As M&A business cools, banks warm to activist investors

As M&A business cools, banks warm to activist investors

Fri, Jan 24 2014

By Jessica Toonkel, Olivia Oran and Soyoung Kim

NEW YORK (Reuters) – Corporate raiders, long scorned by Wall Street, are gaining new credibility as activist investors, to the point that some investment banks are eager to bestow on them a new title: valued customer.

Big Wall Street banks like Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) are still content to defend corporate America against investors like Carl Icahn and Dan Loeb, who take large stakes in companies with the hopes of effecting such changes as spinning off a division, cutting costs or ousting management.

Protecting the corporate castle is profitable work, part of nearly $70 billion in corporate fees generated by investment banks annually, and big banks fear upsetting their best clients.

Smaller investment banks, though, see a new source of revenue: Working with investors on one corporate campaign could help them win future assignments from another company, which may seek defensive services from banks familiar with the inner workings of activists.

Getting involved in a merger-and-acquisition transaction is also opportune if the target company ultimately pursues a sale of itself under investor pressure.

That’s a potentially attractive proposition for an industry still grappling with slow dealmaking activity in the wake of the financial crisis. U.S. M&A fees last year were still down 27 percent from 2007, at $15.9 billion, according to data from Thomson Reuters and Freedman & Co.

“I keep getting calls from people who want to be in this space. Bankers are trying to figure out ‘how can I charge for working with activists?'” said Steve Wolosky at Olshan Frome Wolosky LLP, a top lawyer for activist investors such as Starboard Value LP.

“Everyone is expecting the big banks to start doing this … the answer as to when is ‘follow the money,'” said a banker at a large firm that has discussed working with activists.

“It’s not that different from what happened with the private equity firms in the 1980s. No one wanted to work with the ‘barbarians’ until they realized it was very lucrative,” he added, asking not to be named because he was not authorized to speak with the media.

Boutique banks including Houlihan Lokey, Moelis & Co and Blackstone Group LP’s (BX.N: Quote, Profile,Research, Stock Buzz) advisory group have worked with investors such as Barington Capital, Starboard and Pershing Square Capital on their activist campaigns.

Evercore Partners Inc (EVR.N: Quote, Profile, Research, Stock Buzz) and Jefferies LLC are also keeping a close eye on the trend, several bankers said.

Activist investors have become more respectable in recent years after a series of campaigns that brought about changes seen as instrumental to companies’ success.

Loeb, for instance, made a handsome profit for himself and his investors from his two-year crusade to increase Yahoo Inc’s (YHOO.O: Quote, Profile, Research, Stock Buzz) value. The shares, which were around $13 before got involved, now trade near $40. He was also instrumental in naming former Google Inc (GOOG.O: Quote, Profile, Research, Stock Buzz) executive Marissa Mayer as Yahoo’s chief executive officer.

On Wednesday alone, Icahn urged e-commerce giant eBay (EBAY.O: Quote, Profile, Research, Stock Buzz) to spin off its PayPal arm and renewed an attack on Apple Inc (AAPL.O: Quote, Profile, Research, Stock Buzz) to return cash to shareholders. Loeb revealed a major stake in Dow Chemical Co (DOW.N: Quote,Profile, Research, Stock Buzz) and urged the largest U.S. chemical maker to spin off its petrochemical unit.

The number of activist campaigns against U.S. corporations has increased 20 percent over the last few years, according to FactSet Shark Watch, from 198 in 2010 to 236 last year.

While large activist firms mostly have the team and reputation to take on a fight without outside aid, other activists hire Wall Street advisors to render campaigns more believable, to perform financial analysis and sometimes to find potential buyers for the target company.

ADDING HEFT

For smaller or new activist investors, enlisting a bank helps to “show they are serious because they are paying the bank a significant fee to do the work and use their name,” said Gregg Feinstein, head of the M&A group at Houlihan Lokey.

Houlihan, which also defends companies against activist campaigns, represented its first activist publicly in 2011 when it assisted Orange Capital in its campaign against Australian REIT Charter Hall Office Management.

Orange succeeded in its push, which included the sale of its U.S. portfolio. Houlihan is now helping Barington Capital to persuade Darden Restaurants Inc (DRI.N: Quote, Profile, Research, Stock Buzz) to break up into two separate companies and to spin off its real estate.

Moelis advised Starboard Value during the hedge fund’s push for Smithfield Foods Inc to break itself up rather than sell to Shanghui International Holdings Ltd.

Blackstone will work with corporate clients as well as activists, including Pershing Square, the hedge fund founded by William Ackman. The bank helped Ackman when the billionaire invested in Canadian Pacific Railway Ltd (CP.TO: Quote, Profile, Research, Stock Buzz).

Some bankers work with activists because they are attracted by the opportunities to build relationships with investors, who often manage to secure board seats at major corporations.

“Many banks use the activist product as a means toward securing future mandates from a corporate client, including takeover defense or ultimately the sale of the company,” said Tom Stoddard, a senior managing director at Blackstone.

Banks working with activists generally charge a flat fee, a percentage of the gains the activist receives if the campaign is successful, and an additional fee if the activist publicly discloses the bank’s name, according to several people familiar with these arrangements.

The flat fees can range anywhere from $250,000 to $1 million, and the percentage of investor gains bankers earn can be anywhere from one to 5 percent, these sources said, asking not to be named because the information is not public.

It is hard to generalize fees because often caps and credits are associated with these structures, one of the sources added.

Banks fending off a high-profile attack can make from a few hundred thousand dollars to $2 million in monthly flat fees, on top of a success fee as high as $7 million to $8 million, according to one industry banker.

“People are willing to pay higher fees if you fight people like Carl Icahn than if you are fighting a new kid on the block,” the banker said.

Such fees are only a tiny fraction of what Wall Street banks generate from deals ranging from capital market transactions to mergers and acquisitions.

Computer maker Dell Inc’s $25 billion buyout by founder Michael Dell last year, for example, created $458 million worth of investment banking fees in 2013, according to Thomson Reuters data.

That reliance on corporations for revenue explains why it’s still rare that banks work with activists.

But as investors become more common in the boardroom and the amount of money activists make grows, more banks may change their view, said Lyle Ayes, managing director and head of shareholder activism practice at New York-based Evercore

(EVR.N: Quote, Profile, Research, Stock Buzz).

When Evercore brought on Ayes early last year, one of his first mandates was to help decide if the firm should represent activists.

In the end, Evercore decided against the idea. “It’s too close to home for too many of our important clients.” Still, he added: “Evercore asked the question before I arrived, they asked when I arrived and I suspect they will ask it again.”

Starbucks is getting ready to let you order coffee before you get to the store

Starbucks is getting ready to let you order coffee before you get to the store

By Roberto A. Ferdman @robferdman January 24, 2014

For its next trick, Starbucks may have your order ready before you enter the store.

After reporting strong fourth-quarter earnings yesterday, CEO Howard Schultz confirmed plans to allow customers to place orders through Starbucks’s mobile app and pick them up later. “I can tell you that we understand the value that that will create for our customer base,” Schultz said in reply to a question on the company’sconference call. He added, “You can assume that over time we will lead in this area.”

Starbucks first mentioned “mobile ordering” to investors in 2012, but didn’t elaborate on its intentions.

Pre-ordering would make sense for Starbucks as the coffee giant increasingly focuses on food, which is its fastest-growing segment. ”Everything we’ve seen so far encourages us that we’re just beginning to go after what is a big, big food opportunity,” CFO Troy Alstead said yesterday. Food is more complicated to prepare than coffee and can slow down service in Starbucks stores. “We’re definitely looking to increase the speed of our lines,” spokeswoman Linda Mills told Quartz today.

Some restaurant chains, like Chipotle, already allow mobile pre-ordering. Starbucks’s big advantage in this area would be that so many customers—over 10 million—already use its mobile app to pay for their orders.

