Passed Over for GE CEO, Dave Cote Thrives at Honeywell

Passed Over for GE CEO, Dave Cote Thrives at Honeywell

By Thomas Black on May 02, 2013

In the spring of 1999, General Electric (GE) Chief Executive Officer Jack Welch invited Dave Cote to dinner in his private dining room at GE’s headquarters in Fairfield, Conn. At the time, Cote was a 25-year GE veteran who’d worked his way up from an hourly job on the floor of GE’s aircraft engine plant in Hooksett, N.H. Since 1996, he’d been running GE’s appliances unit and was now one of a half-dozen GE executives competing to succeed Welch as CEO. Welch cut to the chase: Cote would not get the job.

The news wasn’t a surprise. “I could see the handwriting on the wall that it wasn’t going to be me,” Cote says. Not only was GE Appliances missing short-term financial targets, it was also the company’s only unit to see its profit decline in 1998. Meanwhile, Cote’s rivals were thriving. Earnings at GE’s medical systems division, run by Jeff Immelt, grew 25 percent in 1999. Jim McNerney’s aircraft engines unit had doubled its revenue over the previous five years. Under the direction of Robert Nardelli, GE’s power systems division had increased sales of its steam turbines and gas-fired generators by 33 percent since 1994. Although Welch told him he could stay at GE, Cote was gone by that fall, making him the first to bow out of the competition. “I wanted to see what I was capable of,” Cote, now 60, says. Read more of this post

Dr Copper ‘telling us the party’s over…’

Dr Copper, ‘telling us the party’s over…’

Paul Murphy

| May 02 16:19 | 9 comments | Share

With the S&P 500 making a fresh run higher at pixel time, it would be rude not to share the latest thoughts of Albert Edwards, Socgen’s Ice Age bear. Rather than gawping stocks, he reckons we should be mindful of the red metal… Edwards’ central argument is that just as both the US and Europe are slipping towards outright deflation, investors have convinced themselves they just have to participate in the liquidity fueled frenzy offered by unlimited QE. But the copper price is saying something different — and it offers a solid reminder that liquidity itself can disappear very quickly indeed, as it did when Edwards’ last drew our attention to ‘Dr Copper’ (and Wile E. Coyote) back in January, 2007… Read more of this post

SEC Zeroing In on ‘Prime’ Funds; Money Funds Viewed as Most Vulnerable to Flight by Anxious Investors Would Face Tighter Rules

Updated May 2, 2013, 7:01 p.m. ET

SEC Zeroing In on ‘Prime’ Funds

Money Funds Viewed as Most Vulnerable to Flight by Anxious Investors Would Face Tighter Rules

By ANDREW ACKERMAN

WASHINGTON—U.S. securities regulators, under pressure to address risks posed by the $2.6 trillion money-market-mutual fund industry, are considering a scaled-back approach that would tighten rules for about half of the sector that is seen as most vulnerable to investor runs, according to people familiar with staff discussions. Read more of this post

Malaysia Risks Post-Election Protests as Group Cites Vote Buying

Malaysia Risks Post-Election Protests as Group Cites Vote Buying

Malaysia faces the risk of public protests over the accuracy of results from the May 5 national election after an opposition-backed group cited evidence of vote buying and bias by the official ballot oversight agency.

The Coalition for Clean and Fair Elections, known as Bersih, has captured vote-buying on video and received complaints ranging from improper electoral rolls to government abuse of state-run media, according to co-chairwoman Ambiga Sreenevasan. The group, whose protests in recent years have drawn thousands of people onto Kuala Lumpur’s streets, has yet to decide on organizing demonstrations, she said this week.

A contested result between Prime Minister Najib Razak’s ruling coalition and Anwar Ibrahim’s opposition alliance threatens to spark protests in a country that has never seen a transfer of power since independence from Britain in 1957. A tight finish would be the worst outcome for Malaysian stocks because it would lead to policy paralysis and may end Najib’s tenure, Bank of America Merrill Lynch analysts said this week.

“Anything over a 15-to-20 seat victory margin will lead to suspicion — the race is that close,” said Bridget Welsh, associate professor of political science at Singapore Management University, who has edited two books on Malaysian politics. “You’re going to see people on the streets” if election observers produce solid evidence of fraud, she said. Read more of this post

Goldman Sachs CEO Blankfein warned that the interest- rate environment has parallels to 1994, when a sudden and sharp increase in rates caught many investors off-guard

Blankfein Sees Parallels to 1994 Interest-Rate Increases

Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein warned that the interest- rate environment has parallels to 1994, when a sudden and sharp increase in rates caught many investors off-guard. “I worry now — I look out of the corner of my eye to the ‘94 period,’’ Blankfein, 58, said today at a conference in Washington sponsored by the Investment Company Institute. He recalled how investors got used to low interest rates and were shocked by losses when borrowing costs rose.

