Saturday, November 20, 2010

QE2. Is it a ship?

We know from the articles i have posted that the commodity market is manipulated. So relative to QE2 the question I pose is; Is this article designed to create fear in the markets to manipulate the USD or the stock market?

Thanks Jeff for the spirited conversation last night, that put me onto QE2!

Aivars Lode

QE2: 3 signs to watch for progress
Posted by Nin-Hai Tseng, reporter
November 17, 2010 12:42 pm

Will it or won't it work? Here are some ways to find out.

Fed QE2Many economists and market commentators are convinced that the Fed's move to pump $600 billion into the economy by buying up long-term bonds will do more harm than good for America's economic recovery.

Quantitative easing, as it's technically called, is rarely used by central bankers to boost the economy. So while the Fed's last-ditch policy prescription might be well intended, the outcome is still very much uncertain.

If it's successful, a few things would happen: Businesses drawn to lower interest rates would borrow, leading them to invest and hire more. Asset prices including stocks would surge and boost consumer confidence. Consumers, particularly homebuyers attracted to record low mortgage rates, would borrow and spend more.

But then again, things could go terribly wrong, and it appears the criticisms are mounting. With so much newly printed money in the financial system, critics charge that quantitative easing could destroy the value of the US dollar. Meanwhile, world leaders worry the new money could hurt their economies, creating market bubbles that would destabilize their financial systems. What's more, export-rich countries including Brazil and Germany worry the Fed's asset-purchase plan could hurt sales of goods and services abroad as the strengthening of their currencies would make exports less competitive.

Some even argue the first round of quantitative easing turned out to be a flop when officials purchased about $1 trillion in Treasuries during the height of the financial crisis in March 2009. So why would another flush of cash work?

Regardless, the point is it's much too early to tell if the Fed's plan will help. As officials buy up Treasuries over the next eight months or so, Fortune lists three indicators to watch for signs that it's working:

Rising business investments

It's one of the cheapest times for companies to borrow and invest these days. And yet, while some of the biggest corporations including Microsoft (MSFT) and Wal-Mart (WMT) have taken advantage of the low rates, it appears that the new money isn't translating into new jobs.

It's true business investment has fared better than consumer spending following the Great Recession that started December 2007 and ended June 2009. In particular, since mid-2009, there's been an upswing in companies replacing aging software and equipment. But business investment is still far from the levels seen prior to the latest recession.

Meanwhile, companies aren't exactly borrowing much more, even while interest rates have dropped to record lows, and many of the companies that have locked in low rates are just refinancing existing debt – not exactly borrowing new funds and investing them. The latest to do that was Coca-Cola (KO), which recently sold $4.5 billion of bonds in its biggest offering ever, a portion of which went for a coupon of just 0.77%.

Part of the goal of quantitative easing is to spur investment through lower interest rates. Purchases of new equipment and software, which typically makes up two-thirds of business investment, had been steadily picking up since around mid-2009. It rose to 24.8% during the three months ending in June 2010, but has cooled during the latest quarter to 12% growth amid signs that the economic recovery is slowing.

What's more, it remains to be seen how much of the newly printed money falls in the hands of small business owners. Though lending conditions have eased some and owners seem more concerned about consumer demand than borrowing more funds, new capital is nevertheless an important component for expansion and more hiring.

More home purchases and refinancing

Even before the Fed unleashed a second round of freshly printed money into the economy, U.S. mortgage rates dropped to record lows. Rates are expected to stay relatively low following the Fed's policy action.

It's one of the cheapest times to borrow but it's not as if consumers are flocking to cash in on low interest rates. A frenzy of new home loans and refinancing would surely help reduce the excess stock of residential units on the market, raising prices and helping homeowners recoup some of the equity lost on their properties. And while more refinancing might not immediately provoke the debt-weary consumer to start spending much more, it would certainly help them de-leverage and recover from the old days of too much spending.

