Posts from Wednesday Feb 16 2011

Further further reading

For the commute home, or while you’re denying to the SEC that you comment on Alphaville,

– “Financial Crisis Cause No. 2: The moral collapse of the American working class.” Michael Lewis. Satire. ReadRead more

Sanofi agrees $20.1bn Genzyme takeover

Sanofi-Aventis brought an end to its protracted pursuit of Genzyme with an agreed $20.1bn cash takeover of the US biotech company, coupled with additional conditional payments over the next decade, reports the FT. The deal, at $74 a share paid today and up to $14 extra by 2020, sweetens the French pharmaceutical group’s proposed $69 bid to which it had stuck since October, when it appealed to Genzyme’s investors after the board refused to negotiate. It signals the biggest takeover in the pharmaceutical sector since 2009, when Sanofi-Aventis and several of its larger peers were left behind by the large-scale takeovers of Wyeth by Pfizer, Schering-Plough by Merck and Genentech by Roche.

Singh agrees to telecom probe

Manmohan Singh, India’s prime minister, has agreed to face a parliamentary investigation into a spiralling corruption scandal that has paralysed the world’s largest democracy, the FT reports. Mr Singh said on Wednesday that he was prepared to answer questions from legislators about alleged irregularities in the award of 2G telecoms licences. An official audit, claiming the scandal cost the national exchequer $39bn, has rocked a fast-growing sector that attracted investments from some of the country’s most powerful business magnates. A spokesman for Anil Ambani, the Indian billionaire who controls Reliance Communications, said that the tycoon met with federal police on Wednesday “to clarify ongoing issues relating to telecoms matters for the years 2001 to 2010”.

Earnings and M&A put stocks on the front foot

Investors are back on an optimistic tack after a good batch of earnings reports, but ebullience is being tempered by further signs that the global economy remains fundamentally fragile, the FT reports. The Federal Reserve delievered a mixed bag of views in the release of its open market committee meeting notes. It raised the US growth forecast to a maximum of 3.9 per cent for 2011, from a top range of 3.4 per cent. Some members of the Fed believed that may justify a scaling back of the $600bn quantitative easing programme. However, members of the Fed “continued to express disappointment in both the pace and the unevenness of the improvements in labor markets”, the minutes said. Market reaction to the report was muted. The S&P 500 on Wall Street is up 0.6 per cent to a fresh 30-month high – helped by better housing starts data – above the post-crisis market’s low point in March 2009, at 666.79. US Treasury yields reached their highest for the day. Traders are reacting to the Fed’s report by continuing to bet on inflationary pressures and faster growth. The 10-year benchmark at 3.64 per cent, but it was a rise of just 4 basis points. Stocks had received an earlier boost following sparkling results overnight from Dell. The computer maker joined upbeat earnings from farm equipment maker Deere and TV cable giant Comcast, helping it push past concerns that the rally is running out of steam. In addition the agreed $20bn deal between Sanofi and Genzyme and a $7.6bn bid for Family Dollar Stores has kept the M&A pot bubbling.

Fed lifts 2011 forecast

Members of the US Federal Reserve raised their 2011 economic growth forecasts but expressed uncertainty about the effects of a second round of quantitative easing last month, with some suggesting that new signs of economic growth could mean the central bank should scale back its programme to buy $600bn in Treasury securities, the FT reports. In minutes from its latest Federal Open Market Committee meeting, the 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. Despite the brighter outlook, the Fed showed ongoing concern about the labour market and signs that structural unemployment is holding back job creation.

Labour force follies

A striking chart from McKinsey’s new report on US productivity:

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Charts du jour, muni edition

Worried about public pensions liabilities? Well, look away now.

In a report out Wednesday, The Center for Retirement Research at Boston College tried to isloate the factors that influence (1) the spreads on municipal bond yields, and (2) Moody’s rating of those bonds. Read more

FOMC minutes from the January 25-26 meeting

Just a few items to note from the minutes of the FOMC’s meeting on January 25-26.

— The Fed staff gave a presentation on the level of structural unemployment, which the participants then debated: Read more

Cutting out the muni middle man

Here’s a novel idea for municipalities: ignore the prickly muni bond market and accept help from your local Wall St bank.

