30JUN08:
Oil to be USD200 by 30OCT08
USA Inflation to be 7.5% by 30OCT08 23APR08:
Next Rights Issue:
HBOS...yes
All & Lec ... 17APR08: Oil to be USD127 by 30SEP08
...16MAY08 losing my touch 27FEB08:
2 Banks go bust by 30JUN08
BS down, Lehman (a bit late I know) 20NOV07: Northern Crock to be sold for 15p
Nationalized 01NOV07: Oil to be USD103 EOM
...peaked too soon The Big Crash: 17OCT07
...well it's here 08OCT07:
SEC to fine Goldman for pricing issues
...still waiting 15JUN07: ML to buy-out BS
JPM got there first
It is rather shocking to be in New York and learn that London has been voted the world's number 1 commerce city. I will be leaving this afternoon as I cannot be seen in an unfashionable part of the world.
Activism is rampant; Private Equity houses are falling over themselves to list and retire early; Bankers fight over a Hedge; China is on rocky soil; and the bubble is so stretched that even the media is getting bored trying to predict when it will burst.
I will help you. The first big hole will be made on 25th June 2007.
On a more lighter note I have recycled an old image for today's newsletter as it was quite popular first time round and most of my youtube readers have 3 second memories anyway.
Theatre of the Absurd. Some might say that describes today's financial world, where "time, place and identity are ambiguous and fluid," as Wikipedia describes theatrical genre that gained prominence in the 1940s, 1950s, and 1960s, "and even basic causality frequently breaks down."
Everywhere you look, people are doing deals, seeking deals, hoping for deals, and betting on deals that don't make any sense. And yet, up until now at least, it hasn't really mattered. Not when there has been plenty of funny money to go around, in the form of mispriced credit, to keep the phantasmagoric fantasy alive. But as the Washington Post's Steven Pearlstein argues in "The Takeover Boom, About to Go Bust," there is evidence afoot that the show is finally ending and the curtain is fast coming down.
To understand why there's a credit bubble, how it's inflating the price of stocks and what it will mean for you when it bursts, let's consider the acquisition of Avaya, a large telecommunications equipment maker, announced last week by two private-equity firms, Texas Pacific Group and Silver Lake Partners.
Avaya is expected to post revenue of about $5.4 billion this year. It has virtually no debt and has $825 million in the bank. Operating earnings -- profit before counting things like interest payments, taxes, depreciation and amortization -- are expected to reach $700 million. And if that's correct, it means the price being paid for Avaya, $8.2 billion, is 12 times operating profit, making it one of this season's richest deals.
What's driving such high valuations is cheap debt, and plenty of it. We don't know yet how the all-cash purchase of Avaya will be financed, but if it follows the pattern of other recent buyouts, the new owners will take on at least $6 billion in debt. Given the junk-bond rating that has already been assigned to the deal, that is likely to work out to an average interest rate of about 8 percent, along with the obligation to pay back 1 percent of principal every year. Add it all together, and the new, improved Avaya will have to pay about $540 million more a year in debt service than it does now.
Can the company handle that? Well, consider that only three years ago, Standard & Poor's calculated that operating profits for companies involved in leveraged buyouts were typically 3.4 times debt service. Last year, the number fell to 2.4. So far this year, it is 1.7.
And the Avaya deal? It's 1.3 to 1, which, if you think about it, isn't much of a cushion if revenue suddenly falls or expenses rise more than expected. Nor would there be much cash left over for the company to increase its investment in research or pay for new plant and equipment.
In other words, a deal like this would never get financed in normal times. Bank lenders and bondholders would demand that the new owners use more of their own money and take on less debt. Or they would demand interest rates so high that the company, as presently configured, wouldn't be able to generate enough cash to cover debt service. Either way, the buyers would never have agreed to pay $8.2 billion.
But these are not normal times, and overpriced and over-leveraged deals like Avaya have been getting financed in record numbers. Back in 2004, about $275 billion in loans were issued for such highly leveraged transactions. By last year, that had risen to $490 billion. And in just the first five months of 2007, that record was broken.
At some point sanity will be restored, triggered by any number of events. A high-profile acquisition could collapse because the new owners could not secure financing. Or a deal could blow up after it is discovered that there's really not enough cash to meet the debt payments. Or interest rates could suddenly rise from their current low level, threatening the viability of recently acquired companies and making it unlikely that the new owners will be able to sell for anything close to what they paid.
In fact, over the past several weeks, all those things have begun to happen.
On the bond market, yields on the benchmark 10-year Treasury bill have increased from just under 4.5 percent to more than 5.25 percent -- a three-quarters-of-a-point jump without any action by the Federal Reserve.
And just last week, William Gross, one of the country's leading bond investors, recanted on his prediction that interest rates were headed down, warning instead that yields on 10-year Treasurys could reach 6.5 percent over the next several years.
Syndicated loans used to finance the recent purchases of the Minneapolis Star Tribune, Linens 'n Things and Freescale, a semiconductor maker, are trading at significant discounts only months after the deals were closed, after the companies reported disappointing earnings or cash flow.
Meanwhile, the Wall Street Journal reported that after a period in which lenders were throwing money at leveraged buyouts with few if any conditions, several private-equity buyers are having more trouble financing their deals. Those include KKR's $26 billion acquisition of First Data and Texas Pacific's purchase of JVC, the struggling consumer electronics giant.
It is impossible to predict when the magic moment will be reached and everyone finally realizes that the prices being paid for these companies, and the debt taken on to support the acquisitions, are unsustainable. When that happens, it won't be pretty. Across the board, stock prices and company valuations will fall. Banks will announce painful write-offs, some hedge funds will close their doors, and private-equity funds will report disappointing returns. Some companies will be forced into bankruptcy or restructuring.
