Chinese CDS Worsens As Post-Year-End Liquidity Needs Spike

Tyler Durden on 01/23/2014 21:43 -0500

The PBOC has injected around CNY 400 billion into China’s banking system in the last week focused in the 7-day reverse-repo maturity. While this has been greeted with moderation of the spiking trend in ultra-short-dated funding costs, there is a problem still. With the CEG#1 Trust maturing on 12/31 coinciding with the farce that is the ‘confess all mismatched sins’ debacle that occurs every Chinese Lunar New Year, the need for liquidity through that maturity is becoming extreme (while shorter-dated not so much). 14-day repo is now at 7.2% – almost 300bps above 7-day repo (which matures before year-end). In fact, it seems those concerned about possible Chinese contagion effects are buying protection aggressively as 5Y CDS jumped over 5bps to 102bps – the widest in 7 months (since the credit crunch in the Summer). This is far from over…

7-day repo in less demand (or over-supplied for now) as 14-day repo (which will see banks through the year-end) are seeing rates spike… at its widest today banks were willing to pay almost 250bps to extend the reverse-repo from 7 to 14 days – quite a curve!!!


imageb imagea

And Chinese CDS are blowing wider still…

Given our earlier note on the depositor problems at some banks, we though Nomura’s comment very apt:

Media reports that some farmers’ financial cooperatives are failing to pay depositors may be another sign of rising financial stress in China as interest rates rise and economy slows, Zhiwei Zhang, China chief economist at Nomura, wrote in note yesterday.

Continues to see credit defaults to occur in corporate, LGFV and shadow banking sectors in 2014

The fact that CNR, a major official news agency in China, reported on co-ops may suggest govt stance on financial risks is to acknowledge problem, strengthen regulations

Carlyle Co-Founder’s Formula for Success: Study the Humanities

JANUARY 23, 2014, 1:17 PM

Carlyle Co-Founder’s Formula for Success: Study the Humanities


DAVOS, Switzerland – David M. Rubenstein, the co-founder of the Carlyle Group, believes American students have lost a valuable skill that can help them succeed in business and life: critical thinking.

Speaking on a panel at the World Economic Forum, Mr. Rubenstein, the co-chairman of the private equity firm, said American policy makers and educators have put too much of a focus on the fields of science, technology, engineering and mathematics at the expense of the study of literature, philosophy and other areas in the humanities.

Mr. Rubenstein’s comments offered a sharp contrast to a recurring theme in Davos this year: that more technical-based training could help solve a crisis in youth unemployment since the financial crisis.

Humanities teach problem-solving skills that enable students to stand out among their peers and to achieve success in the business world, Mr. Rubenstein said. Career-specific skills can be learned later, he said, noting that many of Wall Street’s top executives studied the humanities.

“You shouldn’t enter college worried about what you will do when you exit,” said Mr. Rubenstein, who majored in political science.

Students increasingly face pressure to enter fields that are perceived as higher paying — many times because of the skyrocketing costs of higher education, said Mr. Rubenstein, chairman of the John F. Kennedy Center for the Performing Arts in Washington.

But the reasoning skills that come with a well-rounded humanities education actually result in higher-paying jobs over time, Mr. Rubenstein said.

He’s even come up for an abbreviation to counter S.T.E.M., the often-cited acronym used by advocates of more career-focused disciplines.

“H=MC. Humanities equals more cash,” Mr. Rubenstein said.


Fed May Protect Warren Buffett as a National Treasure

Fed May Protect Warren Buffett as a National Treasure

Should Berkshire Hathaway be designated a systemically important non-bank financial firm and subjected to Federal Reserve oversight, as the Financial Stability Oversight Council is considering? Oh I don’t know. Obviously, insurers don’t want to be subjected to Federal Reserve oversight; pretty much no one ever wants to be subjected to any oversight. I’m not entirely clear on what that oversight would entail, though the Fed might “impose stricter capital, leverage and liquidity requirements and demand stress testing for crisis scenarios.” I don’t know if that would be good or bad or irrelevant; so far Berkshire seems to have done a decent job of avoiding crises all on its own. Better than the Fed, even.

And it would sure be a shame if a systemic-importance designation took away Berkshire’s ability to, I don’t know, bet a billion dollars on some random numbers picked by a monkey rolling dice. That seems like the sort of thing you can get away with as a scrappy little $280 billion AA/Aa2-rated insurance company, but that gets a little bit more awkward once you’re systemically important. AIG, which has received the systemic-importance designation, hasn’t bet that much money on monkeys since it closed AIG Financial Products, ZING!

Maybe a simpler question is, is Berkshire Hathaway systemically important? Arithmetically the answer seems to be yes, or yes-ish:

non-bank financial companies that have $50 billion or more in assets and meet any one of five other criteria, including having $30 billion in credit-default swaps linked to their debt, can be evaluated.

Berkshire had $458.1 billion of assets as of Sept. 30, the company said in a filing with the SEC. It had $31.4 billion in credit-default swaps linked to its debt as of Jan. 17, according to data from the Depository Trust & Clearing Corp.

Berkshire also had $5.8 billion in derivative liabilities as of Sept. 30, more than the $3.5 billion trigger set by the FSOC.

That $30 billion in CDS criterion is particularly interesting: Why is there so much CDS on Berkshire? Well, there’s only like $5.8 billion of net notional (that is, most of the $31.4 billion is offsetting trades within dealers), but that’s still a lot, more than the net notional outstanding on systemically important issuers like JPMorgan, Citigroup, Bank of America, Deutsche Bank, Goldman Sachs, the United Kingdom and the United States of America.

Are people really into betting against Berkshire? Meh. If you wanted to bet on a really serious meltdown of the global financial system, I guess buying Berkshire CDS at say 70 basis points running might be a cheap way to do it. But, you know, who are you buying it from? If you’re expecting the sort of global meltdown that bankrupts Berkshire, your Berkshire CDS starts looking dicey. Better to buy gold or farmland or ammunition or Dogecoins.1

More likely — well, notice how close that $5.8 billion net notional is to Berkshire’s $5.8 billion in derivative liabilities. There’s probably a link there. Berkshire’s insurance and insurance-ish businesses are about taking financial risks away from other people — a Nomura analyst describes it as, “You’re taking volatility away from other people and accepting it to your own balance sheet” — and some of those people obviously want to be sure that Berkshire will pay up on that insurance. Buying Berkshire CDS is a way to insure that insurance, as it were, though it raises the same “who are you buying it from” issue as a straight bet against Berkshire. (More practically, buying CDS is a way for banks to reduce CVA charges for capital purposes on their trades with Berkshire. Capital regulation doesn’t care as much about the who-are-you-buying-it-from issue.)

So the CDS notional outstanding serves as a rough proxy for how interconnected Berkshire is with the rest of the financial system. And the answer is, relatively speaking, pretty big.

But there’s no sense in measuring Berkshire’s interconnectedness in purely mechanical ways. It’s Berkshire! It’s Warren Buffett! He’s the frequent savior of the financial system! His mere stamp of approval — typically in the form of a large investment in a risky-looking institution — is enough to calm markets and bring firms back from the brink. Once Buffett has invested in a bank, the conspiracy theory goes, regulators will find it a bit harder to let that bank fail, because how can you look Warren Buffett in the eye and take away a toy from him?2 And if Buffett has the power to bestow halos on banks, then that’s a decent argument that the Fed should be monitoring his halo-distributing activities for signs of excessive risk.

Because the main systemic thing about Berkshire is, come on, it’s Berkshire Hathaway. It’s got Warren Buffett and Graham and Dodd and Cherry Coke and weird annual meetings in Omaha and that 29-year-old who’s in charge of everything and whose name is literally Cool. It’s a piece of wholesome Americana incongruously deposited in the heart of the financial system. That’s irreplaceable, and a collapse of Berkshire could destroy America’s already near-zero trust in its financial system. You can see why the FSOC would think it’s too big to fail.

1 By the way, if there’s an argument of the form “If X goes bankrupt, then the entire financial system will probably be bankrupt, so you might as well stockpile weapons in your remote cabin,” then I guess that itself is an argument that X is too big to fail? I mean, not strictly — correlation with end times is not causation — but still.

2 Salomon Brothers is arguably a counterexample, though not a clear-cut one.

Lenovo Said to Have Beaten Fujitsu to IBM Deal After Dell Passed

Lenovo Said to Have Beaten Fujitsu to IBM Deal After Dell Passed

Lenovo Group Ltd. (992), which agreed to buy International Business Machines Corp. (IBM)’s low-end server unit yesterday, beat out prospective bidder Fujitsu Ltd. (6702) because that company would have needed several more weeks to conduct due diligence, a person with knowledge of the negotiations said.

Fujitsu expressed a willingness to pay more than the $2.3 billion Lenovo offered, though it wasn’t yet ready to make a firm bid, said the person, who asked not to be named because the talks were private. Dell Inc., seen as a third potential bidder, was never serious about making an offer, the person said.

IBM, eager to sell the server division amid slumping demand for computer hardware, wanted to complete the deal quickly — rather than waiting additional time for Fujitsu to finish its review, the person said. Holding out for a better deal could have backfired, especially since the business has been hurting IBM’s performance, said Laurence Balter, chief market strategist at Oracle Investment Research in Maui, Hawaii.

“The longer they waited, the more painful it would be to hold on to that unit,” Balter said in an interview. “The more doors they knock on, the lower the price is going to be.”

Fujitsu expressed interest in the server business after earlier talks between IBM and Lenovo broke down last year, the person familiar with the matter said. Lenovo rekindled negotiations in November, culminating in yesterday’s announcement. IBM was concerned that if it waited for Fujitsu and that deal fell through, it would have less leverage going back to Lenovo, the person said.

Brion Tingler, a spokesman for Beijing-based Lenovo, declined to comment on other suitors or competing bids, as did IBM’s Jeff Cross, Dell’s David Frink and Fujitsu’s Sean Nemoto.

‘Quite Confident’

While the deal with Lenovo is likely to draw a national-security review by the U.S. government, IBM and Lenovo expect to clear regulatory hurdles. That confidence bolstered IBM’s attitude that Lenovo’s offer was more of a sure thing than Fujitsu’s, the person said. Still, the companies expect regulators to ask for concessions before approving the transaction, and that may include sending some government work to rival companies, according to the person.

“We’re quite confident of a positive outcome,” Christopher Padilla, IBM’s vice president for government programs, said in an interview yesterday. The two companies have been through the process before: IBM sold its personal-computer business to Lenovo in 2005 for $1.25 billion. That transaction was cleared after a monthlong investigation.

Market Share

Fujitsu could have used IBM’s servers, which run on Intel Corp.’s x86 chip technology, to bolster its own x86 lineup. IBM was the third-largest seller of x86 servers in the third quarter, trailing Hewlett-Packard Co. and Dell, according to IDC. It sold $1.21 billion worth of the machines in the period, accounting for 13 percent of the industry’s $9.52 billion total.

Lenovo’s earlier talks with IBM had broken down in May over price, a person familiar with the situation said at the time. The division was originally valued at $2.5 billion to $4.5 billion, more than what Lenovo wanted to pay.

While IBM shopped the server division to Dell, that company didn’t want to make a bid, the person said. Dell is struggling with its own sales slump and went private last year after a $24.9 billion buyout.

Under the agreement announced yesterday, Lenovo is offering about $2 billion of cash, with the rest coming in stock. Lenovo also will help resell some IBM equipment. That could give the Armonk, New York-based company fresh inroads into China, a market where it’s seen sales slip, Mark Moskowitz, an analyst at JPMorgan Chase & Co., said in a report.

“Given IBM’s recent weakness in China, we believe Lenovo’s presence in the region could help IBM regain momentum there,” he said.

To contact the reporter on this story: Alex Barinka in New York at

Dad, Someday Can I Grow Up to Be Too Big to Fail? Even if you idolize Berkshire and believe Warren Buffett is infallible, there’s no telling how Berkshire’s businesses will perform once he’s no longer at the helm

Dad, Someday Can I Grow Up to Be Too Big to Fail?

Now I understand what it means to reach the pinnacle of achievement as an American investor.

First, you start with a modest kitty, and over the course of several decades, you succeed so far beyond anyone’s wildest dreams that the government has to deem your enterprise a systemically important financial institution. Then, you’re officially too big to fail. And there aren’t many rungs on the ladder left to climb after that. So hand off the management to some young up-and-comers, who over time may benefit from the government halo or perhaps suffer from its smothering embrace.

This is where Berkshire Hathaway Inc. may well be headed. Yesterday, Bloomberg News reported that regulators at the U.S. Financial Stability Oversight Council have begun scrutinizing Berkshire to determine whether it is important enough to the financial system to warrant Federal Reserve supervision. It would be no surprise if the conclusion is that it does. And when you think about this for even a moment, it is a sad turn of events.

I don’t doubt that a meltdown at one of Berkshire’s reinsurance units, which include General Re Corp. and National Indemnity Co., might send world markets into a tizzy. Berkshire long has been the premier backstop of choice for huge financial institutions that get in trouble. It bought stakes in Goldman Sachs Group Inc. and Bank of America Corp. when they needed to restore investor confidence after the banking system almost fell apart. Years before American International Group Inc. imploded, Gen Re once even helped AIG cook its books.

Even if you idolize Berkshire and believe Warren Buffett is infallible, there’s no telling how Berkshire’s businesses will perform once he’s no longer at the helm. It makes sense, too, that the nation’s most favored rescuer of ailing megabanks itself would be deemed too big to fail. Under Fed supervision, an investment from Berkshire might become an even more powerful endorsement than it is already. The Fed conceivably could gain influence in deciding who gets one.

But this isn’t how capitalism and free markets are supposed to work. As Buffett wrote in a 2010 letter to shareholders: “Too-big-to-fail is not a fallback position at Berkshire.” It sure shouldn’t be.

Nobody told Buffett on his way up which securities, derivatives and business acquisitions were appropriate risks for Berkshire to take on, or how concentrated or diversified his company’s bets should be. Nor is it right that the government should deem Berkshire so vital to the financial system that it deserves special treatment.

Regulators and lawmakers can crow all they want about how the Dodd-Frank Act ended “too big to fail.” But there don’t seem to be many investors who believe that. Fannie Mae and Freddie Mac are still around as wards of the state. Congress has been known to change its mind in a panic, as it did in 2008 when it passed the law that created the Troubled Asset Relief Program. Plus, Dodd-Frank gave the government the option of placing insolvent, systemically important companies into a special resolution program and letting them avoid traditional bankruptcy proceedings.

If the government decides that Berkshire’s insurance operations are so critical that their failure might threaten the financial system, the proper thing to do would be to break them up. In other words, make them less important. The same goes for all of the other financial institutions that already have been deemed systemically important. But as everybody knows, that isn’t going to happen.

We decided as a nation years ago that we’re no longer willing to let the markets sort out such companies when they falter. Nobody wants to take the economic hit. So now an icon widely revered as an exemplar of U.S. corporate excellence one day may come to represent something we once prided ourselves on being against: protection rackets for the richest, most powerful corporations — the very embodiment of crony capitalism.

Maybe someday we’ll tell our children: Kids, if you work hard enough, with a little bit of luck, someday you can build something that becomes too big to fail, too. We all should hope for something better.

(Jonathan Weil is a Bloomberg View columnist.)

To contact the writer of this column: Jonathan Weil in New York at

Batista Exit Boosts Outlook for ‘X’ Companies: Corporate Brazil

Batista Exit Boosts Outlook for ‘X’ Companies: Corporate Brazil

Eike Batista’s exit from companies he founded during his quest to become the world’s richest man is fueling bets the shares will do better without him.

Analysts forecast the power utility formerly known as MPX Energia SA will more than double over the next year after Batista left as chairman, potentially the best performance among major Latin American stocks, according to data compiled by Bloomberg. Prumo Logistica SA, the port developer founded as LLX Logistica SA (LLXL3), rebounded 80 percent as EIG Global Energy Partners LLC took control in the second half of 2013.

Investors are bullish on the stocks after being burned by losses last year, when the former tycoon dropped off the list of the world’s billionaires after amassing a fortune that reached $34.5 billion in March 2012. The shares were excessively punished by the ties to Batista amid missed production targets and growing debt at companies from his EBX Group Co., according to Jorry Noeddekaer, a money manager who helps oversee $620 million of assets at Nordea Investment Management in Copenhagen.

“LLX was trading at a big discount compared to the huge opportunity, and Eike was one of the reasons,” Noeddekaer said in a telephone interview. “The new owners started with a new and improved balance sheet, and a new corporate structure where Eike is diluted. That makes us significantly more positive.”

