Posts from Thursday May 12 2011

Further further reading

For the commute home,

- Can you predict who will get a Nobel in economics? Read more

India struggles to cap wage inflation

India’s industrialists are fighting a sharp rise in salary demands as they strive to hold on to scarce talent in the world’s fastest growing large economy after China, the FT reports. India is battling the highest inflation of the big Asian economies. Last week the Reserve Bank of India raised its benchmark lending rates 50 basis points as it tried to bring inflation below 9 per cent. Rising energy and labour costs and higher food prices are big factors in the threat. Concern at the rising cost of living and the Congress party-led government’s inability to curb it are likely to be reflected in the results of five state elections, to be announced on Friday. These include populous states such as West Bengal, Kerala and Tamil Nadu. Some political analysts say the prevailing national concern with inflation and corruption may influence voting outcomes in what are local, rather than federal, elections.

Vine life for Moët as it branches into China

Champagne production is confined to 80,000 acres of French terroir about 100 miles east of Paris, but Moët Hennessy will soon be producing upmarket bubbly from a new winery in north-west China, reports the FT. Moët, which owns historic champagne brands Dom Pérignon, Veuve Cliquot and Krug, has joined forces with a Chinese state-owned agricultural group to develop a sparkling wine in the remote Ningxia Hui region.

Labour costs drive Coach from China

Coach, the US luxury accessories brand, plans to shift up to half of its manufacturing out of China to escape rising labour costs at the same time as it moves aggressively to expand its sales in the country, the FT reports. Lew Frankfort, Coach’s chief executive, said that over the next five years the company would cut its China production to 40-50 per cent of its total from 85 per cent at present by opening factories in lower-wage economies including India, Vietnam and the Philippines.

Commodity aftershock cracks sentiment

The commodity aftershock is fading at the edges as the trading day ends in New York. The dollar has turned modestly lower, the S&P 500 rebounded, while Treasury yields are on the defensive after soft demand for the sale of new 30-year bonds, reports the FT. There has been heightened volatility in the commodity complex of late, cracking investor belief in racier plays as fears rise that previously high raw material costs and the monetary response to contain them signal an end to crowded and once profitable “long risk” strategies. The FTSE All-World index is down 0.4 per cent after an early drop of 1.4 per cent as Asian stocks lost 1.6 per cent following Wall Street’s 1.1 per cent slide on Wednesday. New York started the new session with a loss for the S&P 500 of 0.8 per cent at one stage, but the benchmark came back to close out 0.5 per cent firmer. Sentiment was not helped by a downgrade of Goldman Sachs, nor a warning on profits from Cisco Systems, though bulls will note that the latter’s comments are an outlier in what has been a generally upbeat US first-quarter earnings season.

Adventures at the long end of the muni yield curve

The Bond Buyer has a story on Thursday highlighting strong demand for tax-exempt municipal bonds, which despite recent tightening are still trading at above 100 per cent of comparable US Treasuries at the long end of the yield curve.

The “magic” 5% tax-free yield is ­sustaining strong demand from retail investors. Read more

Core blimey! IMF’s advanced Europe worries

The IMF is back with another chart-laden mash-up of empirical evidence and conventional wisdom.

On Thursday the Fund released the first of two European outlook reports for 2011. It’s a bumper (114 pages) offering that’s well worth skimming. Read more

A tale of two volatilities

We suppose this was inevitable.

This morning the IEA lowered its forecast for global oil product demand for the year (highlights here, full report will be publicly available in two weeks): Read more

And the money kept rolling in…

The above chart is courtesy of Alex Bellefleur at Brockhouse Cooper. It’s worth reading in conjunction with this earlier graph. (The 2014 Greek bond and 2006 Argentine bond are both five-year issues.)

Since we’ll admit the Greece-Argentina comparison is controversial, we’ll annotate the history represented on the chart a bit further if we may. There are… correspondences as the eurozone debates whether extra loans or maturity extensions are the next step for Greek debt. Read more

From vampire squid to 1,100-pound medical emergency

They weren’t murderers or anything; they had merely stolen more money than most people can rationally conceive of, from their own customers, in a few blinks of an eye. But then they went one step further. They came to Washington, took an oath before Congress, and lied about it.