In its latest report for the week ending November 11, Freddie Mac (FMCC) reported rates hit its lowest since at least 1971. The rate for a 30-year fixed loan fell to 4.17% from 4.24% the prior week. On average, the 15-year rate declined to 3.57% from 3.63%. Despite record low borrowing costs, the plethora of underwater mortgages, tighter lending standards and general disinterest seem to have kept borrowers from refinancing. At least half of mortgage holders still pay 5% or higher in interest, regardless of whether a fixed or floating rate. What's more, low interest rates have yet to spark a buying spree of homes.

The "wealth effect"

A fall in interest rates generally causes asset prices including stocks to rise. This is good for shareholders. But as Barry Ritholtz points out, the vast majority of Americans' wealth isn't exactly tied to the stock market. Quantitative easing might make the stock market rally but the equity market is overwhelmingly concentrated to the top 1% of Americans who own about 38% of stocks (by value) in the US, Ritholtz writes. He adds that most Americans have less than a 10% stake in the stock market and that the majority of their investments are still tied to their homes.

So will the rise of stock prices ignite a flurry of consumer spending? Ritholtz thinks it's highly unlikely. In the coming months, it remains to be seen if stock prices will influence the consumer psyche, which is still preoccupied by debts, home values and job prospects.

Australia's healthcare system also costs less than half America's

Thanks dad for the article. Interesting commentary on pension funds towards the end of the article and some insight in the last 2 paragraphs as to why health care is so much more expensive here in the States when compared to Aussie, which has approx a twentieth of the people?

Aivars Lode

Future Fund shows it has no confidence in Telstra chiefs
November 20, 2010

Fund votes against every motion at telco's annual general meeting.

One conclusion from the Future Fund's decision to vote against every motion put up at Telstra's annual meeting yesterday is that the tenure of chairman Catherine Livingstone and chief executive David Thodey is now bound up with the pace of the fund's retreat as a shareholder.

The fund cited specific reasons for voting against Telstra's remuneration report, a reduction in maximum number of directors from 13 to 11, and the confirmation of a new director, Nora Scheinkestel.

The lower cap on director numbers and the appointment of Scheinkestel, a finance and banking specialist whose portfolio of board seats includes AMP and Orica, created a full board that still does not have enough telecommunications experience, it said.
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And it said Telstra's remuneration plan was too vague, about how the $1 billion ''Project New'' attempt to upgrade Telstra's sales marketing effort will be evaluated, and about how long-term incentives that depend partly on cash flow will be affected by the $9 billion cash payment Telstra will book if it sells copper network into the new National Broadband Network, as planned.

Only one Telstra director, John Zeglis, has a telco background, as AT&T general counsel, and chief executive of AT&T wireless. Nora Scheinkestel continues the pattern of appointing well-credentialled generalists.

Project New also came in for criticism for containing no public targets when it was rolled out to investors in August and September. Telstra's shares are down about 22 per cent since early August, when it posted soft earnings and predicted flat revenue and a high single digit profit decline in the current financial year (those forecasts were confirmed yesterday, with Livingstone predicting that Telstra will maintain its 28¢ a share payout this financial year and next).

The fund lobbied Telstra ahead of the meeting. It voted against the motions after failing to secure a board appointment it was prepared to back, and after failing to get the clarity it wanted on the remuneration plan. Significantly, it did not campaign publicly ahead of the meeting, and it says it will continue to ''engage constructively''.

But this was, in effect, a vote of no-confidence in Telstra's leadership, and it could snowball.

The Future Fund is headed for the door. It sold down from a 16.4 per cent stake to 10.9 per cent in a block trade in August last year, and announced last month that it had sold another 1 per cent or 114 million shares, leaving it with just under 10 per cent, or 1.2 billion shares.

It gave itself three to five years two years ago to get its stake down somewhere near Telstra's share of overall market capitalisation, and still has more than 1 billion shares to go.

And the recent sale was done on-market in small parcels that never accounted for more than 14 per cent of the daily trade. At that rate the fund will be a major player for a couple of years, and a lightning rod for other dissatisfied institutional shareholders.

I HAVE returned this week from a trip to Wall Street, where the answer from chief executives, economists and analysts to my opening question - is it safe? was pretty much unanimous: it's still too early to tell: concern lingers that America's private sector is unprepared for the baton-pass from public sector stimulus that is under way.