‘X’ Companies

MPX, which was renamed as Eneva SA (ENEV3) in September after Germany’s E.ON SE (EOAN) joined the company’s group of controlling shareholders, plunged 72 percent last year, while Prumo sank 46 percent. The benchmark Ibovespa fell 15 percent. Eneva trades at 0.85 times the value of its assets, up from 0.66 times last month, the lowest since 2009, according to data compiled by Bloomberg. Prumo’s price-to-book ratio has risen to 1.1 from a four-year low of 0.57 in July.

Eneva dropped 3.3 percent to 3.19 reais at the close of trading in Sao Paulo today. Prumo gained 1 percent to 1 real. The Ibovespa retreated 2 percent.

Nordea, Prumo’s sixth-biggest shareholder, has added 2.3 million shares as of Sept. 30, according to data compiled by Bloomberg. Noeddekaer said the firm started building its position while Batista was still in charge and made a “significant increase” in its stake when management changed.

Batista has taken public six interlinked companies focused on energy and commodities since 2006. All of them contained the letter X in their names to symbolize wealth multiplication.

‘Eike Effect’

Eneva will rise 124 percent in the next 12 months, the most among 237 companies in the region valued at $500 million or more, according to the median of nine analyst estimates compiled by Bloomberg.

The Rio de Janeiro-based utility’s plunge last year was excessive and driven largely by the company’s connection to Batista, according to Beatriz Nantes, an analyst at the equity research firm Empiricus in Sao Paulo.

“There was no reason for the stock to fall that much,” Nantes said in a telephone interview. “Part of it was the Eike effect, and also the company’s debt. Once Eike left and they renegotiated the debt, the market started believing it was different from the others.”

Officials at Eneva, Prumo and Batista’s holding company EBX declined to comment on the companies’ stock performance and analysts’ forecasts after Batista left management. E.ON directed questions about the company to Eneva, while a press official at EIG didn’t reply to e-mails and telephone calls seeking comment.

‘More Complicated’

Batista ceded control of his flagship oil producer OGX Petroleo & Gas Participacoes SA to creditors last month in an agreement to renegotiate $3.6 billion of defaulted dollar bonds. OGX, which lost 95 percent of its market value last year amid missed production targets, filed for bankruptcy protection in October, followed by shipbuilder and sister company OSX Brasil SA. (OSXB3)

OGX has also dropped the X from its name, and is now known as Oleo & Gas Participacoes SA.

While a separation from Batista helps bolster prospects for companies such as Prumo, it probably won’t be enough to lift shares of OGX and OSX as they continue negotiating with creditors after the bankruptcy filings, according to Otavio Vieira, a partner at hedge fund Fides Asset Management.

“For OGX and OSX, things are more complicated,” Vieira, who helps manage 350 million reais at Fides including Prumo shares, said in a phone interview from Rio de Janeiro. “They have a lot of contracts with each other, and it’s hard to assess the value of these companies. They’re just at the beginning of a restructuring process.”

Asset Sales

Press officials at OGX and OSX declined to comment on share performance and projected returns.

Batista also agreed in October to sell assets from his other companies, including a stake in an iron-ore port held by MMX Mineracao & Metalicos SA to Trafigura Beheer BV and Mubadala Development Co. and coal projects from CCX Carvao da Colombia SA to Yildirim Holding AS. The 57-year-old entrepreneur still controls both companies.

The entry of a new management team was a turning point for Prumo as it reduced the perception of risk, according to Nordea’s Noeddekaer. Cost reductions being implemented by Eneva’s new leaders will help that company rebound, according to Nantes.

“Eike was always a big spender, and they’ve already cut down on costs,” she said of the utility. “It’s a good company that is trading cheap. It’s better without him.”

To contact the reporters on this story: Julia Leite in New York at; Ney Hayashi in Sao Paulo at

Facebook ‘will lose 80% of users by 2017’

Facebook ‘will lose 80% of users by 2017’

LONDON— The popularity of Facebook has spread like an infectious disease, but we are slowly becoming immune to its attractions and the platform will be largely abandoned by 2017, researchers at Princeton University have said.

BY –


LONDON— The popularity of Facebook has spread like an infectious disease, but we are slowly becoming immune to its attractions and the platform will be largely abandoned by 2017, researchers at Princeton University have said.

The forecast of Facebook’s impending doom was made by comparing the growth curve of epidemics to those of online social networks. Scientists argue that, like bubonic plague, Facebook will eventually die out.

The social network, which will celebrate its 10th birthday on Feb 4, has survived longer than rivals such as Myspace and Bebo, but the Princeton forecast says it will lose 80 per cent of its peak user base within the next three years.

Mr John Cannarella and Mr Joshua Spechler from the US university’s mechanical and aerospace engineering department have based their prediction on the number of times Facebook is typed into Google as a search term.

The charts produced by the GoogleTrends service show Facebook searches peaked in December 2012 and have since begun to trail off.

“Ideas, like diseases, have been shown to spread infectiously among people before eventually dying out, and have been successfully described with epidemiological models,” claimed the authors.

“Ideas are spread through communicative contact among different people who share ideas with one another. Idea manifesters ultimately lose interest in the concept and no longer manifest the idea, which can be thought of as the gain of ‘immunity’ to the idea,” they said.

Facebook reported close to 1.2 billion monthly active users last October and is due to update investors on its traffic numbers at the end of the month. While desktop traffic to its websites has indeed been falling, this is at least partly due to the fact that many people now access the network only via their mobile phones.

For their study, the researchers tested various equations against the lifespan of Myspace, before applying them to Facebook.

Myspace was founded in 2003 and reached its peak in 2007 with 300 million registered users, before falling out of use by 2011.

Purchased by Mr Rupert Murdoch’sNews Corp for US$580 million (S$743 million), Myspace signed a US$900 million deal with Google in 2006 to sell its advertising space and was at one point valued at US$12 billion. It was eventually sold by News Corp for only US$35 million.

The 870 million people using Facebook via their smartphones each month could explain the drop in Google searches — those looking to log on to the network are no longer doing so by typing the word Facebook into Google.

But Facebook Chief Financial Officer David Ebersman admitted: “We did see a decrease in daily users (during the last three months), specifically among younger teens.” THE GUARDIAN


Jiang Tells CNBC That ICBC Won’t Compensate Trust Investors

Jiang Tells CNBC That ICBC Won’t Compensate Trust Investors

Industrial & Commercial Bank of China Ltd. Chairman Jiang Jianqing said the lender won’t compensate investors for losses tied to a troubled trust product distributed by the bank, CNBC reported on its website.

The incident will be a lesson for investors on moral hazard and risks associated with such investments, Jiang told CNBC from the World Economic Forum in Davos, Switzerland. The Beijing-based lender won’t take “rigid responsibility” for the losses and will review all its partnerships in entities with which it does business, Jiang said, according to CNBC.

Investors in the 3 billion-yuan ($496 million) Credit Equals Gold No. 1 high-yield product met with ICBC officials at a Shanghai branch yesterday to demand their money amid concern that they wouldn’t be repaid when the trust matures Jan. 31. A default on the product, which raised money for a failed coal mining company, would undermine the implicit guarantees offered by trust companies to draw funds from wealthy investors.

Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September, according to the China Trustee Association, even as policy makers sought to curb money flows outside the formal banking system.

Credit Equals Gold No. 1, which has a tenure of three years, indicated investors would get an annual return of 10 percent, according to information posted on the website of Beijing-based China Credit Trust Co., which structured the product to raise funds for Shanxi Zhenfu Energy Group. The coal miner collapsed after its owner Wang Pingyan was arrested in 2012 for illegally collecting deposits.

Safety Guaranteed

Individuals were asked to put at least 3 million yuan in the product with guarantees that it was “100 percent safe,” said Fang Ping, one of 20 investors who went to ICBC’s private-banking branch yesterday. The trust product was distributed by China’s biggest bank, and some investors were its own private-banking clients.

ICBC had assigned the top A ranking to China Credit Trust in 2009 under a four-step scale by which the lender rates its trust partners, according to a marketing presentation for the product that was obtained by Bloomberg News. The sales document included a page on risks attached to the coal industry, such as slower economic growth and the prospect of emission controls lowering demand for the fuel.

Trusts’ Risks

According to China Banking Regulatory Commission rules, banks aren’t responsible for compensating investors for failures of the trust products they sell. Trust companies that issue the products must make clear the risks, including that there’s no guarantee of principal or minimum return, and compensate investors with their own assets in the event of failure or default, the regulations say.

Bank customers need to “see clearly” the risks associated with wealth-management products and other such investments, Jiang told CNBC. ICBC was a distributor of Credit Equals Gold No. 1 and didn’t offer “ironclad guarantees,” Jiang said, according to the report.

The government of Shanxi province, where Zhenfu Energy is based, may take responsibility for about 50 percent of the payments due on Credit Equals Gold No. 1, according to a report this week on the website of Guangzhou city-based Time-Weekly. Local authorities said they won’t take responsibility, and instead urged the financial institutions to prevent and diffuse the risks, the Shanxi government-controlled Yellow River News reported on its website yesterday.

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at

U.S. Auditor Ruling Sinks Baidu to Qihoo: China Overnight

U.S. Auditor Ruling Sinks Baidu to Qihoo: China Overnight

Chinese stocks traded in New York fell to a two-month low, led by E-Commerce China Dangdang Inc. (DANG) and Baidu Inc. (BIDU), after U.S. regulators barred the four largest accounting firms from conducting audits in the Asian nation.

The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. dropped 3.5 percent to 100.48 yesterday as the ruling sparked concern that the companies won’t be able to put together their 2013 earnings reports in time to meet listing requirements in the U.S. Dangdang, China’s biggest web book retailer, sank 11 percent while SouFun Holdings Ltd. (SFUN), a real-estate information website, posted the biggest drop since October. Baidu, China’s largest web search engine, fell the most in nine months.

The decision was made after the accounting firms’ units in China failed to comply with Securities and Exchange Commission orders for documents needed for a series of accounting fraud probes. The firms receiving six-month bans are Deloitte Touche Tohmatsu CPA Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen and PricewaterhouseCoopers Zhong Tian CPAs Ltd. The ruling, if finalized, could impact the 425 Chinese companies with market capitalization of $185 billion traded in New York

“There’s a fear that the U.S.-listed Chinese companies may not file their 2013 annual reports in compliance with SEC rules, leading to the possibility that they may fail to meet listing requirements,” Jeff Papp, a Lisle, Illinois-based senior analyst at Oberweis Asset Management, which oversees $1 billion in assets, said by phone. “This issue has been dragging on for a long time, and this will act as an overhang on U.S.-traded Chinese stocks.”

The sanctioned firms said in an e-mailed statement that they will appeal the decision.

Dangdang Drops

Dangdang’s American depositary receipts fell to $9.89 in the biggest drop since Oct. 22. The slump cut Beijing-based Dangdang’s gain to 3.6 percent this year, compared with a 130 percent surge in 2013. Baidu’s ADRs slid 6.2 percent to $163.58, a two-month low. SouFun’s ADRs sank 7.7 percent to $87.47. YY Inc. (YY), owner of an entertainment website, retreated 7.4 percent to $63.77, falling the most since Nov. 6.

The accounting firms have 21 days to file a so-called petition for review with the SEC before the decision by U.S. Administrative Law Judge Cameron Elliot would become final and go into effect. If the five-member commission were to uphold the judge’s decision, the firms could then take it to the U.S. Court of Appeals in Washington.

‘Law Violations’

The SEC enforcement division was “gratified” by the decision, chief litigation counsel Matthew Solomon said in an e-mailed statement. “These records are critical to our ability to investigate potential securities law violations and protect investors.”

NQ Mobile Inc., a Chinese mobile-security service provider, was accused by Muddy Waters LLC of inflating sales in a October report. Beijing-based NQ Mobile has denied the allegations and set up an independent committee to review Muddy Waters’s report.

Carson Block, founder of Muddy Waters, sent a letter to NQ Mobile auditor PricewaterhouseCoopers urging the accounting firm to take a closer look at NQ’s accounting books, according to a Twitter posting of the short-selling firm on Jan. 22. In 2011, Block accused Sino-Forest Corp., a Chinese plantation company listed in Canada, of fraud, leading it file for bankruptcy protection.


Ernst & Young didn’t conduct audits of Sino-Forest in accordance with accounting industry standards, the Ontario Securities Commission said in a statement of allegations issued in December 2012, and the accounting firm agreed to pay C$117 million ($118 million) to settle claims in a Canadian class action suit in the largest settlement by an auditor in Canadian history.

“This is a preliminary ruling,” Kim Titus, senior director of corporate communication at NQ Mobile, said by phone from Dallas. “All the reports are going to be out as scheduled. All the work with PricewaterhouseCoopers will continue as it has.”

The worst possible time for the suspension would be in the next month or two, as companies need to file an annual report with an audit opinion on Form 20-F, which is due on April 30, Paul Gillis, a professor of accounting at China’s Peking University, said in a post in his China Accounting blog.

Ctrip, NetEase

“If the firms are suspended, they cannot issue audit reports, so the clients cannot file Form 20-F,” he wrote. “Under exchange rules, this should lead to the companies being suspended from trading since investors do not have the data they need to be able to trade.”

More than two-thirds of web traffic in China, which has more than 618 million Internet users, was disrupted on Jan. 21, according to the online security provider Qihoo 360 Technology Co. Affected sites included those of Alibaba Group and Baidu. China said hackers may have been to blame. International Ltd., the biggest online travel agency in China, and NetEase Inc., a web game operator, are scheduled to report their 2013 full-year results on Feb. 12, according to their statements this week. Calls seeking comments from the companies after regular business hours in China weren’t returned.

The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., tumbled 4.5 percent to $35.02, the largest retreat since November 2011. The Standard & Poor’s 500 Index declined 0.9 percent after a China manufacturing index showed contraction and investors analyzed corporate earnings.

The preliminary reading of 49.6 for January in a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics yesterday was below a final figure of 50.5 in December and all 19 estimates of analysts in a Bloomberg News survey.

To contact the reporter on this story: Belinda Cao in New York at

Musk Says China Possible Top Market for Tesla

Musk Says China Possible Top Market for Tesla

Tesla Motors Inc. (TSLA)’s Elon Musk said sales of electric Model S cars in China should match U.S. levels as early as next year, with demand from the world’s largest auto market eventually requiring a local plant.

The electric-car maker said yesterday the Model S will be priced from 734,000 yuan ($121,280) in China when deliveries begin. Musk, Tesla’s billionaire co-founder and chief executive officer, will travel to China in late March to inaugurate the company’s entry there, he said in a phone interview.

For Tesla, “it could be as big as the U.S. market, maybe bigger. I don’t want to get overexcited about it,” Musk said yesterday. “Even without building there locally, it’s always going to be the second-biggest market after the U.S.”

After a rocky start ramping up Model S assembly in 2012, Palo Alto, California-based Tesla surprised analysts and investors this month when it said fourth-quarter deliveries were 20 percent above its target. Musk, 42, has pinned his goal of selling hundreds of thousands of electric autos annually to a global strategy in which China, Europe, Japan and other markets bolster its U.S. business.

If all goes well, Model S shipments to China can match U.S. sales by 2015, Musk said. “It’s not my firm prediction — it’s more like a low-fidelity guess.”

The company named for inventor Nikola Tesla more than quadrupled in value in 2013. Tesla rose 1.6 percent to $181.50 yesterday in New York, the highest in three months. The shares have gained 13 percent since Jan. 14, when it announced quarterly deliveries.

Pricing Comparison

The price of Tesla’s flagship Model S in China, a version equipped with a premium 85 kilowatt hour battery pack, puts it in the same bracket there as Volkswagen AG (VOW)’s Audi S5 sedan and Bayerische Motoren Werke AG’s 5-series GT sedan, according to Autohome, a car-pricing website. It’s also 50 percent more expensive than in the U.S., where the equivalent model sells for $81,070, according to a Tesla statement.

In the U.S., Audi’s S5 is priced at $64,117 and BMW’s 5-series GT costs $70,429, according to, a Santa Monica, California-based auto pricing and data company.

While more costly than the U.S. version, the Model S price in China appears “well below expectations,” John Lovallo, an equity analyst for Bank of America who rates Tesla underperform, said yesterday in a research note.

Since the Model S is imported to China from California, a duty of as much as 25 percent is added to the price tag, Musk said. The company also must cover shipping costs and taxes. Tesla could have charged more than $160,000 had it followed standard industry practices.

‘Huge Idiots’

“They’re basically calling us huge idiots for not ripping off customers in China.” Musk said. “I don’t think ripping off customers is a good long-term strategy.”

Foreign companies have come under scrutiny in China for their pricing practices, with state broadcaster China Central Television producing reports accusing companies from Tata Motors Ltd.’s Jaguar Land Rover to Starbucks Corp. of overcharging consumers in the country.

“It’s a good price,” John Zeng, Shanghai-based managing director of researcher LMC Automotive, said of Tesla’s Model S. “This should attract premium customers to try this product, especially in big cities.”