But the damage won't be limited to Wall Street and its investors. For if we've learned one thing in the past 20 years, it is that what happens on financial markets, in booms and in busts, can have a big impact on the rest of the economy.
Without the billions of dollars flowing each year to financiers and corporate executives, there will be less money to trickle down to car salesmen, yacht makers, real estate agents, third-home builders and busboys at luxury resorts.
Falling stock prices will cause companies to reduce their hiring and capital spending while governments will be forced to raise taxes or reduce services, as revenue from capital gains taxes declines.
And the combination of reduced wealth and higher interest rates will finally cause consumers to pull back on their debt-financed consumption.
It happened after the junk-bond and savings-and-loan collapses of the late 1980s. It happened after the tech and telecom bust of the late '90s. And it will happen this time.
The recent decline in home prices and the meltdown in the market for subprime mortgages are the first signs that the air is coming out of the credit bubble. Already, those factors have shaved half a percentage point off the economic growth rate. And you can be sure that there will be a much larger impact on jobs and incomes from a broad decline in stock and bond prices, a sharp tightening of credit and the turmoil that both of those will create in the murky derivatives markets.
If you ask me, it sounds like Mr. Pearlstein's been reading Financial Armageddon!
Fintag says I spent much of yesterday in New York talking to Hedge Fund Managers. Around 80% are preparing for a crash; they are heavily involved in Credit Derivatives and Correlation Trading; leverage is being tightened and profits are being realised. But nobody has a clue what the "trigger" event will be so I just told them what it says at the top of the FiNTAG website.
June 25th. 2007.
Just wait and see or liquidate everything into cash. This will be a taster but not the big one. That comes in the fall as they always do. Christmas is coming and the cost of that expensive summer vacation weighs heavily along with the banking of unrealised profits into bonuses.
Mark my words (a favourite phrase in an Harry Potter film).
Are global market bubbles set to blow? (bbc) There is a strange fascination in blowing a bubble, when despite your better judgement, you keep willing it to get bigger regardless of the dangers.
Then, suddenly, the violent pop that leaves you picking bubblegum off your eyebrows, or crying soapy tears.
For many observers, global markets are getting dangerously close to such a bursting point.
Until recently, we have been living in a period of low global interest rates that have let consumers and companies borrow money cheaply.
That has driven demand for mortgages, let companies pay increasingly large sums for takeovers, and allowed consumers to spend freely.
And the results of this credit splurge are hard to ignore:
* UK house prices have doubled in the past 10 years. * China's main stock index has quadrupled in value since the start of 2006. * The UK's FTSE 100 and US S&P 500 stock indexes are at levels not seen in almost seven years. * Commodity prices have been buoyed by strong global demand, pushing some such as copper to records. * Merger and acquisition activity has taken off, and private equity firms are now in control of some of the world's biggest brands.
But as the records have continued to tumble, concerns have kept on mounting.
Credit crunch
One of the main reasons for the current uncertainty has been the significant changes and volatility in the US bond market.
The price of 10-year US government-backed bonds has fallen, pushing their yields above 5.25% for the first time in five years.
Simply put, this means that investors are not expecting interest rates to fall anytime soon, especially as the Bank of England, the US Federal Reserve and European Central Bank have all been lifting borrowing costs in recent months.
UK interest rate graph
What has many observers worried is the sudden speed with which the change occurred and the fact that it seems to confirm the view that the era of low interest rates has ended.
First and foremost this will make it more expensive for companies and consumers to get their hands on cash.
That in turn could lead to fewer private equity deals, and a cooling of the housing and stock markets.
Home improvements
In recent years consumers have benefited from the largesse of lenders, taking on larger mortgages and increasing personal borrowing to levels many now see as unsustainable.
The bond-market turmoil may turn out to be the beginning of the end
On Tuesday, figures from the Council of Mortgage Lenders showed that first time buyers borrow an average of 3.33 times their incomes to buy a home. Other measures show they are using 18.7% of their incomes to meet mortgage repayments.
Pessimists also point to a wobble in the US housing market, where prices have started to soften and high levels of sub-prime lending to people with poor credit histories has fanned fears of a surge in mortgage defaults should interest rates rise.
At the same time, some very canny real estate operators have been selling up, signalling that, for them at least, the market could not get any richer.
London estate agency Foxtons was sold to private equity firm BC Partners for a reported £400m in May, and the US property magnet Sam Zell has offloaded his main investment vehicle.
Topping off
There have also been signs that the private equity boom, which has fuelled merger and acquisition activity in Europe and the US, could be hitting a peak.
So far this year, the total value of deals done this year is almost double than at the same point in 2006.
At this stage of bull markets larger corrections become more frequent Morgan Stanley
And companies today are having to pay a premium of as much as 30% to secure takeovers, compared with premiums of about 20% a few years ago, analysts said.
At the same time, the low interest rates and an ever increasing hunt for profits have seen banks relax their restrictions on lending, producing a new breed of loans called "covenant-lite".
Borrowers have fewer restrictions on what they have to do with the money or business, something that has led to a decline in standards of due diligence, according to Jon Moulton, chairman and founder of Alchemy Partners.
While that may not matter when there is a lot of cash sloshing about, risky deals are often the first to collapse when interest rates climb, analysts said.
Market timing
Critics say that the huge amounts of cash companies had at their disposal meant that they could buy back stocks to boost share prices and inflate equities by over-the-top acquisitions.
Certainly stock markets are exhibiting some classic warning signals as well.