But there are plenty of complications to consider. Will the company prioritize pre-orders, or in-store orders? And if pre-ordering takes off, could that diminish impulse purchases of its pastries, packaged food, and other goods? The company wants to make buying coffee and food as easy and fast as possible, but not if it comes at the expense of sales. Which is probably why Starbucks is being so deliberate about the program’s careful development.

Most Germans don’t buy their homes, they rent. Here’s why

Most Germans don’t buy their homes, they rent. Here’s why

By Matt Phillips @MatthewPhillips January 23, 2014

It’s just a fact. Many Germans can’t be bothered to buy a house.

The country’s homeownership rate ranks among the lowest in the developed world, and nearly dead last in Europe, though the Swiss rent even more. Here are comparative data from 2004, the last time the OECD updated its numbers. (Fresh comparisons are tough to find, as some countries only publish homeownership rates every few years or so.)

​And though those data are old, we know Germany’s homeownership rate remains quite low. It was 43% in 2013.

This may seem strange. Isn’t home ownership a crucial cog to any healthy economy? Well, as Germany shows—and Gershwin wrote—it ain’t necessarily so.

In Spain, around 80% of people live in owner-occupied housing. (Yay!) But unemployment is nearly 27%, thanks to the burst of a giant housing bubble. (Ooof.)

Only 43% own their home in Germany, where unemployment is 5.2%.

Of course, none of this actually explains why Germans tend to rent so much. Turns out, Germany’s rental-heavy real-estate market goes all the way back to a bit of extremely unpleasant business in the late 1930s and 1940s.

The war

By the time of Germany’s unconditional surrender in May 1945, 20% of Germany’s housing stock was rubble. Some 2.25 million homes were gone. Another 2 million were damaged. A 1946 census showed an additional 5.5 million housing units were needed in what would ultimately become West Germany.

Germany’s housing wasn’t the only thing in tatters. The economy was a heap. Financing was nil and the currency was virtually worthless. (People bartered.) If Germans were going to have places to live, some sort of government program was the only way to build them.

And don’t forget, the political situation in post-war Germany was still quite tense. Leaders worried about a re-radicalization of the populace, perhaps even a comeback for fascism. Communism loomed as an even larger threat, with so much unemployment.

West Germany’s first housing minister—a former Wehrmacht man by the name ofEberhard Wildermuth—once noted that ”the number of communist voters in European countries stands in inverse proportion to the number of housing units per thousand inhabitants.”

A housing program would simultaneously put people back to work and reduce the stress of the housing crunch. Because of such political worries—as well as genuine, widespread need—West Germany designed its housing policy to benefit as broad a chunk of the population as possible.

The rise of renting

Soon after West Germany was established in 1949, the government pushed throughits first housing law. The law was designed to boost construction of houses which, “in terms of their fittings, size and rent are intended and suitable for the broad population.”

It worked. Home-building boomed, thanks to a combination of direct subsidies and generous tax exemptions available to public, non-profit and private entities. West Germany chopped its housing shortage in half by 1956. By 1962, the shortage was about 658,000. The vast majority of new housing units were rentals. Why? Because there was little demand from potential buyers. The German mortgage market was incredibly weak and banks required borrowers to plunk down large down payments. Few Germans had enough money.

​Why Germany?

It’s worth noting that Germany wasn’t the only country with a housing crisis after World War II. Britain had similar issues. And its government also undertook large-scale spending to promote housing. Yet the British didn’t remain renters. The UK homeownership rate is around 66%, much higher than Germany’s.

​

Why? The answer seems to be that Germans kept renting because, in Germany, rental housing is kind of nice.

Economists think German housing policy struck a much better balance between government involvement and private investment than in many other countries. For instance, in the UK, when the government gave housing subsidies to encourage the building of homes after the war, only public-sector entities, local governments, and non-profit developers were eligible for them. That effectively squeezed the private sector out of the rental market. In Germany, “the role of public policy was to follow a third way that involved striking a sensitive balance between ‘letting the market rip’ in an uncontrolled manner and strangling it off by heavy-handed intervention,” wrote economist Jim Kemeny, of the German approach to housing policy.

Britain also imposed stringent rent and construction cost caps on developers of public housing. Under those constraints, housing quality suffered. Over time, the difference between publicly and privately financed construction became so glaring that rental housing—which was largely publicly financed—acquired a stigma. In other words, it became housing for poor people.

Germany also loosened regulation of rental caps sooner than many other countries,according to economist Michael Voightländer, who has written extensively about Germany’s housing market. By contrast in the UK, harsher regulation on rented housing stretched well into the 1980s, pushing landlords to cut back on maintenance and driving the quality of housing down still further.

Cheap rents

​Of course, all that policy-design detail is interesting. But there might be a simpler explanation for the popularity of renting in Germany. For one thing, it’s relatively cheap. (Germany is listed as “Deu” above.)

Renter-friendly regulations

​Why is renting cheap in Germany? Well, even though the country’s policies might have been slightly more balanced than in other countries, its rental market is still robustly regulated, and the regulations are quite favorable to renters. (Given the strong political constituency renters represent in Germany, this shouldn’t be too surprising.) For example, German law allows state governments to cap rent increases at no more than 15% over a three-year period.

Tax treatment

There’s another pretty simple reason Germans are less likely to own houses. The government doesn’t encourage it. Unlike high-homeownership countries like Spain, Ireland and the US, Germany doesn’t let homeowners deduct mortgage-interest payments from their taxes. (There’s more on the structure of European tax systems here.) Without that deduction, the benefits of owning and renting are more evenly balanced. “Both homeowners and landlords in Germany are barely subsidized,” wrote Voightländer in a paper on low homeownership rates in Germany.

Those regulations, a solid supply of rental housing, and the fact that German property prices historically rise very slowly —that’s a whole other story—mean German rents don’t rise very fast. And because one of the main reasons to buy a home is to hedge against rising rents, the tendency of German rents to rise slowly results in fewer homebuyers and a lower homeownership rate.

A number of other elements contribute too, but it’s tough to disentangle what is cause and what is effect. For example, German banks are quite risk-averse, making mortgages harder and more expensive to get. Others argue that the supply of rental housing might be higher in Germany because of its decentralized, regional approach to planning. (The UK is much more centralized.)

Is Germany just better at housing?

Not necessarily. It’s not as if Germans spend a lot less of their pay on housing. The data below show Germans actually pay more for housing—as a percentage of disposable income—than housing-crazed countries like the US, Spain and Ireland.

1

​But given the economic spasms suffered in house-crazy economies such as the United States, Spain and Ireland in recent years, the German approach to housing looks pretty good right now—even if, before the crash, the low homeownership rate was seen as an albatross around Germany’s economic neck.

And German people clearly like how their system of housing works. According to the OECD, more than 93% of German respondents tell pollsters they’re satisfied with their current housing situation. That’s one of the highest rates of any nation the rich-country think tank surveyed. Then again, the Irish and the Spanish—where homeownership is much more widely spread—seem just as happy.

UBS at Davos: ‘We’ve swapped global imbalances for domestic disequilibrium’; Your guide to EM compartmentalisation

UBS at Davos: ‘We’ve swapped global imbalances for domestic disequilibrium’

FT Alphaville | Jan 24 09:01 | 2 comments | Share

According to a white paper released by UBS for this week’s World Economic Forum in Davos, the world economy remains as unbalanced today as it has been over the past quarter century – with big implications for the global economic recovery.

The authors argue that the adjustment of current account imbalances in the world economy was mostly a function of recession, not shifts in competitiveness. Large current account deficit countries restored external equilibrium at the cost of domestic disequilibrium, so output plummeted and unemployment soared.

One of the consequences of shifting imbalances is changes in capital flows and hence financing conditions, particularly for sovereigns. A related point concerns the role of central banks. For instance, a different buyer of US Treasuries had to step in, which during quantitative easing has been the Federal Reserve.