Tesla’s entry is also being closely watched by other automakers that have been trying to convince local consumers that electric vehicles are worth the hassle. China is lagging behind its target to have 5 million alternative energy-powered vehicles by 2020 because of a lack of charging stations and high costs, even amid mounting concerns over worsening air pollution.

Rigorous Standards

Gaining China’s approval to sell Model S there was the toughest the company has faced to date, Musk said.

“They were the most rigorous of any in the world,” he said.

Beyond safety issues, government officials even inspected the leather used in Model S seats, Musk said. “They seemed to be quite concerned about quality.”

To eliminate tariffs and potentially qualify for Chinese incentives for non-pollution autos, Tesla must produce there, he said.

“Long-term there’s no question we’ll have a factory in China,” he said. “There is an argument for having that be our first major factory outside the U.S.”

At Tesla’s flagship store in a Beijing mall populated by high-end boutiques such as Van Cleef & Arpels and Mulberry, hotelier Kevin Chen says he’s interested in buying the Model S to bump up his green credentials.

“I heard about the car from my friends overseas and we are very interested in getting one,” said Chen, a 28. “Smog in China is getting so bad that we should do whatever we can to help.”

— with assistance from Alexandra Ho in Shanghai and Tian Ying in Beijing. Editors: Niamh Ring, Jamie Butters, Ben Livesey

To contact Bloomberg News staff for this story: Alan Ohnsman in Los Angeles at

‘Mac’ turns 30 in changing computer world

‘Mac’ turns 30 in changing computer world


San Francisco (AFP)

Decades before changing the world with iPhones and iPads, Apple transformed home computing with the Macintosh.

The friendly desktop machine referred to as the “Mac” and, importantly, the ability to control it by clicking on icons with a “mouse,” opened computing to non-geeks in much the way that touchscreens later allowed almost anyone get instantly comfortable with smartphones or tablets.

The Macintosh computer, introduced 30 years ago Friday, was at the core of a legendary rivalry between late Apple co-founder Steve Jobs and Microsoft mastermind Bill Gates.

Thousands of Apple faithful are expected for a birthday party this weekend in a performing arts center in Silicon Valley, not far from the company’s headquarters in the city of Cupertino.

“The Mac was a quantum leap forward,” early Apple employee Randy Wigginton told AFP.

“We didn’t invent everything, but we did make everything very accessible and smooth,” he continued. “It was the first computer people would play with and say: ‘That’s cool.'”

Prior to the January 24, 1984 unveiling of the Mac with its “graphical user interface,” computers were workplace machines commanded with text typed in what seemed like a foreign language to those were not software programmers.

Credit for inventing the computer mouse in the 1960s went to Stanford Research Institute’s Doug Engelbart, who died last year at 88.

“The Mac’s impact was to bring the graphical user interface to ‘the rest of us,’ as Apple used to say,” Dag Spicer, chief content officer of the Computer History Museum in Silicon Valley, told AFP.

“The Mac GUI was picked up by Microsoft, who named it Windows.”

The man remembered today as a marketing magician was a terrified 27-year-old when he stepped on stage to unveil the Mac, then-chief executive John Sculley said of Jobs in a post at the tech news website CNET.

“He rehearsed over and over every gesture, word, and facial expression,” Sculley said.

“Yet, when he was out there on stage, he made it all look so spontaneous.”

Apple spotlighted the arrival of the Mac with a television commercial portraying a bold blow struck against an Orwellian computer culture.

The “1984” commercial directed by Ridley Scott aired in an expensive time slot during a US Super Bowl football championship in a “huge shot” at IBM, Daniel Kottke of the original Mac team told AFP.

“In the Apple board room, there were strong feelings that it was not appropriate; there was a big battle,” Kottke said.

“Fortunately, Steve Jobs and his reality distortion field won the day and it left a strong memory for everyone who saw it.”

There was a drive to keep the Mac price within reach of consumers in a market where computers costing $10,000 or more were typical.

While clicking an on-screen icon to open a file appeared simple, memory and processing demands were huge for the computing power of that time.

“Every time you move that mouse, you are re-drawing the screen,” Kottke said. “It is almost like video.”

The original vision of launching a Macintosh with 64 kilobytes of RAM and a $1,000 price gave way to introducing one with 128 kilobytes of RAM at $2,500.

“Steve really was crazy about details,” Wigginton said. “He wanted everything to be just right. Compared to the IBM PC of those days, it is just gorgeous.”

Macintosh also arrived with a new feature called “drop-down menus.”

“The Macintosh brought a new level of accessibility for personal computing to a much wider market in the same way the iPad did 25 years later,” Kottke said.

Mac prowess at page layouts and photo editing won the devotion of artistic types.The release of “hypercard” is credited with inspiring fanatical loyalty to Macs.

“It was the idea that you could create a page on your screen and create links to other pages,” Kottke said.

“You could have all your computers networked to share data; it was like a private Internet.”

Macs sold decently out of the gate, but Windows machines hit with a low-price advantage for budget-minded buyers. Microsoft released the first version of Windows in late 1985.

The ensuing rivalry is the stuff of Silicon Valley legend and coffee shop smack talk.

“I think Steve Jobs cultivated a sense of Windows versus Mac,” Kottke said.

“Steve Jobs was always taking swipes at Microsoft, but it really heated up when Microsoft released Windows. He would say they copied us.”

Microsoft took the lead in the home computer market by concentrating on software while partners cranked out Windows-powered machines at prices that undercut the Mac.

“Really, Apple could well have gone out of business in the late 1990s,” Kottke said.

“That would not have surprised people.”

The rivalry between Microsoft and Apple has yielded to the mobile age, with Google and its Android operating system targeted as the new nemesis as lifestyles center on smartphones and tablet computers.

The original boxy Macintosh with a mouth-like slit below the screen for “floppy” data disks has evolved into a line that boasts slim, powerful laptops and a cylindrical Mac Pro desktop model.

“I am thankful to have been a part of it,” Wigginton said.

“Once you go through an experience like that, and it was extremely painful, you look back and every sacrifice is absolutely worth it. It is when Apple leapfrogs in technology that they succeed.”


UBS Says Market Wants Default as Risks to Pile Up: China Credit

UBS Says Market Wants Default as Risks to Pile Up: China Credit

UBS AG’s China securities unit, the leading foreign underwriter of debt sales in the country, says the market wants policy makers to allow the first onshore bond default to reduce long-term hazards to the financial system.

“Systematic risk will pile up without any default happening,” Bi Xuewen, head of China debt capital markets at UBS Securities Co., said in an interview in Shanghai. “Market participants would like to see a default in China’s bonds. Only after defaults can the overall risk pricing system be normalized.”

Bi, who has led the bond underwriting unit at UBS since 2010, said he doubts there will be a note default in China this year, following previous cases in which local authorities stepped in to avert non-payment. The yield premium on five-year AA- rated corporate bonds over similar-maturity sovereign securities jumped to 404 basis points this week, the highest since May 2012, as concern mounts about trust defaults.

As Premier Li Keqiang drives up money market rates to deleverage the economy, speculation is mounting yields may increase further after Industrial & Commercial Bank of China Ltd. said it won’t bail out a 3 billion yuan ($496 million) trust-bank product it marketed to its clients. China needs credit-market defaults to help encourage better risk pricing, according to Adam McCabe, deputy head of Asian fixed income at Aberdeen Asset Management Plc, which manages $321 billion.

Risk Reminders

“The policy makers need to remind investors from time to time that there are risks they’re taking,” McCabe said in a briefing in Hong Kong on Jan. 21. “A default will help the Chinese market re-profile itself.”

Authorities in the world’s second-biggest economy must balance efforts to sustain economic growth, which slowed in the fourth quarter to 7.7 percent from 7.8 percent in the previous three months, with steps to trim record borrowings without sparking a financial panic.

Liabilities at non-financial companies may rise to more than 150 percent of gross domestic product in 2014, raising default risks, according to Haitong Securities Co., the nation’s second-biggest brokerage. The ratio of 139 percent at the end of 2012 was already the highest among the world’s 10 biggest economies, according to the most recent data.

“If you don’t allow defaults now, risks will rise,” said Zhang Ming, a senior research fellow at the government-backed Chinese Academy of Social Sciences in Beijing. “If you allow defaults, there will be risks but they are controllable. The sooner the default comes, the better for the long-term growth of the Chinese economy.”

Changzhou Wintafone

Changzhou Wintafone Chemical Co., a maker of herbicides and insecticides based in the eastern province of Jiangsu, said this week it has stopped production and couldn’t repay an aggregate bond due in March. Changzhou Qinghong Chemical Co., the note’s guarantor, repaid 36.9 million yuan on its behalf on Jan. 17, according to a statement from Changzhou Wintafone.

As default concerns escalate, the cost of insuring the nation’s debt against non-payment is rising. China’s credit-default swaps increased 19.5 basis points this month to 99.5, set for the biggest monthly gain since June.

The yuan strengthened 2.9 percent last year, and was little changed at 6.0517 per dollar yesterday, according to China Foreign Exchange Trade System prices.

Bubble Inflating

If defaults come at a time when the currency is no longer appreciating that would spur “massive capital outflows” as Chinese assets would lose their allure for foreign investors, according to Zhang at CASS.

“The bubble is gradually inflating, and sooner or later will burst,” he said. “This year is the best time to squeeze it.”

China Credit Rating Co. lowered the rating for Wuhan Urban Construction Investment & Development Corp., a local-government financing vehicle in the capital of the central Hubei province, from AA to AA-, according to a statement posted on the Chinamoney website on Jan. 6. The Beijing-based rating agency also downgraded Sichuan Coal Industry Group’s rating from A+ to A, according to a statement on Chinamoney on Jan. 13.

The yield on AA- rated five-year corporate bonds has climbed nine basis points this month to 8.34 percent. The rate on the benchmark five-year government bond dropped 14 basis points to 4.32 percent.

Yao Wei, Hong Kong-based China economist at Societe Generale SA, said local governments have helped some companies avert defaults. CHTC Helon Co., a fiber maker that used to be called Shandong Helon Co., repaid 400 million yuan of bonds in April 2012 even as it failed to make loan repayments.

‘Explosive’ Debt

There have been no defaults in China’s publicly traded domestic debt market since the central bank started regulating it in 1997, according to Moody’s Investors Service.

Issuance by LGFVs, which has been “explosive,” is set to rise further this year, according to UBS’s Bi. The National Development & Reform Commission, China’s top planning agency, said Dec. 31 that units facing funding shortfalls for projects will be allowed to sell notes for refinancing.

“The NDRC’s statement is actually a signal to encourage LGFVs to sell bonds,” Bi said. “Previously, the NDRC didn’t allow LGFVs to sell new bonds to roll over their debt and the approval of bond sales was based on new projects.”

UBS led underwrote 27.5 billion yuan of debt onshore in 2013, the most among all the foreign-invested securities firms and banks, according to data compiled by Bloomberg.

Xie Ping, deputy general manager at China Investment Corp., the nation’s sovereign wealth fund, said Jan. 11 China’s local governments won’t default and the central government won’t allow them to go insolvent either, Hexun reported on its website.

While a default in shadow banking would help investors better price risk, it would hurt local funding units and property companies that rely on them for capital, according to Ping An Securities Co.

“A default in the trust product will facilitate the healthy development of the market,” said Ping An’s Shi. “If there is a default, the trust market may shrink and those small LGFVS and small property companies which rely on trust financings will be impacted.”

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at

Alibaba, Yunfeng to Buy Control of Citic 21CN for $171 Million

Alibaba, Yunfeng to Buy Control of Citic 21CN for $171 Million

Alibaba Group Holding Ltd., the owner of China’s biggest e-commerce business, and Yunfeng Capital said they will buy control of Citic 21CN Co. (241) for HK$1.33 billion ($171 million) to enter the drug-data industry.

Alibaba, through wholly owned Perfect Advanced Holding Ltd., has agreed to buy 4.4 billion Citic 21CN shares at 30 Hong Kong cents each, taking a 54.3 percent stake, Citic 21CN said in a filing to Hong Kong stock exchange today. Yunfeng, a private equity firm co-founded by Alibaba Chairman Jack Ma, will buy a 29.8 percent stake in Perfect Advance before the share sale is completed, according to the statement.

“The transaction is the foundation for a strategic partnership aiming at jointly driving development of a pharmaceutical-product information platform,” Alibaba said in an e-mailed statement today. The platform will use Citic 21CN’s drug data and Alibaba’s e-commerce, cloud computing and “big data” capabilities, it said.

Alibaba may use the purchase to help it compete against Tencent Holdings Ltd. for China’s 618 million Internet users who spend money online. Tencent earlier this month said it plans to invest HK$1.5 billion for a 9.9 percent stake in a logistics center operator China South City Holdings Ltd.

On completion of the deal, Alibaba will hold 38.1 percent of Citic 21CN and Yunfeng 16.2 percent, Alibaba said. The buyers will seek a waiver from Hong Kong rules that require purchasers of a majority stake in company to make a buyout offer for all outstanding shares, Citic 21CN said.

Citic 21CN mainly engages in system integration, software development and services for drug authentication, tracking and logistics, according to its filing.

Trading in Citic 21CN, suspended since Jan. 16, will resume in Hong Kong tomorrow. The stock has gained 48 percent in 2014, including a 43 percent single-day surge on Jan. 6

To contact the reporter on this story: Jasmine Wang in Hong Kong at

As Brewing Giants Push Craft Beer, Bud and Miller Suffer

As Brewing Giants Push Craft Beer, Bud and Miller Suffer

Goose Island is the new Bud. So are Shock Top and ZiegenBock. And Leinenkugel’s and Blue Moon, for that matter, could be called the new Coors or Miller.

Those brands are all owned by the world’s biggest brewers, which are aggressively rolling out products designed to appeal to fans of craft beer. But they’re not putting the microbrewers who started the movement out of business.

Instead, the new labels are taking sales from already-troubled mass-market brands owned by the industry giants peddling these crafty brews. Analysts say that may actually be a boon for their owners as margins can be “considerably higher” for craft beers, according to researcher Canadean.

“I don’t really drink Bud Light anymore,” said Tait Foster, a 27-year-old who works at a foreign policy research group in New York. Instead, he’s started sampling a wider range of brews such as Goose Island and Blue Moon. “Bud Light, Coors and all those others are like beer-flavored water.”

Sales of craft beers grew 16 percent in volume over the past year versus a 1.7 percent decline for the biggest U.S. beer brands, according to researcher Symphony IRI Group. Sales of Bud Light were off by 1.3 percent and Miller Lite slid 4.4 percent.

That’s prompted multinationals like Anheuser-Busch InBev NV (ABI) and MillerCoors LLC, with about 75 percent of the U.S. market between them, to introduce their own craft-like brews — many of which make little or no mention of their corporate parentage.

Hard Ciders

AB InBev paid $38.8 million for Goose Island in 2011, five years after it signed a distribution deal with the Chicago brewer. And in 2006 it created Shock Top, a Belgian-style wheat ale, to take on Blue Moon, the biggest of the craft-like labels owned by industry leaders. The Goose Island brands soared 69 percent last year, AB InBev said, citing Symphony IRI data, while Shock Top beers jumped 14 percent.

MillerCoors, co-owned by SABMiller Plc (SAB) and Molson Coors Brewing Co. (TAP), in 2010 set up a unit called Tenth & Blake to focus on Blue Moon and other niche brews as well as premium imports such as Pilsner Urquell from the Czech Republic and Cusquena from Peru. Today, it has more than a dozen brands, including two hard ciders.

“We looked at where the growth sectors were, and craft was exploding,” said Tom Cardella, president of Tenth & Blake. “When you look at the marketing of craft, it requires a different approach.”

Mid-Sized Labels

AB InBev’s shares were little changed at 76.49 euros at 10:20 a.m. in Brussels trading, giving the company a market value of about 123 billion euros. MillerCoors co-owner SABMiller’s shares slid 0.8 percent to 3,013.5 pence in London, and Molson Coors Brewing’s shares rose 0.4 percent in New York yesterday to $55.35.

As the popularity of these beers cuts into sales of the biggest brands, it’s fostering a new crop of mid-sized labels, according to Trevor Stirling, an analyst at Sanford C. Bernstein. Moreover, craft brews are wooing drinkers back from wine and spirits. While craft beer currently has only about 6 percent of the market, that share could more than triple in the next five years, Canadean predicts.

“There’s a new generation choosing a much broader repertoire of drinks,” Stirling said. “It’s virtually inevitable that the larger brands will lose market share to craft.”

Lighter Beers

That’s not to say that the big brands are going to give up on their mass market brews anytime soon. With about 21 percent of the beer market by volume, Bud Light alone is about triple the size of the entire craft sector, Symphony IRI data show.