Wall Street giant Morgan Stanley told investors that its indicators were showing a "full-house" in terms of sell triggers, and that this had only happened five times since 1980.
Each time, global equities have lost an average of 15% over the following six months, it said.
"At this stage of bull markets larger corrections become more frequent," Morgan Stanley said.
And yet, despite the pessimism there are plenty of reasons to believe that a meltdown is not on the cards.
True markets have surged and corporate profits in many industries hit record levels, but indicators are a long way from the scary heights that preceded previous crashes.
In the US, the average price earnings ratio - a measure of the share price when compared to future profits - is about 18 times at present; in the lead up to the dotcom collapse it was at least double that level.
Volatility normally increases ahead of a slump, with corrections of as much as 10% happening regularly, though this has not been the case with the S&P over the past four years.
World view
Elsewhere there have been wobbles, such as in China where a 9% one-day drop in the stock market shook global indexes.
However, many analysts argue that even though the Shanghai stock exchange may seem overvalued and there may be concerns about the veracity of corporate reporting, the long-term prospects for China outweigh many of the risks.
People worry a lot. There can be a boom, but it doesn't mean it is a bubble Jim O'Neil, Goldman Sachs
Instead of a collapse, analysts say there will be corrections in a bull market that will see equity prices continue rising and profits keep growing.
The key to this approach is taking a long-term outlook and buying into the view that the so-called Bric nations of Brazil, Russia, India and China are reshaping the world economy.
Already the changes are being felt and in the first three months of this year China accounted for a greater proportion of the global economy than the US.
Jim O'Neil is chief economist at Goldman Sachs and is the man who coined the term Brics.
"People worry a lot," he explained. "There can be a boom, but it doesn't mean it is a bubble."
Flattening out
The view of the optimists on the housing and private equity markets is not so different.
* It may become more expensive to get mortgages and do deals, but that is likely to slow rather than reverse the current trend. * Rather than the bursting of a bubble, expect a plateau of demand. * UK house price growth probably will slow, though a lack of new homes will help underpin the market especially in prime areas such as London. * Though real interest rates have risen, they are still low by historical standards. * Real estate bubbles may appear but they will localised and dictated by special circumstances. * Mergers and acquisitions are unlikely to stop as there are compelling arguments for consolidation in many industries, such as banking.
The problem for investors and consumers watching events unfold over the next few months will be determining whether the commentators have got it right or wrong, and if it really is time to head for safety before things blow up in their faces.
It is the sort of border dispute one might expect among the Leylandii owners of the suburban middle classes, or which might crop up on the reality TV show Neighbours from Hell. But in the rarefied atmosphere of the Hamptons, the out-of-town summer playground for New York's super-rich? This sort of behaviour just won't do at all.
Earlier this week, the tranquillity of the exclusive getaway was shattered by the sound of earth-moving equipment, followed by police sirens, as two of Wall Street's richest men battled over a path that runs past their neighbouring mansions.
When Marc Spilker a senior executive at the mighty Goldman Sachs, the investment bank known for its aggressive tactics decided the path was too narrow, he ripped down the shrubs that bordered their properties. That enraged Jim Chanos whose $1bn hedge fund is known for its even more aggressive tactics in trying to bring down company share prices who called the police after seeing the shrubs being pulled apart.
Now the two are engaged in a vicious spat that has spilled into the public arena thanks to a furious email by Mr Chanos, not just to Mr Spilker but to a host of senior executives at Goldman Sachs. The email was on the finance industry's gossip-raking blogs before the dust had settled beside the upturned shrubbery.
"My outrage over this arbitrary and unilateral course of action is probably only exceeded by Mr and Mrs Spilker's sense of entitlement that the 4ft-wide path to the beach was, 'just not wide enough for us', as he said when first broaching the subject of arbitrarily widening a path that was in compliance with the local zoning," said Mr Chanos. And he added: " I hope this is not a harbinger of how other Goldman senior executives may act when the markets become, 'just not lucrative enough for us!'."
The pair's mansions are on Further Lane, one of the most exclusive addresses in East Hampton, where neighbours include Jann Wenner, the founder of Rolling Stone magazine, and the comedian Jerry Seinfeld. The rest of the villagers are a mixture of celebrity millionaires and New York's "old money" families, long taken to grumbling about how Wall Streeters seem to acquire money and mansions faster than they acquire taste and decorum.
Mr Chanos is the man who first spotted that something was rotten at the energy giant Enron. His multimillion-dollar bets against the company's shares made him a fortune, and made him a legend on Wall Street. Trader Monthly magazine estimates he is one of the highest paid hedge fund bosses in the world, netting between $300m (£150m) and $400m last year.
Marc Spilker, meanwhile, has scrambled up the ranks at Goldman Sachs and was promoted last year to oversee investments in hedge funds and other complex businesses that gamble on the world's financial markets.
Neither man made their millions from backing down and there was no sign of peace breaking out yesterday. Worse, the lawyers are getting involved.
Christopher Kelley, Mr Spilker's attorney, said his client has made " repeated attempts" to discuss his desire to widen the path, but Mr Chanos "has been unwilling to rationally discuss the situation". Mr Chanos is obliged under terms of his deeds to provide a 15ft wide easement to the ocean, Mr Kelley says.
Mr Chanos's lawyers have a 1982 document to back their claim that the path needed to be just four feet wide and say the incident amounts to trespass. " No one should have the right to send bulldozers onto another person's property to forcibly coerce the other side into negotiation without a prior agreement or court order," he said yesterday.