The Federal Reserve increased its benchmark rate 3 percentage points from February 1994 to February 1995, from a then record-low 3 percent to 6 percent. The yield on the 30-year U.S. Treasury bond surged above 8 percent in late 1994 from below 6 percent 12 months earlier. The rate increase and corresponding collapse in bond prices and stock markets caused losses for Wall Street trading desks and investors. Goldman Sachs, which at the time was a private partnership, suffered a drop in its capital and raised $250 million by selling a stake in the firm to a Hawaiian trust. Partners exited the firm, including then-Chairman Stephen Friedman, who now serves on the company’s board. The rate increase was something ‘‘you’d think in hindsight should have been expected,” Blankfein said, although it “really was stunning.”

Read more of this post

REIT firm may buy low-quality properties – or overpay for real estate – to boost the portfolio size and increase management fees; “If you have money to spend and it’s not your money, your decision-making might be different than if it was your own money,”

Lucrative Fees Behind Property Management Spark Fights

CommonWealth REIT (CWH) owns office buildings throughout the U.S., yet employs no one. Cole Credit Property Trust III Inc., which leases about a thousand stores around the country to retailers such as CVS, Lowe’s and Wal- Mart, also had no workers until a recent acquisition. Instead, both real estate investment trusts have been run by outside managers who are paid to choose properties to buy and at what prices, and which ones to sell and when. That has raised criticism from some investors, who say a management company may make decisions for its own benefit — decisions not necessarily right for REIT shareholders. “It’s a good business if you can get it,” said Jim Sullivan, a managing director at Green Street Advisors Inc., a Newport Beach, California-based research company. “The adviser does well if the REIT gets bigger, but the shareholders may not be well-served by the REIT getting bigger.” That conflict has been at the heart of two of the biggest REIT fights this year. CommonWealth, based in Newton, Massachusetts, is battling an attempt by its second-biggest investor to remove its board. Phoenix-based Cole Credit had to fend off a rival’s buyout offer after announcing plans to purchase the firm that oversaw its properties. CommonWealth — and other REITs that share the same external manager — are among the few publicly traded property trusts with the structure, Sullivan said. It’s a common setup among REITs not listed on stock exchanges, such as Cole.

The problem with using an outside manager is that the firm may buy low-quality properties — or overpay for real estate — to boost the REIT’s portfolio size and increase management fees, Sullivan said. The manager may be focused more on its own income than in building the best portfolio for investors, he said. Read more of this post

Hong Kong Overheating Risk Seen by HKMA’s Chan as Debt Rises

Hong Kong Overheating Risk Seen by HKMA’s Chan as Debt Rises

Hong Kong’s economy is at risk of overheating after household debt rose to a record 61 percent of gross domestic product, said Norman Chan, chief executive of the Hong Kong Monetary Authority.

“Hong Kong’s consumption and personal-debt growth have consistently outpaced overall economic growth,” Chan told lawmakers today, citing risks to “macroeconomic stability.”

While the housing market has shown signs of cooling after extra curbs in February, it’s too early to say that it’s in a downward cycle, Chan said. A declining current-account balance is a “warning signal” that consumption and the economy are at risk of overheating, he said.

Hong Kong home prices, the most expensive among major global cities, last month fell the most in three years after the government imposed its harshest measures yet to curb prices and as lenders raised mortgage rates for the first time since 2011. Chan’s comments come amid signs that the global economic recovery is faltering, with industrial and manufacturing data from China, Japan and South Korea less than estimates.

In December, the HKMA said the overheated property market is increasingly disconnected from the rest of the economy. Sanford C. Bernstein H.K. Ltd. said prices could fall as much as 25 percent after the government stepped up measures to curb an asset bubble and banks raised mortgage rates. Read more of this post

Baht’s Rally Seen Throttling Thai Rice Shipments: Southeast Asia

Baht’s Rally Seen Throttling Thai Rice Shipments: Southeast Asia

The Thai baht’s rally to the highest level in 16 years is hindering exports from the world’s biggest rice shipper, curbing the government’s efforts to diminish record state stockpiles and threatening to increase its losses.