So begins Matt Taibbi’s latest hatchet job on Goldman Sachs, which he goes on to describe as… Read more

Meanwhile, on Planet ECB

Judge not, lest ye be judged.

ECB board member José Manuel González-Páramo, earlier on Thursday: Read more

Devaluation – the great Greek damp squib?

Perhaps there’s been a drachma-tisation of a devaluation’s worth.

A major point of leaving the monetary union, one would presume, would be for Greece to extricate itself from the single currency and switch to the new drachma, or similar. Talk of Greece leaving the eurozone has of course started up again after a Spiegel report last Friday. More importantly, it’s become more nuanced. Kenneth Rogoff is quoted in a Thursday Reuters story saying Greece should “take a sabbatical from the euro zone, do a massive currency devaluation and then re-enter at a later date.” Read more

Markets Live transcript 12 May 2011

Live markets commentary from FT.com 

Yen moves: what next?

Having seen a steady rise back up from lows immediately after Japan’s March 11 disasters, the yen continues to defy economic gravity. It’s now up about 5 per cent against its post-March 11 low of Y85.53 against the dollar on April 6.

Among some observers, the ‘capital repatriation theory‘ has revived somewhat in recent days in efforts to explain the currency’s strength, amid growing complaints by Japan’s top manufacturers about the effect of the strong currency on their exports.. Read more

Corporate America weighs in on debt ceiling

America’s biggest trade associations have pleaded with Congress to reach a deal on the federal debt ceiling in a ‘timely fashion’, the FT reports. Politico has a copy of the letter to congressional leaders, signed by groups ranging from the US Chamber of Commerce to the National Retail Federation. The warning from big business is likely to put more pressure on Republicans to compromise, given ties to conservative lawmakers on issues ranging from taxes to government regulation. Statutory debt limits will be reached on May 16. In the meantime, Asian central bank buyers of US debt have told Reuters they have no choice but to continue purchasing Treasuries despite the political signals from Congress.

Debt-financed buybacks on the increase

Blue-chip companies from Philip Morris to AT&T are taking advantage of cheap debt to finance share buy-backs and mergers and acquisitions activity at an accelerated pace, the FT reports. According to Dealogic data, companies with investment-grade ratings have borrowed more than $200bn in the dollar-bond market, up from $134bn by this time last year. The trend could mark a turning point for the credit cycle and the hoard of cash built up by companies since the crisis. While it’s often unspecified how companies plan to use bond sale proceeds, perhaps 20 per cent of borrowings will be used for M&A financing, a proportion last seen in 2006 and 2007.

Argentina: the default scenario for Greece

We did warn that financial markets would have to come to vivid terms with the comparison one day…

This is not a flattering chart for the eurozone: Read more

FCC official joins Comcast after backing takeover

A Federal Communications Commission official who recently voted in favour of Comcast’s takeover of NBC Universal is set to join the newly integrated company, the FT reports. Meredith Attwell Baker was one of four FCC commissioners who in January approved the combination of Comcast, the country’s largest cable operator, and NBC Universal, the television and film studio, after a lengthy review. Public interest groups have attacked Bakewell’s appointment as overseer of Comcast’s lobbying efforts towards Congress. Comcast said that Bakewell would not be lobbying the executive branch or the FCC itself.

 

Goldman to launch renminbi PE fund

Goldman Sachs has agreed a deal with the Chinese government to create a $760m fund for private equity investments denominated in renminbi, the WSJ says. Managed by Goldman’s private equity unit, seed capital for the fund will come from the bank and a state-owned corporation. Morgan Stanley is set to announce a similar fund next week, Bloomberg says, as US banks follow in the footsteps of Carlyle and Blackstone in seeking access to RMB buyout deals. Local rivalries are intense in China’s private equity market, where investments have jumped 40 per cent to $19.7bn in a year.

Bagehot, bailouts and banks – the entwining continues

It’s a moonless night in October, 2008.

