Every government needs a thick slice of luck, and this week’s has come as Chris Huhne slid off the political road into the ditch. Ed Davey has a golden chance to drive away from an energy policy which might have been designed to make energy expensive and electricity unreliable. This deadly combination might be called the Windmill Solution to oil and coal dependency, and the former Energy Secretary spent his last months flailing around like a demented turbine trying to make the numbers add up.
While Huhne was tilting at windmills, the energy game has been changed utterly by the emergence of shale gas. This rapidly emerging technology promises relatively cheap and abundant natural gas for at least the next two decades. It has already broken the link between oil and gas prices. It promises to turn the US into an energy exporter, and remove the dependency on Russian gas for the states on its borders. Read more
Seems kinda churlish to throw this out amidst the biggest bank bond rally since 2009. But…
We believe investors should assume a low (possibly 0%) recovery rate on most senior unsecured bank bonds
We know who’s brought this on. It was Ben Bernanke, last week, with confirmation of the Fed’s 2 per cent inflation target. We suspect it’s one debate that is going to grow in intensity.
First to Bruce Corneil, a thoughtful fixed income manager at Beutel Goodman in Canada, who has just published this paper. Read more
We can’t let this Bumi RNS go unnoticed:
The Company announces that the Directors have received a notice from Borneo Bumi Energi & Metal Pte. Ltd, being the holder of not less than 5 percent of the paid-up voting share capital of the Company, requiring them, pursuant to section 303 of the Companies Act 2006, to convene a general meeting of the Company to consider and if thought fit to pass ordinary resolutions to: Read more
Live markets commentary from FT.com
FT Alphaville would like to survey the following statement:
Economists are failing to account for mass technological innovations when making forecasts and constructing models. Read more
Perhaps inadvisedly, we chucked the kevlar and tin into the Hudson after we saw the jobs report. We’ll talk about whether we need to retrieve them, plus have some chatter about Glencore, the latest out of Europe, and anything else that hits the tape. See you at the usual place.
By Cardiff Garcia and Joseph Cotterill
Uncaptured seasonality effects or not, this is what a healthy employment report looks like. Read more
Eurozone states signed the final version of the treaty establishing the European Stabilisation Mechanism on February 2.
(Click the image for the full document) Read more
Warning: we start by rambling about a bunch of stuff that may not interest anyone besides methodology geeks. If you want to jump straight to how this morning’s BLS employment report might be affected by seasonality issues, scroll down to the next section in bold.
On the familiar list of challenges faced by the US economy last year were the reemergence of Europe as a perpetual near-disaster, the commodities price spike, supply chain disruptions from the Japanese earthquake, the S&P downgrade, and a remarkable streak of policy stupidity (budget showdown, debt ceiling debate, etc). Read more
Live markets commentary from FT.com
Senators have voted overwhelmingly to pass the Stop Trading On Congressional Knowledge Act, a bill to remind legislators that insider trading is illegal, the WSJ reports. Abysmal approval ratings inspired the Senate into action, especially after media coverage questioning stock trading by its members, the Associated Press (via the Washington Post) says. The STOCK Act will require public disclosure of recent securities trades. Current insider-trading laws probably cover Congress, but an explicit confirmation within legislation would be helpful, SEC officials have previously said.
Glencore and Xstrata could formally announce an $88bn merger as soon as next Tuesday, the FT reports. The deal — modestly codenamed “Everest” — is already being watched for the firepower it could give both firms to bid for rivals within the natural resources industry. Combined, Glencore and Xstrata would create the world’s largest exporter of zinc and coal, and its third-largest in copper, but would leave an opening in iron ore. That may make an assault on the forces of BHP Billiton, Vale, and Rio Tinto, Reuters says. Anglo American, a failed bid target of Xstrata in 2009, could be one high-profile name thrown into a round of consolidation, the WSJ notes.
The use of risky collateral including equities and structured finance has returned to pre-crisis levels in the US repo market, the FT reports. A Fitch Ratings study found that structured finance assets accounted for about 20 per cent of collateral. “Almost half of this collateral is subprime and Alt-A residential mortgage-backed securities (RMBS) and collateralized debt obligations,” the report adds. Reasons for the rise in use range from a shortage of safer assets, to returning liquidity in RMBS, to the hunt for yield among money market funds.
US banks are running out of loan-loss reserves to release and book as income to bolster profits, the WSJ reports. The 10 biggest banks released $4.3bn from the provisions for bad loans in the fourth quarter, translating into $3.5bn of post-tax profits, according to a WSJ analysis. Loan-loss release accounted for a quarter of earnings in the last three months of 2011, up from 15 per cent in the third quarter. However, the well is running dry, with Citigroup now having released $14bn of the $18bn in reserves it began building up in 2009. Regulatory treatment of reserve releases is also likely to change in future.
Panasonic has forecast it will lose $10bn in the financial year ending in March, its largest-ever loss, reports Bloomberg. A strong yen and Thai floods have pummelled the world’s biggest maker of plasma TVs, leading to production cuts and good-will write-downs on past investments, the FT says. Sony and Sharp have also forecast heavy losses in the last week, with Panasonic’s latest warning taking the total for all three Japanese manufacturers to $17bn, according to Reuters.
Facebook already has so much cash, and so little desire for true shareholder control, that it should really call its IPO off instead of “gratifying” its venture capital backers and employees, the FT’s John Gapper writes in a must-read column. Investors have reacted warily to Facebook’s suggested $75bn-$100bn valuation of 100 times price to earnings, says Reuters. Google emerged on public markets in 2005 with a price 218 times its earnings, but was valued at $23bn at the time. Facebook’s price tag would make it worth 53 per cent of Google’s current valuation, despite the latter company earning 10 times the profit, notes the WSJ.