Overseas buyers have rejected attempts by the government to boost prices in dollars to offset reduced revenues as the baht has strengthened, according to Commerce Minister Boonsong Teriyapirom. Thai stockpiles are set to double to 11.6 million metric tons in 2012-2013 from two years ago, according to data from the U.S. Department of Agriculture.

Prime Minister Yingluck Shinawatra’s administration began buying rice from farmers at above-market rates in 2011 to boost rural incomes. While benefiting growers, the program has spurred the buildup of the biggest-ever stockpiles. Even as the USDA forecasts Thailand will regain its role as the largest exporter this year, displacing India, the estimated 8 million tons shipped would be about 25 percent less than two years ago.

“If it’s maintained at this level, our sales will definitely be seriously affected,” Boonsong said at his office in Nonthaburi, outside Bangkok on May 1, referring to the baht. “If we cannot sell to exporters, we might have to open bids here in Thailand for the local market.” Read more of this post

Gridlocked Jakarta launches subway project, 20 years late

Gridlocked Jakarta launches subway project, 20 years late

4:42am EDT

JAKARTA (Reuters) – Jakarta’s popular new governor, who threatens to shake up Indonesian crony politics, has launched the first mass transit railway project to help end the gridlock that brings the capital to a near halt during rush hour.

It is also the first major test of Joko Widodo, popularly known as Jokowi, who swept to office seven months ago with the promise to sweep away the corruption and inefficiency that has long been the hallmark of Indonesian politics and the way the world’s 17th-largest city has been run.

The project, announced late on Thursday and which has been delayed for over two decades, would mark a rare bright spot in Indonesia’s growing infrastructure bottleneck which threatens to throttle what have been record levels of investment in Southeast Asia’s biggest economy.

“Jokowi has no choice but to build the MRT (Mass Rapid Transit railway) to satisfy the emerging middle class,” said Marco Kusumawijaya, head of Rujak, a Jakarta-based urban planning think-tank. “But this will not solve the traffic problems of the city in the long run because the backlog of demand for public transport here is so huge. You can’t solve this with one or two inner-city (subway) lines.” Read more of this post

China has the option of selling to the public some assets from its $3.44 trillion foreign-exchange reserves. China could follow practices of the Tracker Fund (2800) of Hong Kong to sell off the “best, the most complete, and the most liquid” assets to investors

China Magazine Floats Idea of Selling Parts of Currency Reserves

China has the option of selling to the public some assets from its $3.44 trillion foreign-exchange reserves, according to an opinion piece in Caixin Century Weekly, a Chinese magazine. The article, “How to Cope With ‘Excessive’ Foreign- Exchange Reserves,” was published in the April 29 issue under the pseudonym Xiao Yi. Caixin said the author is a “senior economist” without elaborating and that a more detailed account of the proposal will be published in a sister magazine, China Reform.

One possibility is that the author is an official involved in management of the reserves, said Zhang Bin, a Beijing-based researcher with the government’s Chinese Academy of Social Sciences. China could follow practices of the Tracker Fund (2800) of Hong Kong to sell off the “best, the most complete, and the most liquid” assets to investors, according to the piece. Read more of this post

‘Abenomics’ Meets Curse of Second 100 Days

‘Abenomics’ Meets Curse of Second 100 Days

Insight: As economy flounders, Vietnam banks on debt cleanup

Insight: As economy flounders, Vietnam banks on debt cleanup

Thu, May 2 2013

By Martin Petty

HANOI (Reuters) – When Nguyen Manh Hung’s furniture company Phuc Luc was bustling, orders flew in from wealthy Vietnamese who sought his hand-crafted beds, cabinets and tables, netting him $25,000 a month after costs and wages for 35 staff. Two years later, hurt by the slump in Vietnam’s economy, business in his Hanoi shop is crumbling. Hung is hemorrhaging about $4,000 a month even after slicing costs to the bone and idling 30 workers he could no longer afford to pay.