A second consequence is that the unwinding of external imbalances and the ensuing sluggish global recovery have taken their toll on global trade.

One of the authors of the white paper, Stephane Deo, global head of asset allocation and macro strategy at UBS Investment Bank, will be joining FT Alphaville at 11am on Friday for a session of Markets Live.

Deo’s bullet points:

Over the past five years there has been a clear inverse relationship between changes in domestic demand and changes in the external balance.

With the advent of smaller US external deficits, the rise in foreign official holdings of Treasuries (from $600bn in 2000 to $4,000bn in 2013) has slowed and may even be reversing (with a decline of roughly $125bnbetween March and August 2013).

The trade intensity of the global recovery has fallen. Prior to the crisis, a 1 percentage point increase in global GDP growth boosted world trade by roughly 2 percentage points. In the past five years, the trade multiplier has collapsed. Trade is growing in line with sluggish world GDP growth.

With domestic demand still skewed towards the US, the UBS paper concludes conclude that:

The US is still the sole major economic region capable of driving up its rate of growth via increased domestic demand.

If the US is to restore full employment, it will have to do so without much help from the rest of the world.

Given that the US economy does not have the same vitality that it did before the crisis, the exported recoveries elsewhere will remain correspondingly weaker for longer.

Your guide to EM compartmentalisation

Izabella Kaminska

| Jan 24 16:50 | 4 comments | Share

It’s been a tough day for EM. But just in case you were tempted to bundle the whole region together to make a sweeping generalisation about future performance, it’s worth reading through the following note from Capital Economics on Friday.

As they explain, EM is no longer the place it used to be. There are clear divisions emerging, and understanding which countries influence into each other more directly than others matters now more than ever:

Market turbulence in Turkey, Ukraine and now Argentina has led to talk of a new crisis sweeping emerging markets (EMs). But the emerging world has become a far more diverse place over the past decade. The real lesson from recent events is that the need for investors to discriminate between individual EMs has never been greater.

In the past, financial crises have indeed tended to sweep from one EM to another, primarily because they shared many of the same vulnerabilities. The financial crisis that began in Thailand in 1997 swept through the rest of Asia, hit Russia and also caused a wobble in parts of Latin America. Today, the emerging world is a very different place.

Readers wanting to know more might like to ask about our Emerging Markets services. But at the risk of generalising, there are perhaps five separate groups among the 56 EMs that we now cover.

1) The first is those countries where serial mismanagement by the authorities is now posing a risk to economic stability. Of the countries that have been in the spotlight recently, Argentina and Ukraine fall into this category. So too does Venezuela.

2) The second is those countries that have lived beyond their means and that now face a period of weaker growth. These countries are generally the ones that are most vulnerable to Fed tapering and the shift towards tighter global monetary conditions over the next couple of years, Turkey falls into this category, but so too does South Africa, parts of South East Asia and some countries in Latin America (such as Chile and Peru).

3) The third group is those where the legacy of previous booms continues to cloud the outlook. These are mainly in Emerging Europe, where a combination of the hangover from last decade’s credit bubble and strong financial ties to the euro-zone means that banking sectors are still fragile.Hungary stands out in this regard, but so too does Romania.The big risk for these EMs is a re-escalation of financial stress in the euro-zone.

4) The fourth (and by far the largest) grouping is of countries facing domestic structural problems, with the BRICs being the most important in this regard. Their prospects will be shaped by the extent to which policymakers implement economic reform, rather than events in Europe or the actions of the Fed.

5) The fifth and final group of countries is those where the outlook is brightening. This includes Korea (where the improving performance of key export markets should pull up growth), the Philippines (where economic reforms should lift growth) and Mexico(which should benefit from both economic reform and faster growth in export markets).

So there you have it. Don’t go mixing your Group 1 crisis with a Group 5 crisis.

Upscale Shaving: Unilever Bets More Men Will Spend Big

Upscale Shaving: Unilever Bets More Men Will Spend Big

By Kurt Soller January 23, 2014

How much is a great shave worth? If you visit one of Manhattan’s high-end Fellow Barbers, the answer’s $40. Dove Men+Care is hoping guys will spend even more. This January the Unilever (UL) brand introduced its Expert Shave, a three-step, five-product regimen promising to eliminate stubble. It has a steep buy-in: $21.99 for one of two preshave options—an exfoliator to fight ingrown hair or a softening oil—and $21.99 or $25.99 for shaving cream for either normal or drier skin, plus $25.99 for a postshave balm the company claims repairs skin while being “intense.” All told, it’s about $70.

“Fifty percent of guys don’t like shaving because of irritation,” says Rob Candelino, Unilever’s vice president for marketing. For this group, the company launched more basic Dove Men+Care face-moisturizing and shaving products last March, with prices under $8. It sold well, so executives decided to upgrade the concept. “With our mass-market stuff, 10¢ can make a lot of difference,” Candelino says. “But when competing with products sold at department stores, we’re less interested in the minutiae of a dollar.” That’s because the majority of potential customers will already be using equally expensive competitors such as the $19 Ultimate Brushless Shave Cream by Kiehl’s, owned by L’Oréal (LRLCY) since 2000, or the $25 lavender-scented lather fromProcter & Gamble’s (PG) Art of Shaving line. Unlike these offerings, the Expert Shave items will be sold primarily at mainstream retailers such as Target (TGT), where curious men can stumble upon them while checking off their shopping lists of deodorant, toilet paper, and Doritos.

Last year, market research firm NPD Group found that sales of “prestige” men’s skin care (which doesn’t technically include Dove Men+Care’s line, but is the closest category comparison in terms of price and premium ingredients) jumped 3 percent, to $70 million, according to analyst Karen Grant. “The younger generation is more accustomed to buying these products,” she says. “So we expect it to continue growing as more men come of age.”

Many companies are getting in on the game. In November, Tom Ford introduced a dozen face products for men, including a $25 lip balm. L’Oréal in September bought Baxter of California, a niche luxury skin-care line, in an attempt to expand in e-commerce. One of the founders of eyewear startup Warby Parker co-created Harry’s, an Internet company that mails shaving cream and $40 monogrammable aluminum razors. And GQ magazine plans to profit from $75 shave-and-haircuts at its new barbershop in Brooklyn’s Barclays Center. (P&G’s Gillette is going the opposite direction, introducing $7.97 men’s body razors this February for shaving below the neck.)

To sell the new shaving routine, Unilever used money that might have gone toward conventional advertising to produce sleek in-store displays telling men to “think beyond your razor” and offering tester bottles. These displays also highlight the line’s packaging, which is conveniently mirrored. Because a man has no better argument for pampering himself than a good hard look at his own scruffy face.

SEC auditor ban could hit US companies in China

January 23, 2014 7:07 pm

SEC auditor ban could hit US companies in China

By Gina Chon in Washington

US public companies operating in China could be hit by a ruling that bans the Chinese units of the Big Four global auditing firms from working on US-listed companies for six months.

The decision by a US Securities and Exchange Commission judge on Wednesday may also give Chinese authorities an incentive to agree to certain co-operation agreements the US has been seeking, such as joint audits.

SEC administrative trial judge Cameron Eliot ruled that the four joint ventures – Ernst & Young Hua Ming, KPMG Huazhen, Deloitte Touche Tohmatsu, and PwC Zhong Tian – had violated the Sarbanes-Oxley Act by refusing to turn over documents of companiesinvestigated for accounting fraud.

The accounting firms are appealing the ruling, which will not go into effect until the case is resolved. “In the meantime, the firms can and will continue to serve all their clients without interruption,” they said.

The auditors attempted to comply with both US and Chinese laws and hand over documents to the SEC, people familiar with the matter said. But a Chinese government directive ordered the firms to send their documents directly to Chinese regulators, who would then pass it on to the SEC, according to a legal brief by the firms. This could have slowed the process.