“I don’t see the era of big brands being over, but more that there’ll be a bigger mix of beers,” said Lawrence Hutter, who heads the European corporate solutions unit at consultant Alvarez & Marsal. “Don’t forget people still like those lighter, lager-style beers; They’re very drinkable”

The U.S. Brewers Association defines “craft” as beers with annual sales below 6 million barrels and ownership by a big player of no more than 25 percent. Despite the industry’s homespun image, 60 percent of drinkers don’t give much thought to what company owns the brand of beer they drink, according to a survey by AB InBev.

“It’s kind of a disconnect for me that being bigger is necessarily bad,” said Paul Chibe, head of U.S. marketing at AB InBev. “What’s important is that if a beer gets bigger, it has to stay true to what it is.”

Rich Uncle

Even as the giant brewers lose share with their leading brands, the shift could shore up their profits since their craft-like beers enjoy higher margins, analysts and the companies say. Goose Island retails for an average of about $33.10 per case versus $20.17 for Bud Light, according to Symphony IRI. Some offshoots can be far pricier. Goose Island sells a brew called Bourbon County Stout one day a year, the Friday after Thanksgiving, at about $25 for a four-pack of 12-ounce bottles.

The higher prices help offset the added costs the industry’s giants face in producing more small brands. They are typically more labor-intensive, use a wider range of ingredients, and have more elaborate packaging and marketing.

The big companies also gain an edge over smaller rivals by producing the craft-like brands in their industrial-scale breweries. Blue Moon is brewed at MillerCoors’ facilities across the U.S. And some Goose Island beers are made by AB InBev in Fort Collins, Colorado, and Baldwinsville, New York, in addition to the brand’s original brewery in Chicago.

“We’ve been a great home for craft brands like Goose Island,” helping out with additional production capacity as their popularity grows, said AB InBev marketing boss Chibe, who plans to leave his job in February. “They have their own leadership team, their own innovation group, the brewers do their own things. We primarily behave as the rich uncle. When they need resources, we give it to them.”

To contact the reporter on this story: Clementine Fletcher in London at

Behind Staid Steel, a Percolating Boardroom Drama

JANUARY 23, 2014, 11:59 AM  Comment

Behind Staid Steel, a Percolating Boardroom Drama


Updated, 12:57 p.m. | When Craig S. Shular, the chief executive of a small steel company called GrafTech International, retired on Tuesday, it looked like just another management changeover at a midmarket industrial company.

But behind the scenes, a complex corporate governance battle was playing out, pitting Mr. Shular and a clubby board of directors against an outsider who joined the board as part of an acquisition three years ago. And even though Mr. Shular’s departure as chief executive was effective immediately, the fight for control of the $1.5 billion company is not over yet.

The story of GrafTech, replete with accusations of mismanagement and suspicions of leaked confidential information, illustrates the complex dynamics when relations between directors and management turn sour. It also highlights the increased sensitivity inside the boardroom in an era of activist investors and insider trading.

The complications that have ensnared GrafTech began in 2010, when it acquired two companies controlled by Nathan Milikowsky, a small-time player in the big world of industrial steel. GrafTech paid about $850 million for the Carbide Graphite Group, which made a crucial piece of equipment for steel manufacturing called a graphite electrode, and Seadrift Coke, which made the raw material needed to produce the electrodes.

For Mr. Milikowsky, the deal was a windfall. In 2003, he had bought the assets of Carbide Graphite out of bankruptcy for about $6 million and turned the company around. In 2005, he acquired Seadrift Coke, allowing him to integrate an important supplier and ramp up revenue at both companies.

Cashing out to GrafTech made Mr. Milikowsky, his investors and dozens of his employees wealthy. And as part of the sale agreement, Mr. Milikowsky was guaranteed a seat on the GrafTech board as long as he and his associates held at least 12 million of the company’s shares.

Less than three years later, however, Mr. Milikowsky was pushed off the board — after management accused him of leaking material nonpublic information to a hedge fund — even though he still held 15 million shares.

Mr. Milikowsky maintains he was not the source of any leaks and that management and other directors ousted him because he was criticizing them and Mr. Shular as GrafTech’s share price plunged.

In recent weeks, Mr. Milikowsky was preparing to nominate a new slate of directors before the company’s annual meeting, setting up a showdown between an entrepreneur who contends he was improperly ousted and a company that says it is simply protecting itself.

But Mr. Shular’s abrupt resignation on Tuesday threw Mr. Milikowsky’s plans into disarray.

In stepping down, Mr. Shular said he made “the personal decision to retire from day-to-day management in order to spend more time with my family.” He will stay on through the year as executive chairman.

Mr. Milikowsky’s camp, however, says it believes Mr. Shular may have retired to avoid a public fight. This month, Mr. Milikowsky signaled he was on the verge of taking his nominees to GrafTech’s shareholders.

Whether Mr. Milikowsky proceeds with his plan to nominate new directors remains to be seen. On Wednesday, he applauded the resignation of Mr. Shular and called the promotion of Joel L. Hawthorne to chief executive “a good first step in the fundamental turnaround that is necessary to save the company and increase shareholder value.” But Mr. Milikowsky maintains that he deserves to be a director, and he vowed to continue to fight for a seat on the board.

Neither side expected the dispute when Mr. Milikowsky joined the GrafTech board in 2010. He was respected in the steel industry and initially on good terms with Mr. Shular and his fellow directors.

After Mr. Milikowsky spent a year on the board, however, his opinion of management and his fellow board members plunged. He thought the company was underperforming, spending too much on overhead and making poor strategic choices.

“This has been my only public company experience, and I was amazed,” he said in a recent interview. “The C.E.O. knew something about graphite electrodes, but the rest of the directors don’t know anything about the business.”

Some of his discontent can be chalked up to an entrepreneur’s discomfort with outsiders managing a business he built, and GrafTech did underperform its peers. But the last few years were going to be rough for GrafTech regardless of management choices as demand for its products waned in the wake of the financial crisis. Since Mr. Milikowsky joined the board, GrafTech shares have fallen 40 percent.

“I wouldn’t say it’s primarily on management why they’ve had poor performance,” said Michael Gambardella, a JPMorgan Chase analyst who covers GrafTech. “It’s the market.”

Nonetheless, Mr. Milikowsky said the company should have been doing better. “By late 2011, I had come to a distressing preliminary conclusion: Things aren’t as rosy as people say they are,” he said. “We’re turning down orders that we should be taking. So we’re losing market share. The inventory is ballooning.”

In early 2012, Mr. Milikowsky began meeting with other directors to make his case. At least one was openly supportive, he said, and another was sympathetic to his concerns but wary of confronting management without a majority of board members aligned.

Yet before Mr. Milikowsky’s campaign could gain traction, inquiries from a hedge fund, Samlyn Capital, put the company on edge. The hedge fund, which had been a passive investor in GrafTech for years, began asking pointed questions in May 2012 about the company’s operations.

Correspondence reviewed by The New York Times indicated that management and other directors believed that Samlyn appeared to have confidential information about the company, including details that were known only by a small circle of insiders, including the board. GrafTech management was worried that there could be insider trading in the stock, or that Samlyn could be using the information to make its case for change. And to Mr. Shular and some members of the board, Samlyn’s criticisms of the company sounded uncannily like those presented by Mr. Milikowsky.

The correspondence did not cite any specific examples of GrafTech insiders giving the hedge fund information. Samlyn, which no longer holds any GrafTech stock, has not been accused of any wrongdoing. Samlyn declined to comment.

Undaunted, Mr. Milikowsky pressed to replace Mr. Shular in a letter addressed to GrafTech’s lead director, Mary B. Cranston, a retired chairman of the big law firm Pillsbury Winthrop Shaw Pittman, who is also a director at Visa.

But by late 2012, Ms. Cranston and others inside the company had become convinced that Mr. Milikowsky was the source of the leaks. Samlyn had contacted Mr. Milikowsky’s brother, Daniel, who is also a GrafTech shareholder. And despite Mr. Milikowsky’s denials, he was pinned as the culprit.

GrafTech contends it referred the matter to the Securities and Exchange Commission. Meanwhile, it granted Mr. Shular whistle-blower status, protecting him from any related litigation. The S.E.C. appears never to have pursued the matter.

“They dreamed up this whistle-blower nonsense as a total sham excuse to protect Shular, and they dreamed up this leak as an excuse to force me off the board,” Mr. Milikowsky said.

At last year’s annual meeting, Mr. Milikowsky was not nominated for re-election and was subsequently removed from the board.

Since then, he has been working with law firms to make his case to the company that he was improperly ousted. Stephen Fraidin, a top lawyer at Kirkland & Ellis, took on his cause last year, adding legal firepower to the dispute.

But GrafTech has not budged so far. In letters to Mr. Milikowsky’s lawyers, GrafTech contends that Mr. Milikowsky violated the company’s corporate governance guidelines and did not return confidential information after his board service ended.

The company declined to answer questions about Mr. Milikowsky or the board.

After nearly a year away from the company, Mr. Milikowsky concedes he may never return to the board and expressed disillusionment about his experience as a director.

“It really gets to the heart of American capitalism,” he said. “You have this amazing business, and then you have management playing these games. If all public companies are like this, that is horrifying to me.”

Taiwan Funeral Group to Expand With Designer Urns, Body Spa

Taiwan Funeral Group to Expand With Designer Urns, Body Spa

Lung Yen Life Service Corp. (5530), Asia’s second-biggest cemetery and funeral-service operator, plans to expand to Hong Kong and Singapore as populations across the region age.

The company is in talks with the respective governments to obtain licenses and will invest at least NT$10 billion ($331 million) in each market, Chairman and Founder David Lee said in an interview on Jan. 22. The company has formed a unit to study overseas markets including China and Malaysia, he said.

“We plan to become the world’s largest brand among the Chinese community, with a focus in Asia,” Lee said. “We are also optimistic on the China market because of its large population.”

Lung Yen, based in Taipei, is expanding outside Taiwan to serve a bigger population pool. Those over 65 years of age accounted for 11 percent of China’s 1.3 billion population as of 2012, and 24 percent of Japan’s population, Citigroup Inc. analyst Eric Lau wrote in a Jan. 22 report, citing data from Euromonitor. China’s death-care service industry reached 46.5 billion yuan ($7.7 billion) in 2012, Lau said.

Columbarium Towers

The company expects to receive government approval to enter Hong Kong and Singapore in two years, Lee said. The investments will include cemeteries, columbariums — or vaults with niches for urns containing the ashes of cremated bodies — and funeral services, Lee said at his True Dragon Tower, a columbarium in New Taipei City, about 20 miles northwest of Taipei. He declined to name his Hong Kong partner or the location of the planned site.

Lung Yen also wants to enter 10 Chinese cities in the next 10 years, Lee said. The company announced last June a 2 billion yuan investment in China’s eastern city of Wenzhou in Zhejiang province. The price of land still under negotiation, Lee said this week.

“The key is to win support from local governments,” Lee said. “We would also consider mergers or acquiring some local partners in China.”

About 90 percent of the company’s profit comes from the columbarium and cemetery business, according to Lee, who is targeting 10 percent growth in both revenue and profit this year compared with 2013.

Luxury Property

Burial plots in some luxury cemeteries in Taiwan have become more expensive than homes. Plots cost as much as NT$500,000 per ping, or $460 per square foot, according to, the biggest funeral service data tracking site in Taiwan.

Taiwan home prices in the third quarter last year were NT$241,000 per ping, the latest data from Ministry of the Interior. That is equivalent to $222 per square foot. A ping, a standard measure in Taiwan, is about 36 square feet or 3.3 square meters.

Prices for a standard one-person columbarium niche, measuring about 1.7 square feet, start from NT$80,000 and sell for as much as NT$500,000, according to Prices at Lung Yen’s True Dragon Tower range start at NT$300,000 for a one-person niche and a space for a family of 24 can go for as much as NT$12.5 million, Lee said.

Lung Yen’s top line porcelain urns manufactured by Okura Art China, a favorite brand of the Japanese royal family, according to the company’s marketing materials, sell for as much as NT$500,000.

Spa Treatments

The company also offers a spa service for the deceased, where the embalmer follows a 35-step process including hair and body washing, massage, hair dying and manicure, he said. Families can watch the process. A two-hour spa treatment costs about NT$25,000.

Lung Yen shares gained 0.4 percent to NT$84.30 at the market close in Taipei trading today after rising as much as 1.1 percent. Taiwan’s GreTai Securities Market Index (TWOTCI), which includes all stocks that have been listed for more than a month on the island’s secondary board, fell 0.5 percent.

The company, with a market capitalization of about $1.1 billion, may also list in Hong Kong, Lee said, without giving a timetable.

Asia’s biggest operator of cemeteries and funeral facilities by market capitalization is China’s Fu Shou Yuan International Group Ltd. (1448), which debuted in Hong Kong in December and is valued at about $1.4 billion, according to data compiled by Bloomberg.

To contact Bloomberg News staff for this story: Cindy Wang in Taipei at; Bonnie Cao in Shanghai at

Top Singapore firms see margins crimped Profit growth lags surge in revenue amid talent crunch and higher rents


Top Singapore firms see margins crimped

Profit growth lags surge in revenue amid talent crunch and higher rents


Amit Sujan, CEO of IT firm Itcan Pte Ltd, said that while costs have been increasing across most developed markets such as Singapore, he is seeing high local-staff turnover, and a general shortage of labour – PHOTO: SPH

How the profit margins compare

[SINGAPORE] Higher costs are gnawing away at the profit margins of the top 1,000 companies based in Singapore, fresh figures from DP Information Group yesterday indicated – a further suggestion that the tightening of foreign-labour inflows has not yet translated into higher productivity.

With an ongoing push to make foreign labour more expensive, a talent crunch, and higher rent costs, the growth in profit is lagging the surge in turnover, according to data from this year’s Singapore-1000 list, which ranks Singapore-based companies in order of their sales.

The total revenue of Singapore’s top 1,000 firms for the period between June 1, 2012, and May 31, 2013, rose 13.9 per cent over the year to $2.75 trillion. But combined profits for these firms were up just 2.1 per cent to $150 billion, compared to the same period a year ago.

The healthier bottom line was effectively lifted by strong performances in the services sector, given that eight of 11 main sectors in Singapore registered lower combined earnings.

Profits in the services sector jumped 62.6 per cent to $11.5 billion in this year’s ranking. This was driven mostly by the healthcare sector, which has taken advantage of the pressing needs of a “silver generation” in Singapore, and the demands of affluent patients from the region, said Chen Yew Nah, managing director of DP Information, at a press briefing yesterday.

Overall profit margin for the Singapore-1000 companies ranked this year fell to 5.09 per cent, down from 5.78 per cent a year ago.

The margin pressures have also been felt among smaller firms, as shown in the ranking for the top 1,000 SMEs (small and medium enterprises) this year. While combined revenue rose 5.5 per cent for the period to $31.1 billion over the year, overall profit was up just 1.5 per cent to $3.4 billion compared to the same period a year ago.

These figures come as the government tries to wean companies off a dependence on foreign labour. Since 2010, the government has raised, and revised, foreign-worker levies. It has also put out stricter foreign-worker quotas.

But in a KPMG survey released this week, about 45 per cent of polled companies saw manpower costs increasing at a faster clip than productivity gains.

Companies in the IT sector have been particularly hit, with profit margins nearly halved to 8 per cent, data from DP Information showed.

Amit Sujan, CEO of IT firm Itcan Pte Ltd, said that while costs have been increasing across most developed markets such as Singapore, he is seeing high local-staff turnover, and a general shortage of labour.

“In the last one year, I’ve been declining at least $1 million worth of work every month. Straightaway, we tell the clients: We do not have people,” he said, adding that these lost clients are hiring IT firms in Hong Kong and Malaysia, instead.

Singapore-based companies still have a strong credit standing overall, though the growth in the number of companies rated DP1 – a rating that reflects a default probability of less than 0.1 per cent – has eased for the first time in the post-crisis period. The proportion of DP1 companies has been on the rise since 2008, but it came down to 19.8 per cent (or 198 companies out of 1,000) this year, from 20.9 per cent in 2013.

About three quarters of the Singapore-1000 companies have investment-grade ratings this year, though the exact percentage of 75.9 per cent has also come off slightly from 76.6 per cent a year ago.

Head of commercial banking at ANZ Banking Group, Ng Wee Lee, said Singapore companies are still operating in a liquid environment. But she cautioned that some companies may be hesitant in hedging against the likelihood of higher interest rates, with the tapering of quantitative easing.

“Because we’ve enjoyed a low interest rate environment, people might have taken it for granted,” said Ms Ng, adding that some companies might be looking to pass on some of the borrowing costs to clients instead. Companies could consider locking in loans at fixed rates for the next two to three years, and watch for currency risks, she said.