“I just need a few customers to stay afloat, but the ones I have, they’ve cancelled orders,” Hung says. “None of the banks will lend to me. I’m finished.” Read more of this post

Billionaire investor Sam Zell’s tip for real estate newbies? “Go to medical school”; Equity Residential chief shares wisdom at NYU REIT conference

Sam Zell’s tip for real estate newbies? “Go to medical school”

Equity Residential chief shares wisdom at NYU REIT conference

April 12, 2013 06:00PM
By Hiten Samtani

Had Equity Residential’s Samuel Zell known that Lehman Brothers would accept a fixed price for Archstone’s sprawling apartment building portfolio, he would have bought the whole company outright, he told participants yesterday at a real estate investment trust symposium hosted by New York University’s Schack Institute of Real Estate. “The fixed price removes a lot of uncertainty from the deal,” said Zell, looking rakish in a grey blazer and jeans, amidst a suit-clad crowd at the Pierre, a swank Central Park-facing hotel at 2 East 61st Street.  In November of last year, Zell and AvalonBay Communities, a Washington, D.C.-based REIT, agreed to pay roughly $6.5 billion in cash and stock for the portfolio, which contained just under 58,000 apartment units scattered around the Northeast. Zell said he wasn’t aware that Lehman would agree to a fixed price — rather than a fair market value deal — and if he had known that up front, he would have gone solo. Still, AvalonBay was a stellar partner on the deal, Zell said. “To do a deal of that size with such limited friction is pretty extraordinary,” he said. In New York City, Equity Residential is building 400 Park Avenue South, a 40-story condominium and rental apartment tower in partnership with Toll Brothers. But ground-up development — given its inherent risk — is only a small part of the publicly traded company’s arsenal, Zell said, noting that the firm built only “5 percent” of its portfolio, valued at $35 billion.

“We’re going to find out in the next three or four years what happens when you’re in the middle of construction and inflation starts to go up,” he said. When asked about the housing market, Zell said that elevated home ownership rates had historically preceded turmoil. “Every time we’ve got into a crisis in this country, the housing rate has hovered over 62 percent,” he said. “It was 69 percent recently, now it’s at 65.5 percent.” Read more of this post

Billionaire Investor Leon Black’s Apollo Global Management ‘Selling Everything’ as Prices Have Risen

Black’s Apollo ‘Selling Everything’ as Prices Have Risen

Leon Black, chief executive officer of buyout firm Apollo Global Management LLC (APO), said prices for traditional buyouts have risen so much that it’s a good time to sell. “We think it’s a fabulous environment to be selling,” Black said today during a panel discussion at the Milken Institute conference in Los Angeles, adding that Apollo has sold about $13 billion in assets in the last 15 months. “We’re selling everything that’s not nailed down, and if we’re not selling, we’re refinancing.” U.S. equity markets have more than doubled from their 2009 lows, helping push up average prices for leveraged buyouts to nine times earnings, Black said. The Standard & Poor’s 500 Index rose to a record today as consumer confidence offset an unexpected drop in business activity and investors weighed earnings reports. Black’s comments were echoed by buyout executives including Scott Sperling, co-president of Thomas H. Lee Partners LP, and Jonathan Sokoloff, managing partner at Leonard Green & Partners LP. “It has become more difficult to find transactions priced at levels we’d like,” Sperling said on the same panel. “We’re having trouble deploying capital at these price levels,” Sokoloff said. It’s “time to take a pause.”

To contact the reporter on this story: David Carey in New York at dcarey13@bloomberg.net

Without explanation, the Shenzhen government has ended a seven-year incentive plan for the city’s much-hyped LED lighting sector

Shenzhen’s LED incentive plan comes to sudden end

Staff Reporter, 2013-05-02

Without explanation, the Shenzhen government has ended a seven-year incentive plan for the city’s much-hyped LED lighting sector, reports Guangzhou’s Southern Metropolis Daily. The original plan by the city government called for building a 130 billion yuan (US$21 billion) LED industry in Shenzhen from 2009 to 2015, according to Sui Shirong, head of Shenzhen Light Emitting Diode Industry. An official who wished to remain anonymous due to the sensitivity of the issue told the daily that the industry is facing falling prices amid oversupply. Read more of this post

The number of bond funds that own stocks has surged to its highest point in at least 18 years and could expose investors to unexpected losses

May 1, 2013, 8:09 p.m. ET

Bond Funds Running Low on…Bonds

By JOE LIGHT

The number of bond funds that own stocks has surged to its highest point in at least 18 years, another sign that typically conservative investors are taking bigger risks to boost returns. Regulators generally allow funds to hold a mix of assets, but the scale of bond funds’ shift into stocks is unusual, fund experts said, and could expose investors to unexpected losses. Read more of this post

“No more Martini lunches”; Mining Woes Snag Financial Firms; Far from any mine shaft, the legions of bankers, consultants and lawyers who benefited from a decadelong commodities boom are now preparing to retrench as the market weakens.