Fintag says The great and the good fighting over daylight. Unfortunately that isn't something you can buy yet although I am sure we are going to see an "Air Long/Short" Hedge Fund very soon to go along with Hedge Funds trading wine, aircraft, art and pornography.
Am I mad, in a coma or suffering from too much cocaine abuse?
Still, the "gossip blog" referred to in the email sent to Goldman's people didn't mention me which is very irritating as the publicity would have been useful.
Related Managing Globalization Blog: Could This Be the Tipping Point?
Yields on the 10-year Treasury note — a key benchmark that influences nearly all long-term interest rates, including home mortgages — hit a five-year high, climbing to 5.248 percent yesterday, up from 5.154 percent late Monday as investors sold off notes and bonds.
Treasury yields, which have been rising steadily since the end of April and have started to weigh on the stock market, quashed an early afternoon stock rally. The Standard & Poor's 500-stock index, a broad gauge of the market, closed down 1.07 percent, or 16.12 points, to 1,493 points; and the Dow Jones industrial average dropped 1 percent, or 129.95, to 13,295.01 points.
Bond prices, which move in the opposite direction from yields, started falling yesterday after the top official at the Bank of England signaled in a speech late Monday that policy makers in London might continue to raise interest rates.
The sell-off intensified after Alan Greenspan, the former chairman of the Federal Reserve, said in a speech that he thought that borrowing costs would climb, particularly for developing countries.
But investors' expectations of inflation, which traditionally drive bond yields higher, do not appear to be the prime reason for the move. Though inflation continues to run above the upper limit of the Federal Reserve's comfort level of about 2 percent, there has been little to suggest it is picking up pace.
“This is not about inflation in my view,” said Jane Caron, chief economic strategist at Dwight Asset Management, a bond firm based in Vermont. Yields “got down to a level that were not particularly compelling.”
In fact, the price of gold, which is widely seen as a hedge against inflation, has fallen in recent weeks, and the yields on inflation-protected securities have been rising.
Instead, economists and market specialists said, the recent sell-off suggested that investors had become more disenchanted with the low rate of return from bonds at a time when the global economy is continuing to expand at a robust pace. The stock market rally and rising interest rates in Europe and Asia may also be pressuring American government debt
Ms. Caron said there were also some indications that investors in Asia, including the region's central banks that are big purchasers of United States government debt, may be scaling back. In the past, Asian investors have bought Treasuries as yields approach 5 percent.
This time, however, “there is not a lot of buying coming in from Asia,” she said.
Officials in China, one of the biggest holders of American government debt, have said repeatedly that they have not and will not sell or reallocate to different currencies their existing foreign exchange reserve, currently at around $1.2 trillion. But officials of the People's Bank of China have publicly suggested on several occasions that they would seek to improve returns on new investments as money continued to pour into the reserves.
The Chinese government has already distinguished itself from other governments in its willingness to take somewhat greater credit risk on foreign reserves, most notably through its purchase of an estimated $100 billion worth of American mortgage-backed securities.
Since Chinese foreign exchange reserves are rising at more than $300 billion a year as a result of widening trade surpluses and net foreign investment, a decision by officials in Beijing to allocate a greater portion to other currencies could potentially cause ripples in the international currency markets.
But the Chinese tend to move very gradually in any economic or financial policy decision, particularly regarding the currency, so most experts think it is unlikely that they are shifting sharply away from dollar-denominated purchases even with new money coming into their reserves.
“They want to own dollars,” said Harold S. Woolley, a managing director at Bessemer Trust, an investment firm in New York. “Nobody forces them to sell goods to us and take dollars.”
Another explanation for the rise in yields, economists suggest, is that investors are realizing that they had been wrong about the direction of interest rates in the last year or two.
In the United States, investors had believed the slowing housing market would prompt the Fed to cut short-term interest rates. Not only has that not happened, but policy makers have steadfastly signaled that they would not do so until inflation expectations fell more significantly.
That could explain, analyst said, why yields on long-term securities are rising faster than yields on short-term securities. For much of the last year, yields have been inverted or flat so shorter-term debt paid just as much, if not more, than longer-duration notes and bonds.
In Europe and Asia central bankers have been raising rates in response to strong growth and worries about inflation — and indicating that they are not done.
“We are seeing increases in foreign interest rates, and there is lot of evidence that global economy is doing very well,” said David Kelly, an economist at Putnam Investments, the mutual fund company based in Boston. He noted that many economists were even forecasting a pickup in the American economy, which slowed notably in the first quarter.
There is some risk, however, that the higher yields and accompanying higher borrowing costs could put a damper on any resurgence.
As of last week, the national average rate for a 30-year fixed mortgage was at 6.53 percent, up from 6.18 percent at the start of the year, according to Freddie Mac.
Though that is still low by historical levels, rising rates would mean consumers who are refinancing or buying a home will have to spend more of their disposable income on monthly house payments than they have been. That could hurt consumer spending and the broader economy.
Businesses will probably fare somewhat better, according to Mr. Kelly and others, because interest costs tend to have a relatively small impact on corporate profit. Also, business credit remains widely available and at good terms.
“I don't see how this will shut anything off,” said James W. Paulsen, chief investment strategist with Wells Capital Management. He said that yields would have to climb to 6 percent or more before borrowing costs start to hurt businesses.
Keith Bradsher contributed reporting from London.
Fintag says Good to see our sleepy fixed income friends smiling about the future. Inflation is back - yahoo!
I have been buying t-bills all week. As they say, when the stock price falls, it is time to buy.
All aboard mighty Blackstone bandwagon (times) Blackstone, the US buyout firm, is working with no fewer than 17 underwriters on its flotation, including Goldman Sachs and JPMorgan Chase, it emerged yesterday, as the launch date for the IPO was set for June 25.