Rigor and risk in India central bank reform push

Rigor and risk in India central bank reform push

Wed, Jan 22 2014

By Tony Munroe and Suvashree Dey


MUMBAI (Reuters) – The biggest overhaul of India’s monetary policy in 15 years aims to tackle the nagging inflation that pushes up credit costs and stifles investment, but the changes risk imperiling already weak economic growth in the absence of broader reforms.

A central bank panel recommended sweeping changes to how the central bank runs policy, including setting a long-term inflation target of 4 percent, with wiggle room of 2 percent in either direction.

Critics say the ideas would bring a western-style rigor to an economy with emerging market problems; supply bottlenecks, unpredictable monsoon rains and politically sensitive subsidy spending that drives up food prices.

Monetary decisions would be set by a committee – they are now made by the governor – putting the Reserve Bank of India (RBI) in line with the practice at most major central banks.

The arrangement, described by Standard Chartered Bank in India as “one of the most important steps” in at least the last 15 years, may not suit India, some argue.

“I think we need to have a strong decision-maker at this stage given the peculiarities of the macro-economic situation,” said Abheek Barua, chief economist at HDFC Bank.

“And I think this kind of aping of some of the western central banks does us no good. There are huge constraints on the supply side,” he said.

One of the biggest sources of inflation pressure in India is a bottleneck in food production and distribution. One-third of fresh food perishes before it reaches shops and unpredictable weather often adds to supply pressures. That helps explain why consumer prices are rising around 10 percent over year-earlier levels.

“Inflation targeting is done in countries which have more stable kind of pricing,” Economic Affairs Secretary Arvind Mayaram said in an interview with the ETNow TV channel.

Government incentives to grow rice and wheat as part of a subsidized food program for the poor also keep prices high. Another cost pressure is widespread pilfering in government food schemes.

Reducing 10 percent consumer inflation to 4 percent would require politically difficult moves to curtail food prices that have been rising by double-digits for years.

“Even if inflation is higher, it does not mean that people will start eating less just because the interest rates are higher,” Mayaram said.

“There are other structural issues that need to be addressed if we need to control food inflation,” the official said, adding that the panel’s proposal to use consumer prices to anchor inflation was “a little premature”.

The current CPI measure was launched in 2012.


While switching to the CPI as the key inflation measure would put the RBI in sync with most central banks, it would also mean current policy interest rates of 7.75 percent would likely remain high, a prospect that pushed up government bond yields by 10 basis points on Wednesday.

“These recommendations clearly carry hawkish implications,” wrote Credit Suisse economist Robert Prior-Wandesforde.

Under the recommendations of the panel, set up by RBI Governor Raghuram Rajan, managing inflation would be made the primary policy goal of the RBI, ahead of growth and financial stability.

While some of the recommendations announced Tuesday would need legislative approval, most could be implemented by the central bank.

Rajan, a high-profile former chief economist at the International Monetary Fund who took office on September 4 in the midst of a currency crisis, has in the past spoken in favour of setting monetary policy by committee and establishing an inflation target using the CPI.


The government of Prime Minister Manmohan Singh has struggled to implement reforms or remove bureaucratic hurdles that would attract investment to ease the country’s inherent inflation pressures.

A 2012 decision to allow entry to foreign supermarkets, intended to reduce widespread wastage due to a lack of facilities such as refrigeration, has generated little interest because of stiff local sourcing requirements. The UK’s Tesco Plc (TSCO.L: QuoteProfileResearchStock Buzz) recently became the first such chain to invest, albeit with a relatively modest $110 million commitment.

Singh’s government has been paralyzed by corruption scandals that have stifled reform efforts. It faces an election by May, the outcome of which is uncertain.

“The question is whether there is political support for bringing down inflation. If the new government undertakes reforms to reduce subsidies and bring down food inflation, the headline CPI inflation can come down fast,” said A. Prasanna, economist at ICICI Securities Primary Dealership.

The RBI’s current mixed mandate of managing inflation, economic growth and financial stability all in one gives it flexibility but has also led to often-shifting priorities. Critics say that has stifled growth – Asia’s third-largest economy is expanding at its slowest pace in a decade – without bringing inflation under control.

“It’s a big positive for India’s macro policy framework if they can get this implemented, because it will basically help I think better anchor monetary policy by establishing a clear objective,” said HSBC economist Leif Eskesen, echoing the sentiments of many economists.

The challenge is fitting rigid inflation management into an often-messy political reality.

Rajan’s predecessor at the RBI, Duvvuri Subbarao, repeatedly called on New Delhi to implement reforms to ease investment rules, clear infrastructure bottlenecks and cut government subsidies, but with little success.

The new policy set-up would raise the stakes for the government to act – a tall order, especially if another fragmented coalition emerges from the upcoming elections.

Indian governments have tended towards promoting growth and putting pressure on the central bank to keep monetary policy loose. The Mumbai-based RBI is not technically independent – the governor and his deputies are appointed by the government – although it generally enjoys latitude in policymaking.

Setting a CPI target of 4 percent over the long-term would remove some of the discretion in policymaking and at the same time strengthen the central bank’s independence by insulating it from pressures from New Delhi.

Argentina Devaluation Sends Currency Tumbling Most in 12 Years

Argentina Devaluation Sends Currency Tumbling Most in 12 Years

Argentina devalued the peso the most in 12 years after the central bank scaled back its intervention in a bid to preserve international reserves that have fallen to a seven-year low.

The peso has plunged 12.7 percent over the last two days to 7.8825 per dollar at 3:45 p.m. in Buenos Aires, after falling to as low as 8.2435, according to data compiled by Bloomberg. The decline in the peso marks a policy turn for Argentina, which had been selling dollars in the market to manage the foreign-exchange rate since abandoning a one-to-one peg with the U.S. dollar in 2002.

President Cristina Fernandez de Kirchner, who said May 6 that the government wouldn’t devalue the peso, is struggling to hold onto dollar reserves which have fallen 31 percent to $29.4 billion amid annual inflation of more than 28 percent. Reserves are the government’s only source to pay foreign creditors. Since changing her economy minister, cabinet chief and the head of the central bank on Nov. 18, the peso has fallen 25 percent, the most in the world, according to data compiled by Bloomberg.


  • Argentine Default Chaos Relived as Blackouts Follow Looting
  • Argentina’s Fernandez Appears on TV to End Criticism of Absence

“They’re running out of cash and they’re sitting in the corner at the moment,” Phillip Blackwood, who oversees $3.5 billion in emerging market assets as a managing partner at EM Quest Capital LLP, said in a phone interview from London. “There’s a feeling in the market that they’re not going to intervene any more.”

The tumble in the currency is the biggest since March 2002, the year the government abandoned a one-to-one peg with the U.S. dollar following a record $95 billion default.

Bonds Tumble

Dollar-denominated bonds due 2033 sank 2.7 cents on the dollar to 66.6 cents. The extra yield investors demand to own Argentine bonds over U.S. Treasuries surged 24 basis points to 975. Argentina’s dollar bonds have plunged 8.2 percent this year, the biggest loss in emerging markets, according to JPMorgan Chase & Co.’s EMBIG Diversified index.

Yesterday, the peso declined 3.5 percent to 7.14 per dollar after the central bank abstained from intervening in the market.

Cabinet Chief Jorge Capitanich told reporters earlier today the government isn’t intervening in the peso’s decline, allowing the market, which is mostly closed to buyers of dollars, to adjust prices.

“It wasn’t a devaluation induced by the state,” Capitanich said. “For the lovers of free markets, supply and demand was expressed in the capital markets yesterday.”

The central bank’s press office didn’t answer phone calls seeking comment on plans to depreciate the peso or a targeted exchange rate.

The government has changed its strategy which is leaving the market confused on the direction of their policies, Gustavo Quintana, a trader at Rabello & Cia in Buenos Aires said.

‘Deliberate Strategy’

“There’s no doubt this is a deliberate strategy,” Quintana said in a telephone interview. “All of this is really hard to predict. No one saw the dollar at 8 pesos in January so it’s difficult to speculate where it will end up.”

The central bank intervened briefly when the rate hit 8.50, Quintana said.

A free-floating peso may fall as low as 14 per dollar, Citigroup Inc. strategist Dirk Willer wrote in a report today. The central bank sold a net $5.9 billion over the last year in the foreign-exchange market to help bolster the peso.

Since her re-election in 2011 when capital flight almost doubled to $21.5 billion, Fernandez has put into effect more than 30 measures to keep money from leaving the country. Her policies have included blocking most purchases of foreign currencies, taxing vacations abroad and online purchases, banning units of foreign companies from remitting dividends, and restricting imports.

Black Market

The controls cut the total amount traded last year in the local foreign-exchange market in half from 2010, according to data compiled by Argentina’s Mercado Abierto Electronico automated trading system.

Banned from purchasing dollars for savings to protect against inflation, Argentines have turned to an illegal currency market, where the price per dollar soared to a record 12.75 per dollar, according to Buenos Aires-based newspaper Ambito.

Argentina posted the largest current account deficit in the first three quarters of 2013 since 2001, when a crisis in South America’s second-largest economy led to the default. International reserves have fallen or remained unchanged for 14 consecutive business days and fell $80 million yesterday, according to central bank data.

As dollars vanish from the central bank, the government has sought to normalize relations with foreign creditors.

Foreign Creditors

On Jan. 20, Argentina presented a proposal to the Paris Club of creditors to seek a negotiated resolution to outstanding debt of about $10 billion. The government also has begun talks to compensate Repsol SA for the stake in oil company YPF SA it nationalized in 2012, and is preparing to unveil new inflation and growth data to address International Monetary Fund concerns over the accuracy of official statistics.

The government reported inflation was less than half of the 28.4 percent estimate by private economists in 2013.

In addition to devaluing the peso, Argentina must boost interest rates to stem outflows, according to JPMorgan economist Vladimir Werning. Argentina’s benchmark deposit rate, known as the badlar, is 21.5 percent.

“Longer term, it’s a question of inflation, it’s out of control,” EM’s Blackwood, who recently sold Argentine bonds, said. “They need to clear up the holdouts and open access to the international capital market. We don’t think they’ll take that route. They have a range of options but politicians always have better ideas.”

To contact the reporter on this story: Katia Porzecanski in New York at

Gundlach Counting Rotting Homes Makes Subprime Bear: Mortgages

Gundlach Counting Rotting Homes Makes Subprime Bear: Mortgages

For Jeffrey Gundlach, the U.S. housing recovery isn’t so rosy.

The founder of $49 billion investment firm DoubleLine Capital LP is largely avoiding the subprime-mortgage bonds that jumped about 17 percent last year after home prices surged by the most since 2006, deterred by the lengthy process to sell foreclosed houses and the destruction that’s creating.

“These properties are rotting away,” Gundlach, 54, said last week on a conference call with investors, about homes stuck in foreclosure pipelines, adding that it could take six years to resolve defaulted loans made to the least creditworthy borrowers before the real-estate crash.

DoubleLine is giving up potentially higher yields that last year attracted money managers including Western Asset Management Co. along with hedge funds as 21 percent of foreclosed homes across the U.S. are in limbo, vacated by former owners and not yet seized by lenders, according to data company RealtyTrac.

Those residences are a sign of an uneven U.S. recovery, which has left blighted neighborhoods in cities from Los Angeles to Detroit and about 8 million borrowers still owing more on their mortgages than their homes are worth.

“The housing market is softer than people think,” Gundlach said, pointing to a slowdown in mortgage refinancing, shares of homebuilders that have dropped 13 percent since reaching a high in May, and the time it’s taking to liquidate defaulted loans.

Loss Severities

A measure of losses on mortgage debt rose last quarter for the first time since 2011, Fitch Ratings said in a report yesterday. The reversal was driven by an aging pool of loans in the foreclosure process, particularly in states such as Florida and New Jersey which give added legal protections to homeowners against repossessions.

About 32 percent of seriously delinquent borrowers, those at least 90 days late, haven’t made a payment in more than four years, up 7 percent from the beginning of 2012, according to Fitch analyst Sean Nelson.

“These timelines could still increase for another year or so,” Nelson said, leading to even higher losses because of added legal and tax costs, and a greater potential for properties to deteriorate.

Loss severities on subprime debt, tied to risky mortgages that inflated the housing bubble, increased to 75.9 percent from 74.1 in the last three months of the year. The severities — a measure of losses suffered on a liquidated loan — peaked at 77.1 percent in early 2012 from 12.8 percent at the end of 2006, during the property boom.

Keeping Pace

Improvements in loss severities have failed to keep pace with the 24 percent gain in house prices since the 2012 trough. Real-estate values have been recovering for about two years, with prices climbing in October at the fastest pace since 2006, according to a Case-Shiller index of 20 cities.

“You see Case-Shiller price data showing strong markets, and you expect in a certain logical way that these loss severities should be coming down as home values are increasing,” said Gundlach, who started Los Angeles-based DoubleLine Capital in December 2009 and built it into the fastest growing mutual-fund firm ever in its first year. “Unfortunately, that’s being trumped or neutralized by this rotting away problem.”

Investors including Blackstone Group LP and Colony Capital LLC have been central to the rebound, buying more than 366,200 single-family homes in cities such as Phoenix, Las Vegas and Atlanta, since January 2011 to turn into rentals, according to Port Street Realty and RealtyTrac data. Federal Reserve policies that reduced borrowing costs and increased homeowner refinancing also lifted the market.

Improving Economy

While rising prices, and an improving economy have resulted in a steep drop in foreclosures, there are more than 1.2 million properties in the repossession process or owned by banks that the market is absorbing, according to RealtyTrac.

“With the average timeline for foreclosure increasing, these properties are sitting in limbo for a longer period,” said RealtyTrac Vice President Daren Blomquist.

Florida had the highest foreclosure rate last year, with more than 3 percent of households receiving a filing. It’s one of about 20 judicial states including New Jersey, New York and Connecticut, requiring a court review of home repossessions, and lengthening the time it takes to seize a property.

There are about 8 million borrowers still underwater, who owe more on their mortgages than their homes are worth, which increases the probability of default, Deutsche Bank AG wrote in a report this month. Florida and California have the highest concentration, each with more than one million single-family houses in negative equity.

Negative Equity

Subprime and option adjustable-rate mortgages originated at the peak of the market, with weaker underwriting standards, have the highest exposure to negative equity, Deutsche Bank analysts led by Steven Abrahams wrote in the report. Defaults and losses to bondholders are expected to decline as home prices continue to rise, with estimated gains of about 6.8 percent this year, the report said.

An index tied to subprime bonds created in the second half of 2006 that were issued with AAA ratings rose to 59.5 cents on the dollar this month from a low of 31.1 cents on the dollar in October 2011, according to London-based administrator Markit Group Ltd. The debt last year outpaced returns for less risky non-agency mortgage debt, such as Alt-A, which is backed by borrowers who often qualified with limited documentation.

‘Very Bullish’

“In 2013, we were very bullish on subprime,” said Anup Agarwal, head of mortgage-backed and structured products at Pasadena, California-based Western Asset Management. “It was overall a big winner and you saw that reflected in prices.”

Agarwal, whose firm managed $443 billion in fixed-income assets as of Sept. 30, has in the past six months turned more negative on subprime and started shifting money into Alt-A securities.

One William Street Capital Management LP, a hedge fund firm with $2.7 billion in assets, is expecting reduced losses as home prices continue to rise, according to a letter sent to investors this month. The investment firm said increased regulations have added to costs for firms that deal with troubled mortgages.

For subprime prices to make sense, recoveries must improve but won’t because of the backlog of loans, Gundlach said.

The money manager has cautioned investors before about avoiding subprime. In 2012, he said investors can’t assume the “lines will head south” speaking about loss severities for loans and then last year, referred to the debt as being stubborn.

Brash Pronouncements

Gundlach has a history of making contrarian and brash pronouncements. After a conference in April 2012, he said he thought the Federal Reserve should be abolished, and that same month that investors should short Apple Inc. (AAPL), after it had risen more than sevenfold from January 2009.

Most of DoubleLine’s assets are in the $31 billion Total Return Bond Fund, which as of last year had 31 percent, the highest allocation, in residential mortgage-backed securities not backed by the U.S. government.

Gundlach has traditionally favored higher quality non-agency debt in the fund rather than subprime. He balances those securities with bonds that are backed by the government and adjusts the mix to help the fund weather different scenarios in the housing market and changes in interest rates.

Gundlach’s fund returned 6.3 percent over the past three years, ahead of 93 percent of peers, according to data compiled by Bloomberg. Last year was the fund’s worst absolute and relative returns since opening in April 2010, with it gaining just 0.02 percent and beating 80 percent of peers. Investors pulled $6 billion, according to estimates from Morningstar Inc., its first year of net withdrawals.