Updated May 1, 2013, 8:08 p.m. ET

Mining Woes Snag Financial Firms

By ALISTAIR MACDONALD

TORONTO—Far from any mine shaft, the legions of bankers, consultants and lawyers who benefited from a decadelong commodities boom are now preparing to retrench as the market weakens. Global mining capitals such as Toronto, Johannesburg and London all flourished amid lofty prices in recent years for everything from gold and copper to potash. Mining companies have tended to flock to a handful of cities to list their shares, set up headquarters and raise cash.

But over the past year, the sector has been hit by a triple whammy of falling prices, still-rising costs and waning investor interest. Most mined commodities have fallen sharply since their 2011 highs. Gold is 23% off its highs, and copper closed at an 18-month low Wednesday. Gold has fallen 14% since the start of this year to $1,446 a troy ounce. As a result, some of the world’s biggest miners are slashing outlays, shedding assets they bought at the top of the market just a few years ago, and shaking up management teams that spearheaded several years’ of frenetic deal making and fundraising. That is having a spillover effect on the industries servicing miners. Bankers and brokers involved in the sector are starting to see revenue dry up, and some are already shedding staff. Read more of this post

Japan’s Abenomics Haunted by Ghost of General MacArthur

Japan’s Abenomics Haunted by Ghost of General MacArthur

Prime Minister Shinzo Abe’s drive to revise Japan’s pacifist constitution for the first time risks alienating voters who support his economic agenda and dividing his coalition government before July elections.

Abe aims to make it easier to amend the constitution, a first step in plans to beef up the military at a time when Japan is mired in territorial disputes with China and South Korea. His Liberal Democratic Party is forecast to win the upper house race, potentially giving him the two-thirds majority in both chambers needed to alter the charter.

Overhauling a document imposed by U.S. General Douglas MacArthur’s occupation force after World War II has been a goal of LDP politicians, including Abe’s grandfather, since the party was founded in 1955. While polls show the public backs Abenomics, his strategy to resuscitate the world’s third-largest economy after more than a decade of deflation, a majority of voters don’t rate constitutional revision as a priority.

“The growth strategy can only be accomplished with sustained attention,” said Koichi Nakano, a political science professor at Sophia University in Tokyo. “It’s a monumental task in its own right. If he takes up more nationalistic causes and Abenomics is not looking good, this could lead to a loss of authority after the election.” Read more of this post

Energy Makes Up Half of Water Desalination Plant Costs: Study

Energy Makes Up Half of Desalination Plant Costs: Study

Energy is the largest single expense for desalination plants, accounting for as much as half of the costs to make drinking water from the sea, according to a report. Desalination plants on average use about 15,000 kilowatt- hours of power for every million gallons of fresh water that’s produced, the Pacific Institute said today in a report. In comparison, wastewater reuse draws as much as 8,300 kilowatt- hours of power for the same volume and importing a similar amount of water into Southern California requires as much as 14,000 kilowatt-hours of electricity, it said. There are 17 desalination plants proposed in California and two in Mexico to help supply area homes and businesses, according to Heather Cooley, co-director of the institute’s water program. While the projects may ease water strains for area utilities, they’ll increase suppliers’ exposure to variable energy prices, she said by phone. “While you may be improving your water reliability, you may be increasing your vulnerability to energy price changes over time,” Cooley said. A 25 percent increase in energy expenses would raise the cost of producing water by about 9 percent and 15 percent at reverse osmosis and thermal desalination plants respectively, according to the report. Electricity prices in California are projected to rise by about 27 percent from 2008 to 2020 in inflation-adjusted dollars as power grid infrastructure is maintained or replaced, capacity is added and more renewable energy is integrated.

Read more of this post

Qatar National Bank is No. 1 in Bloomberg Markets’ third annual ranking of the world’s strongest banks

Qatar Bank No. 1 Supplanting Singapore as Canada Slips

The tiny Persian Gulf nation of Qatar controls vast gas and oil deposits that feed billions of dollars annually into the state Treasury. Its petroleum riches make it the wealthiest nation per capita in the world, according to the International Monetary Fund. While other countries have been struggling to stay out of recession, Qatar averaged 13 percent annual growth during the five years through 2012, Bloomberg Markets will report in its June issue. The Qatar Investment Authority, a sovereign wealth fund, has big stakes in Agricultural Bank of China Ltd., Barclays Plc (BARC), Credit Suisse Group AG (CSGN) and Tiffany & Co (TIF). It owns London department store Harrods outright.