From the WSJ on WednesdayRead more

Dear fellow Actelion investors…

Just why are there no friggin’ deals An excellent opportunity awaits to ask management to explain their long-term strategy for creating shareholder value, says Elliott Advisors…

Courtesy of the FT’s hedge fund correspondent and former FT Alphavillain Sam Jones, here’s the full letter (click to enlarge): Read more

China’s quirky little bubble-makers

They are in the middle of a rather large bubble. They are feeling the pinch of tightened bank lending.

They are Chinese property developers. Read more

LSE prices oddness, the continuing story

Click to enlarge (image via a friendly source):

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Moody’s puts Antipodean banks on review

Fresh from Moody’s — a threat of bank downgrades Down Under (sorry).

The start of the rating agency’s statement: Read more

China’s yuan-child policy

Surely it was hard enough being a Chinese man without being held responsible for a global currency war.

This is, roughly, the usual US-China currency war logic: (1) Chinese officials intervene aggressively in the currency market, (2) foreign exchange reserves rise, (3) the real exchange rate falls, (4) a current account surplus emerges. Read more

Inflation Chartology

Yes, that’s a y-axis change in the just-released February report

Markets Live transcript 16 Feb 2011

Live markets commentary from 

Basel III blurs

Here’s a capital curio for investors in Credit Suisse’s Monday-announced CoCos issue.

It’s probably not a surprise that a transition from the Basel II to Basel III regulatory regimes might create some scope for capital confusion. But here’s a concrete example picked out by Cannacord Genuity banking analyst, Cormac Leech. Tier 1 common equity ratios under the supposedly-stricter Basel III could end up being bigger than the ratios under Basel II definitions for some banks during the transitional period. Read more

Banks ‘had to know’ — Madoff

Bernard Madoff has pointed the finger at bank and hedge funds who dealt with his fund despite it being an elaborate Ponzi fraud, in his first interview for publication since his arrest two years ago, the NYT reports. “They had to know… But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know,’” Madoff said. The claims have to be weighed against Madoff’s diminished credibility following the collapse of his scheme, the Times notes. Nevertheless, Madoff said that he had provided ‘useful information’ to the team of Irving L. Picard, the trustee charged with recovering money for Madoff’s victims. Picard has filed suits arguing that banks failed to follow up on suspicions over Madoff’s funds.

BarCap criticised over Del Monte sale

A Delaware judge has attacked the dual role played by Barclays Capital in the planned $5.3bn sale of Del Monte to a group of private equity buyers led by KKR, the FT reports. In a scathing preliminary judgment, Judge J. Travis Laster postponed for 20 days Tuesday’s planned shareholder vote to approve the deal, in order for investors to consider additional information and for an alternative bidder to emerge. At issue is Barclays’ role both as adviser to the seller, Del Monte, and as a lender to the buyer, KKR, a not unknown but relatively rare position to be taken by a bank.“Barclays secretly and selfishly manipulated the sale process to engineer a transaction that would permit Barclays to obtain lucrative buy-side financing fees,” the judge wrote.

Exxon’s oil reserves weakness

Exxon’s latest financial report reveals that for every 100 barrels the company has brought out of the ground in the last ten years, only 95 replaced them via new discoveries, the WSJ reports. Exxon said the shortfall was made up for by increasing its positions in natural gas, via acquiring XTO Energy last year. Even so, gas is less lucrative than oil; reserve replacement rates in general have become a struggle for the biggest western oil majors too. Of 3.5 billion barrels of oil and gas added last year to Exxon’s reserves, 2.8 billion came from XTO Energy, AP reports via Bloomberg.

SocGen on depleted Spanish bank loan loss buffers

For some months now, all the Spanish banking concern has been focused on funding and net margin issues. Worries about loan losses (so 2009) have ebbed away.

On Wednesday, Société Générale’s banking team says it’s time to revisit the issue. Read more

Doubts over Dell, despite earnings beat

Shares in Dell rose 6 per cent in after-hours trading and PC makers have risen across Asian markets after the company’s quarterly earnings went beyond expectations, Reuters reports. Dell posted a gross margin of 21.5 per cent, some way above forecast, and predicted a 5 to 9 per cent rise in current fiscal-year revenue. Analysts are however doubtful that the high margins can be maintained as competition rises. Dell’s consumer business also remains slow despite a ‘corporate refresh’ driving sales elsewhere, the NYT says. Sales from consumers, which total 20 per cent of overall sales, fell 8 per cent.