The float will raise about $4.5 billion (£2.2 billion) and value the management company at close to $33 billion. Wall Street firms have been scrambling to get a piece of the action. Morgan Stanley, Citigroup, Merrill Lynch, Credit Suisse and Lehman Brothers are among the host of other Wall Street firms underwriting the flotation.
Analysts believe that Blackstone has signed up more underwriters than necessary because it wants to keep as much of Wall Street onside as possible. Buyout firms such as Blackstone work closely with investment banks, which advise on deals and arrange financing.
The move will also reduce the potential for criticism of its valuation, which will see its shares trading on a much higher multiple than, for example, Goldman Sachs. Deutsche Bank, ABN Amro, Bank of America Securities, Nikko and Wells Fargo are also underwriting the offering, which is expected to value the shares at between $29 and $31 each.
Blackstone's advisory army dwarfs the ten underwriters involved in the recent IPO of Fortress, the US hedge fund.
The underwriting arrangements emerged two days after the sheer scale of riches due to Blackstone's two founders became known. Stephen Schwarz-man, the Blackstone chief executive and co-founder, will see his stake valued at more than $8 billion. He will cash in about $450 million of shares in the listing and retain a 23 per cent holding in the group.
Peter Peterson, a former chief executive of Lehman Brothers, will cash in $1.88 billion of his shares, leaving Blackstone's other co-founder with about 4 per cent of the group.
Mr Schwarzman's windfall comes after a year in which he earned $398.3 million, mostly from profits made on sales of portfolio companies. His 2006 earnings equate to 48 times the $8.3 million average total compensation paid to S&P 500 chief executives last year, according to Associated Press.
Even Lloyd Blankfein, chief executive of Goldman Sachs, earned only $54.3 million in 2006, a record for the head of a Wall Street firm, after his bank made unprecedented profits.
Blackstone will be the first US buyout firm to float, and so every new SEC filing is scrutinised as financial communities across the world seek an insight into a hugely secretive firm working in a notoriously opaque industry. Before Blackstone decided to go public, even its investors knew little about the firm, which, like most buyout groups, used its status as a private company to limit the flow of information.
But in recent weeks, Blackstone's SEC filings have revealed nuggets of information, such as that the firm reported a net income of $2.26 billion for 2006, up from $1.3 billion in 2005.
In a reminder of just how cyclical an industry private equity can be, the company reported only $39.4 million for 2002, the filings have shown.
Rival buyout firms such as Kohlberg Kravis Roberts, Carlyle Group and Apollo Managers are among a host of Blackstone's rivals that are watching the flotation with great interest, with a view to following suit.
There is expected to be a scramble to float if Blackstone's IPO is a success, as experts predict that institutional investors would have an appetite for only two more buyout firms.
Fintag says Is Blackstone the next lastminute.com? If not then Apollo, Texas PG and Carlyle will follow suit. KKR hasn't got bankers lined up but will be next. If it is then the Pirates will stay undercover until the rain stops.
The Pirates know they are up to their necks in poorly performing LP's and the principals are nearing retirement age so listing is a priority. They all want to be over valued like Fortress and this is a great opportunity to build up a war chest in case of those rainy days when we move into a 6% interest rate world when their models all assumed it would be a 4% interest rate world.
READY SET GO
Hedge funds' hopes rise for China opening (reuters) Hedge funds, known for flexing their financial muscles around the globe but still largely shut out of China, hope the quickening pace of Beijing's reforms will open new gateways into the world's fourth-largest economy.
Chinese officials remain suspicious of overseas hedge funds, after witnessing the turmoil partly blamed on the likes of financier George Soros' Quantum Fund during the 1997/98 Asian financial crisis.
Unlike foreign banks, mutual funds and brokerages, hedge funds are excluded from forming fund management ventures in China, which Barclays Capital predicts will offer the highest growth potential of any asset management market in Asia over the next two years.
China, with $1.2 trillion (610 billion pounds) in foreign exchange reserves and $2 trillion in personal savings, also bars domestic investors from buying into hedge funds, although it has let selected China-based financial firms invest in overseas capital markets.
That's why overseas hedge fund managers such as Andrew Smith and his colleagues were rushing around Shanghai last week meeting Chinese regulators to introduce themselves and the industry.
"The main point is really to educate people about our marketplace and try to demystify a little bit the perception of hedge funds," said Smith, a partner in hedge fund Fairfield Greenwich Group, which manages about $15 billion.
Beijing shares the scepticism of many governments toward hedge funds, once derided by a German politician as "locusts" and periodically portrayed in China's local media as predators that only contribute to chaos in the financial markets. But this has not kept hedge funds -- which have grown to $1.5 trillion worldwide and have an established presence in Hong Kong, Singapore, Japan and Australia -- entirely out of China.
Some hedge funds have entered the market by buying into the $30 billion quota for overseas investment banks under China's Qualified Foreign Institutional Investor (QFII) scheme, which lets foreign firms invest in domestic stocks.
They may be finding alternative entry routes, as well, with the Chinese Academy of Social Sciences, a top Chinese government think-thank, estimating that global hedge funds invested as much as US$50 billion into China's soaring stock markets, according to a report in the South China Morning Post last month.
BENEFITS OF REFORM
"Hedge funds are very active in investing in China, driven by its economic growth, opening of the financial market and the renminbi appreciation," said Rex Chan, head of research at China Hedge, a hedge fund adviser in China.
Worried that foreign "hot money" from hedge funds and other investors may be inflating China's share prices and currency, Chinese regulators have pledged repeatedly to step up checks on cross-border flows of short-term capital.