Chinese companies listed publicly in the US will be the hardest hit by the ruling because many of them use one of the Big Four for all of their audits. But US companies doing business in China could also be affected because the ruling prevents the joint venture accounting firms from “appearing or practising” before the SEC for six months, people familiar with the matter said.

The US Public Company Accounting Oversight Board (PCAOB) rules also require an audit firm to be registered and declared on a firm’s financial statement if it handles more than 20 per cent of a company’s assets or revenue.

That means a public US firm using the Chinese affiliate of one of the Big Four accounting firms for their Chinese business may have to stop using that company if the ruling goes into effect. Specific details on how US companies should handle the matter are being worked out, people familiar with the matter said.

The SEC did not want the issue to affect US multinationals. But the judge’s ruling could have unintended consequences since the US companies would probably be better examined in China by a Big Four joint venture than a local Chinese firm. The decision could also drive other Chinese companies seeking to go public to avoid US exchanges.

The SEC and PCAOB declined to comment.

The ruling is part of a longstanding dispute between regulators in the US and China over access to documents of Chinese companies listed in the US, which now total more than 100.

The Big Four accounting firms had refused to turn over documents to the SEC, saying it would violate Chinese law. Last May, the PCAOB, the China Securities Regulatory Commission, and the Chinese Ministry of Finance agreed to co-operate on the exchange of documents related to investigations in either country.

Afterwards, the SEC had received some but not all of the documents it was seeking from the Big Four joint ventures, people familiar with the matter said. Therefore, the SEC had sought a ruling from a judge to obtain the rest of the documents.

“The Division is gratified by the [Administrative Law Judge’s] decision which upholds the commission’s authority to obtain essential records from audit firms registered in the US even when they are located overseas,” said Matthew Solomon, the SEC enforcement division’s chief litigation counsel. “These records are critical to our ability to investigate potential securities law violations and protect investors.

The ruling could provide incentives for China and the US to agree to other co-operation initiatives. The US has been seeking an agreement with Chinese authorities to conduct joint inspections of audit firms in China registered with the PCAOB, in addition to auditing Chinese companies listed on US exchanges.

Cash hoarders are unlikely to ride to the rescue

January 24, 2014 7:46 pm

Cash hoarders are unlikely to ride to the rescue

By Brooke Masters

Consumers are not the only ones sitting on their hands at the moment. Research from Deloitte shows that the 963 non-financial groups in the Standard & Poor’s 1200 Global index have amassed a $2.8tn gross cash pile despite calls from politicians for corporate investment to stimulate economic growth.

But business executives do not appear to be rallying to the cause. In the US, where a growing economy might be expected to prompt increased investment, capital expenditure by non-financial companies in the S&P 500 index is forecast to rise just1.2 per cent in the 12 months to October, according to Factset, the data group.

Corporate leaders wandering around Davos for the World Economic Forum reinforced that view. Zhang Xian, chief executive of Soho China, a Chinese property developer, said of the Rmb11bn ($1.8bn) on its balance sheet: “I am simply sitting tight on the cash.”

In some cases groups may be being sensible. The cash is not evenly spread – the data show that 200 companies are holding $2.2tn, or 71 per cent of the cash. Many of the others, particularly in Europe, are highly indebted. The net cash pile for the broader group is nowhere near as out of whack with historical norms as the gross numbers.

For indebted companies, hiking capital expenditure just as interest rates look likely to rise may not be the best choice. And energy groups and miners are famous for overspending during boom times, only to see profits fall with prices and demand. Shareholders are rightly asking for caution from these sectors given the uncertainty in emerging markets.

But fund managers are growing irritated with the rest. A record 58 per cent of those who responded to a closely watched Bank of America Merrill Lynch survey released this week said they wanted more capex spending.

In some ways this looks like a failure of nerve. When Deloitte looked closely at the hoarders versus those who have been spending, it became clear that more experienced chief executives had been more willing to take a risk and spend. The chiefs of hoarding companies have been in post on average nearly three years less than their more active peers.

The researchers argue that leaders who successfully steered their companies through the downturn are more comfortable taking a risk on the nascent recovery.

Author and asset manager Andrew Smithers blames the caution on executive pay structures. Tying bonuses to share prices, or short-term return on equity, encourages executives to maximise current profits rather than investing for future growth, he says. If he is right, long-tenured chief executives may be more willing to spend because they have run out of easy ways to keep profits up and are worried about their legacies.

There is a further wrinkle. In the US just six tech companies hold a quarter of the big corporates’ cash, and that is unlikely to change soon. Companies such as Apple andGoogle are in high-margin, winner-takes-all businesses that generate enormous free cash flow, and their capital needs are generally low. It is hard to imagine them investing heavily in new plant or making acquisitions large enough to dent their growing cash piles.

Politicians who dream that the corporate sector will ride to the rescue and spur recovery are likely to be disappointed. If corporates do not spend more, governments may have to.

Thailand could lose one million tourists in political turmoil

Published On: Sat, Jan 25th, 2014

Tourism | By Daniel Lorenzzo

Thailand could lose one million tourists in political turmoil

The deepening political turmoil in Thailand, along with a political impasse that may not be resolved soon, will inevitably affect the numbers of inbound tourists, as visits by one million overseas travelers could be lost if the protest prolong until mid-2014, according to a leading economic think tank.

Kasikorn Research Centre (KResearch) said the tourism industry this year still has bright prospects as business could grow if the political turmoil ends soon.

KResearch said 29 million foreign tourists were forecasted to visit the country this year, an 8.5 per cent increase from the previous year and could generate more than Bt1.4 trillion in income, as the European economy was picking up and China has relaxed its rules and regulations concerning the tourism business.

If the demonstration dragged into mid 2014, Thailand could lose one million tourists

The ASEAN Ecomomic Community (AEC) set to be established by 2015 and new low cost airlines have facilitated tourists visiting Thailand, KResearch said.

However, the ongoing political crisis which led to the invocation of the Emergency Decree on January 22 could suppress the growth of tourism business.

KResearch said that if the protest prolonged to the Q1, the numbers of foreign tourists would dwindle by 500,000 to Bt28.5 million tourists, generating Bt1.38 trillion, Bt20 billion lower than targeted.

If the demonstration dragged into mid 2014, Thailand could lose one million tourists, down to 28 million, and the income from tourism business would stand at Bt1.35 trillion or a Bt50 billion loss from last year.

Japan calls off all tours to Thailand

The decision to impose an emergency decree to manage the spreading and intensifying anti-government protests in Bangkok has led to cancellations of all Japanese tours to Thailand, according to Anake Srishevachart, president of the Thai-Japan Tourist Association.To foreign tourists, the emergency decree is a sign of a possible outbreak of violence between the government’s foes and its supporters, and with security forces.

Last year, 1.4 million Japanese tourists visited Thailand. They spent an average of Bt20,000-Bt30,000 per person and stayed in Thailand for an average of about five days on each trip. Thus the cancellation of Japanese tours to Thailand will likely be a big blow to the revenue of the tourism and service sectors, especially during the current high season.

nding corporate America’s investment drought; Capital expenditure relative to sales is at a 22-year low. CEOs must start to put record cash holdings to work

January 23, 2014 6:13 pm

Ending corporate America’s investment drought

CEOs must start to put record cash holdings to work

If 2014 is the year the US economy finally picks up speed, it ought to be the moment companies start investing. US non-financial companies are sitting on record levels of cash – almost $1.5tn. Alas, there is scant sign that chief executives are preparing to put their balance sheets to better use. The latest survey of non-financial companies in the S&P 500 index shows they are expected to boost capital expenditure by just 1.3 per cent for the year ending in June, according to Factset, a data company. This hardly looks like a vote of confidence in the US recovery. Unless companies show signs of stepping up their investments, there will be a question mark over its sustainability.