As Qatar’s government has spread its financial wings, the country’s biggest financial institution, Qatar National Bank SAQ (QNBK), has been at its side. Under Ali Shareef Al Emadi, its chief executive officer since 2005, QNB has become the largest lender in the Middle East and one of the most profitable. Even as the bank has expanded, Al Emadi has maintained QNB’S capital base and aversion to risk. As a result, based on its performance in fiscal year 2012, Qatar National Bank is No. 1 in Bloomberg Markets’ third annual ranking of the world’s strongest banks.

Read more of this post

Malaysia’s election provides a chance for long-overdue change; At stake in Sunday’s poll is governance based on race and patronage

May 1, 2013 6:15 pm

Malaysia’s election provides a chance for long-overdue change

By David Pilling

At stake in Sunday’s poll is governance based on race and patronage

Will it be 13th time lucky for Malaysia’s opposition? Malaysians vote this Sunday in the 13th general election since the country gained independence in 1957. This time, just for novelty value, there is actually some doubt about who will win.

Ever since independence, Malaysia has been run by a coalition dominated by the United Malays National Organisation, which represents the interests of ethnic Malays, who make up 60 per cent of the 29m population. (Ethnic Chinese form 24 per cent, Indians 8 per cent, and there are an estimated 3m migrant workers.) Until now, the arrangement has gone roughly like this. Chinese and Indian communities, who have historically been better off, have allowed the government to hand out preferential treatment to Malays. In return, they are left alone to prosper in a half-decently run economy. Umno administers the system through a policy of affirmative action known as bumiputra, which literally means “sons of the soil”. The system provides Malays with preferential access to everything from schools, universities and civil service jobs to lucrative government contracts and even car imports. Public companies must reserve part of their share allocation for indigenous Malays, who also get a discount on housing. Read more of this post

As Australia’s decadelong mining boom evaporates, the government is girding for what the finance minister calls a harsh “new reality.”

May 1, 2013, 6:22 a.m. ET

Australia’s ‘New Reality’ Sets In as Mining Boom Wanes

By ENDA CURRAN

SYDNEY—Australia faces a harsh “new reality” as a decadelong mining boom evaporates, forcing future governments to seek unpopular savings to avert steep deficits, Finance Minister Penny Wong said. “We have to deal with this new reality,” Ms. Wong said from her Sydney offices ahead of a budget in two weeks that the government already has warned will miss its revenue forecast by about 12 billion Australian dollars (US$12.4 billion). “The new norm is, certainly in the near term, a lower level of revenue growth,” she said. “This budget has to deal with that economic reality, and that is not a popular thing to go out and sell to the public.” And controlling deficits will become even harder in future, Ms. Wong said., as the mining boom fueled by Asia’s demand for Australian raw materials peaks this year and begins to cool.

Read more of this post

Tough times for hedge funds that bet on market tumult using complex trading strategies

Tough times for hedge funds that bet on market tumult

7:06am EDT

By Katya Wachtel

NEW YORK (Reuters) – Nelson Saiers, a trader and math whiz, runs the type of hedge fund that tends to perform best when markets are going haywire. The $600 million Saiers Capital fund and other so-called volatility funds use complex trading strategies to take advantage of pricing discrepancies caused by gyrations in global financial markets. These funds flourished in the years after the financial crisis, when volatility was running hot, but this year is a different story. Financial markets have been largely moving upwards with few wild swings along the way. The Standard & Poor’s 500 index is up about 11 percent and the closely watched CBOE Volatility Index hit a six-year low in March. Saiers Capital’s fund is down about 1.24 percent through April 26, according to an investor. Overall, volatility funds gained 1.16 percent in the first quarter, according to hedge fund tracking firm eVestment, underperforming the broader hedge fund industry’s 3.7 percent gain. Read more of this post

Wall Street to Best Buy – Now, get out of China

Wall Street to Best Buy – Now, get out of China

1:06am EDT

By Dhanya Skariachan

NEW YORK (Reuters) – Best Buy’s move to exit Europe has many on Wall Street hoping the big box retailer does the same in China.

The company sold its stake in a European joint venture to Carphone Warehouse Group this week for less than half of what it paid five years ago. Despite the loss, investors welcomed the news and sent shares up to their highest level in a year.