During a webcast this month Gundlach said that he’s “re sculpted” DoubleLine Total Return Bond Fund (DBLTX), decreasing its holdings of agency mortgages and adding holdings of non-agency and commercial mortgage debt. This year through Jan. 22, the fund returned 1.5 percent, moving it ahead of 99 percent of similarly managed funds, Bloomberg data show.

To contact the reporters on this story: Heather Perlberg in New York at; Alexis Leondis in New York at

Korea Craft Beers Get Boost in Challenge to $1.3 Billion Duopoly

Korea Craft Beers Get Boost in Challenge to $1.3 Billion Duopoly

The smell of fresh paint lingers at the renovated Vaneheim microbrewery in northeast Seoul, a sign of owner Kim Jung Ha’s optimism after a decade of struggling with the economics of South Korea’s lopsided beer market.

Under revisions to alcohol laws announced by the finance ministry yesterday, house brewers like Kim will be allowed to distribute their beer through other bars and restaurants for the first time, while paying a lower rate of tax. The changes are expected to bring more competition to a $1.3 billion beer market that grew 6 percent in 2013 and is dominated by Hite Jinro Co. (000080) and Oriental Brewery Co., re-acquired this week by the world’s biggest beer maker Anheuser-Busch InBev NV.

The changes come as President Park Geun Hye begins her second year in office promising a more “creative” economy that supports small- and medium-sized companies.

“The past 10 years have been a process of bitter learning,” Kim, a 34-year-old who studied both culinary arts and business in college, said last month at Vaneheim, which has seating for 110 people on wooden tables with a window allowing customers to see the polished metal brewing tanks. “Although it’s a small and incremental change, I’m thankful things are finally moving in the right direction,” she said.

Oriental Brewery and Hite Jinro, who’ve been making beer in South Korea since 1933, have dominated the market thanks to legislation that limits licenses based on brewing capacity and a tax system that rewards economies of scale.

Bomb Shots

The government began granting licenses to microbreweries in 2002, when the nation co-hosted the soccer World Cup and consumer perceptions of beer changed. Beer was mainly used for “poktanju,” or bomb shots, in which Korean soju or rice wine is tipped into a glass of beer and downed in one go, said Kim, who opened Vaneheim in a two-story brick building in the primarily residential district of Nowon-gu in 2004.

New licensees found the market tilted against them. Under the current system, Jinro Hite and Oriental Brewery pay an effective 72 percent tax rate, or about 395 won ($0.37) per 355 milliliters (12 ounces) of beer, according to Hong Jong Haak, a lawmaker campaigning for support for small brewers.

While the effective rate for smaller breweries is 57.6 percent, their typical payment is about 710 won because the levy is calculated based on cost of production, allowing the biggest brewers to remain dominant as demand grows, Hong said.

“Compared to the regular brands I’ve always had, I’m surprised to find the rich flavors in these craft beers,” company worker Jeon Mi Young, 36, said at a downtown branch of the Oktoberfest microbrewery chain last month. “Although I like drinking beer, I’ve never really had a chance to try craft beers as they’re still hard to find.”

Paying More

AB InBev (ABI) said this week it is paying $5.8 billion for Oriental Brewery, a business it sold to KKR & Co. (KKR) in 2009 for $1.8 billion as it sought to cut debt. Since then, Oriental Brewery has become South Korea’s largest beer maker and more than doubled earnings, boosted by its Cass brand.

South Korea’s beer market was worth $1.3 billion in 2013, a 6 percent increase from a year earlier, and is forecast to reach $1.6 billion by 2017, according to a Bloomberg Industries report published this week. Oriental Brewery and Hite Jinro had a combined 94.8 percent market share in 2012, according to the report, which cited data from Euromonitor International.

“Korean consumers have become more sophisticated and interested in what else is out there, not just beer,” said Daniel Tudor, one of three partners of the Booth microbrewery in Seoul. “This is bottom-up stuff, and people enjoy it because rough around the edges. Five or ten years from now, the whole landscape for beer will be different.”

Lower Taxes

The finance ministry said yesterday the lower tax rate for microbreweries – an effective 43.2 percent – will take effect from April, and they’ll be able to sell their beer off-site from Feb. 21.

While microbreweries may still pay more than Hite Jinro and Oriental Brewery, the reduction will help smaller brewers operating with slim profit margins to stay afloat, said Lee Won Sik, whose Oktoberfest has eight branches, including one in the Gangnam neighborhood made famous by rapper Psy.

“Many small beer producers closed because they couldn’t reach economies of scale and suffered due to the excessive tax burden, low sales and expensive management costs,” he said.

For Platinum Brewing Co., high taxes were a major reason for its decision to relocate from South Korea to Yantai, northeast China, in 2010. With signs of industry deregulation at home, Platinum is planning to return in three to five years, according to spokesman Song Byeong Chul.


“The environment back then was almost impossible for us,” Song said by phone. “The government had no idea what it needed to do to accommodate the emerging small beer makers.”

Even more than the reduced tax burden, microbreweries will benefit from a broader sales network allowed under the rule changes, according to Craftone owner Chung Hyun Chul, whose American-style beer is called ‘Mingle.’

“It’s an opportunity for us,” Chung said. “We weren’t even allowed to compete with major companies before.”

Oriental Brewery and Hite Jinro, whose main Cass and Hite beers are identically priced with the same 4.5 percent alcohol content, are already responding to the market changes. Hite introduced its Queen’s Ale in September, while Oriental Brewery said it will introduce a new ale beer early this year.

“We will further develop new products and try to improve our existing products to meet consumer demand,” said Hite Jinro spokesman Choi Yong Woon, who predicts competition may intensify further if Oriental Brewery’s new owner sells more of its international brands, including Budweiser and Corona.

Oriental Brewery spokeswoman Lee Eun Ah said South Korea’s beer market will be “invigorated” by microbreweries selling in more locations and the arrival of Lotte Liquor, a unit of South Korea’s fifth-biggest industrial group, which broke ground on a 50,000-kiloliter capacity beer factory last year.

For Kim at Vaneheim, the changes are welcome even if they bring more competition from other brewers. She likens the surging interest in beer with the sudden spread of coffee shops across the country over the past decade.

“People have just started to pay more attention to beer,” she said.

To contact the reporter on this story: Heesu Lee in Seoul at

Hard-to-Sell Junk Debt Lures Oaktree to JPMorgan: Credit Markets

Hard-to-Sell Junk Debt Lures Oaktree to JPMorgan: Credit Markets

Bond investors are losing their aversion to difficult-to-trade corporate debt that handed them some of the biggest losses in the credit crisis.

The extra yield note buyers demand to own older, smaller junk bonds that trade infrequently has shrunk to an average 0.25 percentage point this month from more than 1 percentage point a year ago, according to Barclays Plc data. JPMorgan Chase & Co. money manager Jim Shanahan said he’s preferring “good credit quality and less liquidity” when picking bonds, while Howard Marks, the head of distressed debt investor Oaktree Capital Group LLC (OAK), said he’s finding bigger potential gains in private, less-traded debt.

The evaporating premium for illiquid assets is showing the depths to which money managers are reaching to boost returns after a five-year rally that pushed relative yields on junk bonds to the least since August 2007. With Federal Reserve monetary policies suppressing interest-rate benchmarks for a sixth year, credit buyers are showing more concern that they’ll miss out on a continued rally than get stuck with debt that lost 26 percent during the market seizure in 2008.

“For the past several years, people have been concerned about liquidity,” said Eric Gross, a credit strategist at Barclays in New York. “Now we’re hearing more about people seeking out illiquid bonds.”

Fragile Market

Such debt tends to be more vulnerable to price swings when market sentiment deteriorates, because there are fewer buyers to bid on it when investor withdrawals force money managers to sell. Those risks intensified after stricter banking rules accelerated a pullback by Wall Street dealers that used their own money to facilitate trading.

Primary dealers that trade directly with the Fed cut their holdings of corporate bonds by 76 percent to $56 billion after peaking at $235 billion in 2007, Fed data through March show. After the central bank changed the way it reported the holdings in April, net speculative-grade bond holdings fell as much as 24 percent to a low of $5.63 billion in May before rising to $7.7 billion on Jan. 8.

Investors are demanding an average yield of 5.94 percent to own bonds sold at least 18 months ago in batches of less than $250 million, Barclays data show. That compares with an average 5.7 percent for newer debt offerings of at least $500 million. The gap, which averaged 0.5 percentage point last year and 0.92 percentage point in 2012, reached as much as 1.95 percentage points at the peak of the financial crisis in March 2009.

‘Classic’ Cycle

The yield on MGM Resort International’s $238 million of 6.875 percent notes, which were issued in 2006 and mature in April 2016, has dropped 2.4 percentage points during the past year to 1.85 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That compares with a decline of 0.5 percentage point to 5.4 percent on the casino owner’s $1.25 billion offering of nine-year, 6.625 percent securities in December 2012.

“As people continue to look for yield and performance, they’re willing to move into less-liquid areas of the market,” said Shanahan, who manages high-yield credit investments for JPMorgan’s $1.5 trillion asset management unit. “You’re seeing a classic market cycle of people looking for pockets of value.”

‘Intoxicating Brew’

With corporate borrowers selling record volumes of debt to lock in all-time low yields amid global central bank stimulus, “there is a tremendous and potentially unsustainable amount of paper in investors’ hands, and this harsh reality is causing much angst,” according to a McKinsey & Co. and Greenwich Associates report in August.

Federal Reserve Bank of Dallas President Richard Fisher, a former managing partner of a fund that bought distressed debt, said in a speech last week that he’d “have to hire Sherlock Holmes to find a single distressed company priced attractively enough to buy.”

Five years after the Fed started holding benchmark rates at about zero and pumping more than $3 trillion into the financial system to ignite growth, Fisher warned in the Jan. 14 remarks to the National Association of Corporate Directors that signs are emerging that Fed stimulus has made for “an intoxicating brew.”

Economic Boost

Even as the central bank starts slowing monthly bond purchases to $75 billion from $85 billion, yields on dollar-denominated speculative-grade bonds have fallen to 6.21 percent, 0.22 percentage point from the record low in May 2013, according to Bank of America Merrill Lynch index data.

The securities, which provide bigger cushions of extra yield over benchmark rates than higher-rated debt, are governed by idiosyncratic deal documents and aren’t as frequently traded. While trading in speculative-grade bonds has risen, volumes have failed to keep pace with a market that’s expanded 71 percent since 2008 as Wall Street’s biggest banks reduce their holdings of riskier assets in the face of new regulations.

Speculative-grade, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

Investors are emboldened by a U.S. economy that will probably expand by 2.8 percent this year and 3 percent in 2015 from 1.9 percent in last year, according to a Bloomberg survey of 83 economists. High-yield bond funds have received $3.85 billion of deposits since the end of September, according to data compiled by Royal Bank of Scotland Group Plc, as investors gained conviction that the U.S. economic recovery was strengthening. The unemployment rate dropped to 6.7 percent by Dec. 31 from 10 percent in October 2009.

More Homework

“Money has found it very easy to flow into public, mainstream things,” said Marks, Oaktree’s chairman, in a Dec. 10 presentation for investors. “The best credit opportunities are in niche markets.”

He said the firm is earning about 11.5 percent to extend loans to smaller companies, about twice as much as the yield on a junk bond of comparable quality.

These deals are small and “entirely illiquid,” he said. “It requires a lot of due diligence.”

Publicly traded business-development corporations, which lend to the smallest and riskiest companies, attracted $4.1 billion last year, the most since 2007, as the firms known as BDCs gained an average 16.4 percent. The firms are juicing returns by borrowing about 50 cents for every dollar raised from equity investors, up from 36 cents in 2011, according to data compiled by Keefe, Bruyette & Woods analysts.

Filling Gap

BDCs and other alternative asset managers that lend to small and mid-sized companies are filling a role traditionally dominated by banks, J.P. Morgan Asset Management’s Shanahan said in a telephone interview. Holding smaller, less-traded securities can boost investor returns while maintaining a higher level of credit quality, he said.

“Credit is good and likely to be good over the horizon,” he said. “People become less concerned about liquidity as you’re less likely to need it in the near term.”

Elsewhere in credit markets, the cost to protect against losses on U.S. and European corporate bonds jumped to the highest in five weeks. La Banque Postale SA is turning to the covered bond market to fund its mortgage business that has grown by about 50 percent over the past four years and can no longer be financed solely by customer deposits.

Credit Benchmarks

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, rose 1.5 basis points to 67 basis points as of 9:52 a.m. in New York, according to prices compiled by Bloomberg. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 2.6 to 75.2.

Both gauges, which typically rise as investor confidence deteriorates and fall as it improves, are trading at the highest intraday levels since Dec. 19. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The banking unit of France’s postal service, which has a home loan portfolio of 50 billion euros ($67.8 billion), will now fund 20 percent of that business with covered securities, according to Stephane Magnan, head of asset and liability management at the bank in Paris.

The lender is now the sixth-biggest mortgage lender in France, having taken market share from Credit Agricole SA (ACA) and BNP Paribas SA, according to S&P. The bank’s business expanded even as France’s economy struggles to grow after exiting recession last year and unemployment touches a 16-year high.

To contact the reporter on this story: Lisa Abramowicz in New York at

American Vitality Depends on Whether You Believe Harvard or Yale

American Vitality Depends on Whether You Believe Harvard or Yale

The American consumer’s readiness to kick the economy into high gear comes down to a question of who’s right: Yale’s Stephen Roach or Harvard’s Martin Feldstein.

To Roach, Americans are still working to rebuild savings and will be slow to increase spending as long as wage growth is sluggish and household debt exceeds long-run averages. “We have a long, long way to go,” says Roach, 68, a senior fellow at Yale University’s Jackson Institute of Global Affairs in New Haven, Connecticut, and former chairman for Morgan Stanley Asia.

Over at Harvard University in Cambridge, Massachusetts, Feldstein, 74, predicts “we finally are going to see a good year in 2014,” thanks to stock-market and home-price gains that have boosted household wealth and given consumers the confidence to spend.

Which view proves true will have a lot to do with whether consumer spending, which constitutes about 70 percent of the U.S. economy, makes this the break-out year for the expansion. Consumption gained momentum in 2013, and more vigor this year could spur still-hesitant businesses to hire and invest, augmenting growth.

“After saying year after year that the Fed and others have been too optimistic,” Feldstein says he thinks this year will be different. The former economic adviser to President Ronald Reagan and former chairman of the Council of Economic Advisers commented in a Jan. 13 Bloomberg television interview.

Feldstein’s Camp

Feldstein has more economists on his side, a Bloomberg survey this month shows. Consumer spending will grow 2.6 percent this year and 2.8 percent in 2015 following a projected 2 percent gain last year, according to the median forecast of economists in the survey. That would make 2014 and 2015 the strongest years since 2006.

Feldstein and those who agree with him, including Goldman Sachs Group Inc. Chief Economist Jan Hatzius, cite gains in household net worth, which stood at $77.3 trillion on Sept. 30, $8.2 trillion more than its pre-recession peak. Wealth fell almost 20 percent during the recession that started in December 2007, and didn’t recover the lost ground until the third quarter of 2012.

Contributing to the gains: The Standard and Poor’s 500 Index last year posted its biggest annual advance since 1997. Home prices in 20 U.S. cities climbed 13.6 percent in October 2013 from a year earlier, the biggest increase in more than seven years, S&P/Case-Shiller data show.

Debt Easing

Meanwhile, household debt loads have eased as Americans shied away from borrowing and banks hesitated to lend in the wake of the financial crisis. Revolving consumer-credit, primarily credit-card debt, plummeted 18 percent from 2008 to 2011, and had recovered just 2.6 percent through November 2013. Outstanding home mortgage debt remains below its 2008 peak. The deleveraging has left consumers with room to borrow.

“The main reason we’ve become more optimistic is that the household balance sheet looks much healthier,” Michelle Meyer, a senior U.S. economist at Bank of America Merrill Lynch in New York, said in an interview. “Consumers should continue to heal and feel ever more comfortable and confident in spending.”

Non-revolving credit is already rallying as Americans take out loans to buy cars and other big-ticket items, increasing by $11.9 billion in November after a $13.9 billion gain the month before, data from the Federal Reserve showed.

Drag Dissipating

Goldman economists see an even “more important swing factor” taking shape in 2014: Consumers have adjusted to the hit to incomes from last year’s increase in payroll and income taxes, which won’t be repeated this year. That could help boost consumption growth to 2.9 percent in 2014, from their estimate of 2 percent in 2013.

Payroll and income tax increases last year held the growth rate for real disposable income to 1 percent, Hatzius, 45, wrote in the Dec. 27 analysis, and shaved 0.75 percentage point from consumption growth. This year, income growth should accelerate to 3 percent, boosting purchases and GDP, the New York-based economist said.

“The drag seems to have dissipated at this point,” said Peter D’Antonio, an economist at Citigroup Global Markets Inc. in New York. “The fundamentals of the consumer sector are going to show through in a big way.”