But hedge funds, whose clients overseas include pension funds and other conservative investors, are seeking an accepted role in China's markets and inclusion in reforms that have benefited other foreign financial institutions.
China surprised the markets last month by agreeing to invest $3 billion of its foreign exchange reserves in U.S. private equity powerhouse Blackstone Group.
It has also recently allowed domestic institutions to invest clients' funds in overseas stocks, easing its previous limitation to fixed-income products.
China's development of financial derivatives markets has particularly excited hedge funds -- which make extensive use of derivatives to seek profits in both rising and falling markets.
Regulators are preparing to launch stock index futures trading and to expand the stock warrant market.
"Given the Chinese stock market is relatively immature and irrational, hedge funds are likely to generate decent returns in 2007 if the index futures are launched," said Rob-Roy Roedel, chief executive of Zurich-based hedge fund Plenum Investment.
Roedel and top executives from several other hedge funds, including Netherlands-based Finles Capital Management, were also in Shanghai early this month to raise their profile.
Some hedge funds have set up offices in China to conduct research to facilitate investment in Chinese stocks.
Robin Lewis, head of Fairfield Greenwich Group's proposed Beijing representative office, said it appeared just a matter of time before Beijing lifts its ban on Chinese investment in hedge funds, given recent efforts to integrate further with the global capital markets.
"Nobody has a timetable but nobody would disagree that every step in the reform process has happened more quickly than anyone anticipated all along the line," he said.
Fintag says I am not so sure. As with Imperialism in the C19th century, forcing a country to change doesn't always work as historical cultural forces come into play. Some countries have achieved it, like Japan, but others have failed like Brazil and India; emerging markets that are still being whored around as the next big thing (I am not that old but even my father talks about the great BRIC threat back in the 1960's).
Germany hasn't been able to secure its place as the center of the financial world and who would have thought New York would see Wall Street moving to Florida and Stamford? The world changes but not always in the way we think.
China has a long way to go. It is full of spoilt only children in a large sweet shop immaturely buying everything in sight; a bit like the rest of the world really.
The BP Statistical Review of World Energy 2007 also shows that global energy use has grown much faster and created more carbon dioxide emissions in the past five years than in the second half of the 1990s, despite the big rise in the prices of oil and natural gas.
The discovery of new reserves has kept the four-decades production buffer steady despite increases in production.
Peter Davies, BP's outgoing Chief Economist, rejects the "peak oil" claims that oil production is already at or near its peak.
"We don't believe there is an absolute resource constraint," he said. "When peak oil comes, it is just as likely to come from consumption peaking, perhaps because of climate change policies or for some other reason, as from production peaking." However, the big oil majors including BP are facing increasing challenges in getting access the oil reserves, with almost two-thirds located in the Middle East.
The BP review also shows that the world's proven reserves of natural gas rose slightly, and are sufficient to provide more than 60 years of current consumption.
However, coal is the fossil fuel that has seen the greatest growth in usage because of the huge market for it in China.
Coal creates more greenhouse gas emissions than other fuels and while the growth rate in world energy use accelerated from an average 1.2 per cent a year in 1996-2001 to 3 per cent a year in 2001-06, the growth in emissions from fossil fuels tripled to an annual average of 3.4 per cent.
BP says that the year 2006 was another year of high and volatile energy prices. But despite high prices, world energy consumption growth remained above average, continuing the trend of recent years. Energy use is also increasingly shifting away from OECD countries and becoming more carbon-intensive.
It was a year when energy markets were once again the centre of attention, attracting the interest of politicians, consumers and policy-makers alike.
“Last year showed markets at work. Primary energy consumption growth has decelerated - particularly for fuels which have seen the highest increase in price,” said BP's Chief Economist-designate Christof Rühl speaking today at the launch of the report. “However, global carbon intensity - the link between carbon emissions growth and energy growth - has increased.”
For the second year in a row, world energy growth slowed, rising by 2.4 per cent, down from 3.2 per cent in 2005, but still just above the 10-year average.
The pattern of recent years, which has seen robust demand in Asia Pacific and China in particular, was repeated with Chinese energy consumption rising more than 8 per cent. China's usage of all forms of energy rose in the year, taking the country's share of total global consumption to more than 15 per cent.
Continued high energy prices resulted in slower consumption growth amongst the main energy importers, particularly the US where primary energy consumption fell by 1 per cent in 2006 compared with 2005, despite economic growth. Oil, natural gas and coal usage were down while nuclear energy and hydro-electricity were up very slightly.
Oil and gas reserves were largely unchanged in the year with the reserves-to-production ratio remaining above 40 years for oil and 60 years for gas. Despite a small decline in 2006, oil reserves are still some 15 per cent higher than a decade ago, at 1,208 billion barrels. Global gas reserves were slightly higher at 181 trillion cubic metres, with the US and several Opec members showing increases.
Oil: a 400,000 barrel per day (b/d) fall in OECD oil consumption, the biggest decline from that grouping for more than 20 years, underlines the impact of rising oil prices. Prices peaked at more than $78 a barrel in August as the average price of dated Brent increased by nearly one fifth to $65.14 a barrel in 2006. The OECD fall was the main factor behind the weakest global growth rate for oil since 2001, at 0.7 per cent or half the average for the past decade.
Overall global production was up some 0.4 per cent to 81.7 million b/d. Faced with weak demand, Opec cut production late in 2006 for the first time in nearly two years. For the year as a whole, Opec increased its production by an average 130,000 b/d to 34.2 million b/d.