But quite a few of the people I spoke to also had a question for me: how did Australia escape the global financial crisis? I got better at answering as I progressed, and argued that it was more than luck.

Sure, Australia is sitting on a commodity motherlode at a time when its own part of the world is continuing to grow strongly. But in ways that mattered in 2008 and 2009, it is also the more nimble and responsive economy.

Loans including home loans are made here mainly at variable rates, for example, so cash rate cuts by the Reserve Bank during the crisis flowed quickly into the system. That did not occur in the United States, where mortgage rates are fixed: US mortgages are theoretically renegotiable when rates move lower, but the process broke down in the crisis, as house prices plunged and loan to valuation ratios rose.

Banks here are also not limited to the house they are lending on for collateral, as occurs in many US states. Australian borrowers are therefore less likely to over-extend, and less likely to default. They simply have more to lose. Australia also had, and has, a smaller debt problem.

This is partly because it was carrying less debt going in, but it is also because it is on the way to funding its pension obligations, through the national superannuation scheme that began as a wages trade-off in the '80s, and through the Future Fund, which will cover Commonwealth employee superannuation payments.

US public pension plans are unfunded, and liabilities are growing as investment returns fall, and interest rates stay low.

Australia's healthcare system also costs less than half America's relative to GDP, partly because malpractice awards are capped. They are uncapped in the US, and are a catalyst for the over-prescription of drugs and procedures by doctors who are desperate to show they are covering all the bases.

Caps on healthcare damages are one of the reforms now proposed in draft form by President Obama's Fiscal Commission, which proposes to cut the deficits by $US4 trillion between 2012 and 2020. But the debt reduction debate will run for years before much happens.

Whats happening in China

Interesting perspective from one of our board members.

Thanks Trevor for the article. Aivars Lode

Volume 2 - 2010
I hope you enjoy our 2nd volume of the Focus International Newsletter for your information. As 2010
draws to a close the jury is still out on whether the global economy is over the worst of things but at least
the Flavor & Fragrance industry is reporting healthy gains compared to prior year which is an encouraging
sign. Many of these companies are achieving this growth from China and the other BRIC countries and are
investing heavily in these markets to establish a market position. On the other hand Food Ingredient
commodity prices are seeing a lot of upward pressure particularly sugar and Cocoa which is creating
problems and opportunities in the industry.
The China market continues its extraordinary growth ‐ Freedonia predict that the Asian F&F market will be
the number 2 regional market by 2014 behind only North America led by the 2nd largest market being
China. I personally think the growth numbers they are using are conservative but lack of information will
always mean that it is more of a guess but one thing is certain. What happens in China will have a big
bearing on the future of not only the F&F Industry but nearly every industry and the rise of local players as
effective global competitors is almost inevitable. The article on the size of the Chinese beer industry
emphasises this as does the investments from the F&F industry such as Sensient and Cargill as well as the
ramp up of Investment by Pepsi and Coca Cola.
Food safety and quality issues continue to be addressed by the Chinese Government and they are working
closely with other organisations such as the FDA. The Chinese Government have started to encourage
Chinese companies to start moving abroad and gain more of the value chain and are reducing approval
requirements for SME’s to make the move abroad.
While the market in China is big now, the future offers even more promise as the impact of urbanization
will continue to drive growth for years to come. 2nd and 3rd tier cities as well as whole new cities will
emerge as key centers of population and consumption. China is where the USA was in % of urban
population in the early 1990’s so we are witnessing a population movement unprecedented in human
history and unlikely to be repeated. The F&F industry in China is extremely fragmented and estimates put
the number of F&F companies anywhere between 800 to 1000 and this offers many interesting
opportunities for foreign companies to enter the market without having to start from scratch. Focus
International is a specialist in developing unique solutions for its clients looking to enter China or other
International markets and would be very happy to talk with you to discuss your needs and strategic
I hope you all have a great Thanksgiving.
Best regards
Trevor Rahill / President