One piece of good news is that investors are increasingly demanding that chief executives put their cash to work. Until recently the pressure went the other way. Investors demanded share buybacks and companies complied. But the continued rise in US equity prices has made buybacks increasingly expensive. And investors, at least, appear to be regaining their animal spirits. In a Bank of America Merrill Lynch survey published on Tuesday, 58 per cent said they wanted companies to prioritise capital expenditure over other uses of cash flow, the highest number since the survey began in 2001. Their next step should be to punish risk-averse bosses by shifting money to more ambitious companies.

Washington should also do its part by showing it is serious about cleaning up the US corporate tax system. A large share of the non-financial cash mountain is held offshore by just five US tech companies – Cisco, Apple, Google, Oracle and Qualcomm. At $150bn, Apple’s cash reserves alone account for a 10th of the total. And a large share of the cash that chief executives have been returning to shareholders has been raised through the proceeds of debt in the domestic markets. This is tax arbitrage at its worst. US repatriated earnings are taxed at 35 per cent – the difference between what they pay abroad and at home, which is close to the highest headline rate in the world. That needs to change. Washington also needs to get rid of its generous tax subsidies on debt interest.

Third, US companies may be held back by fear of a continuing lack of demand in the economy. There is precious little they can do about this on their own. Paying employees more would help. So too would a rise in the federal minimum wage, which is near historic lows in real terms. But these will only assist at the margins. A better fiscal stance from Washington that took advantage of low borrowing costs to upgrade US infrastructure would also help. Politics makes that unlikely. A more plausible solution comes from John Delaney, a centrist Democrat from Maryland, who has submitted a bill that would give companies a partial tax holiday on any repatriated earnings they put into infrastructure bonds. Such imagination is in short supply in Washington. It should be rewarded.

Ultimately, there is no single fix for what has become a prolonged corporate investment strike. The remedies are manifold. But investors could do more to alter the misaligned incentives facing bosses. Remuneration based on stock price performance rewards chief executives who squeeze their companies for short-term returns. These must be rejigged. And bosses themselves must show more leadership. The problem is not unique to the US. Companies around the world held almost $7tn of cash and equivalents at the end of 2013 – more than twice the level of 10 years ago – according to Thomson Reuters. Capital expenditure relative to sales is at a 22-year low. The moment is long past due to ask why. Everyone, including investors and governments, will need to pitch in to reverse this trend.

Google Pushes Back Against Data Localization

JANUARY 24, 2014, 6:28 PM  2 Comments

Google Pushes Back Against Data Localization

By CLAIRE CAIN MILLER

The big tech companies have put forth a united front when it comes to pushing back against the government after revelations of mass surveillance. But their cooperation goes only so far.

Microsoft this week suggested that it would deepen its existing efforts to allow customers to store their data near them and outside the United States. Google, for its part, has been fighting this notion of so-called data localization.

“If data localization and other efforts are successful, then what we will face is the effective Balkanization of the Internet and the creation of a ‘splinternet’ broken up into smaller national and regional pieces, with barriers around each of the splintered Internets to replace the global Internet we know today,” Richard Salgado, Google’s director of law enforcement and information security, told a congressional panel in November.

Data crisscrosses the globe among data centers, and companies often store redundant copies of data in different places in case of natural disaster or technical failure. In most cases, companies cannot even pinpoint precisely where certain data is located.

At the same time, the United States government is tapping the fiber-optic network that connects data centers worldwide, according to leaked documents. So even if data is stored outside the United States, it could be intercepted during its travels.

Still, Microsoft and other tech companies are trying to prevent foreign customers from switching to services outside the United States. In the next three years, the cloud computing industry could lose $180 billion, 25 percent of its revenue, because of such defections, according to Forrester, a  research company.

Yet even though Google faces these same risks and requests from foreign customers, its policy position is for surveillance reform instead of data localization, according to a person briefed on Google’s policy who would speak only anonymously.

Though Google at one time tried to offer customers the ability to store their data in one location in response to requests, it does not offer that feature now because it determined it was illogical, the person said. Google decided data is more secure if it is stored in multiple locations and that storing it in one location slows Google services and makes accessing the data less convenient for customers, the person said.

Mr. Salgado said a proposed law in Brazil that would require all data of Brazilian citizens and companies to be stored in the country would be so difficult to comply with that Google “could be barred from doing business in one of the world’s most significant markets.”

Bank-Run Fears Continue; HSBC Restricts Large Cash Withdrawals

Bank-Run Fears Continue; HSBC Restricts Large Cash Withdrawals

Tyler Durden on 01/24/2014 21:31 -0500

Following research last week suggesting that HSBC has a major capital shortfall, the fact that several farmer’s co-ops were unable to pay back depositors in China, and, of course, the liquidity crisis in China itself, news from The BBC that HSBC is imposing restrictions on large cash withdrawals raising a number of red flags. The BBC reports that some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it. HSBC admitted it has not informed customers of the change in policy, which was implemented in November for their own good: “We ask our customers about the purpose of large cash withdrawals when they are unusual… the reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime.” As one customer responded: “you shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”

Via The BBC,

Some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it, the BBC has learnt.

Listeners have told Radio 4’s Money Box they were stopped from withdrawing amounts ranging from £5,000 to £10,000.

HSBC admitted it has not informed customers of the change in policy, which was implemented in November.

The bank says it has now changed its guidance to staff.

“When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved.”

Mr Cotton says the staff refused to tell him how much he could have: “So I wrote out a few slips. I said, ‘Can I have £5,000?’ They said no. I said, ‘Can I have £4,000?’ They said no. And then I wrote one out for £3,000 and they said, ‘OK, we’ll give you that.’ “

He asked if he could return later that day to withdraw another £3,000, but he was told he could not do the same thing twice in one day.

Mr Cotton cannot understand HSBC’s attitude: “I’ve been banking in that bank for 28 years. They all know me in there. You shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”

HSBC has said that following customer feedback, it was changing its policy: “We ask our customers about the purpose of large cash withdrawals when they are unusual and out of keeping with the normal running of their account. Since last November, in some instances we may have also asked these customers to show us evidence of what the cash is required for.”

“The reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime.However, following feedback, we are immediately updating guidance to our customer facing staff to reiterate that it is not mandatory for customers to provide documentary evidence for large cash withdrawals, and on its own, failure to show evidence is not a reason to refuse a withdrawal. We are writing to apologise to any customer who has been given incorrect information and inconvenienced.”

But Eric Leenders, head of retail at the British Bankers Association, said banks were sensible to ask questions of their customers: “I can understand it’s frustrating for customers. But if you are making the occasional large cash withdrawal, the bank wants to make sure it’s the right way to make the payment.”

Why Crash Tests Have Auto Makers Looking to 2017 Unless the Obama auto-mileage rules are rolled back, all cars will be small cars

Why Crash Tests Have Auto Makers Looking to 2017

Unless the Obama auto-mileage rules are rolled back, all cars will be small cars.

HOLMAN W. JENKINS, JR.

Jan. 24, 2014 6:50 p.m. ET

In the strange world created by the government’s highly irrational policies toward the auto industry, car makers got some good news-bad news this week. Their new minicars were found to be sadly lagging on safety by an independent testing lab.

Among the teensy euro-style cars flying off the assembly lines, only the Chevy Spark rated “acceptable” by the vaunted Insurance Institute for Highway Safety in a common type “front overlap” crash at 40 miles an hour. Ten others, including the Fiat F.MI -3.41% 500 and theToyota 7203.TO -1.37% Prius C, were rated “poor” or “marginal.”

This bad news, which has been all over TV the past few days, is good news for an industry gearing up for the lobbying fight of its life—the 2017 “mid-term review” of President Obama’s strict new fuel-economy rules. The review was the key concession ceded to auto makers when the White House had the industry by the throat in 2009.