Unrest rises in Bahrain and Libya

The wave of popular protest hitting the Middle East has consolidated in Bahrain and reached Libya, the FT and NYT report. Demonstrators are occupying a main roundabout in Bahrain’s capital and say they will not leave until demands to end the country’s absolute monarch are met, says the FT. Protesters were gathering once again on Wednesday, Reuters reports. At the other end of the region, violence has erupted in Benghazi, Libya’s second-largest city, according to the NYT — a rare event, given Colonel Gaddafi’s iron grip on the country’s security forces. Meanwhile, Egyptian regulators are considering whether to cancel trades made two days before Cairo’s stock exchange shut in January, Bloomberg reports.

Antitrust spectre hangs over Apple subscriptions

Apple is dictating tougher terms of commerce on apps sold via its iPhones and iPads, demanding a 30 per cent cut of all subscriber content that will be sold directly through the App Store, the FT reports. News and magazine publishers had pushed for a subscription service, and for clarity about its rules, but the expansion of the subscription offer to video and music had not been expected. Publishers have been concerned that Apple will end up controlling the billing relationship with their customers, depriving them of valuable data. There is another obstacle — law professors think that the move could bring antitrust scrutiny, the WSJ says.

Japan bond auction comes in weak

An auction of five-year Japanese government debt has sold bonds cheaper than the market had expected, again suggesting that economic recovery is hampering demand for safe-have assets, Dow Jones reports. Bid cover for the auction fell to 3.56 from 3.97 at a previous sale. Ten-year government bond yields hit a 10-month high following the auction, FT Alphaville notes, adding that JGBs are entering a season of volatility. Having been among the biggest supporters of the market in recent months, Japanese banks are now sitting on huge positions beset by rising yields and increasing yield volatility, implying little appetite for further forays into JGBs in the near future.

A eurozone timeline by Fitch

Oh the newsflow! Fitch Ratings has come up with a timeline of upcoming events that will “help shape the direction” of eurozone sovereign credit quality. Here it is:

JPMorgan cutting global trading platforms

JPMorgan Chase has revealed a $500m plan to slash the number of trading platforms around the world, the FT reports. The move could save between $300m to $1bn and lead to the elimination or redeployment of up to 3,000 employees. Jes Staley, head of JPMorgan’s investment banking unit, told investors on Tuesday that the cuts had been set in motion two years ago. Like many other financial groups that have grown through acquisitions and expanded around the globe, JPMorgan is striving to reduce technology costs and streamline systems that are often obsolete or incompatible. JPMorgan spends around $8.5bn a year on technology.

Sanofi buys Genzyme for $20.1bn

Sanofi-Aventis has ended a nine-month pursuit of US biotech company Genzyme with a $20.1bn deal worth $74 a share, Bloomberg says. The French drugmaker will now be able to add rare disease treatments to a portfolio hit by the rise of generic drugs. The deal also gives Genzyme’s shareholders tradeable contingent value rights based on whether the company produces enough versions of two drugs and whether the FDA approves a new multiple sclerosis product, Reuters reports. The deal will also provide an exit for Genzyme investors, the FT says. The company has suffered setbacks partly triggered by manufacturing problems and supply shortfalls, despite its profitable niche in ‘orphan’ diseases.

Jumping JGB rates

Never short a Japanese government bond — no matter what you think of the country’s debt-to-GDP ratios, demographics, savings and the like. The JGB market can stay irrational longer than you can stay solvent etc. So swaption it, instead.

Here’s Bank of America Merrill Lynch’s Bin Gao on why: Read more

Oaktree Capital returns investors’ money

Oaktree Capital’s distressed investment fund has returned $3bn of the $10bn it raised from investors, after difficulties in finding opportunities following the economic recovery, people familiar with the matter have told the FT. The strategy of Bruce Karsh, Oaktree’s manager, contrasts with competitors who are either trying to accumulate bigger positions in a dwindling number of distressed companies or, in the case of Carlyle, raising a new distressed fund. According to Standard & Poor’s, loan defaults have fallen from a record of 10.8 per cent of the total outstanding to 1.46 per cent last month.