Gross domestic product climbed at a 4.1 percent annualized rate in the third quarter of 2013, boosted by consumer purchases that increased 2 percent, according to a Dec. 20 Commerce Department report. GDP growth was up from a 2.5 percent rate in the second quarter and 1.1 percent in the first. Fourth-quarter data come out Jan. 30.

Wealth Rebounding

Adding fuel to consumption, Feldstein said consumers who have rebuilt their net worth will be willing to spend more of their discretionary income.

The personal saving rate averaged 4.5 percent last year through November, down from 5.3 percent in the same period a year earlier. The saving rate is still up from a record-low 2 percent reached in July 2005.

“Last year, the consumer by reducing the savings rate boosted GDP,” Feldstein said in the television interview. “We’re going to see more of that as a result of this big increase in wealth that occurred though the stock market.”

Goldman Sachs economists wrote in a Dec. 27 note to clients that “the saving rate can fall a bit further as household wealth is increasing, credit conditions are easing, and the labor market is improving.”

Roach isn’t buying it. Savings will rise closer to historical levels and that will keep a lid on spending, he says. The saving rate averaged about 9 percent between 1970 and 2000.

‘Anemic’ Spending

“We’ve got several more years of surprisingly anemic consumption growth,” Roach said in an interview, predicting “at least two to three years” of 2 percent advances in consumer spending. “The path is well short of 3 1/4 percent norms we’ve become used to historically in the United States.”

Job market healing could help. Though a Jan. 10 report showed employers added 74,000 jobs in December, the smallest gain since January 2011, that was at odds with better gains throughout the year. Employment increased by 2.19 million positions in 2013, averaging more than 180,000 jobs a month.

Still, that’s little changed from 2012, and it’s shy of the sustained 250,000 readings Roach says would boost his economic outlook.

Plus, the portion of prime working-age adults in the labor force dropped to 62.8 percent in December from 65.8 percent five years before. Some 3.9 million Americans have been out of work for more than 27 weeks, and Congress hasn’t reached a deal to continue extended unemployment insurance, which expired in December.

Tempered Growth

Roach’s outlook for tempered consumption growth gets some support from Russ Koesterich, the San Francisco-based chief investment strategist at BlackRock Inc. and from Yelena Shulyatyeva, an economist at BNP Paribas in New York.

“The labor market is recovering very slowly, and really the missing ingredient of this recovery has been income growth,” Koesterich said during a Bloomberg Television interview last week. “With income growth very slow, that means that consumption may not grow as fast as some people think.”

The economy’s inability to generate bigger wage gains is also a concern for Shulyatyeva. “Wages have to pick up, and even when we see growth in payrolls we don’t see much of an acceleration,” she said in an interview. “Consumers are still deleveraging, and there’s really not that much willingness on the consumer side to start borrowing again.”

While the job market is in better shape, it’s still weak, said Harvard’s Lawrence Katz, a former Labor Department chief economist. Wage gains have been slow, he said, long-term unemployment remains high, and many of the pluses in the economy mainly benefit upper-income consumers.

Income Inequality

“If you are sitting on a large bonus from Wall Street or you’re a post-college graduate in a steady job, you’re probably pretty confident going out and spending,” said Katz, 54. “For a large part of Americans, it’s still a very tenuous economy.”

Rising inequality could become an increasing concern, Katz said, as people in poorer households struggle to access education and job opportunities.

Wealth gains have accrued at the higher end of the income spectrum, while wages have been expanding more slowly. Hourly earnings climbed 1.8 percent in 2013, the slowest pace in three years. Rising home and stock prices primarily benefit those who hold the assets.

“The upper-income earners who have benefited from the rise in wealth have been spending, will continue to spend, but I just don’t think that the lower-income consumers who are still facing high unemployment rates and low wages are going to spend a lot more in 2014,” Michelle Girard, chief U.S. economist at RBS Securities Inc. in Stamford, Connecticut, said in an interview.

Aggregate Spending

The income gap might not matter for economic growth in the short term. As long as consumers in the aggregate spend more, it will add to GDP, said Deutsche Bank Securities Inc. Chief U.S. Economist Joseph LaVorgna.

Through 2014, continued monetary easing from the Federal Reserve could keep providing fuel for the so-called wealth effect. Central bank policy makers have indicated that the Fed will keep its main interest rate near zero even as it slows its unprecedented pace of asset purchases, which it scaled back to $75 billion a month from an $85 billion pace.

Fed policy makers, who meet Jan. 28-29, will probably reduce their bond purchases in $10 billion increments over the next six meetings before announcing an end to the program no later than December, according to a Bloomberg News survey of economists following the latest jobs report.

Slower Easing

“The Fed is still easing, they’re just easing at a slower pace,” New York-based LaVorgna said. Consumers have already started to exhibit the sort of vitality that may lie ahead, he said. Retail sales increased 0.2 percent in December after a 0.4 percent advance in November, Commerce Department figures showed. Excluding cars, demand jumped by the most in almost a year.

“The consumer did better in the fourth quarter than at any point in recent history,” LaVorgna said. “Barring a negative, exogenous shock, there is no reason why the consumer won’t spend at a healthy pace this year, and we expect real GDP growth to reach the promised land of 3 percent-plus growth.”

To contact the reporter on this story: Jeanna Smialek in Washington at

Davos Stalked by Tech Disruption as Intel to Wal-Mart Challenged

Davos Stalked by Tech Disruption as Intel to Wal-Mart Challenged

As the Internet took off, newspaper publishers, record labels and travel agencies were all walloped by the emergence of free online alternatives.

Today, the range of threats to businesses is widening as companies from Wal-Mart Stores Inc. to Intel Corp. and Siemens AG grapple with similar dilemmas. At this week’s World Economic Forum in Davos, Switzerland, technological disruption — and what companies are doing to prepare for it — is on executives’ minds, and will be the subject of a Bloomberg Television panel today on the slopes of the Alpine resort town.

When meeting with chief executive officers, “what you hear is, technology is moving three to five times faster than management,” said Dominic Barton, the global managing director of consultancy McKinsey & Co., who is in Davos. “I don’t know whether to be excited or paranoid. It means you can do new things, but it also means competitors can come out of nowhere.”

Today’s panel will include Qualcomm Inc. CEO Paul Jacobs and incoming Wal-Mart CEO Doug McMillon, discussing how innovation will affect the global marketplace this year.

The last year saw a run of bad news for blue-chip corporate names even as a recovery in the U.S. and European economies took hold. Wal-Mart in November cut its annual profit forecast for the second time since mid-2013 as Inc. expands its online retail offerings. A Wal-Mart spokesman didn’t immediately return a message seeking comment.

Upstart Competitors

Intel, the world’s largest chipmaker, predicted 2014 sales will be little changed from a year earlier as chips designed by smaller competitors like ARM Holdings Plc dominate the market for semiconductors in tablets and smartphones. And Siemens abandoned a profitability goal and began an overhaul of its structure as performance slumped in its infrastructure and industry units.

“Digitalization and software has an increasing role in what were traditional hardware markets,” said Siemens CEO Josef Kaeser, who is also in Davos. “That means there are opportunities in lots of sectors for others coming into our area.”

For Siemens, those challenges include staying ahead of software-focused firms that are pushing into industries like energy equipment. Google Inc. this month announced a $3.2 billion acquisition of energy-management startup Nest Labs, one of a welter of companies offering tools for “smart grid” electrical systems. Siemens is also competing with companies like Samsung Electronics Co. in the market for medical devices.

Energy Software

Among other measures, Siemens has tried to pre-empt the possibility of seeing its business model disrupted by creating a joint venture with Accenture Plc for energy software and services. It also appointed Jim Hagemann Snabe, who is stepping down as co-CEO of enterprise-software maker SAP AG, to its board in October. Siemens Chairman Gerhard Cromme said Snabe was brought in to improve understanding of new technologies.

Like Google, many companies are turning to takeovers to avoid being disrupted, especially in the telecommunications, media, and technology, or TMT, sectors. They were a rare bright spot for dealmaking last year, with about $561 billion in announced takeovers, up 29 percent from 2012, while overall transactions rose four percent.

The largest deal in those areas, Verizon Communications Inc.’s $130 billion buyout of Vodafone Group Plc’s stake in its wireless unit, reflected the potential of so-called 4G mobile technology. Verizon, the largest U.S. mobile carrier, has said it will use full control to increase investment in 4G service, which can be sold at a premium to users.

Ad Industry

Another major deal, the $30 billion merger of Publicis SA and Omnicom Group Inc. that will create the world’s largest advertising agency, was hatched in part, the companies said, to prevent Silicon Valley firms like Google and Facebook Inc. from displacing the traditional ad industry.

“Tech business models are starting to disrupt a greater portion of the Fortune 500,” said Neil Rimer, a partner at venture capital firm Index Ventures.

Emerging technologies may expand the array of threats to successful companies. 3D printers, which produce complex items using extruded plastic or metal, may reduce demand for some manufactured goods and for deliveries.

United Parcel

Sales in the 3D printing industry will approach $6 billion by 2017, compared with $2.2 billion in 2012, according to consultancy Wohlers Associates, growth that’s prompting United Parcel Service Inc. to offer the service in some of its shops — before customers start buying the printers themselves.

The machines could also threaten suppliers of parts to the automotive and aerospace industries if manufacturers opt to produce the items in-house instead, according to venture capitalists.

The financial industry, too, faces disruption, thanks to new models for payments and lending that cut out traditional providers. For example, China’s Alibaba Group Holding Ltd., the country’s largest e-commerce firm, has begun lending to small and medium-sized businesses, posing a potential future threat to banks. Startups like Britain’s Ltd. are doing the same.

“Innovation is all happening outside of banks,” said Bruce Golden, a partner at Accel Partners. Risk-averse and slow to adopt new technologies, most large financial institutions “don’t have the architectural skills to innovate,” he said.

Money Laundering

Regulation will protect banks’ existing businesses to some extent. China and Denmark have already tightened rules on the Bitcoin virtual currency amid concern over money laundering. In the U.S., politicians including Senators Tom Carper and Tom Coburn have asked regulators to lay out their plans for virtual currencies.

Yet on the whole, vigorous technological competition is making it harder for big firms to innovate, said Reinhard Ploss, CEO of German semiconductor producer Infineon Technologies AG. “When our market was young, it was easy to have an impact with new technologies,” Ploss said. “That’s becoming increasingly difficult.”

The market leader in semiconductors, Intel, is making particular efforts to find a new business model as demand for personal computers shrinks for a third year in a row.

Broadcast Content

To stay ahead, Intel assigned a former Apple Inc. executive to head its New Devices division, which is seeking to develop wearable gadgets and peripherals for smartphones and tablets.

Intel spokesman Chuck Mulloy declined to comment.

The risks even to nimble firms will only grow as the so-called Millennial generation, raised on Facebook and YouTube, enters the workplace and demands better, faster technology, said Marcus Weldon, chief technology officer at Alcatel-Lucent SA.

“We’re at five minutes to midnight because of the evolution of the teenage population into the adult population,” Weldon said. “You’ve got a generation that just thinks how we do things is stupid.”

To contact the reporter on this story: Matthew Campbell in Davos, Switzerland at

Merger Bonanza Hits Finland as Economic Pain Becomes Asset

Merger Bonanza Hits Finland as Economic Pain Becomes Asset

Finland, reeling from a slump in its two main industries, is finding that a weak economy has turned a number of its businesses into attractive acquisition targets.

Competitors from the U.S., Sweden, the U.K. and Japan are circling in to snap up cheap assets in the northernmost euro nation, including a $1.56 billion takeover offer for steelmaker Rautaruukki Oyj (RTRKS) by Sweden’s SSAB. The risk of job cuts brought by the deals is worth it for an economy in need of transformation, according to Mika Maliranta, research director at the Research Institute of the Finnish Economy ETLA.

It’s “an essential part of economic growth in the long term,” Maliranta said. “This is how the economy becomes profitable and competitive, again producing the prerequisites for the creation of new jobs.”

The export-led economy, which has suffered two recessions in four years, is reeling from a structural shift in its main industries — paper makers and the Nokia Oyj-led technology cluster. In September, Microsoft Corp. announced a deal to buy Nokia’s mobile-phone unit after it succumbed to competition in smartphones. Ship-engine maker Waertsilae said this month it ended takeover talks initiated by Rolls-Royce Holdings Plc.

Finance Minister Jutta Urpilainen has warned that the nation faces “historic” challenges as its biggest industries suffer. Prime Minister Jyrki Katainen said last week his government can’t afford stimulus measures as he targets policies designed to bring about an export-based recovery.

Depressed Economy

Finland is in a “depressed” state, Nobel Laureate Paul Krugman said this month during a Nordic tour, blaming the Katainen administration for peddling austerity that has undermined demand. The nation is one of eight in the 18-member euro area that saw its economy contract in both 2012 and 2013, according to the European Commission. The economy will grow 0.8 percent this year and 1.8 percent in 2015, the Finance Ministry forecasts.

The government, which in November hammered out details on a 9 billion-euro ($12.2 billion) plan comprising structural measures to tackle costs from an aging population, welcomed the purchase of Rautaruukki.

“This arrangement ensures production continues in Finland,” Labor Minister Lauri Ihalainen said in a statement. Rautaruukki would have faced a “rocky path,” had it continued independently, he said.

Job Cuts

SSAB offered to buy Rautaruukki for 10.1 billion kronor ($1.56 billion) to cut costs amid falling steel prices and over capacity. The company will be based in Stockholm and target annual cost savings of 1.4 billion kronor within three years.

The companies said they will need to cut about 5 percent of the combined 17,400 jobs over three years. That comes on top of at least 25,000 job cuts by Nokia as it struggled to regain profitability after losing the smartphone battle to Apple Inc. and devices using Google Inc.’s Android platform.

Nokia today reported a loss of 25 million euros in the fourth quarter, compared with a profit of 193 million euros a year earlier, as sales at its network-equipment division fell.

Finland is at least half a decade behind Spain and Portugal in matching pay with productivity as it drops behind southern Europe in boosting exports, ETLA said in August.

Shutting Units

Unemployment rate was 7.9 percent in December, up 1 percentage point from a year earlier, and 137,000 people didn’t even seek work actively last month.

Still, some politicians say it’s far from clear Finland will benefit from the takeover.

The new company is more likely to shut small units and cut jobs in Finland than in Sweden, Risto Kalliorinne, a member of parliament for the Left Alliance, said by e-mail. The local economy in northern Finland will shrivel and Finland lose taxes as the headquarters move to Sweden, he said.

According to Maliranta, the takeovers are a positive sign and will help in the long run.

“For a wealthy nation, multinational ownership is something to strive for,” he said. “In a best-case scenario, the Finnish technological know-how combines with commercial knowledge from elsewhere.”

Finland is also finding new areas of growth as a thriving startup scene fills the gap left by Nokia. In mobile gaming, “Angry Birds” maker Rovio Entertainment Oy and Supercell Oy, which was valued at $3 billion in a deal with Japan’s Softbank Corp, have ascended from obscurity to worldwide fame as online distribution channels lowered barriers of entry.

More than 30,000 new companies have been created each year since 2006, according to Statistics Finland. That’s partly as a result of the thousands of positions eliminated by the country’s technology cornerstone Nokia.

The recent deals “show there are attractive acquisition targets and good companies in Finland,” said Anssi Rantala, chief economist at Aktia Bank Oyj. “The question is — should we be more worried if there was no interest in Finnish companies?”

To contact the reporter on this story: Kasper Viita in Helsinki at

Iceland Traps Hedge Funds in Refusal to Discuss Bank Claims

Iceland Traps Hedge Funds in Refusal to Discuss Bank Claims

More than five years after its biggest banks defaulted on $85 billion, Iceland’s government is refusing to speak to the hedge funds and other creditors that are still trying to get their claims paid out.

The island, which the International Monetary Fund has held up as a model for crisis management, says addressing the needs of bond investors in Kaupthing Bank hf, Glitnir Bank hf and Landsbanki Islands hf isn’t its concern. Instead, Prime Minister Sigmundur D. Gunnlaugsson says he’ll fight to ensure any steps taken protect the nation’s financial markets.

Creditors, represented through winding-up committees, want the government to let them sidestep currency controls that were created back in 2008, when Iceland was hemorrhaging capital. Gunnlaugsson says such a settlement isn’t viable.

“Because these actors have such huge funds in the agreement, or will have, if such an agreement is reached, it will affect whether or not, and when, we can lift the capital controls,” Gunnlaugsson said yesterday in an interview in Reykjavik. “It’s in everyone’s interest to create a situation which would allow for the lifting of controls.”

The winding-up committee of Glitnir, the first of Iceland’s three biggest banks to fail in October 2008, said its efforts to get a reply from the central bank have also fallen on deaf ears.