Economists puzzle over the matter in a world of yo-yoing gas prices and advancing technology, but let’s just say a back-of-the-envelope estimate is that the 40-year-old fuel-economy regime known as CAFE, or corporate average fuel economy, has never secured any real benefit for the United States. Consider: The mileage targets went unchanged from 1990 to 2009 and yet the U.S. light-vehicle contribution to global greenhouse emissions fell from a negligible 3.3% to an even more negligible 2.6% for reasons beyond Washington’s control.

But one thing is certain: However much government agencies keep insisting lighter cars don’t have to be smaller and more dangerous cars, vehicles would get a lot smaller under the Obama out-year targets. In 2013, the average vehicle tipped the scales at 4,041 lbs. By 2025, the average vehicle would hardly be heftier than today’s 2,500-pound minicars—about 2,976 lbs., according to an MIT study.

Voters may not care about auto-industry profits, but they do care about safety and comfort. Auto makers make a near-riskless bet that Washington will rein in the rules before they really bite. In the 1990s and 2000s, pols carved out the SUV loophole to keep auto makers and car buyers happy. Only one big question lingers, on which millions in lobbying fees will be spent, and that’s the exact form Washington’s climb-down will take.

Indeed, CAFE shows how terrible government policy, like ladies of the night and oversize oil paintings, can become respectable with age. The Bush White House once routinely criticized the rules in its annual economic report. When President Bush got in trouble in Iraq, he seized on higher mileage targets as a kind of recognizable currency to show that his only approach to a messy Mideast wasn’t to send in the troops.

President Obama, for his part, routinely blames Detroit’s focus on selling big cars for its financial meltdown. This is complete nonsense, of course. Big cars earn all of Detroit’s profits. But Mr. Obama is borrowing the logic of cognitive linguist George Lakoff, who teaches Democrats to say what voters want to hear. And liberals and environmentalists want to hear that Detroit’s bankruptcy was punishment for SUVs.

As a House GOP investigation would later find, the current target of 54.5 miles-per-gallon target in 2025 was picked by Team Obama because it made an impressive-sounding “headline number.” Decimals apparently indicate seriousness. In reality, the rules are full of fudge factor to favor the electric cars Mr. Obama likes to talk about and Detroit’s pickup truck business. A more realistic claim would be about 47 mpg in 2025, though that’s still far more fuel economy than car buyers would likely find worth paying for at any gas price below $7.

Which brings us to the small cars that fared so badly in the front overlap tests, including the 2014 Ford Fiesta.

Ford was louder than most in predicting that Americans would become more like Europeans, willing to hand over top dollar for teensy cars with luxurious touches. But Europeans pay $9 and $10 for gas. Plus, even as they get fatter and older like Americans, Europeans spend fewer hours behind the wheel, which makes a lack of full-size comfort easier to accept.

In the U.S., gasoline is about $3.28. At this week’s Detroit auto show, Ford was talking up not its minicars but its full-size pickup and a forthcoming 155-mph Mustang.

But then fraudulence in all things is not the worst practical slogan for anybody practicing politics. We don’t exaggerate when saying all auto makers are focused on 2017. Hard to find is an executive who believes the rules will survive as written. Get ready for one of the great regulatory scrums. Not only will car makers send lobbyist hordes to shape the successor rules to their own advantage, but to the disadvantage of their rivals.

The Bernanke Tide What the Fed gives to emerging markets it also takes away

The Bernanke Tide

What the Fed gives to emerging markets it also takes away.

Jan. 24, 2014 6:41 p.m. ET

In Warren Buffett‘s famous formulation, only when the tide rolls out do you see who’s been swimming naked. So it goes in emerging markets with the skinny dippers being exposed as the Federal Reserve tapers its unprecedented bond-buying.

That’s the story of the week in global financial markets, as it becomes clear that some of the swimmers need a better workout regimen. The last few years have been good for countries such as Brazil, Turkey and Indonesia as the Fed’s low-interest-rate policies have had investors hunting for yield around the world. Any semi-respectable country without Hugo Chávez or Ayatollah Khamenei in charge could attract foreign capital. Not all of that money went to productive use. And now that the Fed seems set on drawing down the QE era, investors are hedging their bets and returning to dollar and euro assets.

The hardest hit are the countries with policies least able to stand without the Fed prop. That includes Argentina, which the Kirchner clique has run like Venezuela without the populist charm. Turkey’s lira has taken a bath amid the political showdown over corruption, a large current-account deficit, and monetary policy that has been too easy for too long. Russia’s ruble is also hitting new lows against the euro, as its economy increasingly looks like a one-act play (oil).

China is a special case because its growth jitters have more to do with the withdrawal of its own domestic financial stimulus. But China’s hints of slowdown, and the probability of a big bill for cleaning up bad debts, have spooked investors elsewhere worried that global growth may slow.

One lesson is that countries are going to have to improve their policies to attract capital. South Korea is in better shape than most in part because it has struck free-trade agreements that have made it more globally competitive. Mexico’s energy and other reforms have investors optimistic about its growth prospects and burgeoning middle class. The end of Ben Bernanke’s Fed tide will have its uses if it spurs the kind of tax, trade and investment reforms that have been put off in too many places.

The question is how much damage will be done as this global adjustment takes place. One of the conceits of the Bernanke era has been that U.S. monetary policy need only be concerned with America’s domestic economy. The rest of the world would take care of itself. This was always an illusion.

A country that runs the world’s reserve currency is also the world’s central banker, as the rude shifts in capital flows have shown. The last week’s exchange-rate gyrations are a repeat of what happened last summer when Mr. Bernanke made clear he wanted to begin tapering the Fed’s bond-buying. A few bad weeks in global markets at the time caused the Fed chief to blink in September and put off the start of tapering until December. Now the Fed is leaking that it will keep tapering at its meeting next week, probably by another $10 billion, and markets are moving again.

Will the Fed blink again? This will be Mr. Bernanke’s final meeting as chairman and it’s unlikely that the Open Market Committee will pull a surprise after the recent leaks. Mr. Bernanke will go out having set the Fed on a tapering course. But continued market ructions will put the pressure on new chairman Janet Yellen, especially if they spill into U.S. stocks and affect U.S. business and consumer confidence.

Yet sooner or later the world will have to adjust to a normal monetary policy. QE and near-zero interest rates can’t last forever without running risks of even more misallocated capital and market distortions. The end of the Bernanke tide was always going to leave somebody naked, and the sooner they get dressed the better.

Cory Booker: Building on the Success of the War on Poverty; The government’s half-century of effort has slashed poverty rates. It’s time to strengthen and scale up what works

Cory Booker: Building on the Success of the War on Poverty

The government’s half-century of effort has slashed poverty rates. It’s time to strengthen and scale up what works.

CORY BOOKER

Jan. 24, 2014 7:01 p.m. ET

In my three months as a senator, I have already seen firsthand that partisan debates in Washington can distract us from uniting around common-sense actions to address our most urgent needs. I always try to remember the old African saying: “When there is a snake in the hut, there is no need to debate its color.”

Two of the interrelated dangers we face today include an underperforming economy and, in everything from health care to criminal justice, the continuing problem of spending too much money and not getting the results we want in return.

Our national investment strategy is hardly a strategy at all. We are failing to invest in areas that not only produce great social returns but also reduce federal spending in the long run. Most glaring of all, we’ve got our priorities wrong: We are failing to maximize the productivity of our greatest natural resource—our people.

Opposing Argument

In America, tragically, social mobility is flat or, by some measures, actually declining: If you are born poor, you are likely to stay poor. This fact contradicts the very concept of America, deprives us of the genius of our people, damages our economy and threatens our way of life.

Against this backdrop, we are now having a debate over the War on Poverty, marking the 50th anniversary of President Lyndon B. Johnson’s 1964 speech. Listening to pundits and politicians over the past month, I’ve felt that too much of the discussion has been fueled by our partisan divide and has failed to unite us around actually addressing the pressing crisis of poverty.

Don’t get me wrong: I’m happy to hear more people talking about poverty. But we can’t fall prey to the debilitating simplicities of our seemingly binary political world.

