.6bn to Fannie Mae and Freddie Mac, the struggling mortgage finance companies ‐ Fannie Mae and Freddie Mac, known as government sponsored entities, were rescued by the US Treasury in 2008 and have received more than $150bn in taxpayer aid to stem ballooning losses on mortgages that went bad after the housing bubble burst. The companies have since been trying to force lenders to buy back mortgages that failed to meet certain underwriting requirements (Prof Note: $150bn was the total taxpayer loss for the S&L crisis)
Republicans ready for battle on debt ceiling – Pg. 2 ‐ The new Republican‐led Congress was elected vowing to repeal healthcare reforms and to cut radically government spending, but many believe the real battle will be over raising the debt ceiling ‐ Some Republicans want to use a must‐pass vote on the debt ceiling, which is likely to be held in March, to force Democrats to agree to aggressive spending cuts
Foreigners abandon Polish property market – Pg. 3 ‐ The steep falls seen in the Spanish and Irish real estate markets have also strained investors’ finances and made them more risk averse
Risks grow from Asian price rises – Pg. 6 ‐ A raft of manufacturing data showing Asian economies growing strongly in the wake of last year’s recovery from the global financial crisis has refocused attention on the threat to the region from inflation ‐ Inflation pressures have been rising in all of emerging Asia’s biggest economies. India’s forecast growth of 8.5% from 2010 has been accompanied by price rises generally above 8%, … ‐ …inflation is probably most feared in China, where many officials believe that double‐digit price rises were a leading cause of the public discontent that spilled over into student‐led protests in the spring of 1989, ending in a military crackdown in Beijing’s Tiananmen Square
On their heads be it – Pg. 8 ‐ Last year brought the eurozone debt crisis. Greece and Ireland had to be bailed out and big question marks still hang over Portugal and Spain. ‐ For now, the focus is on Europe and whether contagion can be stopped before Spain is infected. The next few months are likely to prove vital ‐ Underpinning this concern have been analyses of the total level of debt in countries, including the private sector. Once interest rates have risen for governments, the worry of many in the markets is that banks and other companies could also find it hard to borrow ‐ With banks having loaded up on government debt, prompted by capital regulations, any problems would have far‐reaching consequences ‐ …debt‐to‐GDP levels in the US, UK, core Europe and peripheral Europe are all at 150‐200%, higher than at any time in the past 15 years and possibly the past century ‐ …the US, UK and Japan all have control over fiscal and monetary authorities, allowing them to use quantitative easing – where central banks purchase government bonds – to buy all the debt they issue if necessary. The eurozone, with the European Central Bank unwilling to engage in full quantitative easing, is more constrained ‐ The US is scared of recession, whereas Europe is more worried about inflation than a downturn ‐ The relationship between China and the US, perhaps the archetypal creditor/debtor set‐up, is frequently summed up as being a “prisoner’s dilemma” where neither side can exit the arrangement without causing considerable damage to both. ‐ The problems around sovereign debt look less and less limited to single countries such as Greece. But equally a full‐blown crisis that draws in the Us seems unlikely
Pension funds invest direct in infrastructure – Pg. 16 ‐ Big pension funds are increasingly looking to invest directly in infrastructure assets, …. ‐ Increased investment in the sector would come at a time when cash‐strapped states and local authorities are being forced to cut back on much‐needed infrastructure upgrades and development projects