Reuters Breakingviews
China’s strong banks choke the weak
By John Foley The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
HONG KONG — China’s strong banks are choking the weak. Second-tier lenders have fewer deposits to fund their growth than larger rivals and those they do have are the most fickle kind. The distortions that penalise small banks will eventually bite.
Minsheng, which reported earnings on April 28, typifies China’s smaller lenders. It relies overwhelmingly on corporate deposits for funding, according to an analysis by China Construction Bank. Companies are much flightier than retail depositors, so make for less stable funding. Minsheng’s loans are 77 percent of its deposits, above the 75 percent permitted by regulators, while its Tier 1 capital ratio was just 8 percent at the end of 2010.
Compare that with state-owned ICBC, which relies on corporates for below 50 percent of its deposits. Its Tier 1 capital was a healthier 9.7 percent at the end of the first quarter, and its loans just 61 percent of deposits. It is a similar story at Agricultural Bank, whose 56 percent loan-to-deposit ratio helped it expand its loan book twice as fast as Minsheng in the first three months of the year.
Coal bubble rears head in Arch’s $3.4 bln ICG bid
By Christopher Swann The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The coal bubble has reared its blackened face yet again, if the reaction of Arch Coal’s shareholders to its $3.4 billion takeover of a rival is any indication. The company is paying a premium to International Coal Group that’s well above the capitalized value of potential synergies. And though investors belatedly bid down shares of Arch, they have yet to fully recognize the extent of value destruction.
Even taking the upper estimate of Arch’s synergies, $80 million, the promised savings have a net present value of about $500 million. This is below the premium of almost $730 million that Arch is offering. Yet so far Arch investors have marked down the firm by only about half that level.
Shareholders have other reasons for skepticism. The purchase price is at the upper end of other recent deals, at an enterprise value of around 6.6 times EBITDA, according to Brean Murray. That’s higher than what Alpha Natural Resources <ANR.N> paid for Massey or Walter Energy offered for Western Coal. And Arch is buying after a bull run in ICG. The stock had doubled in value over the past year — far outpacing the 25 percent rise in Arch.
Buffett inadvertently nails it evoking Salomon
By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
OMAHA, Nebraska — Warren Buffett, to his credit, dove right in to the David Sokol affair. Early at the Berkshire Hathaway annual shareholders meeting on Saturday, the Oracle of Omaha compared his one-time deputy’s dealing in Lubrizol shares to the scandal that rocked Salomon Brothers two decades ago. Buffett called both events “inexcusable” and “inexplicable.” Yet he overlooked the more significant link to the Wall Street bank he once partly owned and led as chairman. The rogue trading at Salomon exposed poor controls.
Buffett’s long-time investing partner, Charlie Munger, at least diagnosed part of the problem. He told the packed Qwest Center in Omaha, Nebraska, that hubris can sometimes cause irrational behavior. It probably wasn’t his intention, but he could easily have been describing some of his boss’s actions, too, including praising Sokol in the press release that disclosed his executive’s dodgy trades and resignation. Buffett at the time said nothing of the glaring violations of Berkshire’s codes of conduct and went out of his way to say he didn’t believe any laws had been broken.
What’s inexplicable is why Buffett didn’t disclose more when alerting the world to the trouble at Berkshire. And still, he seemed unwilling, or unable, to dwell on his own failings when addressing Berkshire shareholders. He pleaded guilty for not expressing any outrage and joked that Munger would be left in charge of future press releases.
Inadvertent? Hardly. Salomon is now part of Citi. Buffett didn’t find out about Citi investment bankers meeting with Sokol until he read it in Lubrizol’s draft of the proxy.
When confronted about Citi, Sokol lied and promptly resigned. Buffett is putting this totally on Sokol and Citi and well he should. How many other stocks on that list of 18 that Citi provided did Sokol decide to purchase for his own account?
BlackBerry maker starts to feel serious squeeze
By Robert Cyran The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Research In Motion is starting to feel a serious squeeze. The BlackBerry maker is hemorrhaging market share and just warned product delays are hurting sales. The pressure is showing: its co-CEO recently stormed off a TV interview when asked about security issues. RIM needs to compose itself if a new tablet and operating system are to keep the firm relevant.