Amongst Opec producers the main increases came from United Arab Emirates and Iraq while there were declines in Saudi Arabia, Venezuela and Nigeria. Outside of Opec output was up some 300,000 b/d in 2006, though this rise was less than half the 10-year average. The biggest growth came from Russia, up by some 220,000 b/d, and Azerbaijan, Angola and Canada. Oil production was down in the UK for the seventh year in a row, and in the US for the sixth year in a row.
Gas: consumption, strongly fuelled by demand growth in Russia and China, rose by some 2.5 per cent in 2006, close to the average of the past decade. These rises in demand offset the declines in the US and Europe. The European fall was due to a combination of higher prices and warmer-than-normal weather. Russian gas demand, almost as large as the total consumed by the whole Asia Pacific region, increased by some 7 per cent in 2006, accounting for 40 per cent of the global increase. China's consumption grew more than 20 per cent to 55.6 billion cubic metres.
Gas production was up more strongly than it has been for many years, by some 3 per cent, led by Russia. The US also staged a recovery following the severe hurricane damage in 2005. UK production fell for the sixth year in a row.
Coal: dominated by China, coal was once again the world's fastest growing hydrocarbon. For the eighth year in a row China's demand grew, but at 8.7 per cent was well down on the double digit growth of recent years. China still accounted for 70 per cent of global growth in coal consumption. Even excluding China, global coal consumption is increasing. While US consumption was down for the second year in a row, consumption in the UK and elsewhere in the OECD was up for the third consecutive year.
Nuclear and Hydroelectricity: the OECD countries accounted for the lion's share of the global increase of some 1.4 per cent in nuclear output, mainly through increased capacity utilization and capacity upgrades. Hydroelectric generation was above the decade average at 3.2 per cent, with notable capacity-related increases in China, India and Brazil. Increased rainfall in the US offset declines in Canada and Scandinavia.
Renewables: use of wind and solar continue to grow rapidly but from a low base. Installed wind power capacity was up by some 25 per cent in 2006 but still accounts for less than 1 per cent of worldwide electricity production. Solar power was also up sharply but its contribution, like wind and other renewables relying heavily on government subsidies, is still an even smaller contributor to global power. Ethanol use rose by 22%.
Fintag says Maybe this is the reason the party is still going on strong. We are all in denial that oil runs out in 2050.
When I was at school it was 2060 so I guess we are consuming more than we should.
Basically we are all fcked and should continue partying. I mean I wouldn't be seen dead in recylced clothes riding a bicycle.
TRADE OFF
UK unemployment rate fell to lowest level in May since September 2005 (finfacts) UK unemployment fell to the lowest in more than a year and a half in May, a signal that the pace of economic growth is keeping up inflation pressures in the labour market. However, UK headline average earnings growth unexpectedly slowed in April to its weakest since December as high New Year bonuses dropped fell out of the three month calculation.
The trend in the employment rate is falling while the trend in the unemployment rate is close to flat. There has been a further fall in the number of people claiming Jobseeker's Allowance benefit. The trend in the inactivity rate is increasing. The number of job vacancies has increased. Growth in average earnings excluding bonuses is unchanged but growth in average earnings including bonuses has fallen.
The employment rate for people of working age was 74.3 per cent for the three months ending in April 2007, down 0.1 from the previous quarter and down 0.3 over the year.
The number of people in employment for the three months ending in April 2007 was 29.01 million, down 10,000 over the quarter but up 87,000 over the year. Total hours worked per week were 925.9 million, down 3.7 million over the quarter but up 1.7 million over the year.
The number of jobs in March 2007 was 31.59 million, down 22,000 over the quarter but up 265,000 over the year.
The unemployment rate was 5.5 per cent, unchanged over the quarter but up 0.2 over the year. The number of unemployed people fell by 15,000 over the quarter but increased by 58,000 over the year, to reach 1.68 million. This quarterly fall in unemployment occurred entirely among women.
The claimant count was 880,400 in May 2007, down 9,300 over the previous month and down 71,500 over the year. The claimant count has now fallen for ten out of the last eleven months.
The inactivity rate for people of working age was 21.3 per cent for the three months ending in April 2007, up 0.2 both over the quarter and over the year. The number of economically inactive people of working age increased by 77,000 over the quarter to reach 7.95 million, the highest figure since comparable records began in 1971. This quarterly increase in inactivity was largely due to more economically inactive students and more people looking after the family and home.
The annual rate of growth in average earnings (the AEI) excluding bonuses was 3.6 per cent in April 2007, unchanged from the previous month. Including bonuses it was 4.0 per cent, down 0.4 from the previous month.
There were 638,800 job vacancies for the three months to May 2007, up 21,700 over the previous quarter and up 54,400 over the year. The quarterly increase in vacancies mainly occurred in the service sectors.
The redundancy rate for the three months to April 2007 was 5.2 per 1,000 employees, down 0.3 over the quarter.
Source: UK Office for National Statistics
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Average Earnings
Average earnings in the UK, including bonuses rose by 4.0 per cent in the year to April, down from 4.4 per cent in March. The fall in the including bonuses rate is due to lower growth in the private sector services sector, following two months of stronger growth in February and March which had been driven by higher bonuses in the financial intermediation sector. Average earnings excluding bonuses, or regular pay, rose by 3.6 per cent in the year to April 2007, unchanged from March.
In the year to April pay growth (including bonuses) in the private sector was 4.2 per cent, compared with 3.1 per cent for the public sector. Excluding bonus payments, private sector growth stood at 3.7 per cent compared with 3.1 per cent for the public sector.
Fintag says For those economists out there who remember the unemployment / inflation trade off, here is some empirical evidence.