Data, not stultifying political or ideological rhetoric, must drive our agenda. So let’s be clear on the facts. The federal government’s half-century of effort has slashed poverty among seniors from 35% in 1960 to 9% in 2011; it has brought so-called “deep poverty” (those living 50% below the poverty line) down to 5.3%; and it has cut overall poverty by a third, when you factor in tax credits and other payments, according to a recent report by the Council of Economic Advisers.

Continuing our fight against poverty—an endeavor that President Johnson rightly warned would be long and difficult—is fiscally responsible. If we are going to have a real conversation about it, we must abandon the rigid ideological view that, simply by virtue of being a government initiative, the Great Society was a failure.

We must dispense with the false choice between pursuing fiscal responsibility and funding programs to help the poor. Instead, we should be focused on outcomes and substantive cost-benefit analyses. So how do we best leverage societal investment for maximum return?

As mayor of Newark, it always frustrated me to see constant assaults on initiatives—from food stamps to Medicaid expansion—that keep so many New Jersey families out of the quicksand of poverty and make financial sense.

Take food stamps—formally known as the Supplemental Nutrition Assistance Program. A 2010 National Academy of Sciences study found that it lifted four million people out of poverty. But those dollars also “ripple throughout the economies of the community, state and nation,” according to the U.S. Department of Agriculture, which also found that “every $5 in new SNAP benefits generates a total of $9 in community spending.”

I’m sure many Americans share my frustration and worry about whether their federal government feels a sense of urgency on poverty. The failure to extend unemployment insurance is the current case in point.

But I believe we have a profound opportunity: Fifty years after the War on Poverty began, we can greatly advance our common cause if we recommit to policies that have been successful and update our approach, based on the evidence of what works and what doesn’t. There are many sound ideas, ranging from addressing the educational needs of our children to stimulating more investment and entrepreneurship in pockets of urban poverty. Here are just a few.

In a global, knowledge-based economy, the genius of our children is our nation’s greatest asset. Universal pre-K is a must: Based just on cost-benefit analysis, the evidence is overwhelming. We know that every dollar spent on high-quality early education returns roughly $7—through reduced spending on social services, as well as higher earning and productivity for participants as adults.

In focusing on kids, we must be willing to confront some uncomfortable truths. Whether a child grows up in a two-parent home is one of the top predictors of social mobility. This doesn’t mean that we demean single-parent households. But we should focus on proven strategies that empower couples to stay together (like eliminating the marriage penalty in the Earned Income Tax Credit) and better support single parents (like raising the federal minimum wage).

As mayor, I saw countless families broken apart and economically hobbled when one parent went to jail for a nonviolent drug offense. We can save taxpayer money and keep families together by reforming our ineffective criminal-justice system. For instance, re-entry programs that help former prisoners move quickly toward training and work have been shown to produce profound benefits, with significant reductions in recidivism and future taxpayer expenditures.

In terms of anti-poverty impact and return on investment, few programs surpass at-home nursing initiatives designed to serve low-income, first-time mothers. A study funded by the Pew Center estimated that the returns of such programs exceed $73,000 over the life of a child. Other studies have shown marked reductions in crime, child abuse and other problems, including infant death rates.

For young people entering the workforce, apprenticeships are a great way to close the skills gap and to increase lifetime earnings—by up to $300,000. But the U.S. had just 358,000 active, registered apprenticeships in 2012—a tiny fraction compared with other industrialized countries. We should expand private-sector-led apprenticeship strategies similar to those in South Carolina, which saw a 580% increase in apprenticeships in recent years.

The above examples give me hope that we can cut through the old false debates. We’ve proved, through strategic investments, that we can tackle poverty by empowering people to succeed—and save taxpayer dollars in the long run.

What excites me about being a senator is the opportunity to strengthen and scale up these common-sense programs through federal investments, public-private partnerships and incentives. Significantly reducing poverty isn’t a question of whether we can—it is a question of whether we have the collective will.

I welcome a broad conversation about poverty and social mobility, but the balance sheet is indisputable after a half-century of the War on Poverty. We need to do more, not less.

But doing more doesn’t mean wasteful and indiscriminate spending. Doing more means making smart investments in proven programs and innovating around promising new strategies.

We have a historic opportunity today to lift millions out of poverty, to limit government spending in the long term and to create middle-class jobs. Doing so isn’t just a moral imperative; it will also profoundly improve our global competitiveness and the economic security of American families. As that African saying goes, the snake is in the hut; it is now time for us to act on the urgent challenges before us.

The 13-F Spotlight: Revealing And Concealing Hedge Fund Trades

The 13-F Spotlight: Revealing And Concealing Hedge Fund Trades

Jan 22 2014 | 8:28am ET

By Ronan Cosgrave
Director and Sector Specialist
for Convertible Bond Hedging, PAAMCO

One of the more interesting snapshots of the investing universe is captured by the 13-F filings with the U.S. Securities and Exchange Commission (SEC), which come out 45 days after the end of each quarter. Institutional investors, including hedge funds with more than $100 million in assets, are obliged to file their long U.S. equity positions, other securities such as select options, and some convertible bonds with the SEC at the end of each quarter. The SEC then publishes them for the world to see 45 days later. The $100 million asset threshold captures hedge funds above a moderate size that are investing in U.S. equities whether they are U.S. based or not.

Plenty of people find it very interesting and useful to see where the largest and most successful hedge funds are investing. In fact, there is now an index that tracks the best-regarded managers’ largest 30 investments as well as an upcoming ETF of the same theme. For example, if one just invested in the top 10 holdings of the hedge fund universe identified in the 13-F filings released on July 15, 2013 and sold them when the next holdings release occurred on November 15, the portfolio would have had a total return of 17.3% (11.6% when you exclude Icahn Enterprises which is in the top ten purely due to Carl Icahn’s own holding of his eponymous holding company). The S&P 500’s return for the same time period was 7.65%.

13-F: A Game of Cat and Mouse

The 13-F filings of hedge funds have spurred an ongoing game of cat and mouse. Everybody with a high profile knows that their 13-F filings are going to be dissected. These investors hardly have a problem with the world piling into their trades behind them, and sometimes they even take advantage of these trades by subsequently lightening up on their holdings. To further add to the confusion, some of these long positions may be hedges to short exposures, such as put options, where the fund may actually have a negative bias on the individual company. It is for this reason that inferences should not be drawn from the holdings of firms like Susquehanna Investment Group, and other options traders and market makers, which regularly feature in the 13-F data. Regardless of these firms’ opinions on any given company, they are, in general, simply hedging an exposure derived from their dealings in the options and other related markets.

While large funds file considerably more data privately with the SEC, other government agencies in the U.S., and in other jurisdictions, the 13-F filing offers a rare chance for comparative analysis of the equity positions of the hedge fund world in general. At PAAMCO, we have transparency into our own fund investments, and we furthermore have a reasonable idea of what is going on in the broader hedge fund universe. Having an actual external comparison, however, is a very useful tool.

September Filing

The data from the filing on September 30 covers $1.48 trillion worth of U.S. equity holdings spread across 860 filing hedge fund managers. This very non-trivial number represents an average holding of $1.72 billion of long U.S. equities for each reporting hedge fund. While this may seem rather high, it is fair to say an element of distortion is introduced by the quantitative market neutral funds that may be levered multiple times as they can have thousands of names with tiny weights in their portfolios. To put the $1.48 trillion number in perspective, the total market cap of the S&P 500 is nearly $16 trillion (as of November 29) while the total full market capitalization of all listed U.S. stocks is (as measured by the Wilshire 5000) $22 trillion (as of November 29). For further comparison, the most recent Hedge Fund Intelligence biannual Global Review estimates that hedge funds around the world manage $2.6 trillion, $1.8 trillion of which is managed out of the U.S.