Cutting estimates just weeks after issuing them hardly inspires confidence. The company warned hold-ups bringing out new handsets scared off customers. Those still buying RIM devices in the United States and Latin America are choosing cheaper, lower-end ones. As a result, earnings per share will actually shrink slightly, despite the booming market for smartphones.
Research In Motion reckons it’s a temporary hiccup. Phones introduced this summer, along with its answer to the iPad, mean earnings should rise 18 percent during the fiscal year ending February 2012. If so, the shares look incredibly cheap at 6.5 times this year’s earnings — including their nearly 14 percent tumble on Friday morning.
Demise of bin Laden brings risks as well as relief
By Ian Campbell and Una Galani The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
LONDON/DUBAI — Osama bin Laden’s death is an important landmark which leaves hope for the Arab spring intact. The initial, obvious, response is to expect celebratory gains and for global equities and commodity prices to advance. But while the medium-term outlook is undoubtedly improved — for the United States and the rest of the world — bin Laden’s death may heighten investors’ sense of risk in the near term, bolstering the dollar and curbing flows into speculative assets.
In recent weeks and months markets have been partying on something bin Laden himself might have welcomed: a plunging dollar. Traders have been shorting the greenback and going long a host of other assets, not least in emerging economies. Last week Ben Bernanke, the Federal Reserve chairman, fuelled this tendency by suggesting the Fed was in no hurry to raise its policy interest rate. U.S. dollar weakness has been a big factor in record prices for silver and gold and the highs for currencies such as the Australian and Singapore dollars. The euro is at $1.48, despite the great difficulties of the euro zone periphery.
Bin Laden’s death doesn’t change the broad market picture materially — U.S. interest rates will remain very low — but it may, at least temporarily, alter the market mood. It could make markets wary of reprisal attacks and of heightened risks in North Africa and the Islamic world. It is easy to overstate the al Qaeda influence on world finance, however. The risks posed have not helped world growth but the bursting of the dot-com bubble and the credit crunch, balanced by the emergence of new economic powers such as China, have been of greater importance.
For a humorous look at this event, please go to http://www.joyce-iamwhatiyam.blogspot.co m
U.S. GDP data starts to spell stagflation
By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
WASHINGTON — It’s starting to feel like stagflation in America. Gross domestic product rose just 1.8 percent in the first quarter, despite the injection of additional fiscal stimulus in December. At the same time, the Fed’s chosen measure of inflation — the personal consumption expenditures deflator — rose 3.8 percent. If the trends aren’t temporary and oil prices don’t retreat, the Fed may find itself scrambling.
The first-quarter rise in GDP is weaker than it looks, for two reasons. First, half of it derived from a build-up in inventories, which may weigh on future growth. Second, while most of the bipartisan December stimulus consisted of extending the Bush tax cuts, with no short-term effect on the economy, it also included a one-year reduction of 2 percent in employees’ social security contributions, estimated to cost $112 billion and entering pay packets in January. That boosted personal income, which rose at an 8.3 percent annual rate in the quarter, and should have increased growth.
Instead, prices increased so fast that even though the savings rate increased only marginally, real personal consumption rose only at a modest 2.7 percent. With government cutting back and construction weak, GDP growth was sluggish.
Stagflation is not the most likely outcome today, because a habit of low inflation has been established. However, I am concerned that the Federal Reserve Bank doesn’t see a relationship between people working and spending. When the cost of capital is too low the situation exists like in Japan’s lost decade where the risks of hiring a worker are much greater than the risks of buying overly expensive equipment.