“Thank you for depositing a $3bn merger rumour. An RNS will be credited to our investors in 24 hours.”
As the FT wrote on Thursday morning … Read more
Elsewhere on Friday,
– Why the collapse of the euro could be good. Read more
Comment, analysis, and other offerings from Thursday’s FT,
Breaking pre-market news on Friday,
— Misys admits to merger talks with Temenos – statement Read more
Hong Kong billionaire Li Ka-shing’s Hutchison Whampoa agreed to buy Orange Austria in a deal valued at €1.3bn ($1.7bn), adding to more than $31bn of investments in overseas mobile-phone operations, reports Bloomberg. Hutchison 3G Austria, the local unit of Hutchison, expects to complete the purchase of Orange Austria in the middle of this year, the Hong Kong parent said in a statement today. Some Orange Austria assets, including mobile carrier Yesss!, will be sold to Telekom Austria Group for €390m after the acquisition, Hutchison said.
Bank of England policymaker Adam Posen looks set to vote for another cash injection for the faltering British economy next week, and expressed some confidence that other central bankers may join him, says Reuters. Mr Posen suggested on Thursday that he might vote for an extra £75bn of quantitative easing next week – at the upper end of analysts’ predictions – as forecasts suggest inflation will fall sharply. On Wednesday the Bank completed the £75bn of gilt purchases that it started in October, and most economists polled by Reuters expect the central bank’s Monetary Policy Committee to raise the purchase target by £50bn on February 9. In an interview with financial news channel Bloomberg TV, Mr Posen gave the clearest commitment from any MPC member to date that he was planning to vote for more QE. “I am certainly leaning towards doing more QE if we don’t change the forecast,” he said.
“Ultra-fast” broadband using direct fibre-optic connections will become available to most British homes and businesses next year, after a significant technological breakthrough by BT, the FT reports. The advance, to be announced in BT’s third-quarter results on Friday morning, will place the UK at the vanguard of the European race for the highest available broadband speeds with connections of up to 300mbps. BT has so far provided the majority of its fibre connection only as far as the so-called “cabinets” or junction boxes located in the street, with a more antiquated copper wire making the final link with the end user. To date, it has deployed fibre directly to homes and businesses from just 10 exchanges, but its new “fibre overlay” technology makes it viable for the telecoms provider for the first time to open its whole network.
Asian shares and major currencies were stuck in ranges on Friday ahead of key US jobs data, and while Greek debt restructuring talks dragged on, says Reuters.
Australian shares edged up, with mining stocks heading higher as news that Glencore and Xstrata are in talks on a $80 billion merger stirred interest. European shares closed at a six-month high on Thursday after miner Xstrata and commodities trader Glencore confirmed merger talks, helping to lift sentiment. US employers are expected to have added 150,000 jobs in January, compared with 200,000 the month before. Read more
News Corp has named Lex Fenwick, a former chief executive of Bloomberg, as chief executive of Dow Jones, the publisher of The Wall Street Journal. The FT says Mr Fenwick fills a position that has been empty since July when his predecessor, Les Hinton, stepped down in the midst of the phone hacking scandal at News Corp’s UK newspaper arm, which he had run for 12 years before joining Dow Jones in 2007. Separately, the FT reports digital subscriptions to the New York Times online edition stabilised revenues at the publisher’s flagship title in the fourth quarter of 2011, but group results were dragged down by a further decline at About.com, its consumer information website. Arthur Sulzberger Jr, chairman and interim chief executive officer, told analysts that a search for a new chief executive was “in its early stages”, and emphasised that the board was looking for an executive “with digital and brand building experience”, without mentioning any need for experience in print publishing. The group made no mention of any dividend plans, saying instead priorities for its cash would be addressing its underfunded pension plans and paying off $75m in notes maturing later this year. It cut net debt from $597m to $493m over the course of 2011, reducing interest expense in the period from $23.2m to $15.5m.
US Congress has taken a big step toward approving new rules to ban legislators from trading stocks based on information they pick up in Capitol Hill, says the WSJ. The Senate voted overwhelmingly, 96-3, to pass the legislation, called the Stop Trading On Congressional Knowledge Act, or Stock Act. The bill now moves to the House, where Republican leaders said they would vote on it next week.
Trading in the most popular US exchange-traded funds fell to multiyear lows in January, threatening to increase transactions costs for retail investors. ETFs, which track the performance of a basket of securities such as an equity or bond index, have surged in popularity in recent years, reaching $1tn in assets by the end of 2011, according to BlackRock. The FT reports the fall in ETF trading volumes has coincided with a decline in volatility and correlations in January, compared to their elevated levels in the second half of 2011. That appears to have made index-based investing strategies, which can benefit if an entire asset class moves in the same direction, less popular.
Spanish banks must find €50bn ($66bn) from profits and capital this year to finance a clean-up of their balance sheets or agree to merge with another bank by May to gain an extra year’s grace, according to Luis de Guindos, Spain’s economy minister. Outlining the new centre-right government’s first big reform programme, Mr De Guindos said on Thursday that the aim of the rapid “one-off” clean-up of bad property loans was to “increase the confidence and credibility of the Spanish financial system”, the FT reports. Mr De Guindos said no public money was being used. However, banks that needed state help would be able to apply for high-interest loans from the Fund for Orderly Bank Restructuring (Frob). Bankers say the Frob will charge 8 per cent interest. The Frob’s capital is being raised from €9bn to €15bn by the state, and it has the power to deploy up to €99bn by borrowing money on its capital.