‘Vast, Complicated’

“We’ve gotten no feedback from the bank on whether, or when, they will respond,” Steinunn Gudbjartsdottir, head of Glitnir’s committee, said in an interview.

Stefan Stefansson, the central bank’s spokesman, said it has held “several meetings,” including with representatives of the winding-up committees and creditors, and is conducting “various probes” on what “kind of solutions will harmonize with stability, as anticipated in law.”

Reaching a settlement is taking time because “the matter is vast and complicated,” Stefansson said.

A number of the creditors waiting to get their money back are hedge funds that had bet on a faster resolution of Iceland’s banks. Firms including Davidson Kempner Capital Management LLC and Taconic Capital Advisors LP bought claims on the lenders’ assets at prices well below face value.

“It seems they’ve been waiting to see whether the government would somehow step into the process,” Gunnlaugsson said. “But this is not a project for the government. The only role of the government here is to assess whether they come up with a solution which allows for the lifting of the controls.”

No Talks

The creditors in question “are just private entities trying to reach an agreement regarding a private debt,” he said. “So the state — the government — has nothing to do with that. We’re not in talks with those creditors and we won’t be. Never were going to be.”

Gunnlaugsson and Finance Minister Bjarni Benediktsson both say that failure to arrive at a viable settlement could prompt the government to amend Iceland’s bankruptcy act. If that happens, all foreign-currency holdings at the failed banks could be converted into kronur before being paid out to creditors.

The banking failure in 2008 triggered Iceland’s worst recession in six decades and forced the government to seek an international bailout to stay afloat. Backing the banks’ liabilities was never an option as claims dwarfed Iceland’s $14 billion gross domestic product, former Finance Minister Steingrimur J. Sigfusson has said.

$4 Billion

Since the crash, the estates of the banks have been run by winding-up committees, which have sought to get about $4 billion through Iceland’s capital controls. In total, the krona restrictions are blocking about $7.2 billion, according to a central bank estimate.

The krona has appreciated 9 percent against the euro over the past 12 months. Still, today’s rate of about 157 per euro compares with an average of 88 in 2007, a year before the island’s financial collapse.

Though the IMF has praised Iceland’s recovery trajectory, the fund warns that failure to end currency restrictions threatens to delay foreign investment needed to bring about a full recovery.

The economy will expand 2.7 percent this year, according to the Organization for Economic Cooperation and Development. That’s better than the average for the OECD-area as a whole, which will grow 2.3 percent, the Paris-based group estimates.

Keeping Krona

Gunnlaugsson said Iceland’s economic recovery is bound up with the krona. The government last year put talks to join the European Union on hold amid growing opposition to joining the bloc.

“When we see that long term stability is in place, then we will be free to make a decision on the future of the currency,” he said. “But for now we’re sticking with the krona and when I say ‘for now’ I’m talking about the foreseeable future.”

He argues that the bank creditors will gain the most if in the end they come up with a plan that allows them to complete settlements without disrupting the island’s economy.

“These investors — most of them came in after the economic collapse — then they could cash in on their investment and in many cases multiply their investment,” he said. That would allow “the government to lift the controls and they could then cash in, so to speak.”

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik at

Brembo Chairman Becomes Billionaire on Brakes for Porsche

Brembo Chairman Becomes Billionaire on Brakes for Porsche

Five different drivers took the checkered flag during the Formula One season last year. The winning cars all had one thing in common — brakes or clutches supplied by Italian auto-parts maker Brembo SpA. (BRE)

The Bergamo-based company established its foothold in the racing world 40 years ago. Since then, Brembo has expanded its customer base by supplying braking systems for car manufacturers such as Ferrari SpA and Porsche SE, a business that has made the company’s chairman, Alberto Bombassei, a billionaire.

“One of Brembo’s greatest fortunes has been the opportunity to enter the world of racing in 1975, when the company started to supply Ferrari in Formula One,” Bombassei said in a Jan. 17 e-mail. “This has enabled Brembo over the years to test on the track new technological solutions, which over time have been transferred to road cars and bikes.”

Demand for the vehicles has helped Brembo’s share price double in the last year. Revenue increased 11 percent to 1.4 billion euros ($1.8 billion) in 2012.

Bombassei controls 53.5 percent of Brembo and has a net worth of $1.2 billion, according to the Bloomberg Billionaires Index. He has never appeared on an international wealth ranking.

The billionaire’s stake in the brake manufacturer is controlled through the family’s holding company, Nuova Fourb Srl, whose shares are held in equal proportion under the names of Bombassei’s two children, according to Italian newspaper Corriere della Sera.

‘Family Business’

The stake is credited to Bombassei because the 73-year-old and his wife still receive the income from 80 percent of the shares. As patriarch and chairman, the billionaire also retains effective control of the family business.

“The fact that Brembo is a family business gives strength to the company,” Bombassei said. “I don’t have plans to reduce my involvement, or to lose control of the company.”

He declined to comment on his net worth.

Brembo was founded by Bombassei’s father, Emilio, and Italo Breda in 1961, when the partners established a workshop making spare parts for vehicles. Their breakthrough came in 1975, when Enzo Ferrari asked the company to equip his F1 racing cars.

Brake Caliber

Five years later, the company developed an aluminum brake caliper that was adopted by manufacturers like Porsche, Mercedes and BMW. It also helped pioneer carbon ceramic discs, which have been a staple of the company since 2002.

“The business is doing well thanks to the company’s focus on high-end road cars, a sector growing three times faster than the auto supplier market in general,” said Monica Bosio, a Milan-based analyst at Banca IMI SpA.

The Bloomberg Billionaires Index takes measure of the world’s wealthiest people based on market and economic changes and Bloomberg News reporting. Each net worth figure is updated every business day at 5:30 p.m. in New York and listed in U.S. dollars.

To contact the reporters on this story: Tom Metcalf in London at; Zohair Siraj in New York at

4 Lessons in Building a Brand; Lessons on How to Build a Successful Brand from Popular Snowboarding Company Neff Headwear

Love it or hate it, your success this year and beyond depends on your ability to shape a brand: your career’s, product’s, department’s, or company’s.
Here are some counterintuitive lessons from a man who built a popular snowboarding brand as a college sophomore, knowing little about his industry, marketing, or business.Shaun Neff, founder and CEO of Neff Headwear, now has his products in 3,500 stores in 40 countries, and his gear is sported on ski slopes and streets, by celebrities from Holly Madison to Lil’ Wayne.
I got a chance to sit down with Neff, to learn how he did it and, more importantly, what we can extract from his success to help us build whatever brands we are working on.
(You can watch the 15-minute interview segment on “The Outthinker: Shaun Neff” here.)
Here are four lessons on building a brand from Shaun Neff:
We hold this fantasy about great entrepreneurs being oracles who somehow recognize and move on new opportunities more quickly than others. But my research for The Way of Innovation showed that they actually make a commitment before the opportunity arises and so are poised to step into it when an opening appears.
Neff knew he wanted to start a brand long before college. He noticed what brands people wore and was fascinated by their power. His drive stemmed not from a calculated market view, but from an internal personal passion. When you choose a pre-existing commitment, it becomes an always-there, always-searching filter through which you scan for opportunities.
What pre-existing commitment are you willing to pursue, regardless of when the market offers you a profitable opportunity to do so?
The term “brand” brings up thoughts of logos, colors, and products. But when I asked Neff what a brand was, he spoke of none of these things. He said a brand is “a loyal fan base.” When you think of a brand as something to be looked at, when you admire it, you turn your back on what really matters: your fan base. Instead, think of your would-be fans: who are they, what are their passions, where do they spend their time?
If you thought of your brand as your fan base, rather than its elements and colors and meanings, what would you do differently?
Shaun said that lots of brands “get stuck in one product: If you are a footwear company, you are always selling footwear. If you are an eyewear company, you’re always in eyewear.” A product-defined brand is inherently limiting. Neff Headgear has top-selling watches, sunglasses, and snowboard gloves. When they think of expanding into a new product they ask two questions: (a) do our retailers know how to sell this and (b) does our “gut” tell us this fits.
If your brand were not defined by your product or category, what would it stand for?
With your pre-existing commitment in your heart and your fan base in mind, find your opening. If one angle doesn’t work, back up and try again, then again, until you find a way through.
Neff started out selling T-shirts. He’d paste stickers on signs, win over local taste-makers, and seek out the coolest snowboard shops. This created a small ecosystem in which his brand started selling. But he wanted to replicate this on a larger scale. For that he needed nationally known snowboarders to wear Neff gear. But he quickly learned that the best snowboarders were prevented by current sponsors from wearing other people’s shirts.
So Shaun studied their contracts one night and realized, “These apparel deals said nothing about the head!” Snowboarders couldn’t wear Neff T-shirts, but they could wear Neff headwear.
Unfortunately, Neff didn’t make headwear. So he went to the local dollar store, bought a stack of beanies, removed their labels, and wrote his last name with a black marker on each one. At the next tournament he convinced several competitors to wear his Neff hat. When two of them stood on the medal podium, “Neff” inscribed prominently over their heads, he knew he had found his opening. “The heavens opened … I am no longer Neff clothing; I’m Neff Headwear.”
Are you stuck pursuing just one “opening”? If so, think of three more you can try this month.

Swiss Raise Bank-Capital Buffer to Cool Property Market

Swiss Raise Bank-Capital Buffer to Cool Property Market

Switzerland is raising the amount of capital banks must hold as a buffer to guard against mortgage writedowns as the country finds itself in the throes of its biggest property boom in two decades.

The government in Bern has agreed to the Swiss National Bank’s request to raise the buffer, to 2 percent from 1 percent of risk-weighted positions secured by residential real estate, according to a statement today. The deadline for banks to comply is June 30.

The SNB’s policy of zero interest rates has kept mortgages cheap, causing residential property prices to climb to a level last reached in 1989, shortly before a slump in values that hurt Switzerland’s economy for years. The government introduced the initial buffer in February and can boost it to as much as 2.5 percent.

“There was a further increase in imbalances on the mortgage and real estate markets,” the SNB said in a separate statement. “In an environment of persistently low interest rates, coupled with banks’ continued appetite for risk, the danger that imbalances will build up even more unless additional countermeasures are taken is considerable.”

No Restrictions

The increase of the buffer aims at making mortgage-lending less attractive, SNB President Thomas Jordan told Swiss public broadcaster SRF in Davos today.

The buffer will most affect Raiffeisen Schweiz and cantonal and regional lenders, according to Andreas Venditti, an analyst at Vontobel in Zurich. He sees “no major impact” on UBS AG and Credit Suisse Group AG, he said in a note to customers.

Raiffeisen “already fulfills these new requirements,” Franz Wuerth, a spokesman for the St. Gallen-based bank, said by telephone. Raiffeisen has granted 140 billion francs ($155 billion) in mortgages and about 75 percent are with private customers, he said. “Mortgages are still our core business and we will continue to seek growth there,” Wuerth said

Zuercher Kantonalbank, the country’s largest state-owned regional bank, also won’t restrict its “already cautious” mortgage policy, according to a statement from the Zurich-based company. The buffer will increase ZKB’s capital requirements by about 0.4 percent, or 250 million francs, it said. The bank had 69 billion francs in mortgage liabilities at the end of June.

Housing Costs

The Swiss Bankers Association said it’s disappointed by today’s decision to increase the buffer.

“The SBA remains convinced that this is not an effective means of controlling property prices: among other considerations, its impact is much too broad and it has not been tested in reality,” lobby group said in a statement.

The decision will increase mortgage interest rates and in turn housing costs, the Swiss association of house owners said in a statement. The organization said that while it understood the need for the measure, it found it regrettable.

Swiss mortgage lending has grown at a faster pace than the economy. Since 2008, mortgages outstanding to Swiss private households have increased 25 percent and apartment prices have risen 27 percent.

Today’s measure was predicted by Bloomberg’s monthly economic survey published earlier this week, in which 71 percent of economists expected the buffer to be raised, and more than half of those predicted an increase before the end of March. The median estimate was for the measure to be boosted to 2 percent.

At its most recent policy review, in December, SNB President Thomas Jordan implied further steps might be imminent. “We recognize that at the moment, the dynamic on the mortgage market hasn’t been tempered enough yet,” he said.

To contact the reporters on this story: Catherine Bosley in Davos, Switzerland at; Carolyn Bandel in Zurich at

Investors Meet ICBC Officials on Concern of Trust Default

Investors Meet ICBC Officials on Concern of Trust Default

Investors in a troubled trust product distributed by Industrial & Commercial Bank of China Ltd. met with the lender’s officials at a private-banking branch in Shanghai, demanding their money amid concern of a default.

Individuals were asked to sink at least 3 million yuan ($496,000) in the 3 billion-yuan Credit Equals Gold No. 1 product amid guarantees that it was “100 percent safe,” said Fang Ping, one of 20 investors who went into the branch. The product, which comes due on Jan. 31, raised funds for a coal mining company that collapsed after its owner was arrested.

“ICBC is taking advantage of their private banking customers,” said Alex Ke, 45, before joining his fellow investors in the meeting. “We’re victims in this. This is a shocking scam.”

ICBC, the trust’s issuer and the government may bail out the product, Time-Weekly reported today. A default would shake investors’ faith in the implicit guarantees offered by trust companies to draw funds from wealthy investors. Assets managed by China’s 67 trusts soared 60 percent to $1.67 trillion in the 12 months ended September even as policy makers sought to curb money flows outside the formal banking system.

China Credit Trust Co., based in Beijing, created the product, which raised funds for Shanxi Zhenfu Energy Group. Wang Zhenning, an ICBC spokesman, declined to comment when contacted by telephone today. Two phone calls to the office of China Credit Trust Board Secretary Wei Qing went unanswered.

Raised Voices

Raised voices were heard periodically from inside the ICBC branch where Fang, Ke and the other investors had been meeting bank officials since around 11:15 a.m. Shanghai time. Credit Equals Goal No. 1, which has a tenure of three years, promised an expected annual return of 10 percent, according to information on China Credit’s website.

“If they don’t settle this by Jan. 31, we’ll meet in Beijing,” Chen, a Shanghai investor aged about 50 who declined to give his full name, said before the meeting. “In Beijing, there’ll be more people. We know that investors from Guangzhou will also gather there for this.”

ICBC and China Credit may each take responsibility for 25 percent of payments for the product, while the government of Shanxi province, where the failed coal miner was based, may take responsibility for the remainder, Guangzhou city-based Time-Weekly reported on its website today.

Bailout Plan

The final version of the bailout plan may only be known next week, according to Guangzhou city-based Time-Weekly, which is owned by Guangdong Provincial Publishing Group.

ICBC had rejected calls to bail out the product it distributed for China Credit, a bank official with knowledge of the matter said Jan. 17. Shanxi Zhenfu’s owner, Wang Pingyan, was arrested in 2012 for taking deposits illegally, according to the Shanghai Securities News.

ICBC won’t assume primary responsibility for the product, according to the executive, who asked not be identified while negotiations continue.

“It’s a problem with the sales and marketing of these products,” Liu Mingkang, former head of the China Banking Regulatory Commission, said in an interview from the World Economic Forum in Davos, Switzerland. “They should have made clear that the return rate is not guaranteed and what kind of risks are involved. There shouldn’t be an ironclad guarantee at all.” China’s banking watchdog regulates trusts.

A project backed by the product obtained a new mining license, the Securities Times reported yesterday, citing a statement from China Credit. Another coal mine project has won support from local authorities and the community, it said. Obtaining licenses will permit the mines to start operating and produce coal for sale.

Biggest Shareholder

State-owned People’s Insurance Company (Group) of China Ltd. is China Credit’s largest shareholder with a 32.9 percent stake, according to the credit firm’s website.

China should allow defaults of some wealth-management and trust products to reduce incentives for financial institutions to sell risky products and maintain stability in the financial system, Ma Jun, Deutsche Bank AG’s chief China economist, wrote in a report this week.

Trusts, along with banks’ wealth-management products and private lending among individuals, make up China’s shadow-banking system, which JPMorgan Chase & Co. estimated in May to be worth $6 trillion. The figure is equivalent to 69 percent of the nation’s 2012 gross domestic product.

Shadow Banking

China’s trust industry is now larger than the insurance and mutual fund sectors, McKinsey & Co. and Ping An Trust Co. wrote in a report in November.

The State Council, China’s Cabinet, has taken steps to rein in shadow lending, National Development and Reform Commission spokesman Li Pumin said Jan. 22, according to a briefing transcript posted on, a government-run website. The commission will actively participate and promote the measures, Li said, without elaborating.

The State Council imposed new controls on shadow banking that include a ban on using third parties to evade restrictions on lending directly to certain borrowers, three people familiar with the matter said this month.

To contact Bloomberg News staff for this story: Aipeng Soo in Beijing at; Alexandra Ho in Shanghai at

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