Many are betting that the next move for the world’s largest consumer electronics chain will be out of China, where it has struggled to fend off local rivals and failed to carve a niche in a cluttered market. That unit has also been without a leader for more than a month.

“They are really struggling in China, much more so than they were in Europe,” said BB&T Capital Markets analyst Anthony Chukumba, who predicted the company could divest its assets there later this year. “There are no strategic benefits to them being in China.” Read more of this post

China Past Due: Hukou ‘Economic Apartheid’

China Past Due: Hukou ‘Economic Apartheid’

APRIL 30, 2013 ⋅ POST A COMMENT

After school in her scruffy Shanghai migrant neighborhood, Yang Liping strolls over to a community center for migrant kids, sits down with an ancient Chinese stringed instrument, and loses herself in the music. “I started playing the guzheng here, three years ago, “ says Yang, an affable 16-year-old in a ponytail and a navy and white tracksuit. She moved to Shanghai from Sichuan in 2008, just after the earthquake, to join her migrant worker parents. And she’s impressed with Shanghai. “There’s a lot more going on here than in my hometown – a lot more ways I can improve myself.” Yang would like to stay in Shanghai for senior high school, so she’ll be likely to do better on the all-important college entrance exam. Not only are Shanghai schools better funded, with better facilities and teachers, but the better universities in Shanghai also require higher scores from those outside Shanghai than from those who go through the school system here. But staying in the city through senior high school and into college is not an option for Yang, or for millions of other migrant schoolchildren like her. That’s thanks to the household registration – or hukou – system, which requires students to take the college entrance exam in the place where their parents are registered. And very few migrant workers can move their hukous to the cities where they work. So some 260 million Chinese migrants – about 20 percent of China’s total population — live as second-class citizens in their adopted cities, in them, but not of them.

China has had a hukou system for at least a couple thousand years, mostly, to keep track of who was in what family. But it was only under Communist Party rule, starting in the late 1950s, that the hukou system started to be used to restrict movement and enforce a kind of economic apartheid. Read more of this post

It is indisputable that China is over-issuing currency. But the reasons behind China’s massive liquidity growth – and the most effective strategy for controlling it – are less obvious

Zhang Monan is a fellow of the China Information Center, a fellow of the China Foundation for International Studies, and a researcher at the China Macroeconomic Research Platform.

Controlling China’s Currency

01 May 2013

BEIJING – It is indisputable that China is over-issuing currency. But the reasons behind China’s massive liquidity growth – and the most effective strategy for controlling it – are less obvious.

The last decade has been a “golden age” of high growth and low inflation in China. From 2003 to 2012, China’s annual GDP growth averaged 10.5%, while prices rose by only 3% annually. But the unprecedented speed and scale of China’s monetary expansion remain a concern, given that it could still trigger high inflation and lead to asset-price bubbles, debt growth, and capital outflows.

Data from the People’s Bank of China (PBOC) show that, as of the end of last year, China’s M2 (broad money supply) stood at ¥97.4 trillion ($15.6 trillion), or 188% of GDP. To compare, M2 in the United States amounts to only roughly 63% of GDP. In fact, according to Standard Chartered Bank, China ranks first worldwide in terms of both overall M2 and newly issued currency. In 2011, China accounted for an estimated 52% of the world’s added liquidity. Read more of this post

Where the Chinese credit is going; there is plenty of evidence to suggest that financial distress is another reason why credit expansion has not worked well