Stagflation comes from underutilization of the workforce coupled with low capital costs that make it nearly riskless to to displace workers with machines. Instead of productivity gains the result is a shortage of consumers, while nations that better utilized their workforce compete for natural resources driving up natural resource prices, such as to manufacture machines with Busnesses compensate for the lack of consumers by raising pricing margins in order to meet fixed costs. The lack of consumers is the “stag,” while the need for higher margins is the “flation”
Berkshire board tries cleaning up Buffett’s mess
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Agnes T. Crane
Berkshire Hathaway’s directors are cleaning up after their chairman. The audit committee’s findings that David Sokol, one-time heir apparent to Warren Buffett, misled the company and violated its ethical standards should help restore confidence in Berkshire’s corporate governance. But just days before the annual shareholder meeting in Omaha, Nebraska, it raises even more questions about how Buffett handled the matter.
Sokol’s purchase of shares of Lubrizol in the months before Berkshire bought the company never looked good. And the trickle of information in the ensuing month, including Sokol’s odd TV appearance and Lubrizol’s subsequent timeline of events, has only made it worse. But Buffett, the model of commonsense investing, abandoned his signature skepticism when it came to his own deputy. When Sokol told his boss he owned Lubrizol shares, according to the audit committee’s report, Buffett didn’t inquire further.
buffet is a one trick pony. its shocking that so many people think he’s brilliant when speaking about taxes and other stuff he knows nothing about.
Britain’s royal family is an affordable indulgence
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Robert Cole
Britain’s royal family is an affordable indulgence. If taxpayers stopped funding the clan destined to be led by William Windsor and Catherine Middleton, they would escape a 1.14 billion pound liability. For some, this is a burden the cash-strapped state could do without. In fact, it is a national treasure.
True, the royal wedding will lead to some chunky one-off costs. First, there is the extra public holiday. Assuming UK GDP is evenly spread across the 260 working days of a normal year, that’s 5.9 billion pounds in lost output. The direct cost of the celebration — comprising everything from couture to security — may add another 50 million pounds.
Reading about the nonsense of monarchies, I found this really good article (the last paragraph really makes sense to me): http://www.deliveringdata.com/2011/05/as -english-as-queen.html
Thain and Corzine redemption doesn’t come easy
By Antony Currie The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Jon Corzine and John Thain are in a long slog to revive their high-flying Wall Street careers. In early 2010, each of the two former Goldman Sachs partners took the reins at far smaller financial firms than their illustrious pasts would once have suggested. Corzine now runs agency broker MF Global, while Thain landed at mid-market lender CIT. The two have certainly made progress. But full rehabilitation looks a way off yet.
Shareholders might be willing to write glowing recommendations. CIT’s shares have jumped by more than a third since Thain arrived in February 2010 — almost three times as much as the increase in the KBW banks index. Corzine, meanwhile, has overseen a 20 percent jump in his company’s stock during his 13 months on the job, outperforming the KBW capital markets index fourfold.
Both firms, however, had been struggling badly and lagging the recovery at some larger rivals. CIT had just emerged from bankruptcy when Thain was installed, following his banishment from the Bank of America Merrill Lynch <BAC.N> kingdom, and MF Global had been bleeding losses for two years before Corzine rode in after New Jersey voters sent him packing from the governor’s mansion.
J&J may have more on overseas shopping list
By Robert Cyran The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
J&J may have more on its overseas shopping list. The U.S. health giant’s $21.3 billion purchase of Swiss listed, U.S. incorporated Synthes is its largest ever. A big deal seemed like a way for J&J to deploy its $28 billion of cash, largely trapped overseas. But as it turns out it is paying mostly in stock.
Using equity for an overseas deal is often a non-starter. The target’s shareholders, usually mainly domestic, may not want foreign shares — and might quickly dump them if they got them. Merger arbitrageurs, whose votes can be critical to getting a deal approved by shareholders, generally prefer cash. And for a U.S. acquirer, bringing overseas cash home triggers a tax liability, so it’s better used for offshore acquisitions.
Yet J&J is paying 65 percent of the deal price in stock. One possible reason is that Synthes founder Hansjoerg Wyss and his family foundations own 48 percent of the company. He has pledged at least 33 percent of votes in favor of the transaction, suggesting it is likely to be approved. Wyss may be perfectly happy with J&J shares. Moreover, since he is above the traditional retirement age, taking stock may be preferable for estate tax planning purposes.
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