The UK unemployment rate is falling and inflation is rising. After all these years with falling inflation and unemployment barely moving I feel at home at last.
So what happens next? Well with only interest rates as a bat to control the trade off, they will for sure be going up for many more years to come.
LONDON VOTED #1
How the City has consumed business (times) London has been ranked the world's No 1 centre of commerce in a report commissioned by MasterCard, ahead of New York and Tokyo. The credit card network used an international panel of “experts” to compare everything from bond trading volumes to the number of five-star hotels and come up with an overall index.
Other experts might come up with different measures, but there is little doubt that the City ranks top overall in financial dealing in anything from debt to derivatives, with the biggest financial services network anywhere.
Too big, many would say. Given that the UK economy is a fraction of the size of the US or even Japan, it is no surprise that the City is so prominent. A trading mentality has come to dominate business culture. The drive to generate higher returns from workaday assets by the use of financial engineering and complex instruments seems to have reduced British business - from water-supply to garden centres - to little more than packaged raw material for City bankers.
Most basic UK industries have already been sold to foreign investors. Ingenious traders have moved on to unlikely targets such as sheltered housing and closed company pension funds.
Arguments about the balance between trading, creativity and stability are nothing new, however. Today's frenetic markets have evolved logically from developments going back 40 years.
Many look back to Arnold Weinstock of GEC, whose heyday was in the 1960s, as Britain's last great industrialist, although fantastic businesses, from Vodafone to Tesco, have been built since. When he mounted takeovers for the rivals AEI and English Electric, however, he was seen as the ruthless friend of capital but enemy of labour, closing factories, cutting jobs and axeing lines. Lord Weinstock worked assets hard to raise efficiency and returns. But he did so to make a world-class electrical group, and not a quick turn.
By the end of the 1960s, the more modern figure of Jim Slater, of Slater Walker, was the talk of the town, seeming to play a role in most big share moves and takeover bids of the time. It gave rise, in unsubtler hands, to the phase of asset-stripping, when businesses were closed to flog their assets. His motto, “we are moneymakers, not thingmakers” would serve as well today.
It was a response to the complaint of Harold Wilson, then Prime Minister, that “what is wrong with our society is that those who make the money are more highly regarded than those who earn it”. Not much changes. Slater Walker succumbed to the crash of 1973-74, but was a prototype for Hanson Trust, one of the most feared conglomerators of the 1980s. No company or industry was safe from a bid. Lord Hanson. earned a high proportion of group profits from trading in companies and assets, but he kept and looked after some basic businesses, such as bricks and tobacco, using the cashflow to fund the need for ever bigger deals.
BTR, the other top conglomerate of the time, shared some genes with GEC, buying unrelated big and small manufacturing businesses and making the assets sweat by applying the same ruthless system of management to all. However, BTR also prefigured today's private equity industry, except that it unwisely kept most of its businesses indefinitely, trying to squeeze ever-higher returns. Sir Owen Green, its chairman, argued that all cash profits should be paid out to investors each year, but fund managers did not allow him to put this into practice.
Three years before the City's Big Bang of 1986, another path-breaking step was taken. After a fierce debate, the board of Lloyds Bank, the most staid of the clearers, set its new chief executive, Sir Brian Pitman, the objective of maximising shareholder value. Sir Brian applied this philosophy with legendary fervour. He used a series of takeovers to restructure operations, slash costs and boost sales to customers, creating, for better or worse, the typical retail banking service of today.
By 1990, maximising shareholder value was the only acceptable company mission statement. In principle, it is hard to argue with. Shareholders own the company. Maximising their returns should ensure the most efficient use of capital, so that self-interest makes the economy better off to the eventual benefit of all. But buying the competition to gain monopoly power is still top priority for the mergers and acquisitions trade. And the shareholder value maxim does not specify any time horizon.
Henry Kravis, of KKR, inadvertently filled this gap after 1988, when he mounted a $25 billion leveraged bid for RJR Nabisco, one of America's biggest groups. This blueprint for today's private equity mayhem was a financial failure for many KKR investors and dragged on for years. Thereafter, private equity set a time frame of three to five years for its investors and lenders. That is a weakness, but is now the farthest any business in the City's orbit dare think. Fortunately for the world economy, they still do things differently in China, India, or France.
The seal was set on rule by financial markets in 1992, when George Soros made about $1 billion in a day for his Quantum Fund by selling sterling, forcing a devaluation he rightly judged inevitable. Even those who berated the power of the speculator came to admire what he had done. Hedge funds, until then an arcane idea to Britons, were the future. Market dealings and the fate of great companies are now led by price-moving hedge fund trades that may have a time horizon of hours.
Has it all gone too far? Probably, but sceptics have predicted a great reckoning and a return to solid values since the 1960s. Use of derivatives to isolate risk has made it possible to push for ever more efficient use of capital. This economic compulsion will only grow, until . . .
Fintag says Maybe I will put my move to Singapore on hold.
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I spent much of yesterday in New York talking to Hedge Fund Managers. Around 80% are preparing for a crash; they are heavily involved in Credit Derivatives and Correlation Trading; leverage is being tightened and profits are being realised. But nobody has a clue what the "trigger" event will be so I just told them what it says at the top of the FiNTAG website.
June 25th. 2007.
Just wait and see or liquidate everything into cash. This will be a taster but not the big one. That comes in the fall as they always do. Christmas is coming and the cost of that expensive summer vacation weighs heavily along with the banking of unrealised profits into bonuses.
Mark my words (a favourite phrase in an Harry Potter film).
Champagne Cheaper Than Vinegar Means Bubble (bloomberg)