Where the Chinese credit is going…

Kate Mackenzie | May 01 10:51 | 3 comments | Share

Part of the CHINA’S CREDIT CONUNDRUM SERIES

After Chinese first quarter GDP missed expectations, there was some hope that the relatively strong manufacturing PMIs in March would point to a better second quarter. Now that we know China’s April PMIs are definitely not supporting that notion, it is worth revisiting, again, the whole question of the country’s recent surging credit growth. The significance of the debt-to-GDP ratio can be argued over, and it’s impossible to say at what level it might become a big problem. But here are a couple of ideas to consider. First, UBS’ China economist Wang Tao has taken a look at the debt/GDP question. Her estimate is that government debt was about 55 per cent of GDP at the end of 2012, and total debt is about 210 per cent of GDP. (China’s official government debt to GDP ratio is only about 15 per cent, going purely on government bonds, but that ignores many government corporations, local debt, and the asset management companies that took on bad debt in the early 2000s financial crisis.) Anyway, 210 per cent is broadly in line with other credible estimates. Wang argues this absolute level in itself is not cause for dismay. In comparison to developed economies it may seem high, but it’s less dramatic measured against other emerging and Asian economies, which she points out typically have high savings rates which in turn provide some of that credit: There are a couple of other reasons not to worry. The growth might simply be lagging the credit surge, and some credit might have been double-counted: To be fair, we think credit growth has a delayed effect on economic growth, and expect construction an investment to pick up in Q2 and Q3 this year on the back of strong credit growth so far. Also, the TSF may overstate (or double count) the leverage increase in the real economy – corporates that engage in interest arbitrage by borrowing cheaply in the interbank credit market and lend to other corporate and/or local governments have both legs of their transaction included in TSF. While Wang doesn’t think a debt crisis is imminent, she does believe there are certainly reasons to worry. One is the recent rapid increase in the debt-to-GDP ratio. This is a very good point which we mentioned in February and forgot to point out in our ruminations of the past couple of weeks. To recap: Morgan Stanley’s Ruchir Sharma sums up some of these reasons in a WSJ op-ed, citing a BIS paper by Mathias Drehmann and Mikael Juselius which finds that if the private debt-to-GDP ratio increases by 6 per cent or more above its 15-year average, that is a “very strong indication that a crisis may be imminent”.

Wang believes there’s another reason for worry:

However, there is also plenty of evidence to suggest that financial distress is another reason why credit expansion has not worked well. Some local governments and companies do not have sufficient cash flow to pay interest on their existing debt, and have to borrow new debt to help service older debt. This is not hard to imagine for local governments – even if they have invested in sound projects in the last stimulus program, most of the projects do not yet have a cash return. In a downturn where local governments face weak tax revenue, dropping land sales, and more demand for pushing up investment and GDP from higher levels of government, the logical solution would be to incur more debt to keep the ball rolling. Read more of this post

China: Subprime for the masses

China: Subprime for the masses

May 1, 2013 11:54am by Simon Rabinovitch and Naomi Rovnick

With Chinese workers enjoying a break from their travails on May 1 for Labour Day, it is an opportune time to look at one gift recently bestowed on them by the country’s financiers. The gift is a new investment opportunity going by the name ‘fund of trusts’, which conjures up a sense of diversification and safety. But a more accurate name might be ‘subprime for the masses’. China’s funds of trusts are inspired by the funds of funds that are common in developed financial markets, allowing people to invest in a blend of other funds – whether mutual funds or hedge funds – to gain broader and more dispersed exposure. In China, the funds are invested in a cocktail of different trust products, which include some of the riskiest, high-yielding investments legally available in the country.

This innovation is notable for one major reason. Until now trust products have typically required minimum investments of Rmb1mn ($162,000) as a way of ensuring that only wealthy individuals put their money at risk. With funds of trusts, the entry barrier has been cut to as little as Rmb100,000 ($16,200). That puts trust investments within the reach of tens of millions of middle-class Chinese. Read more of this post

Chinese officials ‘taking lavish displays, banquets and secret sauna parties underground’

Chinese officials ‘taking lavish displays, banquets underground’

BEIJING — China’s top newspaper warned yesterday that some government officials were finding ways around President Xi Jinping’s graft-busting instructions to be frugal by taking banquets and other lavish displays underground, including hiding liquor in water bottles.

BY –

6 HOURS 35 MIN AGO

BEIJING — China’s top newspaper warned yesterday that some government officials were finding ways around President Xi Jinping’s graft-busting instructions to be frugal by taking banquets and other lavish displays underground, including hiding liquor in water bottles. Mr Xi has made battling pervasive corruption a top priority of his administration, warning the problem is so severe it could threaten the party’s survival. But despite his repeated admonitions for officials to practice frugality and stop wasting public funds, some people still have not got the message or are finding ways around it, the Communist Party’s official newspaper, People’s Daily, reported.

“In some places, the use of public money for eating and drinking has switched from high-end hotels to private venues and places of business … which has become known as ‘low-key luxury’,” the paper said. Cases had come to light of “saunas in farmhouses” and “maotai being put in mineral water bottles”, it said, in reference to the expensive spirit traditionally drunk at banquets. “These ways of pulling the wool over people’s eyes is typical of not following instructions and not stopping what is banned,” the commentary added. This phenomenon has reminded the party of the need to strictly enclose power “in the fence of supervision” and “the cage of regulation”, it said.  Read more of this post