A hooded figure turns the corner of Threadneedle Street. It’s Fred Goodwin, head man of the languishing British bank, RBS. He glances behind him. No one’s there. With a sigh of relief he pulls open the heavy door and disappears into the warm welcoming light of the Bank of England. Read more

Gasoline crack confusion in oil markets

Gasoline futures have been blamed for triggering Wednesday’s collapse in oil markets, with the RBOB contract falling 8 per cent, FT Alphaville reports. However, it’s not clear whether ‘bearish’ EIA data on gasoline supplies were really such a bearish signal to sell after all. Refinery use has actually been falling even despite the beginning of the US driving season, apparently as refineries fear that demand destruction is on its way. In the meantime, the ‘widow-maker’ trade of going long gasoline futures against heating oil has lived up to its name once more, reports Reuters. Wednesday’s price move was the biggest drop in more than two years, with traders citing a large European company being forced to stop out of its trade, leading to a spike in volumes.

Cisco warns on profit

Cisco Systems has warned that sales and profit in the current quarter would fall below expectations, announcing that it will take a charge of up to $1.1bn next quarter to cover the cost of reducing its headcount, reports the FT. The company said that revenue in the current quarter would be flat to 2 per cent higher from a year earlier. Cisco’s intense reorganisation comes as revenue growth slows and profit margins fall under pressure from Huawei, Hewlett-Packard and others. In the meantime however, the company is reeling from falls in switching revenue and sales from the public sector.

Superdroop [updated]

The owner of the rapidly expanding Superdry fashion brand is experiencing some growing pains:

 Read more

AIG share sale at risk of being pulled

The Treasury could yet abandon the imminent $9.2bn sale of stock in AIG if it cannot make a profit on the offering, people familiar with the matter told Reuters. AIG said on Wednesday that it would sell 100m shares and that the Treasury would sell 200m shares, raising some $9.2bn – an amount much lower than the $20bn originally targeted, reports the FT. While AIG shares rallied on the announcement, the offering of shares by AIG itself has increased fears that the sale will become dilutive.

Takeda in $12bn deal talks with Nycomed

Japan’s Takeda Pharmaceutical is eyeing a $12bn takeover of Swiss drugmaker Nycomed too give it a foothold in emerging markets and Europe, Reuters reports. Talks are in an advanced stage with several banks approached to provide financing, Bloomberg says. The size of the acquisition would make it the second-biggest takeover by a Japanese company ever, following Japan Tobacco’s $19bn purchase of a British rival, and Takeda’s largest since acquiring US specialist Millennium Pharmaceuticals for $9bn. Japanese pharmaceuticals have rushed to acquisitions as they seek to make up for expiring patents on products.

Crackageddon

The justification for Wednesday’s commodity rout is still that RBOB futures fell (or crashed) after the EIA reported larger than expected US stockbuilds in gasoline. The more than 8 per cent move, in the usually much more stable contract, saw the CME lift margins for speculators by 21.4 per cent for Thursday.

But is the RBOB situation really all that simple? Read more

Feds see green light after Raj verdict

The conviction of Raj Rajaratnam on all charges in his insider trading trial will likely embolden investigators to launch a new wave of cases using wiretaps against traders, the WSJ reports. Wire-tapped phone calls were central to the Rajaratnam case, with 45 conversations used during the trial. Indeed the defence team plan to appeal Rajaratnam’s conviction by challenging the decision to allow wiretap evidence, says the FT. However, there is little chance that wiretap evidence could be overturned making an appeal unlikely to succeed, Reuters says. The trial result is also likely to force Wall Street to overhaul compliance in boardrooms, given the insider networks revealed by wiretaps, the FT adds.

Which came first – the margin call or the commods mayhem?

Silver prices rose by over 60 per cent between the start of the year and April 25.

They’ve now fallen by over 30 per cent — unwinding some 80 per cent of the upward move in the space of two weeks, according to Société Générale figures. Such violent swings have lead to margin call hikes on the precious metal (along with other commodities) at the Chicago Mercantile Exchange, and have also unleashed a wave of debate about just how much margin moves may have attributed to price falls. Read more

Euro exit as legal quagmire

Ignore (for now) the question of whether, or when, or should the periphery leave the euro, as part of a debt restructuring or a long process of fixing their balance of payments crisis.

We want to have another look at its legal possibility. Read more

Further reading

Elsewhere on Thursday,

- It’s not just “Fountainhead” — reading lists of the (really) rich. Read more