13-F filings will only show approximately half of the hedge fund books as the 13-F filers are not obliged to show short positions. Also, the number of managers holding many positions is artificially increased by the aforementioned market neutral funds. However, the sum of the dollars invested in each name is a good indication of where hedge fund assets are flowing.

The Numbers

Taking the S&P 500 as a guide, out of aggregate 13-F filings, 46% of the dollars represented are invested in S&P 500 companies. The S&P 500 is approximately 75% of total U.S. market capitalization, so one might infer there is a relative bias away from the large/mega cap companies. However, within the S&P 500 it is relatively unevenly distributed ranging from very popular (e.g., Dollar General: held by 97 funds with ownership of 30% of the shares outstanding) to ignored (e.g., Windstream: held by 20 funds with ownership of 0.57% of the company; though Windstream is certainly not ignored on the short side with a 13.9% short interest as of October 31). The average market cap of the top ten holdings is $159 billion. While on average just over 19% of reporting managers hold each of the top ten holdings, it is hard to draw many conclusions from that. Notably, there is a very distinct technology and financial sector bias within the top ten.

As noted before, Icahn Enterprises is a holding company for activist investor Carl Icahn and while it would seem like a very direct example of investors piggybacking on another investor’s ideas, in fact it is Carl Icahn’s own hedge fund which holds just over 88% of this company.

It is interesting for us to compare our PAAMCO portfolio to the 13-F filings; only 10% of PAAMCO’s U.S. equity investments are in S&P 500 companies and the average market cap of the top 10 U.S. equity names in the PAAMCO book is $8.5 billion as of September 30, 2013. The PAAMCO top 10 holdings add up to 15.3% of our long equity portfolio and are held on average by two managers out of a possible 41 13-F eligible managers (4.9%). Based on this data, it is apparent that PAAMCO’s managers are more concentrated in top names and that these names are smaller than what the overall hedge fund universe focuses on.

Conclusion

Good trade ideas are limited in number and hard to come by. When a lot of smart people are given more or less the same objective (make money!), the same information (Reg FD!) and the same tools (the market!) they can at times look very similar. However, investors should be careful to make sure that passive hedge fund herd-following is not masquerading (and charging) as active investing. Having a fund with a consistent overlap with the most popular names or with the portfolio of various famous investors’ positions is not value-adding active management.

In general, hedge fund assets are concentrated in the larger cap names, though to be fair, less so than the actual market. However a large weight in mega-cap names is an inevitable result of the sheer size of some of the funds in the hedge fund industry. Don’t forget that the average size of long portfolio in this sample is close to $2 billion. This inhibits the amount of impact smaller market cap investments could possibly have on a portfolio, while also magnifying liquidity issues. Another take-away is that hedge funds seem to like ‘growthier’ names. For example, more staid large-cap investments such as Exxon Mobil or J&J are comparatively ignored in favor of names such as Apple, Facebook or Qualcomm. Finally, it is important to know what is in underlying portfolios and to use that information in a cohesive manner recognizing that there are many different angles one must examine to truly understand risk exposures.

13-F filings throw into relief the use of portfolio transparency; a large part of the hedge fund universe already offers this transparency to larger clients. However for those that don’t, the SEC has done their clients a favor and given them a tool to monitor their hedge fund investments and assess them relative to other hedge funds: 13F filings can be used to monitor crowdedness of individual positions in hedge fund portfolios and risk-manage exposures in times of hedge fund de-leveraging; they can be used to measure overlap between managers in the same portfolio or to independently assess sector weightings independent of different sector categorizations by underlying managers. It is up to investors to make use of this data as an evaluation tool and judge accordingly.

Ronan Cosgrave, CFA, CQF is a Partner and Sector Specialist for the Convertible Bond Hedging strategy at PAAMCO. He also serves as the Portfolio Manager and main point of contact for certain institutional investor relationships. He is responsible for global manager research and portfolio construction within this sector. Ronan is a member of PAAMCO’s Investment Oversight and Risk Management Committees. Prior to joining PAAMCO, Ronan worked as a Process Engineer at IBM’s Storage Technology Division sites in Silicon Valley, Germany and Ireland. He also did chemical engineering design and commissioning for ProsCon, an Irish engineering and process control consultancy. Ronan received his MBA in Finance and Economics from Columbia Business School, and B. Eng. in Chemical and Process Engineering (Honors) from Cork Institute of Technology.

Immigration debate mars Norway’s liberal reputation

Immigration debate mars Norway’s liberal reputation

MORTENSRUD (NORWAY) — Ms Lise Ulvestrand and her husband went to the southern Oslo town of Mortensrud in 2005 for the space, the forest and the cheaper rents. A former development worker in Latin America and a social worker who worked with Norway’s immigrants, she says she is comfortable around foreigners and different cultures.

6 HOURS 28 MIN AGO

MORTENSRUD (NORWAY) — Ms Lise Ulvestrand and her husband went to the southern Oslo town of Mortensrud in 2005 for the space, the forest and the cheaper rents. A former development worker in Latin America and a social worker who worked with Norway’s immigrants, she says she is comfortable around foreigners and different cultures.

However, as the number of immigrants, including Muslims, gradually increased in Mortensrud, she began to worry about her children and their education. So, the Ulvestrands decided last summer to move back to comfortable western Oslo, where she grew up. The family wanted a stable environment and had some questions about the social challenges at the children’s school, where the non-ethnic Norwegian majority was growing rapidly.

Their concerns about immigration and perceptions that Islam is challenging prevailing national values are widely shared, both among some Norwegians, like the Ulvestrands who are on the left of the political spectrum, and among many on the right, who in September put the Conservative Party into office after eight years of Labour Party-led leftist coalitions.

The intensifying debate about immigration has focused on the anti-immigration Progress Party, which is part of the new Conservative-led government. It came under intense scrutiny in 2011, when a former member, Anders Behring Breivik, bombed government buildings in Oslo, killing eight people, before going on to kill 69 others at a Labour Party summer camp on the island of Utoya. Breivik quit the party in 2006 because he felt it was not sufficiently radical.

Mr Ketil Solvik-Olsen, Minister of Transport and Communications and a deputy leader of the party, scoffed at the notion that the party had anything to do with Breivik’s ideas. “We are strict on immigration, but this is not a war on cultures. Our idea is to protect our welfare system,” he said.

Instead, he spoke about the kind of discomfort that the Ulvestrands felt. “Some people feel they wake up one morning and their old neighbourhood is gone,” he said. “Strangers move in and people don’t even understand what they’re saying; we have a generous welfare system and you feel like a stranger in your own neighbourhood.”

After the killings and a disastrous showing in local elections in 2011, the populist party began tamping down more extreme voices. In September, the party won 16.3 per cent of the vote, down from the 22.9 per cent it won in 2009, but enough to form a coalition with the Conservative Party led by Prime Minister Erna Solberg.

The Progress Party is now considered mainstream and its level of support has required “more moderate rhetoric” than that from smaller, more extreme parties such as the Swedish Democrats, said Mr Thomas Hylland Eriksen, a social anthropologist at the University of Oslo.

“Yet they firmly belong with other parties … that see immigrants, and in particular Muslims, as a threat to the integrity of society,” he said.

The party, however, is facing criticism by older, more ideological members and beginning to lose support in opinion polls. Mr Anders Romarheim, a fellow at the Norwegian Institute for Defense Studies said the new acceptability of the party may have encouraged the fierce anti-Islam opinion that remains prevalent on Norwegian social media.

However, there is also a new reticence about public rhetoric, the Prime Minister said in an interview. Public discussion of Islam is less about their beliefs or their colour and more about lack of education and need for training, Ms Solberg said.

Mr Hylland Eriksen said Breivik’s massacre had regrettably little lasting impact on Norway’s politics. “Some of us were hoping that it would serve as a loud and clear reminder of the need to accept that we live in a culturally diverse society,” he said. “Instead, the political dimensions of the attack have been consistently dodged.” The New York Times